Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
Altria Group, Inc.
2015 Annual Report
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Altria’s
Operating Companies
Philip Morris USA Inc. (PM USA)
PM USA is the largest tobacco company
in the U.S. and has about half of the U.S.
cigarette market’s retail share.
U.S. Smokeless Tobacco
Company LLC (USSTC)
USSTC is the largest producer and marketer
of moist smokeless tobacco, one of the
fastest growing tobacco segments in the U.S.
John Middleton Co. (Middleton)
Middleton is a leading manufacturer of
machine-made large cigars and pipe tobacco.
Ste. Michelle Wine Estates Ltd. (Ste. Michelle)
Ste. Michelle ranks among the top-ten
producers of premium wines in the U.S.
Nu Mark LLC (Nu Mark)
Nu Mark is focused on responsibly developing
and marketing innovative tobacco products
for adult tobacco consumers.
Philip Morris Capital Corporation (PMCC)
PMCC manages an existing portfolio of
leveraged and direct finance lease investments.
altria.com
an Altria Company
an Altria Company
an Altria Company
an Altria Company
An Altria Innovation Company
an Altria Company
an Altria Company
From the
1800’s to
Today…
You’d never know our companies
came from humble beginnings
by looking at them today. When
George Weyman opened up his
tobacconist shop in Pittsburgh in
1822, he had no idea he was taking
the first steps toward creating
U.S. Smokeless Tobacco Company,
the world’s largest smokeless
tobacco company. And when
John Middleton opened his Phila-
delphia tobacco shop in 1856, he
was paving the way to become one
of America’s largest cigar manufac-
turers. Ste. Michelle’s roots were
built on the 1912 estate owned by
Frederick Stimson, and today has
grown to 10 wineries across three
states. In 1929, when Philip Morris
& Co. leaders selected Richmond,
VA to manufacture their cigarettes,
they didn’t realize their focus on
quality would help the company
soon sell more than half of all
cigarettes sold in the United States.
We’re proud that we’ve provided
thousands of manufacturing jobs
right here in America for almost a
century. And we’re proud of the
focus on quality and consumers
that has helped make us the leader
in the tobacco industry for 30 years.
Shareholder Information
Shareholder Response Center:
Computershare Trust Company,
N.A. (Computershare), our
transfer agent, will be happy to
answer questions about your
accounts, certificates, dividends
or the Direct Stock Purchase and
Dividend Reinvestment Plan.
Within the U.S. and Canada,
shareholders may call toll-free:
1-800-442-0077
From outside the U.S. or Canada,
shareholders may call:
1-781-575-3572
Postal address:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
To eliminate duplicate mailings,
please contact Computershare (if
you are a registered shareholder)
or your broker (if you hold your
stock through a brokerage firm).
Direct Stock Purchase and
Dividend Reinvestment Plan:
Altria Group, Inc. offers a Direct
Stock Purchase and Dividend
Reinvestment Plan, administered
by Computershare. For more
information, or to purchase
shares directly through the Plan,
please contact Computershare.
Shareholder Publications:
Altria Group, Inc. makes a variety
of publications and reports avail-
able. These include the Annual
Report, news releases and other
publications. For copies, please
visit our website at:
www.altria.com/investors
Altria Group, Inc. makes available
free of charge its filings (such as
proxy statements and Reports
on Form 10-K, 10-Q and 8-K)
with the U.S. Securities and
Exchange Commission (SEC).
For copies, please visit our
website at:
www.altria.com/SECfilings
If you do not have Internet
access, you may call:
1-804-484-8222
Internet Access
Helps Reduce Costs:
As a convenience to shareholders
and an important cost-reduction
and environmentally friendly
measure, you can register to
receive future shareholder
materials (i.e., Annual Report and
proxy statement) electronically.
Shareholders also can vote their
proxies electronically.
For complete instructions, please
visit our website at:
www.altria.com/investors
2016 Annual Meeting:
The Altria Group, Inc. Annual
Meeting of Shareholders will be
held at 9:00 a.m. (Eastern Time)
on Thursday, May 19, 2016 at
The Greater Richmond
Convention Center,
403 North Third Street,
Richmond, VA 23219.
For further information, call:
1-804-484-8838
Download the Altria IR App
Stay up to date with the latest
investor information on our
App. Download at the Apple
Store and at Google Play.
Stock Exchange
Listing:
The principal stock
exchange on which
Altria Group, Inc.’s
common stock (par value $0.331⁄3
per share) is listed is the New
York Stock Exchange (ticker sym-
bol: MO). As of January 31, 2016,
there were approximately
71,000 holders of record of Altria
Group, Inc.’s common stock.
Additional Information:
The information on the respec-
tive websites of Altria Group, Inc.
and its subsidiaries is not, and
shall not be deemed to be, a part
of this report or incorporated into
any other filings Altria Group, Inc.
makes with the SEC.
Trademarks and service marks
in this report are the registered
property of or licensed by Altria
Group, Inc. or its subsidiaries.
Mailing Addresses
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
altria.com
Philip Morris USA Inc.
P.O. Box 26603
Richmond, VA 23261-6603
philipmorrisusa.com
U.S. Smokeless Tobacco
Company LLC
P.O. Box 85107
Richmond, VA 23285-5107
ussmokeless.com
John Middleton Co.
6601 W. Broad Street
Richmond, VA 23230-1723
johnmiddletonco.com
Ste. Michelle Wine
Estates Ltd.
P.O. Box 1976
Woodinville, WA 98072-1976
smwe.com
Philip Morris
Capital Corporation
225 High Ridge Road
Suite 300 West
Stamford, CT 06905-3000
philipmorriscapitalcorp.com
Nu Mark LLC
6603 West Broad Street
Richmond, VA 23230-1723
nu-mark.com
The 2015 annual report was printed on FSC®
certified paper. The FSC® is an independent,
non-governmental, not-for-profit global
organization established to promote the
responsible management of the world’s forests.
Independent Auditors:
PricewaterhouseCoopers LLP
1021 E. Cary St., Suite 1250
Richmond, VA 23219
Transfer Agent and Registrar:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Design: Andra Design andradesignllc.com
Photography: Casey Templeton
Printer: Stephenson Printing Inc.
© Copyright 2015 Altria Group, Inc.
Financial Highlights
Consolidated Results
(dollars in millions, except per share data)
Net revenues
Operating income
Net earnings attributable to Altria Group, Inc.
Basic and diluted earnings per share (EPS)
attributable to Altria Group, Inc.
Cash dividends declared per share
2015
$ 25,434
8,361
5,241
2014
$ 24,522
7,620
5,070
Change
3.7%
9.7%
3.4 %
2.67
2.17
2.56
2.00
4.3%
8.5%
Results by Reportable Segment
2015
2014
Change
Smokeable Products
Net revenues
Operating companies income
Smokeless Products
Net revenues
Operating companies income
Wine
Net revenues
Operating companies income
$ 22,792
7,569
$ 21,939
6,873
$ 1,879
1,108
$ 1,809
1,061
$
692
152
$
643
134
3.9%
10.1%
3.9%
4.4%
7.6%
13.4%
The chief operating decision maker of Altria Group, Inc. (Altria) reviews operating companies income (OCI) to
evaluate the performance of, and allocate resources to, the segments. OCI for the segments is defined as operating
income before amortization of intangibles and general corporate expenses. Management believes it is appropriate
to disclose this measure to help investors analyze the business performance and trends of the various segments.
For a reconciliation of OCI to operating income, see Note 15.Segment Reporting to the consolidated financial
statements in Item 8 of the enclosed Annual Report on Form 10-K.
Adjusted Diluted
EPS Growth 1
+8.9%
$2.80
$2.57
Annualized Dividend
Growth ($) 2
+8.7%
Total Shareholder
Return 3
23.1%
$2.26
$2.08
14.7%
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1 Explanations and reconciliations of adjusted measures to corresponding GAAP financial measures are
provided on the Disclosure of Non-GAAP Financial Measures page at the back of this report.
2 Source: Altria company reports
3 Note: Assumes quarterly reinvestment of dividends as of ex-dividend date. Source: Bloomberg Daily Return
(December 31, 2014 - December 31, 2015)
1 Further explanations and reconciliations of adjusted measures to corresponding GAAP financial measures are
provided on the Disclosure of Non-GAAP Financial Measures page at the back of the report.
2 Source: Altria company reports
3 Note: Assumes quarterly reinvestment of dividends as of ex-dividend date. Source: Bloomberg Daily Return
(Dec. 31, 2013 - Dec. 31, 2014)
1
30
20
10
0
4.0
3.5
3.0
2.5
2.0
1.5
1.0
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2.0
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Martin J. Barrington, Chairman of the Board, CEO and President
Dear Fellow Shareholders
Our Mission
Our Mission is to own and develop
financially disciplined businesses
that are leaders in responsibly
providing adult tobacco and wine
consumers with superior branded
products.
Our Goals
l Invest In Leadership
l Satisfy Adult Consumers
l Align With Society
l Create Substantial Value
for Shareholders
Our Values
l Integrity, Trust & Respect
l Passion to Succeed
l Executing With Quality
l Driving Creativity Into
Everything We Do
l Sharing With Others
2
We are pleased to report that Altria
delivered yet another year of excel-
lent business results and outstanding
returns for our shareholders.
In 2015, Altria grew its adjusted
diluted earnings per share (EPS) by
nearly 9% in-line with our long-term
7% to 9% growth objective. We also
returned approximately 80% of our
adjusted diluted EPS to shareholders
in the form of dividends.
Our heritage of consistent, long-
term performance, profit growth and
returning cash to shareholders con-
tinues to be why we believe Altria is
such an attractive investment. In fact,
several financial media outlets called
Altria “America’s Most Successful
Stock” in modern history. Altria’s 2015
total shareholder return of 23.1% far
outpaced both the S&P 500 and S&P
Food, Beverage and Tobacco indexes,
marking the third consecutive year
that total shareholder return has
exceeded 20%.
We take great pride in further-
ing the entrepreneurial legacies of
the founders of our businesses. Our
tobacco companies are stewards of
leading premium brands built over
as many as 180 years, a leadership
position we don’t take for granted.
Our Mission and Values define
and guide our companies’ and em-
ployees’ behaviors in this pursuit.
Our Three Core Strategies
We pursue three strategies to deliver
on our long-term financial goals:
l maximize income from our core
tobacco businesses over the
long term;
l grow new income streams
through innovative tobacco
products; and
l manage our diverse income
streams and strong balance
sheet to deliver consistent
financial performance.
Maximizing the Core
In 2015, our core tobacco companies
grew their operating companies
income (OCI) and strengthened their
market leadership positions.
In the smokeable products
segment, PM USA and Middleton had
an outstanding year, growing adjust-
ed OCI nearly 11%. PM USA’s flagship
brand, Marlboro, led the way. With
over 60 years of retail share growth,
Marlboro continued to enhance its
offerings, expanding Marlboro Mid-
night Menthol nationally to build on
the very positive momentum we’ve
seen from the Marlboro Black family.
Marlboro also continued to innovate
by expanding its pioneering mobile
couponing capability and launching
an age-verified mobile app. These
investments helped PM USA increase
Marlboro’s retail share by 0.2 share
points to 44%, a record high.
USSTC, with nearly 55% share of
the smokeless category, generated
more than $1.1 billion in OCI in 2015.
The smokeless products segment grew
adjusted OCI by nearly 5% behind
USSTC’s two leading premium brands,
Copenhagen and Skoal, which
increased their combined retail share
by 0.3 retail share points to 51.3%.
Innovating for Our Future
As we maximize the contribution from
our core tobacco businesses, we con-
tinue to invest for the future with new,
innovative tobacco products. Nu Mark
is building a portfolio of such products
using its strong internal capabilities
and agreements with third parties.
In 2015, Nu Mark introduced and
then expanded MarkTen XL in select
retail chains, furthered Green Smoke’s
lead market presence and supple-
mented our 2013 agreement with
Philip Morris International to include
joint research and development on
e-vapor products.
Our tobacco companies
are stewards of leading
premium brands built over
as many as 180 years, a
leadership position we
don’t take for granted.
Managing Our Diverse Income
Streams and Strong Balance
Sheet to Deliver Consistent
Financial Performance
Our diverse business model, includ-
ing unique positions in the wine and
beer categories, supports our ability to
consistently deliver on our financial
objectives and pay a strong and grow-
ing dividend to our shareholders.
Altria owns Ste. Michelle Wine
Estates, a leading domestic producer,
importer and distributor of premium
wines. In 2015, Ste. Michelle grew its
OCI by more than 13%, and its wines
earned more than 250 90+ ratings.
In beer, Altria, SABMiller’s largest
shareholder, supported the approxi-
mately $107 billion business com-
bination between Anheuser-Busch
InBev SA/NV and SABMiller, which
would create the first truly global
beer company. We strongly believe
that the deal is in the best interest of
our shareholders, offering a signifi-
cant premium on our very large beer
investment and continued participa-
tion in the global beer profit pool on
attractive terms.
Our track record of returning cash
to shareholders is unparalleled. In
August 2015, Altria’s Board of Directors
voted to increase our dividend by 8.7%
to $2.26 per share on an annualized
basis, the 49th increase in the past 46
years. Altria paid nearly $4.2 billion in
dividends during the year.
Culture of Compliance
and Responsibility
Success for us also means achieving
results the right way. Altria, its compa-
nies and employees are focused on
continuously improving our culture
of compliance and responsibility and
working to resolve societal concerns
relevant to our business. We were
pleased that Corporate Responsibility
Magazine ranked Altria #25 on its 2015
“100 Best Corporate Citizens List,” the
fifth consecutive year Altria appeared
on the list.
Altria supports meaningful Food
and Drug Administration (FDA) regu-
lation of all tobacco products, and FDA
has completed inspections at each of
our regulated companies’ facilities.
We continue to work constructively
with FDA to shape reasonable, science-
and evidence- based regulation by
sharing our industry experience and
knowledge.
Our operating companies contin-
ue investing in our Success 360° ini-
tiative, by supporting leading national
and local non-profits like the Boys &
Girls Clubs and Big Brothers Big Sisters
to promote the healthy development
of kids and help them avoid risky
behaviors like tobacco use.
Investing In Communities
Community investment where we
live and work is deeply rooted in our
culture. Every year, our companies
donate millions of dollars to non-profit
organizations in areas such as Youth
Development, the Environment, Arts
& Culture and support for our Military.
In fact, our corporate contributions to
the arts span nearly six decades.
We continue to work
constructively with FDA to
shape rea sonable, science-
and evidence- based
regulation by sharing
our industry experience
and knowledge.
Diversity and Inclusion
Great companies seek and value
differences to drive success and fuel
innovation, and we’ve had a three-year
initiative to do just that. Just as our
companies focus on understanding
their consumers, we’re becoming
more intentional about working inclu-
sively and learning about our differ-
ences to drive better solutions to our
business challenges.
Our internal efforts are being
noticed externally. For the third
straight year, Altria was named to
DiversityInc’s list of 25 Noteworthy
Companies for Diversity, and last
year, Altria was named to Forbes’
America’s Best Employers List.
In summary, Altria had a great year
in 2015. We continue to harness the
strengths of our company’s heritage to
support innovation for the future.
Thank you for your continuing
interest and commitment to Altria, and
for the continuing privilege of leading
this great company.
Martin J. Barrington
Chairman of the Board,
CEO and President
March 1, 2016
3
Board of Directors
Gerald L. Baliles 2,3,5,6
Retired Director and
Chief Executive Officer,
Miller Center of Public Affairs
at the University of Virginia
and former Governor of the
Commonwealth of Virginia
Director since 2008
Martin J. Barrington 3
Chairman of the Board,
Chief Executive Officer
and President,
Altria Group, Inc.
Director since 2012
John T. Casteen III 1,5,6
President Emeritus,
University of Virginia
Director since 2010
Dinyar S. Devitre 4,5
Special Advisor,
General Atlantic LLC
Retired Senior Vice President
and Chief Financial Officer,
Altria Group, Inc.
Director since 2008
Thomas F. Farrell II 2,3,6
Chairman, President and
Chief Executive Officer,
Dominion Resources, Inc.
Director since 2008
Thomas W. Jones 1,2,3,4
Senior Partner, TWJ Capital LLC
Director since 2002
Debra J. Kelly-Ennis 1,5,6
Retired President and
Chief Executive Officer,
Diageo Canada, Inc.
Director since 2013
W. Leo Kiely III 2,3,4,5
Retired Chief Executive Officer,
MillerCoors LLC
Director since 2011
Kathryn B. McQuade 1,2,4
Retired Executive Vice President
and Chief Financial Officer,
Canadian Pacific Railway
Limited
Director since 2012
George Muñoz 1,3,4,6
Principal, Muñoz Investment
Banking Group, LLC
Partner, Tobin & Muñoz
Director since 2004
Nabil Y. Sakkab 3,4,5,6
Retired Senior Vice President,
Corporate Research and
Development, The Procter
& Gamble Company
Director since 2008
Committees
Presiding Director,
Thomas F. Farrell II
1 Member of Audit Committee,
George Muñoz, Chair
2 Member of Compensation Committee,
W. Leo Kiely III, Chair
3 Member of Executive Committee,
Martin J. Barrington, Chair
4 Member of Finance Committee,
Thomas W. Jones, Chair
5 Member of Innovation Committee,
Nabil Y. Sakkab, Chair
6 Member of Nominating,
Corporate Governance and
Social Responsibility Committee,
Gerald L. Baliles, Chair
The primary responsibility
of the Board of Directors
is to foster the long-term
success of the company.
In fulfilling this role, each
director exercises his or
her good faith business
judgment of the best
interests of the company.
The Board has responsibil-
ity for establishing broad
corporate policies, setting
strategic direction and
overseeing management,
which is responsible for
the day-to-day operations
of the company.
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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
(State or other jurisdiction of
incorporation or organization)
6601 West Broad Street, Richmond, Virginia
(Address of principal executive offices)
13-3260245
(I.R.S. Employer
Identification No.)
23230
(Zip Code)
804-274-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.33 1/3 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
(Do not check if smaller reporting company) Smaller operating company
No
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $96 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Common Stock, $0.33 1/3 par value
Class
Outstanding at February 12, 2016
1,957,931,815 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on
May 19, 2016, to be filed with the Securities and Exchange Commission on or about April 7, 2016, are incorporated by reference
into Part III hereof.
TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
Business
Business
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Properties
Item 2.
Legal Proceedings Mine
Legal Proceedings Mine
Item 3.
Safety Disclosures
Safety Disclosures
Item 4.
PART I
PART I
Item 1.
Item 1.
Item 1A. Risk Factors
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1B. Unresolved Staff Comments
Item 2.
Item 2.
Properties
Item 3.
Item 3.
Legal Proceedings Mine
Item 4.
Item 4.
Safety Disclosures
PART II
Item 5.
PART II
Item 5.
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Equity Securities
Selected Financial Data
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Equity Securities
Item 6.
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Item 9B. Other Information
12
14
15
38
39
110
110
Item 9B. Other Information
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Matters
110
111
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 14. Principal Accounting Fees and Services
Item 14. Principal Accounting Fees and Services
PART IV
PART IV
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 15. Exhibits and Financial Statement Schedules
Item 15. Exhibits and Financial Statement Schedules
Signatures
Signatures
Signatures
Page
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Part I
Item 1. Business.
General Development of Business
General: Altria Group, Inc. is a holding company
incorporated in the Commonwealth of Virginia in 1985. At
December 31, 2015, Altria Group, Inc.’s wholly-owned
subsidiaries included Philip Morris USA Inc. (“PM USA”), which
is engaged predominantly in the manufacture and sale of
cigarettes in the United States; John Middleton Co.
(“Middleton”), which is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco, and is a wholly-
owned subsidiary of PM USA; and UST LLC (“UST”), which
through its wholly-owned subsidiaries, including U.S. Smokeless
Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine
Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and
sale of smokeless tobacco products and wine. Altria Group, Inc.’s
other operating companies included Nu Mark LLC (“Nu Mark”),
a wholly-owned subsidiary that is engaged in the manufacture and
sale of innovative tobacco products, and Philip Morris Capital
Corporation (“PMCC”), a wholly-owned subsidiary that
maintains a portfolio of finance assets, substantially all of which
are leveraged leases. Other Altria Group, Inc. wholly-owned
subsidiaries included Altria Group Distribution Company, which
provides sales, distribution and consumer engagement services to
certain Altria Group, Inc. operating subsidiaries, and Altria Client
Services LLC, which provides various support services in areas
such as legal, regulatory, finance, human resources and external
affairs, to Altria Group, Inc. and its subsidiaries.
At December 31, 2015, Altria Group, Inc. also held
approximately 27% of the economic and voting interest of
SABMiller plc (“SABMiller”), which Altria Group, Inc. accounts
for under the equity method of accounting. On November 11,
2015, Anheuser-Busch InBev SA/NV (“AB InBev”) announced
its firm offer to effect a business combination with SABMiller in
a cash and stock transaction. For further discussion, see Note 6.
Investment in SABMiller to the consolidated financial statements
in Item 8. Financial Statements and Supplementary Data of this
Annual Report on Form 10-K (“Item 8”).
Source of Funds: Because Altria Group, Inc. is a holding
company, its 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 December 31, 2015,
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. In addition, Altria Group, Inc. receives cash
dividends on its interest in SABMiller if and when SABMiller
pays such dividends.
Financial Information About Segments
Altria Group, Inc.’s reportable segments are smokeable products,
smokeless products and wine. The financial services and the
innovative tobacco products businesses are included in an all
1
other category due to the continued reduction of the lease
portfolio of PMCC and the relative financial contribution of Altria
Group, Inc.’s innovative tobacco products businesses to Altria
Group, Inc.’s consolidated results.
Altria Group, Inc.’s chief operating decision maker reviews
operating companies income to evaluate the performance of, and
allocate resources to, the segments. Operating companies income
for the segments is defined as operating income before
amortization of intangibles and general corporate expenses.
Interest and other debt expense, net, and provision for income
taxes are centrally managed at the corporate level and,
accordingly, such items are not presented by segment since they
are excluded from the measure of segment profitability reviewed
by Altria Group, Inc.’s chief operating decision maker. Net
revenues and operating companies income (together with a
reconciliation to earnings before income taxes) attributable to
each such segment for each of the last three years are set forth in
Note 15. Segment Reporting to the consolidated financial
statements in Item 8 (“Note 15”). Information about total assets
by segment is not disclosed because such information is not
reported to or used by Altria Group, Inc.’s chief operating
decision maker. Segment goodwill and other intangible assets,
net, are disclosed in Note 4. Goodwill and Other Intangible
Assets, net to the consolidated financial statements in Item 8
(“Note 4”). The accounting policies of the segments are the same
as those described in Note 2. Summary of Significant Accounting
Policies to the consolidated financial statements in Item 8 (“Note
2”).
The relative percentages of operating companies income
(loss) attributable to each reportable segment and the all other
category were as follows:
Smokeable products
Smokeless products
Wine
All other
Total
2015
2014
2013
87.4%
87.2%
84.5%
12.8
1.8
(2.0)
13.4
1.7
(2.3)
12.2
1.4
1.9
100.0% 100.0%
100.0%
For items affecting the comparability of the relative percentages
of operating companies income (loss) attributable to each
reportable segment, see Note 15.
Narrative Description of Business
Portions of the information called for by this Item are included in
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Operating Results by
Business Segment of this Annual Report on Form 10-K.
Tobacco Space
Altria Group, Inc.’s tobacco operating companies include PM
USA, USSTC and other subsidiaries of UST, Middleton and Nu
Mark. Altria Group Distribution Company provides sales,
distribution and consumer engagement services to Altria Group,
Inc.’s tobacco operating companies.
The products of Altria Group, Inc.’s tobacco subsidiaries
include smokeable tobacco products comprised of cigarettes
manufactured and sold by PM USA and machine-made large
cigars and pipe tobacco manufactured and sold by Middleton;
smokeless tobacco products, substantially all of which are
manufactured and sold by USSTC; and innovative tobacco
products, including e-vapor products manufactured and sold by
Nu Mark.
Cigarettes: PM USA is the largest cigarette company in the
United States, with total cigarette shipment volume in the United
States of approximately 126.0 billion units in 2015, an increase of
0.5% from 2014. Marlboro, the principal cigarette brand of PM
USA, has been the largest-selling cigarette brand in the United
States for the past 40 years.
Cigars: Middleton is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco to customers,
substantially all of which are located in the United States.
Middleton sources a portion of its cigars from an importer
through a third-party contract manufacturing arrangement. Total
shipment volume for cigars was approximately 1.3 billion units in
2015, an increase of 4.2% from 2014. Black & Mild is the
principal cigar brand of Middleton.
Smokeless tobacco products: USSTC is the leading
producer and marketer of moist smokeless tobacco (“MST”)
products. The smokeless products segment includes the premium
brands, Copenhagen and Skoal, value brands, Red Seal and
Husky, and Marlboro Snus, a premium PM USA spit-free
smokeless tobacco product. Substantially all of the smokeless
tobacco products are manufactured and sold to customers in the
United States. Total smokeless products shipment volume was
813.5 million units in 2015, an increase of 2.5% from 2014.
Innovative tobacco products: Nu Mark participates in the
e-vapor category and has developed and commercialized other
innovative tobacco products. In addition, Nu Mark sources the
production of its e-vapor products through overseas contract
manufacturing arrangements. In 2013, Nu Mark introduced
MarkTen e-vapor products. In April 2014, Nu Mark acquired the
e-vapor business of Green Smoke, Inc. and its affiliates (“Green
Smoke”), which has been selling e-vapor products since 2009.
For a further discussion of the acquisition of Green Smoke, see
Note 3. Acquisition of Green Smoke to the consolidated financial
statements in Item 8 (“Note 3”).
In December 2013, Altria Group, Inc.’s subsidiaries entered
into a series of agreements with Philip Morris International Inc.
(“PMI”) pursuant to which Altria Group, Inc.’s subsidiaries
provide an exclusive license to PMI to sell Altria Group, Inc.’s
subsidiaries’ e-vapor products outside the United States, and
PMI’s subsidiaries provide an exclusive license to Altria Group,
Inc.’s subsidiaries to sell two of PMI’s heated tobacco product
technologies in the United States. Further, in July 2015, Altria
Group, Inc. announced the expansion of its strategic framework
with PMI to include a joint research, development and
technology-sharing agreement. Under this agreement, Altria
Group, Inc. and PMI will collaborate to develop e-vapor products
for commercialization in the United States by Altria Group, Inc.
and in markets outside the United States by PMI. This agreement
also provides for exclusive technology cross licenses, technical
information sharing and cooperation on scientific assessment,
regulatory engagement and approval related to e-vapor products.
Distribution, Competition and Raw Materials: Altria
Group, Inc.’s tobacco subsidiaries sell their tobacco products
principally to wholesalers (including distributors), large retail
organizations, including chain stores, and the armed services.
The market for tobacco products is highly competitive,
characterized by brand recognition and loyalty, with product
quality, taste, price, product innovation, marketing, packaging and
distribution constituting the significant methods of competition.
Promotional activities include, in certain instances and where
permitted by law, allowances, the distribution of incentive items,
price promotions, product promotions, coupons and other
discounts.
In June 2009, the President of the United States of America
signed into law the Family Smoking Prevention and Tobacco
Control Act (“FSPTCA”), which provides the United States Food
and Drug Administration (“FDA”) with broad authority to
regulate the design, manufacture, packaging, advertising,
promotion, sale and distribution of cigarettes, cigarette tobacco
and smokeless tobacco products; the authority to require
disclosures of related information; and the authority to enforce the
FSPTCA and related regulations. The FSPTCA imposes
restrictions on the advertising, promotion, sale and distribution of
tobacco products, including at retail. The law also grants the
FDA authority to extend the FSPTCA application, by regulation,
to all other tobacco products, including cigars, pipe tobacco and
e-vapor products. In April 2014, the FDA issued proposed
regulations for other tobacco products, which as proposed would
include machine-made large cigars, e-vapor products, pipe
tobacco and oral tobacco-derived nicotine products marketed and
sold by some of Altria Group, Inc.’s tobacco subsidiaries. The
proposed regulations would impose the FSPTCA regulatory
framework on products manufactured, marketed and sold by
Middleton and Nu Mark with potentially wide-ranging impact on
their businesses. PM USA and USSTC are subject to quarterly
user fees as a result of the FSPTCA. Their respective FDA user
fee amounts are determined by an allocation formula administered
by the FDA that is based on the respective market shares of
manufacturers and importers of each kind of tobacco product.
PM USA, USSTC and other U.S. tobacco manufacturers have
agreed to other marketing restrictions in the United States as part
of the settlements of state health care cost recovery actions.
In the United States, under a contract growing program, PM
USA purchases burley and flue-cured leaf tobaccos of various
grades and styles directly from tobacco growers. Under the terms
of this program, PM USA agrees to purchase the amount of
tobacco specified in the grower contracts. PM USA also
purchases a portion of its United States tobacco requirements
through leaf merchants.
2
Tobacco production in the United States was historically
subject to government controls, including the production control
programs administered by the United States Department of
Agriculture (the “USDA”). In October 2004, the Fair and
Equitable Tobacco Reform Act of 2004 (“FETRA”), which
applied to PM USA, Middleton and USSTC, was signed into law.
FETRA eliminated the federal tobacco quota and price support
program through an industry-funded buy-out of tobacco growers
and quota holders. The cost of the 10-year buy-out, which
expired after the third quarter of 2014, was approximately
$9.5 billion and was paid by manufacturers and importers of each
kind of tobacco product subject to federal excise tax (“FET”).
The cost was allocated based on the relative market shares of
manufacturers and importers of each kind of tobacco product. As
a result of FETRA, Altria Group, Inc.’s subsidiaries recorded
charges to cost of sales of approximately $0.3 billion for the year
ended December 31, 2014 and approximately $0.4 billion for the
year ended December 31, 2013.
USSTC purchases burley, dark fire-cured and air-cured
tobaccos of various grades and styles from domestic tobacco
growers under a contract growing program as well as from leaf
merchants.
Middleton purchases burley and dark air-cured tobaccos of
various grades and styles through leaf merchants. Middleton does
not have a contract growing program.
Altria Group, Inc.’s tobacco subsidiaries believe there is an
adequate supply of tobacco in the world markets to satisfy their
current and anticipated production requirements. See Item 1A.
Risk Factors of this Annual Report on Form 10-K (“Item 1A”)
and Tobacco Space - Business Environment - Price, Availability
and Quality of Agricultural Products in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations of this Annual Report on Form 10-K for a discussion
of risks associated with tobacco supply.
Wine
Ste. Michelle is a producer and supplier of premium varietal and
blended table wines and of sparkling wines. Ste. Michelle is a
leading producer of Washington state wines, primarily Chateau
Ste. Michelle, Columbia Crest and 14 Hands, and owns wineries
in or distributes wines from several other domestic and foreign
wine regions. Ste. Michelle’s total 2015 wine shipment volume
of approximately 8.9 million cases increased 6.2% from 2014.
Ste. Michelle holds an 85% ownership interest in Michelle-
Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa
Valley. Ste. Michelle also owns Conn Creek in Napa Valley and
Erath in Oregon. In addition, Ste. Michelle imports and markets
Antinori, Torres and Villa Maria Estate wines and Champagne
Nicolas Feuillatte in the United States.
Distribution, Competition and Raw Materials: Key
elements of Ste. Michelle’s strategy are expanded domestic
distribution of its wines, especially in certain account categories
such as restaurants, wholesale clubs, supermarkets, wine shops
and mass merchandisers, and a focus on improving product mix
to higher-priced, premium products.
Ste. Michelle’s business is subject to significant competition,
including competition from many larger, well-established
domestic and international companies, as well as from many
smaller wine producers. Wine segment competition is primarily
based on quality, price, consumer and trade wine tastings,
competitive wine judging, third-party acclaim and advertising.
Substantially all of Ste. Michelle’s sales occur in the United
States through state-licensed distributors.
Federal, state and local governmental agencies regulate the
beverage alcohol industry through various means, including
licensing requirements, pricing rules, labeling and advertising
restrictions, and distribution and production policies. Further
regulatory restrictions or additional excise or other taxes on the
manufacture and sale of alcoholic beverages may have an adverse
effect on Ste. Michelle’s wine business.
Ste. Michelle uses grapes harvested from its own vineyards
or purchased from independent growers, as well as bulk wine
purchased from other sources. Grape production can be adversely
affected by weather and other forces that may limit production.
At the present time, Ste. Michelle believes that there is a
sufficient supply of grapes and bulk wine available in the market
to satisfy its current and expected production requirements. See
Item 1A for a discussion of risks associated with competition,
unfavorable changes in grape supply and governmental
regulations.
Financial Services Business
In 2003, PMCC ceased making new investments and began
focusing exclusively on managing its portfolio of finance assets in
order to maximize its operating results and cash flows from its
existing lease portfolio activities and asset sales. For further
information on PMCC’s finance assets, see Note 7. Finance
Assets, net to the consolidated financial statements in Item 8
(“Note 7”).
Other Matters
Customers: The largest customer of PM USA, USSTC and
Middleton, McLane Company, Inc., accounted for approximately
26% of Altria Group, Inc.’s consolidated net revenues for the year
ended December 31, 2015, and 27% for each of the years ended
December 31, 2014 and 2013. In addition, Core-Mark Holding
Company, Inc. accounted for approximately 10% of Altria Group,
Inc.’s consolidated net revenues for the year ended December 31,
2015. Substantially all of these net revenues were reported in the
smokeable products and smokeless products segments.
Sales to three distributors accounted for approximately 66%,
67% and 66% of net revenues for the wine segment for the years
ended December 31, 2015, 2014 and 2013, respectively.
Employees: At December 31, 2015, Altria Group, Inc. and
its subsidiaries employed approximately 8,800 people.
Executive Officers of Altria Group, Inc.: The disclosure
regarding executive officers is included in Item 10. Directors,
Executive Officers and Corporate Governance - Executive
Officers as of February 12, 2016 of this Annual Report on Form
10-K.
3
Research and Development: Research and development
Available Information
expense for the years ended December 31, 2015, 2014 and 2013
is set forth in Note 17. Additional Information to the consolidated
financial statements in Item 8.
Intellectual Property: Trademarks are of material
importance to Altria Group, Inc. and its operating companies, and
are protected by registration or otherwise. In addition, as of
December 31, 2015, the portfolio of over 600 United States
patents owned by Altria Group, Inc.’s businesses, as a whole, was
material to Altria Group, Inc. and its tobacco businesses.
However, no one patent or group of related patents was material
to Altria Group, Inc.’s business or its tobacco businesses as of
December 31, 2015. Altria Group, Inc.’s businesses also have
proprietary secrets, technology, know-how, processes and other
intellectual property rights that are protected by appropriate
confidentiality measures. Certain trade secrets are material to
Altria Group, Inc. and its tobacco and wine businesses.
Environmental Regulation: Altria Group, Inc. and its
subsidiaries (and former subsidiaries) are subject to various
federal, state and local laws and regulations concerning the
discharge of materials into the environment, or otherwise related
to environmental protection, including, in the United States: The
Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act (commonly known as
“Superfund”), which can impose joint and several liability on
each responsible party. Subsidiaries (and former subsidiaries) of
Altria Group, Inc. are involved in several matters subjecting them
to potential costs of remediation and natural resource damages
under Superfund or other laws and regulations. Altria Group,
Inc.’s subsidiaries expect to continue to make capital and other
expenditures in connection with environmental laws and
regulations. As discussed in Note 2, Altria Group, Inc. provides
for expenses associated with environmental remediation
obligations on an undiscounted basis when such amounts are
probable and can be reasonably estimated. Such accruals are
adjusted as new information develops or circumstances change.
Other than those amounts, it is not possible to reasonably estimate
the cost of any environmental remediation and compliance efforts
that subsidiaries of Altria Group, Inc. may undertake in the future.
In the opinion of management, however, compliance with
environmental laws and regulations, including the payment of any
remediation and compliance costs or damages and the making of
related expenditures, has not had, and is not expected to have, a
material adverse effect on Altria Group, Inc.’s consolidated results
of operations, capital expenditures, financial position or cash
flows.
Financial Information About Geographic Areas
Substantially all of Altria Group, Inc.’s net revenues are from
sales generated in the United States for each of the last three fiscal
years and substantially all of Altria Group, Inc.’s long-lived assets
are located in the United States.
Altria Group, Inc. is required to file annual, quarterly and current
reports, proxy statements and other information with the
Securities and Exchange Commission (“SEC”). Investors may
read and copy any document that Altria Group, Inc. files,
including this Annual Report on Form 10-K, at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Investors may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC, from which investors can electronically access Altria Group,
Inc.’s SEC filings.
Altria Group, Inc. makes available free of charge on or
through its website (www.altria.com) its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as soon as reasonably
practicable after Altria Group, Inc. electronically files such
material with, or furnishes it to, the SEC. Investors can access
Altria Group, Inc.’s filings with the SEC by visiting
www.altria.com/secfilings.
The information on the respective websites of Altria Group,
Inc. and its subsidiaries is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings Altria
Group, Inc. makes with the SEC.
Item 1A. Risk Factors
The following risk factors should be read carefully in connection
with evaluating our business and the forward-looking statements
contained in this Annual Report on Form 10-K. Any of the
following risks could materially adversely affect our business, our
results of operations, our cash flows, our financial position and
the actual outcome of matters as to which forward-looking
statements are made in this Annual Report on Form 10-K.
We (1) may from time to time make written or oral forward-
looking statements, including earnings guidance and other
statements contained in filings with the SEC, reports to security
holders, press releases and investor webcasts. You can identify
these forward-looking statements by use of words such as
“strategy,” “expects,” “continues,” “plans,” “anticipates,”
believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,”
“goals,” “objectives,” “guidance,” “targets” and other words of
similar meaning. You can also identify them by the fact that they
do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will
be realized, although we believe we have been prudent in our
plans and assumptions. Achievement of future results is subject
to risks, uncertainties and assumptions that may prove to be
___________________________________________________
1 This section uses the terms “we,” “our” and “us” when it is not
necessary to distinguish among Altria Group, Inc. and its various
operating subsidiaries or when any distinction is clear from the context.
4
inaccurate. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate,
actual results could vary materially from those anticipated,
estimated or projected. You should bear this in mind as you
consider forward-looking statements and whether to invest in or
remain invested in Altria Group, Inc.’s securities. In connection
with the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we are identifying important
factors that, individually or in the aggregate, could cause actual
results and outcomes to differ materially from those contained in
any forward-looking statements made by us; any such statement
is qualified by reference to the following cautionary statements.
We elaborate on these and other risks we face throughout this
document, particularly in the “Business Environment” sections
preceding our discussion of the operating results of our
subsidiaries’ businesses in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of this
Annual Report on Form 10-K (“Item 7”). You should understand
that it is not possible to predict or identify all risk factors.
Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties. We do
not undertake to update any forward-looking statement that we
may make from time to time except as required by applicable law.
Unfavorable litigation outcomes could materially adversely
affect the consolidated results of operations, cash flows or
financial position of Altria Group, Inc., or the businesses of
one or more of its subsidiaries.
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-related claims, patent infringement,
employment matters, claims for contribution and claims of
competitors and 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 or other
litigation are significant and, in certain cases, range in the billions
of dollars. The variability in pleadings in multiple jurisdictions,
together with the actual experience of management in litigating
claims, demonstrate that the monetary relief that may be specified
in a lawsuit bears little relevance to the ultimate outcome. In
certain cases, plaintiffs claim that defendants’ liability is joint and
several. In such cases, Altria Group, Inc. or its subsidiaries may
face the risk that one or more co-defendants decline or otherwise
fail to participate in the bonding required for an appeal or to pay
their proportionate or jury-allocated share of a judgment. As a
result, Altria Group, Inc. or its subsidiaries under certain
circumstances may have to pay more than their proportionate
share of any bonding- or judgment-related amounts. Furthermore,
in those cases where plaintiffs are successful, Altria Group, Inc.
or its subsidiaries may also be required to pay interest and
attorneys’ fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
verdicts have been appealed, there remains a risk that such relief
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico now
limit the dollar amount of bonds or require no bond at all. As
discussed in Note 18, Contingencies to the consolidated financial
statements in Item 8 (“Note 18”), tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. Although we
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 the businesses of one or more of
its subsidiaries, could be materially adversely affected in a
particular fiscal quarter or fiscal year by an unfavorable outcome
of one or more such challenges.
In certain litigation, PM USA faces potentially significant
non-monetary remedies. For example, in the lawsuit brought by
the United States Department of Justice, discussed in Note 18, the
district court did not impose monetary penalties but ordered
significant non-monetary remedies, including the issuance of
“corrective statements” in various media.
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 the businesses
of one or more of its subsidiaries, could be materially adversely
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. See Item 3. Legal
Proceedings of this Annual Report on Form 10-K (“Item 3”),
Note 18 and Exhibits 99.1 and 99.2 to this Annual Report on
Form 10-K for a discussion of pending tobacco-related litigation.
Significant federal, state and local governmental actions,
including actions by the FDA, and various private sector
actions may continue to have an adverse impact on our
tobacco subsidiaries’ businesses.
As described in Tobacco Space - Business Environment in Item 7,
PM USA faces significant governmental and private sector
actions, including efforts aimed at reducing the incidence of
5
tobacco use and efforts seeking to hold PM USA responsible for
the adverse health effects associated with both smoking and
exposure to environmental tobacco smoke. These actions,
combined with the diminishing social acceptance of smoking,
have resulted in reduced cigarette industry volume, and we expect
that these factors will continue to reduce cigarette consumption
levels.
Actions by the FDA and other federal, state or local
governments or agencies, including those specific actions
described in Tobacco Space - Business Environment in Item 7,
may impact the consumer acceptability of tobacco products, limit
adult tobacco consumer choices, delay or prevent the launch of
new or modified tobacco products or products with claims of
reduced risk, require the recall or other removal of tobacco
products from the marketplace (for example as a result of product
contamination or a determination by the FDA that one or more
tobacco products do not satisfy the statutory requirements for
substantial equivalence), restrict communications to adult tobacco
consumers, restrict the ability to differentiate tobacco products,
create a competitive advantage or disadvantage for certain
tobacco companies, impose additional manufacturing, labeling or
packing requirements, interrupt manufacturing or otherwise
significantly increase the cost of doing business, or restrict or
prevent the use of specified tobacco products in certain locations
or the sale of tobacco products by certain retail establishments.
Any one or more of these actions may have a material adverse
impact on the business, consolidated results of operations, cash
flows or financial position of Altria Group, Inc. and its tobacco
subsidiaries. See Tobacco Space - Business Environment in Item
7 for a more detailed discussion of these risks.
Tobacco products are subject to substantial taxation, which
could have an adverse impact on sales of the tobacco products
of Altria Group, Inc.’s tobacco subsidiaries.
Tobacco products are subject to substantial excise taxes, and
significant increases in tobacco product-related taxes or fees have
been proposed or enacted and are likely to continue to be
proposed or enacted within the United States at the state, federal
and local levels. Tax increases are expected to continue to have an
adverse impact on sales of the tobacco products of our tobacco
subsidiaries through lower consumption levels and the potential
shift in adult consumer purchases from the premium to the non-
premium or discount segments or to other low-priced or low-
taxed tobacco products or to counterfeit and contraband products.
Such shifts may have an adverse impact on the reported share
performance of tobacco products of Altria Group, Inc.’s tobacco
subsidiaries. For further discussion, see Tobacco Space - Business
Environment - Excise Taxes in Item 7.
Our tobacco businesses face significant competition and their
failure to compete effectively could have an adverse effect on
the consolidated results of operations or cash flows of Altria
Group, Inc., or the business of Altria Group, Inc.’s tobacco
subsidiaries.
Each of Altria Group, Inc.’s tobacco subsidiaries operates in
highly competitive tobacco categories. Significant methods of
competition include product quality, taste, price, product
innovation, marketing, packaging, distribution and promotional
activities. A highly competitive environment could negatively
impact the profitability, market share and shipment volume of our
tobacco subsidiaries, which could have an adverse effect on the
consolidated results of operations or cash flows of Altria Group,
Inc.
PM USA also faces competition from lowest priced brands
sold by certain United States and foreign manufacturers that have
cost advantages because they are not parties to settlements of
certain tobacco litigation in the United States. These settlements,
among other factors, have resulted in substantial cigarette price
increases. These manufacturers may fail to comply with related
state escrow legislation or may avoid escrow deposit obligations
on the majority of their sales by concentrating on certain states
where escrow deposits are not required or are required on fewer
than all such manufacturers’ cigarettes sold in such states.
Additional competition has resulted from diversion into the
United States market of cigarettes intended for sale outside the
United States, the sale of counterfeit cigarettes by third parties,
the sale of cigarettes by third parties over the Internet and by
other means designed to avoid collection of applicable taxes, and
imports of foreign lowest priced brands. USSTC faces significant
competition in the smokeless tobacco category and has
experienced consumer down-trading to lower-priced brands. In
the cigar category, additional competition has resulted from
increased imports of machine-made large cigars manufactured
offshore.
Altria Group, Inc. and its subsidiaries may be unsuccessful in
anticipating changes in adult consumer preferences,
responding to changes in consumer purchase behavior or
managing through difficult competitive and economic
conditions.
Each of our tobacco and wine subsidiaries is subject to intense
competition and changes in adult consumer preferences. To be
successful, they must continue to:
promote brand equity successfully;
anticipate and respond to new and evolving adult
consumer preferences;
develop, manufacture, market and distribute products
that appeal to adult consumers (including, where
appropriate, through arrangements with, or investments
in, third parties);
improve productivity; and
protect or enhance margins through cost savings and
price increases.
See Tobacco Space - Business Environment - Summary in Item 7
for additional discussion concerning evolving adult tobacco
consumer preferences, including increased consumer awareness
of, and expenditures on, e-vapor products. Continued growth of
this product category could further contribute to reductions in
cigarette consumption levels and cigarette industry sales volume
6
and could adversely affect the growth rates of other tobacco
products.
do succeed, our tobacco subsidiaries may be at a competitive
disadvantage.
The willingness of adult consumers to purchase premium
consumer product brands depends in part on economic conditions.
In periods of economic uncertainty, adult consumers may
purchase more discount brands and/or, in the case of tobacco
products, consider lower-priced tobacco products, which could
have a material adverse effect on the business, consolidated
results of operations, cash flows or financial position of Altria
Group, Inc. and its subsidiaries. Our tobacco and wine
subsidiaries work to broaden their brand portfolios to compete
effectively with lower-priced products.
Our financial services business (conducted through PMCC)
holds investments in finance leases, principally in transportation
(including aircraft), power generation and manufacturing
equipment and facilities. Its lessees are also subject to intense
competition and economic conditions. If parties to PMCC’s
leases fail to manage through difficult economic and competitive
conditions, PMCC may have to increase its allowance for losses,
which would adversely affect our earnings.
Altria Group, Inc.’s tobacco subsidiaries may be unsuccessful
in developing and commercializing adjacent products or
processes, including innovative tobacco products that may
reduce the health risks associated with current tobacco
products and that appeal to adult tobacco consumers, which
may have an adverse effect on their ability to grow new
revenue streams.
Altria Group, Inc. and its subsidiaries have growth strategies
involving moves and potential moves into adjacent products or
processes, including innovative tobacco products. Some
innovative tobacco products may reduce the health risks
associated with current tobacco products, while continuing to
offer adult tobacco consumers (within and outside the United
States) products that meet their taste expectations and evolving
preferences. Examples include tobacco-containing and nicotine-
containing products that reduce or eliminate exposure to cigarette
smoke and/or constituents identified by public health authorities
as harmful. These efforts may include arrangements with, or
investments in, third parties. Our tobacco subsidiaries may not
succeed in these efforts, which would have an adverse effect on
the ability to grow new revenue streams.
Further, we cannot predict whether regulators, including the
FDA, will permit the marketing or sale of products with claims of
reduced risk to consumers, the speed with which they may make
such determinations or whether regulators will impose an unduly
burdensome regulatory framework on such products. Nor can we
predict whether adult tobacco consumers’ purchasing decisions
would be affected by such claims if permitted. Adverse
developments on any of these matters could negatively impact the
commercial viability of such products.
If our tobacco subsidiaries do not succeed in their efforts to
develop and commercialize innovative tobacco products or to
obtain regulatory approval for the marketing or sale of products
with claims of reduced risk, but one or more of their competitors
Significant changes in tobacco leaf price, availability or
quality could have an adverse effect on the profitability and
business of Altria Group, Inc.’s tobacco subsidiaries.
Any significant change in tobacco leaf prices, quality or
availability could adversely affect our tobacco subsidiaries’
profitability and business. For further discussion, see Tobacco
Space - Business Environment - Price, Availability and Quality of
Agricultural Products in Item 7.
Because Altria Group, Inc.’s tobacco subsidiaries rely on a
few significant facilities and a small number of significant
suppliers, an extended disruption at a facility or in service by
a supplier could have a material adverse effect on the
business, the consolidated results of operations, cash flows or
financial position of Altria Group, Inc. and its tobacco
subsidiaries.
Altria Group, Inc.’s tobacco subsidiaries face risks inherent in
reliance on a few significant facilities and a small number of
significant suppliers. A natural or man-made disaster or other
disruption that affects the manufacturing operations of any of
Altria Group, Inc.’s tobacco subsidiaries or the operations of any
significant suppliers of any of Altria Group, Inc.’s tobacco
subsidiaries could adversely impact the operations of the affected
subsidiaries. An extended disruption in operations experienced
by one or more of Altria Group, Inc.’s subsidiaries or significant
suppliers could have a material adverse effect on the business, the
consolidated results of operations, cash flows or financial position
of Altria Group, Inc. and its tobacco subsidiaries.
Altria Group, Inc. may be unable to attract and retain the
best talent due to the impact of decreasing social acceptance
of tobacco usage and tobacco control actions.
Our ability to implement our strategy of attracting and retaining
the best talent may be impaired by the impact of decreasing social
acceptance of tobacco usage and tobacco regulation and control
actions. The tobacco industry competes for talent with the
consumer products industry and other companies that enjoy
greater societal acceptance. As a result, we may be unable to
attract and retain the best talent.
Acquisitions or other events may adversely affect Altria
Group, Inc.’s credit rating, and Altria Group, Inc. may not
achieve its anticipated strategic or financial objectives.
Altria Group, Inc. from time to time considers acquisitions and
may engage in confidential acquisition negotiations that are not
publicly announced unless and until those negotiations result in a
definitive agreement. Although we seek to maintain or improve
our credit ratings over time, it is possible that completing a given
acquisition or the occurrence of other events could impact our
credit ratings or the outlook for those ratings. Any such change in
ratings or outlook may negatively affect the amount of credit
available to us and may also increase our costs and adversely
affect our earnings or our dividend rate.
7
Furthermore, acquisition opportunities are limited, and
acquisitions present risks of failing to achieve efficient and
effective integration, strategic objectives and anticipated revenue
improvements and cost savings. There can be no assurance that
we will be able to acquire attractive businesses on favorable
terms, that we will realize any of the anticipated benefits from an
acquisition or that acquisitions will be quickly accretive to
earnings.
Disruption and uncertainty in the debt capital markets could
adversely affect Altria Group, Inc.’s access to the debt capital
markets, earnings and dividend rate.
Access to the debt capital markets is important for us to satisfy
our liquidity and financing needs. Disruption and uncertainty in
the credit and debt capital markets and any resulting adverse
impact on credit availability, pricing, credit terms or credit rating
may negatively affect the amount of credit available to us and
may also increase our costs and adversely affect our earnings or
our dividend rate.
Altria Group, Inc.’s reported earnings from and carrying
value of its equity investment in SABMiller may be adversely
affected by unfavorable foreign currency exchange rates and
other factors.
For purposes of financial reporting, the earnings from and
carrying value of our equity investment in SABMiller are
translated into U.S. dollars from various local currencies. During
times of a strengthening U.S. dollar against these currencies, our
reported earnings from and carrying value of our equity
investment in SABMiller will be reduced because the local
currencies will translate into fewer U.S. dollars. The earnings
from and carrying value of our equity investment in SABMiller
are also subject to the risks encountered by SABMiller in its
business.
Altria Group, Inc. may be required to write down intangible
assets, including goodwill, due to impairment, which would
reduce earnings.
We periodically calculate the fair value of our reporting units and
intangible assets to test for impairment. This calculation may be
affected by several factors, including general economic
conditions, regulatory developments, changes in category growth
rates as a result of changing adult consumer preferences, success
of planned new product introductions, competitive activity and
tobacco-related taxes. If an impairment is determined to exist, we
will incur impairment losses, which will reduce our earnings.
Competition, unfavorable changes in grape supply and new
governmental regulations or revisions to existing
governmental regulations could adversely affect Ste.
Michelle’s wine business.
Ste. Michelle’s business is subject to significant competition,
including from many large, well-established domestic and
international companies. The adequacy of Ste. Michelle’s grape
supply is influenced by consumer demand for wine in relation to
industry-wide production levels as well as by weather and crop
conditions, particularly in eastern Washington. Supply shortages
related to any one or more of these factors could increase
production costs and wine prices, which ultimately may have a
negative impact on Ste. Michelle’s sales. In addition, federal,
state and local governmental agencies regulate the alcohol
beverage industry through various means, including licensing
requirements, pricing, labeling and advertising restrictions, and
distribution and production policies. New regulations or revisions
to existing regulations, resulting in further restrictions or taxes on
the manufacture and sale of alcoholic beverages, may have an
adverse effect on Ste. Michelle’s wine business. For further
discussion, see Wine Segment - Business Environment in Item 7.
The failure of Altria Group, Inc.’s information systems or
service providers’ information systems to function as
intended, or cyberattacks or security breaches, could result in
loss of revenue, assets, personal data, intellectual property,
trade secrets or other sensitive data, violation of applicable
privacy and data security laws, reputational harm and
significant costs.
Altria Group, Inc. and its subsidiaries rely on information systems
to help manage business processes, collect and interpret business
data, comply with regulatory, financial reporting and tax
requirements, engage in marketing and e-commerce activities,
collect and store sensitive data and confidential information, and
communicate internally and externally with employees, investors,
suppliers, trade customers, adult consumers and others. Many of
these information systems are managed by third-party service
providers. We have implemented administrative, technical and
physical safeguards, including testing and auditing protocols,
backup systems and business continuity plans, intended to protect
our systems and data. However, because the techniques used in
cyberattacks and security breaches change frequently and often
are not recognized until launched against a target, we may be
unable to anticipate these techniques or to implement adequate
preventative measures. To date, interruptions of our information
systems have been infrequent and have not had a material impact
on our operations. Failure of our systems or service providers’
systems to function as intended or cyberattacks or security
breaches by parties intent on extracting or corrupting information
or otherwise disrupting business processes could result in loss of
revenue, assets, personal data, intellectual property, trade secrets
or other sensitive and confidential data, violation of applicable
privacy and data security laws, damage to the reputation of our
companies and their brands, legal challenges and significant
remediation and other costs to Altria Group, Inc. and its
subsidiaries.
Unfavorable outcomes of any governmental investigations
could materially affect the businesses of Altria Group, Inc.
and its subsidiaries.
From time to time, Altria Group, Inc. and its subsidiaries are
subject to governmental investigations on a range of matters. We
cannot predict whether new investigations may be commenced or
the outcome of such investigations, and it is possible that our
8
business could be materially adversely affected by an unfavorable
outcome of future investigations.
Expanding international business operations subjects Altria
Group, Inc. and its subsidiaries to various United States and
foreign laws and regulations, and violations of such laws or
regulations could result in reputational harm, legal challenges
and/or significant costs.
While Altria Group, Inc. and its subsidiaries are primarily
engaged in business activities in the United States, they do engage
(directly or indirectly) in certain international business activities
that are subject to various United States and foreign laws and
regulations, such as the U.S. Foreign Corrupt Practices Act and
other laws prohibiting bribery and corruption. Although we have
a Code of Conduct and a compliance system designed to prevent
and detect violations of applicable law, no system can provide
assurance that it will always protect against improper actions by
employees or third parties. Violations of these laws, or
allegations of such violations, could result in reputational harm,
legal challenges and/or significant costs.
AB InBev’s proposed transaction to effect a business
combination with SABMiller may not be completed within the
anticipated time frame or at all, which could have a negative
effect on the value of our equity investment in SABMiller.
As described in more detail in Note 6, Investment in SABMiller to
the consolidated financial statements in Item 8 (“Note 6”), on
November 11, 2015, AB InBev announced its firm offer to effect
a business combination with SABMiller. The proposed
transaction is subject to a number of closing conditions, including
shareholder approvals of both SABMiller and AB InBev, and
receipt of the required regulatory approvals. These conditions
may not be satisfied or may take longer than expected to be
satisfied. The transaction is also subject to other risks and
uncertainties over which Altria Group, Inc. has no control. We
cannot provide any assurance that the proposed transaction will
be completed or that there will not be a delay in the completion of
the proposed transaction. If the transaction is not completed or is
subject to a delay, the value of our investment in SABMiller could
be adversely affected.
If AB InBev’s proposed transaction to effect a business
combination with SABMiller is completed, AB InBev may not
achieve the intended benefits of the transaction, which could
have a negative effect on our reported earnings from and
carrying value of our equity investment in the combined
company.
There can be no assurance that AB InBev will be able to
successfully integrate SABMiller’s business or otherwise realize
the expected benefits of the proposed transaction. Any of these
outcomes could result in increased costs to the combined
company and dilution to its shareholders, and could adversely
affect the combined company’s financial condition and Altria
Group, Inc.’s reported earnings from and carrying value of our
investment in the combined company.
9
If AB InBev’s proposed transaction to effect a business
combination with SABMiller is completed, we will receive a
substantial portion of our transaction consideration in the
form of restricted shares. Furthermore, the number of
restricted shares we expect to receive is, under certain
circumstances described below, subject to proration, which if
it were to occur would decrease the number of restricted
shares and increase the amount of cash that we receive in
connection with the transaction. Any cash we receive will be
subject to taxation and to risks associated with changes in the
value of the U.S. dollar versus the British pound.
Altria Group, Inc. has committed to elect the partial share
alternative (“PSA”) in the transaction. Therefore, upon
completion of the proposed transaction, we expect to receive a
substantial portion of our transaction consideration in the form of
shares that will be subject to certain limitations and restrictions,
including a five-year restriction on sale or transfer, subject to
limited exceptions. These transfer restrictions will require us to
bear the risks associated with our investment in the combined
company for a five-year period following completion of the
proposed transaction. Further, while we have committed to elect
the PSA in the transaction, our election is subject to proration to
the extent that other SABMiller shareholders also elect this
alternative and these elections exceed the maximum number of
shares that AB InBev’s firm offer makes available to those
SABMiller shareholders that elect the PSA. If we receive more
cash and less equity consideration than we currently expect, we
will be subject to additional tax liabilities, our percentage
ownership of the combined company will be reduced and we may
be unable to account for our investment under the equity method
of accounting as we currently do for our investment in
SABMiller.
In addition, the cash consideration we expect to receive will
be denominated in British pounds. Based on the British pound to
U.S. dollar exchange rate on November 10, 2015, the trading day
prior to the announcement of the proposed transaction, we
anticipate receiving approximately $2.5 billion in pre-tax cash.
We entered into a derivative financial instrument in the form of a
put option to hedge our exposure to foreign currency exchange
rate movements. We are exposed to the risk of default by, or
failure of, our counterparty financial institution to perform under
the contractual obligation of the derivative financial instrument.
In addition, as indicated above, we may receive more cash
consideration than we anticipate because our election of the PSA
is subject to proration and, therefore, we may not be successful in
effectively mitigating our foreign currency exchange rate risk on
any additional cash proceeds above the $2.5 billion in pre-tax
cash that we may receive. As a result of either of the above risks,
Altria Group, Inc. could incur a decrease in the amount of the
gain recorded upon the completion of the AB InBev and
SABMiller transaction.
If AB InBev’s proposed transaction to effect a business
combination with SABMiller is completed, our tax treatment
of the transaction may be challenged.
While we expect the equity consideration that we receive in the
transaction to qualify for tax-deferred treatment, we cannot
provide any assurance that federal and state tax authorities will
not challenge the expected tax treatment and, if they do, what the
outcome of any such challenge will be. It is also possible that the
tax treatment of the dividends Altria Group, Inc. expects to
receive from the combined company may not be as favorable as
that applied to the dividends we receive from SABMiller.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The property in Richmond, Virginia that serves as the
headquarters facility for Altria Group, Inc., PM USA, USSTC,
Middleton, Nu Mark and certain other subsidiaries is under lease.
At December 31, 2015, the smokeable products segment used
four manufacturing and processing facilities. PM USA owns and
operates two tobacco manufacturing and processing facilities
located in the Richmond, Virginia area that are used in the
manufacturing and processing of cigarettes. Middleton owns and
operates two manufacturing and processing facilities - one in
King of Prussia, Pennsylvania and one in Limerick, Pennsylvania
- that are used in the manufacturing and processing of cigars and
pipe tobacco. In addition, PM USA owns a research and
technology center in Richmond, Virginia that is leased to an
affiliate, Altria Client Services LLC.
At December 31, 2015, the smokeless products segment used
four smokeless tobacco manufacturing and processing facilities
located in Franklin Park, Illinois; Hopkinsville, Kentucky;
Nashville, Tennessee; and Richmond, Virginia, all of which are
owned and operated by USSTC. In 2016, USSTC expects to
complete construction of a new facility located in Hopkinsville,
Kentucky and expects the facility to be operational in the second
half of 2016.
At December 31, 2015, the wine segment used 11 wine-
making facilities - seven in Washington, three in California and
one in Oregon. All of these facilities are owned and operated by
Ste. Michelle, with the exception of a facility that is leased by Ste.
Michelle in Washington. In addition, in order to support the
production of its wines, the wine segment used vineyards in
Washington, California and Oregon that are leased or owned by
Ste. Michelle.
The plants and properties owned or leased and operated by
Altria Group, Inc. and its subsidiaries are maintained in good
condition and are believed to be suitable and adequate for present
needs.
Item 3. Legal Proceedings.
The information required by this Item is included in Note 18 and
Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K.
Altria Group, Inc.’s consolidated financial statements and
accompanying notes for the year ended December 31, 2015 were
filed on Form 8-K on January 28, 2016 (such consolidated
financial statements and accompanying notes are also included in
Item 8). The following summarizes certain developments in
Altria Group, Inc.’s litigation since the filing of such Form 8-K.
Recent Developments
Smoking and Health Litigation
Non-Engle Progeny Litigation:
In Pooshs, on February 8, 2016, a California federal court jury
returned a verdict in favor of PM USA.
In Bullock, on February 8, 2016, the district court denied
plaintiff’s motion for a new trial.
In Schwarz, on February 10, 2016, PM USA filed a petition for
writ of certiorari with the United States Supreme Court.
Engle Progeny Trial Results:
In McCoy, on January 27, 2016, plaintiff filed a notice of cross-
appeal to the Florida Fourth District Court of Appeal.
In Ewing, on January 28, 2016, an Escambia County jury
returned a verdict in favor of PM USA.
In Pollari, on January 28, 2016, PM USA posted a bond in the
amount of $2.5 million.
On January 29, 2016, the Florida Supreme Court upheld the
trial court’s decision in favor of plaintiff in R. Cohen. On
February 1, 2016, the Florida Supreme Court upheld the trial
courts’ decisions in favor of plaintiffs in Kayton and Putney. On
February 3, 2016, defendants filed a motion for clarification in
Putney. On February 8, 2016, in Kayton and R. Cohen, PM USA
posted riders increasing the amount of its bonds to $15 million
and $7.5 million, respectively.
In Buchanan, on February 2, 2016, the Florida Supreme Court
declined to accept jurisdiction of PM USA’s petition for review.
On February 8, 2016, PM USA posted a rider increasing the
amount of its bond to $5.5 million.
In Bowden, on February 2, 2016, the Florida First District Court
of Appeal affirmed the trial court’s decision in favor of plaintiff.
In the first quarter of 2016, PM USA will record a provision of
approximately $1.6 million for the judgment plus interest.
In Barbose, on February 17, 2016, PM USA posted a bond in
the amount of $2.5 million and, on February 16, 2016, defendants
filed a notice of appeal to the Florida Second District Court of
Appeal.
In Cooper, on February 10, 2016, the trial court entered final
judgment in favor of plaintiff, reducing the compensatory
damages award against PM USA to approximately $300,000.
In Ahrens, on February 13, 2016, a Pinellas County jury
returned a verdict in favor of plaintiff and against PM USA and
R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding $9
million in compensatory damages and allocating 24% of the fault
to PM USA. The jury also awarded $2.5 million in punitive
damages against each defendant.
In Greene (formerly Rizzuto), on February 16, 2016, PM USA
paid the judgment plus interest in the amount of approximately
$6.8 million.
10
In Hess, on February 22, 2016, PM USA paid the judgment
plus interest and associated costs in the amount of approximately
$10.6 million.
In E. Smith, on February 22, 2016, a Palm Beach County jury
returned a verdict in favor of PM USA and R.J. Reynolds.
In Ledoux, on February 23, 2016, the trial court denied
defendants’ post-trial motions.
Medical Monitoring Class Actions: In Donovan, on February
10, 2016, a Massachusetts jury returned a verdict in favor of PM
USA.
“Lights/Ultra Lights” Cases
State Trial Court Class Certifications: In Aspinall, on
February 19, 2016, the trial court issued its “Findings of Fact and
Conclusions of Law.” The court found that (1) PM USA violated
Massachusetts consumer protection laws in marketing Marlboro
“Lights” and (2) plaintiffs proved that class members were
economically injured, but did not prove a specific measure of
damages. As a result, the court awarded statutory damages of $25
per class member, for a total of $4.9 million, plus interest,
attorneys’ fees and costs.
Health Care Cost Recovery Litigation
Certain Other Tobacco-Related Litigation
Argentine Grower Cases: In Hupan, on January 29, 2016,
plaintiffs filed an amended complaint against defendants,
including PM USA. On February 12, 2016, PM USA and Philip
Morris Global Brands Inc. (a subsidiary of PMI) filed a motion to
strike the amended complaint.
UST Litigation: In Vassallo, on February 3, 2016, the trial
court denied plaintiff’s motion to amend the complaint to add
fraud and conspiracy claims.
Item 4. Mine Safety Disclosures.
Not applicable.
NPM Adjustment Disputes: On February 8, 2016, PM USA
and certain other manufacturers entered into an agreement with
the State of Missouri to settle the non-participating manufacturer
(“NPM”) adjustment disputes under the 1998 Master Settlement
Agreement (“MSA”). The settlement is contingent upon
Missouri’s enactment by June 3, 2016 of certain amendments to
its existing escrow statute. Similar to the settlement of these
disputes with 24 other signatory states, the settlement with
Missouri would resolve the disputes for the years 2003-2012 and
treat 2013-2014 as “transition years.” If the settlement becomes
effective, PM USA will retain approximately $36 million
previously received as a result of an arbitration panel’s ruling that
Missouri did not diligently enforce its escrow statute during 2003
and will receive an additional approximately $18 million in the
form of a reduction to the next MSA payment following the
effectiveness of the settlement. In addition, if the settlement
becomes effective, the NPM Adjustment provision will be revised
and streamlined as to Missouri for the years after 2014. The
original participating manufacturers have agreed that the amounts
they receive under the settlement for the years after 2014 will be
allocated among them pursuant to a formula that modifies the
MSA allocation formula in a manner favorable to PM USA,
although the extent to which it remains favorable to PM USA will
depend upon future developments.
On February 22, 2016, the Court of Appeals of Maryland
denied PM USA’s petition for discretionary judicial review of the
Maryland intermediate appellate court decision that had reversed
the Maryland trial court’s ruling in PM USA’s favor on the pro
rata judgment reduction method. This decision leaves in effect
the intermediate court’s decision applying a judgment reduction
method that is more favorable to the state. As a result of this
denial of PM USA’s petition, PM USA will be required to return
approximately $12 million of the 2003 NPM Adjustment and $7
million of the interest it received (plus interest on those amounts).
In addition, PM USA will record a corresponding reduction to its
pre-tax earnings in the first quarter of 2016.
Federal Government’s Lawsuit: On February 8, 2016, the
U.S. District Court for the District of Columbia issued an order on
the content of the corrective communications and ordered the
parties to submit proposed changes to the consent order on the
implementation details by April 1, 2016.
11
Part II
Part II
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Securities.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Performance Graph
Securities.
Performance Graph
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
investment of $100 in common stock and each of the indices as of the market close on December 31, 2010 and the reinvestment of all
investment of $100 in common stock and each of the indices as of the market close on December 31, 2010 and the reinvestment of all
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
investment of $100 in common stock and each of the indices as of the market close on December 31, 2010 and the reinvestment of all
dividends on a quarterly basis.
dividends on a quarterly basis.
dividends on a quarterly basis.
investment of $100 in common stock and each of the indices as of the market close on December 31, 2010 and the reinvestment of all
dividends on a quarterly basis.
Comparison of Five-Year Cumulative Total Shareholder Return
Altria Group, Inc.
Altria Peer Group
S&P 500
$400
$350
$300
$250
$200
$150
$100
$50
2010
2011
2012
2013
2014
2015
$
S&P 500
Date
S&P 500
Date
December 2010
S&P 500
Date
$ 100.00
December 2010
S&P 500
Date
December 2011
December 2010
$ 100.00
$ 102.11
December 2011
December 2012
$ 100.00
December 2010
$ 102.11
December 2011
December 2012
$ 118.44
December 2013
$ 102.11
December 2011
$ 118.44
December 2012
December 2013
$ 156.79
December 2014
$ 118.44
December 2012
$ 156.79
December 2013
December 2014
$ 178.24
December 2015
$ 156.79
December 2013
$ 178.24
December 2014
December 2015
$ 180.68
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
$ 178.24
December 2014
$ 180.68
December 2015
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1)In 2015, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating
$ 180.68
December 2015
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1)In 2015, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating
companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-
(1)In 2015, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Kraft Foods Group, Inc., The
companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-
Kraft Heinz Company, Lorillard, Inc.,
International, Inc., PepsiCo, Inc. and Reynolds American Inc.
companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-
Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Kraft Foods Group, Inc., The
(1)In 2015, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating
Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Kraft Foods Group, Inc., The
Kraft Heinz Company, Lorillard, Inc.,
International, Inc., PepsiCo, Inc. and Reynolds American Inc.
Note - On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to
companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-
Kraft Heinz Company, Lorillard, Inc.,
International, Inc., PepsiCo, Inc. and Reynolds American Inc.
International, Inc. (MDLZ). On July 2, 2015, Kraft Foods Group, Inc. merged with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation,
Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Kraft Foods Group, Inc., The
Note - On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to
which was renamed The Kraft Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO).
Note - On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to
International, Inc., PepsiCo, Inc. and Reynolds American Inc.
Kraft Heinz Company, Lorillard, Inc.,
International, Inc. (MDLZ). On July 2, 2015, Kraft Foods Group, Inc. merged with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation,
International, Inc. (MDLZ). On July 2, 2015, Kraft Foods Group, Inc. merged with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation,
which was renamed The Kraft Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO).
Note - On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to
which was renamed The Kraft Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO).
Altria
Altria
Group, Inc.
Altria
Group, Inc.
100.00
$
Group, Inc.
Altria
$
Group, Inc.
$
127.66
$ 102.11
$
$
142.68
$
$ 118.44
$
$
$
183.42
$
$ 156.79
$
$
$
246.72
$
$ 178.24
$
$
$
$ 303.71 $ 204.47 $ 180.68
$
$
$
$
$
$
Altria Group, Inc.
Altria Group, Inc.
Peer Group
Altria Group, Inc.
Peer Group
100.00
Peer Group
Altria Group, Inc.
$
Peer Group
114.65
$
$
124.68
$
$
$
155.86
$
$
$
175.31
$
$
$
$
$
$
$
$
$
100.00
100.00
114.65
100.00
114.65
124.68
114.65
124.68
155.86
124.68
155.86
175.31
155.86
175.31
204.47
175.31
204.47
204.47
100.00
100.00
127.66
100.00
127.66
142.68
127.66
142.68
183.42
142.68
183.42
246.72
183.42
246.72
303.71
246.72
303.71
303.71
International, Inc. (MDLZ). On July 2, 2015, Kraft Foods Group, Inc. merged with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation,
$
$
$
$
$ 100.00
12
which was renamed The Kraft Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO).
12
12
12
Market and Dividend Information
The principal stock exchange on which Altria Group, Inc.’s common stock (par value $0.33 1/3 per share) is listed is the New York
Stock Exchange. At February 12, 2016, there were approximately 71,000 holders of record of Altria Group, Inc.’s common stock.
The table below discloses the high and low sales prices and cash dividends declared per share for Altria Group, Inc.’s common stock as
reported by the New York Stock Exchange.
2015:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2014:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Price Per Share
High
Low
Cash Dividends
Declared Per Share
$
$
$
$
$
$
$
$
61.74
56.39
52.99
56.70
51.67
46.20
43.38
38.38
$
$
$
$
$
$
$
$
53.68
47.41
47.31
48.52
44.59
40.26
37.13
33.80
$
$
$
$
$
$
$
$
0.565
0.565
0.52
0.52
0.52
0.52
0.48
0.48
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2015
The Board of Directors authorized a $1.0 billion share repurchase program in July 2015 (the “July 2015 share repurchase program”),
which Altria Group, Inc. expects to complete by the end of 2016. The timing of share repurchases under the July 2015 share repurchase
program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of
Directors.
Altria Group, Inc.’s share repurchase activity for each of the three months in the period ended December 31, 2015, was as follows:
Period
October 1- October 31, 2015
November 1- November 30, 2015
December 1- December 31, 2015
Total Number
of Shares
Purchased (1)
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs
1,811 $
1,977 $
613,973 $
61.14
54.03
57.65
— $
— $
612,000 $
1,000,000,000
1,000,000,000
964,710,531
For the Quarter Ended December 31, 2015
(1) The total number of shares purchased include (a) shares purchased under the July 2015 share repurchase program (which totaled 612,000 shares
in December) and (b) shares withheld by Altria Group, Inc. in an amount equal to the statutory withholding taxes for holders who vested in
restricted stock and restricted stock units, and forfeitures of restricted stock for which consideration was paid in connection with termination of
employment of certain employees (which totaled 1,811 shares in October, 1,977 shares in November and 1,973 shares in December).
617,761 $
57.65
13
Item 6. Selected Financial Data.
(in millions of dollars, except per share and employee data)
Summary of Operations:
Net revenues
Cost of sales
Excise taxes on products
Operating income
Interest and other debt expense, net
Earnings from equity investment in SABMiller
Earnings before income taxes
Pre-tax profit margin
Provision for income taxes
Net earnings
Net earnings attributable to Altria Group, Inc.
Basic and Diluted EPS — net earnings attributable to Altria Group, Inc.
Dividends declared per share
Weighted average shares (millions) — Basic and Diluted
Capital expenditures
Depreciation
Property, plant and equipment, net
Inventories
Total assets
Long-term debt
Total debt
Total stockholders’ equity
Common dividends declared as a % of Basic and Diluted EPS
Book value per common share outstanding
Market price per common share — high/low
Closing price per common share at year end
Price/earnings ratio at year end — Basic and Diluted
Number of common shares outstanding at year end (millions)
Approximate number of employees
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
2015
2014
2013
2012
2011
$
25,434
$
24,522
$
24,466
$
24,618
$
23,800
7,740
6,580
8,361
817
757
8,078
7,785
6,577
7,620
808
1,006
7,774
7,206
6,803
8,084
1,049
991
6,942
7,937
7,118
7,253
1,126
1,224
6,477
7,680
7,181
6,068
1,216
730
5,582
31.8%
31.7%
28.4%
26.3%
23.5%
2,835
5,243
5,241
2.67
2.17
1,961
229
204
1,982
2,031
32,535
12,915
12,919
2,873
2,704
5,070
5,070
2.56
2.00
1,978
163
188
1,983
2,040
34,475
13,693
14,693
3,010
2,407
4,535
4,535
2.26
1.84
1,999
131
192
2,028
1,879
34,859
13,992
14,517
4,118
2,294
4,183
4,180
2.06
1.70
2,024
124
205
2,102
1,746
35,329
12,419
13,878
3,170
2,189
3,393
3,390
1.64
1.58
2,064
105
233
2,216
1,779
36,751
13,089
13,689
3,683
81.3%
1.47
78.1%
1.53
81.4%
2.07
82.5%
1.58
96.3%
1.80
61.74-47.31
51.67-33.80
38.58-31.85
36.29-28.00
30.40-23.20
58.21
22
1,960
8,800
49.27
19
1,971
9,000
38.39
17
1,993
9,000
31.44
15
2,010
9,100
29.65
18
2,044
9,900
14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the
other sections of this Annual Report on Form 10-K, including the
consolidated financial statements and related notes contained in
Item 8, and the discussion of cautionary factors that may affect
future results in Item 1A.
Description of the Company
At December 31, 2015, Altria Group, Inc.’s wholly-owned
subsidiaries included PM USA, which is engaged
predominantly in the manufacture and sale of cigarettes in the
United States; Middleton, which is engaged in the manufacture
and sale of machine-made large cigars and pipe tobacco, and is
a wholly-owned subsidiary of PM USA; and UST, which
through its wholly-owned subsidiaries, including USSTC and
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, a wholly-owned
subsidiary that is engaged in the manufacture and sale of
innovative tobacco products, and 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. In addition, Nu Mark
and Middleton use third-party contract manufacturing
arrangements in the manufacture of their products. 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 December 31, 2015,
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 December 31, 2015, Altria Group, Inc. also held
approximately 27% of the economic and voting interest of
SABMiller, which Altria Group, Inc. accounts for under the
equity method of accounting. Altria Group, Inc. receives cash
dividends on its interest in SABMiller if and when SABMiller
pays such dividends. On November 11, 2015, AB InBev
announced its firm offer to effect a business combination with
SABMiller in a cash and stock transaction. For further
discussion, see Note 6.
Altria Group, Inc.’s reportable segments are smokeable
products, smokeless products and wine. The financial services
and the innovative tobacco products businesses are included in an
all other category due to the continued reduction of the lease
portfolio of PMCC and the relative financial contribution of Altria
Group, Inc.’s innovative tobacco products businesses to Altria
Group, Inc.’s consolidated results.
Executive Summary
The following executive summary is intended to provide
significant highlights of the Discussion and Analysis that follows.
Consolidated Results of Operations
The changes in Altria Group, Inc.’s net earnings and diluted
earnings per share (“EPS”) attributable to Altria Group, Inc. for
the year ended December 31, 2015, from the year ended
December 31, 2014, were due primarily to the following:
$
(in millions, except per share data)
For the year ended December 31, 2014
2014 NPM Adjustment Items
2014 Asset impairment, exit, integration and
acquisition-related costs
2014 Tobacco and health litigation items
2014 SABMiller special items
2014 Loss on early extinguishment of debt
2014 Tax items
Subtotal 2014 special items
2015 NPM Adjustment Items
2015 Asset impairment, exit and integration
Net
Earnings
Diluted
EPS
2.56
(0.03)
5,070 $
(56)
14
28
17
28
(14)
17
51
0.01
0.01
0.01
0.02
(0.01)
0.01
0.03
costs
Subtotal 2015 special items
2015 Tobacco and health litigation items
2015 SABMiller special items
2015 Loss on early extinguishment of debt
2015 Other income, net
2015 Tax items
(9)
(94)
(82)
(143)
3
11
(263)
—
Fewer shares outstanding
(53)
Change in tax rate
470
Operations
5,241 $
For the year ended December 31, 2015
See the discussion of events affecting the comparability of
statement of earnings amounts in the Consolidated Operating
Results section of the following Discussion and Analysis.
—
(0.05)
(0.04)
(0.07)
—
—
(0.13)
0.02
(0.03)
0.24
2.67
$
Fewer Shares Outstanding: Fewer shares outstanding
during 2015 compared with 2014 were due primarily to
shares repurchased by Altria Group, Inc. under its share
repurchase programs.
Change in Tax Rate: The change in tax rate was due
primarily to decreased recognition of foreign tax credits
associated with SABMiller dividends.
Operations: The increase of $470 million in operations
shown in the table above was due primarily to the
following:
higher income from the smokeable products and
smokeless products segments; and
lower interest and other debt expense, net;
15
partially offset by:
lower earnings from Altria’s equity investment in
SABMiller.
For further details, see the Consolidated Operating Results and
Operating Results by Business Segment sections of the
following Discussion and Analysis.
2016 Forecasted Results
In January 2016, Altria Group, Inc. forecasted that its 2016 full-
year adjusted diluted EPS growth rate is expected to be in the
range of 7% to 9% over 2015 full-year adjusted diluted EPS.
This forecasted growth rate excludes the net expenses in the
table below. Altria Group, Inc. expects that its 2016 full-year
effective tax rate on operations will be 35.3%. This forecast
does not include any impact from the anticipated AB InBev and
SABMiller business combination, as the transaction remains
subject to certain approvals and the closing date has not yet
been determined. In addition, the factors described in Item 1A
represent continuing risks to this forecast.
Expense (Income), Net Excluded from Adjusted Diluted EPS
NPM Adjustment Items
Asset impairment, exit and implementation
costs1
Tobacco and health litigation items
SABMiller special items
Loss on early extinguishment of debt
2016
$
— $
2015
(0.03)
0.05
—
—
—
0.05
$
—
0.05
0.04
0.07
0.13
$
1 Represents restructuring charges, substantially all of which are
expected to be recorded in the first quarter of 2016 in connection with
the productivity initiative announced in January 2016. For further
discussion of the productivity initiative, see Note 21. Subsequent Event
to the consolidated financial statements in Item 8.
Altria Group, Inc. reports its financial results in accordance
with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). Altria Group, Inc.’s
management reviews certain financial results, including diluted
EPS, on an adjusted basis, which excludes certain income and
expense items that management believes are not part of
underlying operations. These items may include, for example,
loss on early extinguishment of debt, restructuring charges,
SABMiller special items, certain tax items, charges associated
with tobacco and health litigation items, and settlements of, and
determinations made in connection with, disputes with certain
states and territories related to the NPM adjustment provision
under the MSA (such settlements and determinations are
referred to collectively as “NPM Adjustment Items” and are
more fully described in Health Care Cost Recovery Litigation -
NPM Adjustment Disputes in Note 18). Altria Group, Inc.’s
management does not view any of these special items to be part
of Altria Group, Inc.’s sustainable results as they may be highly
variable, are difficult to predict and can distort underlying
business trends and results. Altria Group, Inc.’s management
also reviews income tax rates on an adjusted basis. Altria
Group, Inc.’s effective tax rate on operations may exclude
certain tax items from its reported effective tax rate. Altria
Group, Inc.’s management believes that adjusted financial
measures provide useful insight into underlying business trends
and results and provide a more meaningful comparison of year-
over-year results. Adjusted financial measures are used by
management and regularly provided to Altria Group, Inc.’s
chief operating decision maker for planning, forecasting and
evaluating business and financial performance, including
allocating resources and evaluating results relative to employee
compensation targets. These adjusted financial measures are
not consistent with U.S. GAAP and may not be calculated the
same as similarly titled measures used by other companies.
These adjusted financial measures should thus be considered as
supplemental in nature and not considered in isolation or as a
substitute for the related financial information prepared in
accordance with U.S. GAAP.
Altria Group, Inc.’s full-year adjusted diluted EPS
guidance and full-year forecast for its effective tax rate on
operations exclude the impact of certain income and expense
items, including those items noted in the preceding paragraph.
Altria Group, Inc.’s management cannot estimate on a forward-
looking basis the impact of these items on Altria Group, Inc.’s
reported diluted EPS and reported effective tax rate because
these items, which could be significant, are difficult to predict
and may be highly variable. As a result, Altria Group, Inc. does
not provide a corresponding U.S. GAAP measure for, or
reconciliation to, its adjusted diluted EPS guidance or its
forecast for its effective tax rate on operations.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2 includes a summary of the significant accounting
policies and methods used in the preparation of Altria Group,
Inc.’s consolidated financial statements. In most instances,
Altria Group, Inc. must use an accounting policy or method
because it is the only policy or method permitted under U.S.
GAAP.
The preparation of financial statements includes the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities at
the dates of the financial statements and the reported amounts
of net revenues and expenses during the reporting periods. If
actual amounts are ultimately different from previous estimates,
the revisions are included in Altria Group, Inc.’s consolidated
results of operations for the period in which the actual amounts
become known. Historically, the aggregate differences, if any,
between Altria Group, Inc.’s estimates and actual amounts in
any year have not had a significant impact on its consolidated
financial statements.
The following is a review of the more significant
assumptions and estimates, as well as the accounting policies
and methods, used in the preparation of Altria Group, Inc.’s
consolidated financial statements:
16
Consolidation: The consolidated financial statements
include Altria Group, Inc., as well as its wholly-owned and
majority-owned subsidiaries. Investments in which Altria
Group, Inc. has the ability to exercise significant influence are
accounted for under the equity method of accounting. All
intercompany transactions and balances have been eliminated.
Revenue Recognition: Altria Group, Inc.’s businesses
recognize revenues, net of sales incentives and sales returns,
and including shipping and handling charges billed to
customers, upon shipment of goods when title and risk of loss
pass to customers. Payments received in advance of revenue
recognition are deferred and recorded in other accrued liabilities
until revenue is recognized. Altria Group, Inc.’s businesses also
include excise taxes billed to customers in net revenues.
Shipping and handling costs are classified as part of cost of
sales.
Depreciation, Amortization, Impairment Testing and
Asset Valuation: Altria Group, Inc. depreciates property, plant
and equipment and amortizes its definite-lived intangible assets
using the straight-line method over the estimated useful lives of
the assets. Machinery and equipment are depreciated over
periods up to 25 years, and buildings and building
improvements over periods up to 50 years. Definite-lived
intangible assets are amortized over their estimated useful lives
up to 25 years.
Altria Group, Inc. reviews long-lived assets, including
definite-lived intangible assets, for impairment whenever events
or changes in business circumstances indicate that the carrying
value of the assets may not be fully recoverable. Altria Group,
Inc. performs undiscounted operating cash flow analyses to
determine if an impairment exists. These analyses are affected
by general economic conditions and projected growth rates.
For purposes of recognition and measurement of an impairment
for assets held for use, Altria Group, Inc. groups assets and
liabilities at the lowest level for which cash flows are separately
identifiable. If an impairment is determined to exist, any
related impairment loss is calculated based on fair value.
Impairment losses on assets to be disposed of, if any, are based
on the estimated proceeds to be received, less costs of disposal.
Altria Group, Inc. also reviews the estimated remaining useful
lives of long-lived assets whenever events or changes in
business circumstances indicate the lives may have changed.
Goodwill and indefinite-lived intangible assets recorded by
Altria Group, Inc. at December 31, 2015 relate primarily to the
acquisitions of Green Smoke in 2014, UST in 2009 and
Middleton in 2007. Altria Group, Inc. conducts a required
annual review of goodwill and indefinite-lived intangible assets
for potential impairment, and more frequently if an event occurs
or circumstances change that would require Altria Group, Inc.
to perform an interim review. If the carrying value of goodwill
exceeds its fair value, which is determined using discounted
cash flows, goodwill is considered impaired. The amount of
impairment loss is measured as the difference between the
carrying value and the implied fair value. If the carrying value
of an indefinite-lived intangible asset exceeds its fair value,
which is determined using discounted cash flows, the intangible
asset is considered impaired and is reduced to fair value.
Goodwill and indefinite-lived intangible assets, by
reporting unit at December 31, 2015 were as follows:
(in millions)
Cigarettes
Smokeless products
Cigars
Wine
E-vapor
Total
$
$
Goodwill
Indefinite-Lived
Intangible Assets
2
8,801
2,640
258
10
11,711
— $
5,023
77
74
111
5,285 $
During 2015, 2014 and 2013, Altria Group, Inc. completed
its quantitative annual impairment test of goodwill and
indefinite-lived intangible assets, and no impairment charges
resulted.
At December 31, 2015:
the estimated fair values of all reporting units
substantially exceeded their carrying values;
the estimated fair values of the indefinite-lived
intangible assets within the cigars and wine reporting
units substantially exceeded their carrying values; and
in the smokeless products reporting unit, the estimated
fair value of the Copenhagen trademark substantially
exceeded its carrying value, while the estimated fair
values of the Skoal trademark and certain other
smokeless products trademarks (primarily Red Seal
and Husky) did not substantially exceed their carrying
values.
At December 31, 2015, the estimated fair value of the
Skoal trademark exceeded its carrying value of $3.9 billion by
approximately 15%, and the estimated fair value of certain
other smokeless products trademarks (primarily Red Seal and
Husky) exceeded their collective carrying value of $921 million
by approximately 10%. The 2015 results for Skoal continue to
be impacted by a lower category growth rate and increased
competitive activity. USSTC continues to implement strategies
to enhance Skoal’s equity and to invest more efficiently in the
brand. USSTC expects these strategies to improve Skoal’s
profitability over the long term. Red Seal and Husky continue
to be impacted by lower levels of promotional support on these
brands, increased competitive activity in the discount category
and sustained growth in popular priced products.
In 2015, Altria Group, Inc. used an income approach to
estimate the fair values of substantially all of its reporting units
and indefinite-lived intangible assets. The income approach
reflects the discounting of expected future cash flows to their
present value at a rate of return that incorporates the risk-free
rate for the use of those funds, the expected rate of inflation and
the risks associated with realizing expected future cash flows.
The average discount rate used in performing the valuations
was approximately 10%.
In performing the 2015 discounted cash flow analysis,
Altria Group, Inc. made various judgments, estimates and
assumptions, the most significant of which were volume,
17
income, growth rates and discount rates. The analysis
incorporated assumptions used in Altria Group, Inc.’s long-term
financial forecast, which is used by Altria Group, Inc.’s
management to evaluate business and financial performance,
including allocating resources and evaluating results relative to
setting employee compensation targets. The assumptions
incorporated the highest and best use of Altria Group, Inc.’s
indefinite-lived intangible assets and also included perpetual
growth rates for periods beyond the long-term financial
forecast. The perpetual growth rate used in performing all of
the valuations was 2%. Fair value calculations are sensitive to
changes in these estimates and assumptions, some of which
relate to broader macroeconomic conditions outside of Altria
Group, Inc.’s control.
Although Altria Group, Inc.’s discounted cash flow
analysis is based on assumptions that are considered reasonable
and based on the best available information at the time that the
discounted cash flow analysis is developed, there is significant
judgment used in determining future cash flows. The following
factors have the most potential to impact expected future cash
flows and, therefore, Altria Group, Inc.’s impairment
conclusions: general economic conditions; federal, state and
local regulatory developments; changes in category growth
rates as a result of changing consumer preferences; success of
planned product expansions; competitive activity; and tobacco-
related taxes. For further discussion of these factors, see
Operating Results by Business Segment - Tobacco Space -
Business Environment below.
While Altria Group, Inc.’s management believes that the
estimated fair values of each reporting unit and indefinite-lived
intangible asset are reasonable, actual performance in the short-
term or long-term could be significantly different from
forecasted performance, which could result in impairment
charges in future periods.
For additional information on goodwill and other intangible
assets, see Note 4.
Marketing Costs: Altria Group, Inc.’s businesses promote
their products with consumer engagement programs, consumer
incentives and trade promotions. Such programs include
discounts, coupons, rebates, in-store display incentives, event
marketing and volume-based incentives. Consumer
engagement programs are expensed as incurred. Consumer
incentive and trade promotion activities are recorded as a
reduction of 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. For interim reporting
purposes, consumer engagement programs and certain
consumer incentive expenses are charged to operations as a
percentage of sales, based on estimated sales and related
expenses for the full year.
Contingencies: As discussed in Note 18 and Item 3, 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. In 1998, PM USA and certain other U.S. tobacco
product manufacturers entered into the MSA with 46 states and
various other governments and jurisdictions to settle asserted
and unasserted health care cost recovery and other claims. PM
USA and certain other U.S. tobacco product manufacturers had
previously entered into agreements to settle similar claims
brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the “State Settlement Agreements”). PM USA’s
portion of ongoing adjusted payments and legal fees is based on
its relative share of the settling manufacturers’ domestic
cigarette shipments, including roll-your-own cigarettes, in the
year preceding that in which the payment is due. PM USA,
USSTC and Middleton were also subject to payment
obligations imposed by FETRA. The FETRA payment
obligations expired after the third quarter of 2014. In addition,
in June 2009, PM USA and USSTC became subject to quarterly
user fees imposed by the FDA as a result of the FSPTCA.
Payments under the State Settlement Agreements and the FDA
user fees are based on variable factors, such as volume,
operating income, market share and inflation, depending on the
subject payment. Altria Group, Inc.’s subsidiaries account for
the cost of the State Settlement Agreements, FETRA and FDA
user fees as a component of cost of sales. As a result of the
State Settlement Agreements, FETRA and FDA user fees, Altria
Group, Inc.’s subsidiaries recorded approximately $4.8 billion,
$4.9 billion and $4.4 billion of charges to cost of sales for the
years ended December 31, 2015, 2014 and 2013, respectively.
The 2015, 2014 and 2013 amounts included reductions to cost
of sales of $97 million, $43 million and $664 million,
respectively, related to the NPM Adjustment Items discussed
further below and in Health Care Cost Recovery Litigation -
NPM Adjustment Disputes in Note 18. In addition, the 2015
and 2014 amounts reflected decreases in the charge to cost of
sales of approximately $300 million and $100 million,
respectively, for the expiration of the obligations imposed by
FETRA after the third quarter of 2014.
Altria Group, Inc. and its subsidiaries record provisions
in the 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 in
Note 18 and Item 3: (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 consolidated financial statements for
unfavorable outcomes, if any. Litigation defense costs are
expensed as incurred and included in marketing, administration
and research costs on the consolidated statements of earnings.
Employee Benefit Plans: As discussed in Note 16. Benefit
Plans to the consolidated financial statements in Item 8 (“Note
18
16”), Altria Group, Inc. provides a range of benefits to its
employees and retired employees, including pension,
postretirement health care and postemployment benefits. Altria
Group, Inc. records annual amounts relating to these plans
based on calculations specified by U.S. GAAP, which include
various actuarial assumptions as to discount rates, assumed
rates of return on plan assets, mortality, compensation increases,
turnover rates and health care cost trend rates. Altria Group,
Inc. reviews its actuarial assumptions on an annual basis and
makes modifications to the assumptions based on current rates
and trends when it is deemed appropriate to do so. Any effect
of the modifications is generally amortized over future periods.
Altria Group, Inc. recognizes the funded status of its
defined benefit pension and other postretirement plans on the
consolidated balance sheet and records as a component of other
comprehensive earnings (losses), net of deferred income taxes,
the gains or losses and prior service costs or credits that have
not been recognized as components of net periodic benefit cost.
The gains or losses and prior service costs or credits recorded as
components of other comprehensive earnings (losses) are
subsequently amortized into net periodic benefit cost in future
years.
At December 31, 2015, Altria Group, Inc. changed the
approach used to estimate the service and interest cost
components of net periodic benefit costs for Altria Group, Inc.’s
pension and postretirement plans. In 2015 and prior years,
Altria Group, Inc. estimated the service and interest cost
components using a single weighted-average discount rate
derived from the yield curve used to measure the pension and
postretirement plans benefit obligations. Beginning in 2016,
Altria Group, Inc. will use a spot rate approach in the estimation
of these components of net periodic benefit costs by applying
the specific spot rates along the yield curve to the relevant
projected cash flows, as Altria Group, Inc. believes that this
approach provides a more precise estimate of service and
interest costs. Altria Group, Inc. is accounting for this change
prospectively as a change in accounting estimate. This change
will not affect the measurement of Altria Group, Inc.’s pension
and postretirement benefit obligations as the change in the
service and interest costs will be offset by a corresponding
change in actuarial gains/losses.
At December 31, 2015, Altria Group, Inc.’s discount rate
assumptions for its pension and postretirement plans obligations
increased to 4.4% from 4.1% and 4.0%, respectively, at
December 31, 2014. Altria Group, Inc. presently anticipates a
decrease of approximately $160 million in its 2016 pre-tax
pension and postretirement expense versus 2015, not including
amounts in each year, if any, related to termination, settlement
and curtailment. This anticipated decrease is due primarily to
the impact of the change in approach used to estimate service
and interest costs ($90 million) and the impact of the higher
discount rate. Assuming no change to the shape of the yield
curve, a 50 basis point decrease in Altria Group, Inc.’s discount
rates would increase Altria Group, Inc.’s pension and
postretirement expense by approximately $50 million, and a 50
basis point increase in Altria Group, Inc.’s discount rates would
decrease Altria Group, Inc.’s pension and postretirement
expense by approximately $43 million. Similarly, a 50 basis
point decrease (increase) in the expected return on plan assets
would increase (decrease) Altria Group, Inc.’s pension expense
by approximately $35 million. See Note 16 for a sensitivity
discussion of the assumed health care cost trend rates.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions. Altria Group, Inc.’s deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Altria Group, Inc. records a valuation
allowance when it is more-likely-than-not that some portion or
all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax
positions when a tax position taken or expected to be taken in a
tax return is more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement.
Altria Group, Inc. recognizes accrued interest and penalties
associated with uncertain tax positions as part of the provision
for income taxes on its consolidated statements of earnings.
As discussed in Note 14. Income Taxes to the consolidated
financial statements in Item 8 (“Note 14”), Altria Group, Inc.
recognized income tax benefits and charges in the consolidated
statements of earnings during 2015, 2014 and 2013 as a result
of various tax events.
Leasing: Substantially all of PMCC’s net revenues in
2015 related to income on leveraged leases and related gains on
asset sales. Income attributable to leveraged leases is initially
recorded as unearned income, which is included in the line item
finance assets, net, on Altria Group, Inc.’s consolidated balance
sheets and subsequently recognized as revenue over the terms
of the respective leases at constant after-tax rates of return on
the positive net investment balances. As discussed in Note 7,
PMCC lessees are affected by bankruptcy filings, credit rating
changes and financial market conditions.
PMCC’s investment in leases is included in the line item
finance assets, net, on the consolidated balance sheets as of
December 31, 2015 and 2014. At December 31, 2015, PMCC’s
net finance receivables of approximately $1.3 billion, which are
included in finance assets, net, on Altria Group, Inc.’s
consolidated balance sheet, consisted of rents receivable ($2.1
billion) and the residual value of assets under lease ($0.7
billion), reduced by third-party nonrecourse debt ($1.2 billion)
and unearned income ($0.3 billion). The repayment of the
nonrecourse debt is collateralized by lease payments receivable
and the leased property, and is nonrecourse to the general assets
of PMCC. As required by U.S. GAAP, the third-party
nonrecourse debt has been offset against the related rents
receivable and has been presented on a net basis within finance
assets, net, on Altria Group, Inc.’s consolidated balance sheets.
19
Finance assets, net, of $1.2 billion at December 31, 2015 also
included an allowance for losses.
Estimated residual values represent PMCC’s estimate at
lease inception as to the fair values of assets under lease at the
end of the non-cancelable lease terms. The estimated residual
values are reviewed at least annually by PMCC’s management,
which includes analysis of a number of factors, including
activity in the relevant industry. If necessary, revisions are
recorded to reduce the residual values. In 2015 and 2014,
PMCC’s review of estimated residual values resulted in a
decrease of $65 million and $63 million, respectively, to
unguaranteed residual values. These decreases in unguaranteed
residual values resulted in a reduction to PMCC’s net revenues
of $41 million and $26 million in 2015 and 2014, respectively.
There were no such adjustments in 2013.
PMCC considers rents receivable past due when they are
beyond the grace period of their contractual due date. PMCC
stops recording income (“non-accrual status”) on rents
receivable when contractual payments become 90 days past due
or earlier if management believes there is significant
uncertainty of collectability of rent payments, and resumes
recording income when collectability of rent payments is
reasonably certain. Payments received on rents receivable that
are on non-accrual status are used to reduce the rents receivable
balance. Write-offs to the allowance for losses are recorded
when amounts are deemed to be uncollectible. There were no
rents receivable on non-accrual status at December 31, 2015.
To the extent that rents receivable due to PMCC may be
uncollectible, PMCC records an allowance for losses against its
finance assets. Losses on such leases are recorded when
probable and estimable. PMCC regularly performs a
systematic assessment of each individual lease in its portfolio to
determine potential credit or collection issues that might
indicate impairment. Impairment takes into consideration both
the probability of default and the likelihood of recovery if
default were to occur. PMCC considers both quantitative and
qualitative factors of each investment when performing its
assessment of the allowance for losses. For further discussion,
see Note 7.
Consolidated Operating Results
(in millions)
Net Revenues:
Smokeable products
Smokeless products
Wine
All other
Net revenues
Excise Taxes on Products:
Smokeable products
Smokeless products
Wine
Excise taxes on products
Operating Income:
Operating companies income
(loss):
Smokeable products
Smokeless products
Wine
All other
Amortization of intangibles
General corporate expenses
Changes to
and PMI
tax-related receivables/
payables
Operating income
For the Years Ended December 31,
2015
2014
2013
$ 22,792
1,879
692
71
$ 25,434
$ 21,939 $ 21,868
1,778
609
211
$ 24,522 $ 24,466
1,809
643
131
$ 6,423
133
24
$ 6,580
$ 6,416 $ 6,651
130
22
$ 6,577 $ 6,803
138
23
$ 7,569
1,108
152
(169)
(21)
(237)
$ 6,873 $ 7,063
1,023
118
157
(20)
(235)
1,061
134
(185)
(20)
(241)
(41)
$ 8,361
(2)
(22)
$ 7,620 $ 8,084
As discussed further in Note 15, Altria Group, Inc.’s chief
operating decision maker reviews operating companies income
to evaluate the performance of, and allocate resources to, the
segments. Operating companies income for the segments is
defined as operating income before amortization of intangibles
and general corporate expenses. Management believes it is
appropriate to disclose this measure to help investors analyze
the business performance and trends of the various business
segments.
The following events that occurred during 2015, 2014 and
2013 affected the comparability of statement of earnings
amounts.
NPM Adjustment Items: For the years ended December
31, 2015, 2014 and 2013, pre-tax income for NPM Adjustment
Items was recorded in Altria Group, Inc.’s consolidated
statements of earnings as follows:
(in millions)
2015
2014
2013
Smokeable products segment
$ 97
$ 43
$ 664
Interest and other debt expense, net
(13)
47
—
Total
$ 84
$ 90
$ 664
The amounts shown in the table above for the smokeable
products segment were recorded by PM USA as reductions to
costs of sales, which increased operating companies income in the
smokeable products segment. For further discussion, see Health
20
Care Cost Recovery Litigation - NPM Adjustment Disputes in
Note 18.
Tobacco and Health Litigation Items: For the years
ended December 31, 2015, 2014 and 2013, pre-tax charges
related to certain tobacco and health litigations items were
recorded in Altria Group, Inc.’s consolidated statements of
earnings as follows:
As a result of the Altria Group, Inc. debt tender offers and the
UST debt redemption, pre-tax losses on early extinguishment of
debt were recorded as follows:
(in millions)
2015
2014
2013
Premiums and fees
$
226
$
44
$ 1,054
Write-off of unamortized debt
discounts and debt issuance costs
2
—
44
30
$ 1,084
(in millions)
2015
2014
2013
Total
$
228
$
Smokeable products segment
$ 127
$
General corporate
Interest and other debt expense, net
—
23
$
27
15
2
Total
$ 150
$
44
$
18
—
4
22
During 2015, PM USA recorded pre-tax charges in
marketing, administration and research costs related to tobacco
and health judgments in seven state Engle progeny lawsuits and
Schwarz of $59 million and $25 million, respectively, as well as
$14 million and $9 million, respectively, in interest costs related
to these cases. Additionally in 2015, PM USA and certain other
cigarette manufacturers reached an agreement to resolve
approximately 415 pending federal Engle progeny cases. As a
result of the agreement, PM USA recorded a pre-tax provision of
approximately $43 million in marketing, administration and
research costs. For further discussion, see Smoking and Health
Litigation in Note 18.
During 2014, Altria Group, Inc. and PM USA recorded an
aggregate pre-tax charge of $31 million in marketing,
administration and research costs for the estimated costs of
implementing the corrective communications remedy in
connection with the federal government’s lawsuit against Altria
Group, Inc. and PM USA. For further discussion, see Health
Care Cost Recovery Litigation - Federal Government’s Lawsuit in
Note 18.
Asset Impairment, Exit, Integration and Acquisition-
Related Costs: Pre-tax asset impairment, exit, integration and
acquisition-related costs for the years ended December 31, 2015,
2014 and 2013 were $11 million, $21 million and $11 million,
respectively.
For 2014, these costs consisted primarily of integration and
acquisition-related costs of $28 million related to the acquisition
of Green Smoke, partially offset by a pre-tax gain of $10 million
from the sale of PM USA’s Cabarrus, North Carolina
manufacturing facility in 2014. For further discussion of the
Green Smoke acquisition, see Note 3.
Loss on Early Extinguishment of Debt: During 2015
and 2013, Altria Group, Inc. completed debt tender offers to
purchase for cash certain of its senior unsecured notes in
aggregate principal amounts of $0.8 billion and $2.1 billion,
respectively.
During 2014, UST redeemed in full its $300 million
(aggregate principal amount) 5.75% senior notes due 2018.
For further discussion, see Note 9. Long-Term Debt to the
consolidated financial statements in Item 8 (“Note 9”).
SABMiller Special Items: Altria Group, Inc.’s earnings
from its equity investment in SABMiller for 2015 included
net pre-tax charges of $126 million, consisting primarily of
Altria Group, Inc.’s share of SABMiller’s asset impairment
charges.
Tax Items: Tax items for 2015 primarily included the
reversal of tax reserves and associated interest due primarily to
the closure in August 2015 of the Internal Revenue Service
audit of Altria Group, Inc. and its consolidated subsidiaries’
2007-2009 tax years, partially offset by a reversal of foreign tax
credits primarily associated with SABMiller dividends. Tax
items for 2014 included the reversal of tax accruals no longer
required. Tax items for 2013 included the reversal of tax
accruals no longer required and the recognition of previously
unrecognized foreign tax credits primarily associated with
SABMiller dividends. For further discussion, see Note 14.
2015 Compared with 2014
The following discussion compares consolidated operating
results for the year ended December 31, 2015, with the year
ended December 31, 2014.
Net revenues, which include excise taxes billed to
customers, increased $912 million (3.7%), due primarily to
higher net revenues in the smokeable products segment.
Cost of sales decreased $45 million (0.6%), due primarily to
lower resolution expenses (due principally to the end of the
federal tobacco quota buy-out payments after the third quarter of
2014) and higher NPM Adjustment Items in 2015, partially offset
by higher manufacturing costs in the smokeable products and
smokeless products segments.
Marketing, administration and research costs increased
$169 million (6.7%), due primarily to higher costs in the
smokeable products segment (which included higher tobacco
and health litigation items).
Operating income increased $741 million (9.7%), due
primarily to higher operating results from the smokeable
products and smokeless products segments.
Interest and other debt expense, net, increased $9 million
(1.1%), due primarily to interest income recorded during 2014
and the reversal of interest income recorded during 2015 as a
result of the NPM Adjustment Items, and higher interest costs
related to tobacco and health litigation items, mostly offset by
21
lower interest costs on debt as a result of debt refinancing
activities in 2015 and 2014.
Earnings from Altria Group, Inc.’s equity investment in
SABMiller, which decreased $249 million (24.8%), were
negatively affected by SABMiller special items and unfavorable
currency impacts from a stronger U.S. dollar.
Net earnings attributable to Altria Group, Inc. of $5,241
million increased $171 million (3.4%), due primarily to higher
operating income, partially offset by lower earnings from Altria
Group, Inc.’s equity investment in SABMiller and higher losses
on early extinguishment of debt. Diluted and basic EPS
attributable to Altria Group, Inc. of $2.67, each increased by 4.3%
due to higher net earnings attributable to Altria Group, Inc. and
fewer shares outstanding.
2014 Compared with 2013
The following discussion compares consolidated operating results
for the year ended December 31, 2014, with the year ended
December 31, 2013.
Net revenues, which include excise taxes billed to
customers, were essentially unchanged, due primarily to higher
net revenues in all reportable segments, offset by lower gains
on asset sales in the financial services business.
Excise taxes on products decreased $226 million (3.3%), due
primarily to lower smokeable products shipment volume.
Cost of sales increased $579 million (8.0%), due primarily
to higher NPM Adjustment Items in 2013.
Marketing, administration and research costs increased
$199 million (8.5%), due primarily to higher investment
spending in the innovative tobacco products businesses, lower
reductions to the allowance for losses in the financial services
business and higher costs in the smokeable products segment.
Operating income decreased $464 million (5.7%), due
primarily to lower operating results from the smokeable
products segment (which reflected higher NPM Adjustment
Items in 2013), higher investment spending in the innovative
tobacco products businesses and lower income from the
financial services business, partially offset by higher operating
results from the smokeless products segment.
Interest and other debt expense, net, decreased $241
million (23.0%) due primarily to lower interest costs on debt as
a result of debt maturities in 2013 and 2014, and debt
refinancing activities during 2013, as well as interest income
recorded in 2014 as a result of the NPM Adjustment Items.
Net earnings attributable to Altria Group, Inc. of $5,070
million increased $535 million (11.8%), due primarily to lower
losses on early extinguishment of debt, lower interest and other
debt expense, net, partially offset by lower operating income.
Diluted and basic EPS attributable to Altria Group, Inc. of $2.56,
each increased by 13.3% due to higher net earnings attributable to
Altria Group, Inc. and fewer shares outstanding.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The United States tobacco industry faces a number of business
and legal challenges that have adversely affected and may
adversely affect the business and sales volume of our tobacco
subsidiaries and our consolidated results of operations, cash flows
or financial position. These challenges, some of which are
discussed in more detail below, in Note 18, Item 1A and Item 3,
include:
pending and threatened litigation and bonding
requirements;
the requirement to issue “corrective statements” in
various media in connection with the federal
government’s lawsuit;
restrictions and requirements imposed by the FSPTCA,
and restrictions and requirements that have been, and in
the future will be, imposed by the FDA;
actual and proposed excise tax increases, as well as
changes in tax structures and tax stamping requirements;
bans and restrictions on tobacco use imposed by
governmental entities and private establishments and
employers;
other federal, state and local government actions,
including:
increases in the minimum age to purchase tobacco
products above the current federal minimum age of
18;
restrictions on the sale of tobacco products by
certain retail establishments, the sale of certain
tobacco products with certain characterizing flavors
and the sale of tobacco products in certain package
sizes;
additional restrictions on the advertising and
promotion of tobacco products;
other actual and proposed tobacco product
legislation and regulation; and
governmental investigations;
the diminishing prevalence of cigarette smoking and
increased efforts by tobacco control advocates and others
(including employers and retail establishments) to
further restrict tobacco use;
changes in adult tobacco consumer purchase behavior,
which is influenced by various factors such as economic
conditions, excise taxes and price gap relationships, may
result in adult tobacco consumers switching to discount
products or other lower priced tobacco products;
22
the highly competitive nature of the tobacco categories
in which our tobacco subsidiaries operate, including
competitive disadvantages related to cigarette price
increases attributable to the settlement of certain
litigation;
illicit trade in tobacco products; and
potential adverse changes in tobacco leaf price,
availability and quality.
In addition to and in connection with the foregoing, evolving
adult tobacco consumer preferences pose challenges for Altria
Group, Inc.’s tobacco subsidiaries. Our tobacco subsidiaries
believe that a significant number of adult tobacco consumers
switch between tobacco categories, use multiple forms of tobacco
products and try innovative tobacco products, such as e-vapor
products. While the e-vapor category grew significantly in recent
years, Nu Mark estimates a slowdown in growth during 2015.
Altria Group, Inc. and its tobacco subsidiaries work to meet
these evolving adult tobacco consumer preferences over time by
developing, manufacturing, marketing and distributing products
both within and outside the United States through innovation and
adjacency growth strategies (including, where appropriate,
arrangements with, or investments in, third parties). For example,
Nu Mark entered the e-vapor category in 2013. See the
discussions regarding new product technologies, adjacency
growth strategy and evolving consumer preferences in Item 1A
for certain risks associated with the foregoing discussion.
We have provided additional detail on the following topics
below:
FSPTCA and FDA Regulation;
Excise Taxes;
International Treaty on Tobacco Control;
State Settlement Agreements;
Other Federal, State and Local Regulation and Activity;
Illicit Trade in Tobacco Products;
Price, Availability and Quality of Agricultural Products;
and
Timing of Sales.
FSPTCA and FDA Regulation
The Regulatory Framework: The FSPTCA expressly
establishes certain restrictions and prohibitions on our cigarette
and smokeless tobacco businesses and authorizes or requires
further FDA action. Under the FSPTCA, the FDA has broad
authority to (1) regulate the design, manufacture, packaging,
advertising, promotion, sale and distribution of cigarettes,
cigarette tobacco and smokeless tobacco products; (2) require
disclosures of related information; and (3) enforce the FSPTCA
and related regulations.
Among other measures, the FSPTCA:
23
imposes restrictions on the advertising, promotion, sale
and distribution of tobacco products, including at retail;
bans descriptors such as “light,” “mild” or “low” or
similar descriptors when used as descriptors of modified
risk unless expressly authorized by the FDA;
requires extensive product disclosures to the FDA and
may require public disclosures;
prohibits any express or implied claims that a tobacco
product is or may be less harmful than other tobacco
products without FDA authorization;
imposes reporting obligations relating to contraband
activity and grants the FDA authority to impose
recordkeeping and other obligations to address illicit
trade in tobacco products;
changes the language of the cigarette and smokeless
tobacco product health warnings, enlarges their size and
requires the development by the FDA of graphic
warnings for cigarettes, and gives the FDA the authority
to require new warnings;
authorizes the FDA to adopt product regulations and
related actions, including imposing tobacco product
standards that are appropriate for the protection of the
public health (e.g., related to the use of menthol in
cigarettes, nicotine yields and other constituents or
ingredients) and imposing manufacturing standards for
tobacco products;
establishes pre-market review pathways for new and
modified tobacco products, including:
authorizing the FDA to subject tobacco products that
would be modified or first introduced into the market
after March 22, 2011 to application and pre-market
review and authorization requirements (the “New
Product Application Process”) if the FDA does not
find them, as a manufacturer may contend, to be
“substantially equivalent” to products commercially
marketed as of February 15, 2007, and possibly to
deny any such new product application, thereby
preventing the distribution and sale of any product
affected by such denial; and
authorizing the FDA to determine that certain
existing tobacco products modified or introduced into
the market for the first time between February 15,
2007 and March 22, 2011 are not “substantially
equivalent” to products commercially marketed as of
February 15, 2007, in which case the FDA could
require the removal of such products from the
marketplace or subject them to the New Product
Application Process and, if any such applications are
denied, prevent the continued distribution and sale of
such products (see FDA Regulatory Actions -
Substantial Equivalence and Other New Product
Processes/Pathways below); and
equips the FDA with a variety of investigatory and
enforcement tools, including the authority to inspect
tobacco product manufacturing and other facilities.
In April 2014, the FDA issued proposed regulations for other
tobacco products, which as proposed would include machine-
made large cigars, e-vapor products, pipe tobacco and oral
tobacco-derived nicotine products marketed and sold by some of
our tobacco subsidiaries. The proposed regulations would impose
the FSPTCA regulatory framework on products manufactured,
marketed and sold by Middleton and Nu Mark with potentially
wide-ranging impact on their businesses. See FDA Regulatory
Actions - Proposed Deeming Regulations below.
Implementation Timing, Rulemaking and Guidance: The
implementation of the FSPTCA began in 2009 and will continue
over time. The provisions of the FSPTCA that require the FDA to
take action through rulemaking generally involve consideration of
public comment and, for some issues, scientific review. From
time to time, the FDA also issues guidance for public comment,
which may be issued in draft or final form.
Altria Group, Inc.’s tobacco subsidiaries participate actively
in processes established by the FDA to develop and implement
the FSPTCA’s regulatory framework, including submission of
comments to various FDA proposals and participation in public
hearings and engagement sessions.
The implementation of the FSPTCA and related regulations
and guidance also may have an impact on enforcement efforts by
states, territories and localities of the United States of their laws
and regulations as well as of the State Settlement Agreements
discussed below (see State Settlement Agreements below). Such
enforcement efforts may adversely affect our tobacco
subsidiaries’ ability to market and sell regulated tobacco products
in those states, territories and localities.
Impact on Our Business; Compliance Costs and User
Fees: Regulations imposed and other regulatory actions taken by
the FDA under the FSPTCA could have a material adverse effect
on the business, consolidated results of operations, cash flows or
financial position of Altria Group, Inc. and its tobacco
subsidiaries in a number of different ways. For example, actions
by the FDA could:
impact the consumer acceptability of tobacco products;
delay, discontinue or prevent the sale or distribution of
existing, new or modified tobacco products;
limit adult tobacco consumer choices;
impose restrictions on communications with adult
tobacco consumers;
create a competitive advantage or disadvantage for
certain tobacco companies;
impose additional manufacturing, labeling or packaging
requirements;
impose additional restrictions at retail;
result in increased illicit trade in tobacco products; or
otherwise significantly increase the cost of doing
business.
The failure to comply with FDA regulatory requirements,
even inadvertently, and FDA enforcement actions could also have
a material adverse effect on the business, consolidated results of
operations, cash flows or financial position of Altria Group, Inc.
and its tobacco subsidiaries.
The FSPTCA imposes fees on tobacco product manufacturers
and importers to pay for the cost of regulation and other matters.
The cost of the FDA user fee is allocated first among tobacco
product categories subject to FDA regulation and then among
manufacturers and importers within each respective category
based on their relative market shares, all as prescribed by the
statute and FDA regulations. Payments for user fees are adjusted
for several factors, including inflation, market share and industry
volume. For a discussion of the impact of the FDA user fee
payments on Altria Group, Inc., see Financial Review - Off-
Balance Sheet Arrangements and Aggregate Contractual
Obligations - Payments Under State Settlement and Other
Tobacco Agreements, and FDA Regulation below. In addition,
compliance with the FSPTCA’s regulatory requirements has
resulted and will continue to result in additional costs for our
tobacco businesses. The amount of additional compliance and
related costs has not been material in any given quarter or year to
date but could become material, either individually or in the
aggregate, and will depend on the nature of the requirements
imposed by the FDA.
Investigation and Enforcement: The FDA has a number of
investigatory and enforcement tools available to it, including
document requests and other required information submissions,
facility inspections, examinations and investigations, injunction
proceedings, monetary penalties, product withdrawals and recalls,
and product seizures. The use of any of these investigatory or
enforcement tools by the FDA could result in significant costs to
the tobacco businesses of Altria Group, Inc. or otherwise have a
material adverse effect on the business, consolidated results of
operations, cash flows or financial position of Altria Group, Inc.
and its tobacco subsidiaries.
TPSAC
The Role of the TPSAC: As required by the FSPTCA, the
FDA has established a tobacco product scientific advisory
committee (the “TPSAC”), which consists of voting and non-
voting members, to provide advice, reports, information and
recommendations to the FDA on scientific and health issues
relating to tobacco products.
Challenge to TPSAC Membership: In February 2011,
Lorillard Tobacco Company (“Lorillard”) and R.J. Reynolds
filed suit in the U.S. District Court for the District of
Columbia against the United States Department of Health
and Human Services and individual defendants (sued in their
official capacities) asserting that the composition of the
TPSAC and the composition of the Constituents
Subcommittee of the TPSAC violates several federal laws,
including the Federal Advisory Committee Act, because four
24
of the voting members of the TPSAC have financial and
other conflicts (including service as paid experts for plaintiffs
in tobacco litigation). In July 2014, the district court granted
plaintiffs’ summary judgment motion, in part, and denied
defendants’ summary judgment motion, ordering the FDA to
reconstitute the TPSAC and barring defendants from relying
on the TPSAC report on menthol, discussed below. The FDA
appealed to the U.S. Court of Appeals for the District of
Columbia Circuit in September 2014. On January 15, 2016,
the U.S. Court of Appeals for the District of Columbia
Circuit vacated the trial court’s ruling on procedural grounds,
finding that plaintiffs lacked standing to bring suit.
TPSAC Action on Menthol: As mandated by the FSPTCA, in
March 2011, the TPSAC submitted to the FDA a report on
the impact of the use of menthol in cigarettes on the public
health and related recommendations. The TPSAC report
recommended, among other things, that the “[r]emoval of
menthol cigarettes from the marketplace would benefit public
health in the United States.” The TPSAC report noted the
potential that any ban on menthol cigarettes could lead to an
increase in contraband cigarettes and other potential
unintended consequences and suggested that the FDA consult
with appropriate experts on this matter.
In March 2011, PM USA submitted a report to the FDA
outlining its position that neither science nor other evidence
demonstrates that regulatory actions or restrictions related to the
use of menthol cigarettes are warranted. The report noted PM
USA’s belief that significant restrictions on the use of menthol
cigarettes would have unintended consequences detrimental to
public health and society. The FDA has stated that the TPSAC
report is only a recommendation, and, in July 2013, the FDA
released its preliminary scientific evaluation on menthol, which
states “that menthol cigarettes pose a public health risk above that
seen with non-menthol cigarettes.” At the same time, the FDA
also issued an advance notice of proposed rulemaking requesting
comments on the FDA’s preliminary scientific evaluation and
information that may inform potential regulatory actions
regarding menthol in cigarettes or other tobacco products. In
November 2013, PM USA submitted comments to the FDA
raising a number of concerns with the preliminary scientific
evidence and about unintended consequences detrimental to
public health and society. No future action can be taken by the
FDA to regulate the manufacture, marketing or sale of menthol
cigarettes (including a possible ban) until the completion of the
rulemaking process.
Final Tobacco Marketing Rule: As required by the
FSPTCA, the FDA re-promulgated in March 2010 a wide range
of advertising and promotion restrictions in substantially the same
form as regulations that were previously adopted in 1996 (but
never imposed on tobacco manufacturers due to a United States
Supreme Court ruling) (the “Final Tobacco Marketing Rule”).
The Final Tobacco Marketing Rule:
bans the use of color and graphics in tobacco product
labeling and advertising;
prohibits the sale of cigarettes and smokeless tobacco to
underage persons;
restricts the use of non-tobacco trade and brand names
on cigarettes and smokeless tobacco products;
requires the sale of cigarettes and smokeless tobacco in
direct, face-to-face transactions;
prohibits sampling of cigarettes and prohibits sampling
of smokeless tobacco products except in qualified adult-
only facilities;
prohibits gifts or other items in exchange for buying
cigarettes or smokeless tobacco products;
prohibits the sale or distribution of items such as hats
and tee shirts with tobacco brands or logos; and
prohibits brand name sponsorship of any athletic,
musical, artistic or other social or cultural event, or any
entry or team in any event.
Subject to the limitations described below, the Final Tobacco
Marketing Rule took effect in June 2010. At the time of the re-
promulgation of the Final Tobacco Marketing Rule, the FDA also
issued an advance notice of proposed rulemaking regarding the
so-called “1000 foot rule,” which would establish restrictions on
the placement of outdoor tobacco advertising in relation to
schools and playgrounds. PM USA and USSTC submitted
comments on this advance notice.
Since enactment, several lawsuits have been filed challenging
various provisions of the FSPTCA and the Final Tobacco
Marketing Rule, including their constitutionality and the scope of
the FDA’s authority thereunder. Altria Group, Inc. and its tobacco
subsidiaries are not parties to any of these lawsuits. As a result of
one such challenge (Commonwealth Brands), the portion of the
Final Tobacco Marketing Rule that bans the use of color and
graphics in labeling and advertising is unenforceable by the FDA.
For a further discussion of the Final Tobacco Marketing Rule and
the status of graphic warnings for cigarette packages and
advertising, see FDA Regulatory Actions - Graphic Warnings
below.
In a separate lawsuit that challenged the constitutionality of
an FDA regulation that restricts tobacco manufacturers from using
the trade or brand name of a non-tobacco product on cigarettes or
smokeless tobacco products, the case was dismissed without
prejudice pursuant to a stipulation by which the FDA agreed not
to enforce the current or any amended trade name rule against
plaintiffs until at least 180 days after rulemaking on the amended
rule concludes. This relief only applies to plaintiffs in the case.
However, in May 2010, the FDA issued guidance on the use of
non-tobacco trade and brand names applicable to all cigarette and
smokeless tobacco product manufacturers. This guidance
indicated the FDA’s intention not to commence enforcement
actions under the regulation while it considers how to address the
concerns raised by various manufacturers. In November 2011,
the FDA proposed an amended rule, but has not yet issued a final
rule.
25
FDA Regulatory Actions
Graphic Warnings: In June 2011, as required by the
FSPTCA, the FDA issued its final rule to modify the required
warnings that appear on cigarette packages and in cigarette
advertisements. The FSPTCA requires the warnings to
consist of nine new textual warning statements accompanied
by color graphics depicting the negative health consequences
of smoking. The graphic health warnings will (i) be located
beneath the cellophane, and comprise the top 50% of the
front and rear panels of cigarette packages and (ii) occupy
20% of a cigarette advertisement and be located at the top of
the advertisement. After a legal challenge to the rule initiated
by R.J. Reynolds, Lorillard and several other plaintiffs, in
which plaintiffs prevailed both at the federal trial and
appellate levels, the FDA decided not to seek further review
of the U.S. Court of Appeals’ decision and announced its
plans to propose a new graphic warnings rule in the future.
Substantial Equivalence and Other New Product Processes/
Pathways: In January 2011, the FDA issued guidance
concerning reports that manufacturers must submit for certain
FDA-regulated tobacco products that the manufacturer
modified or introduced for the first time into the market after
February 15, 2007. These reports must be reviewed by the
FDA to determine if such tobacco products are “substantially
equivalent” to products commercially available as of
February 15, 2007. In general, in order to continue
marketing the products commercially available before March
22, 2011, manufacturers of FDA-regulated tobacco products
were required to send to the FDA a report demonstrating
substantial equivalence by March 22, 2011. PM USA and
USSTC submitted timely reports. PM USA and USSTC can
continue marketing these products unless the FDA makes a
determination that a specific product is not substantially
equivalent. If the FDA ultimately makes such a
determination, it could require the removal of such products
from the marketplace or subject them to the New Product
Application Process and, if any such applications are denied,
prevent the continued distribution and sale of such products.
While PM USA and USSTC believe that all of their current
products meet the statutory requirements of the FSPTCA,
they cannot predict whether, when or how the FDA
ultimately will apply its guidance to their various respective
substantial equivalence reports or seek to enforce the law and
regulations consistent with its guidance.
Manufacturers intending to introduce new products and
certain modified products into the market after March 22,
2011 must submit a report to the FDA and obtain a
“substantial equivalence order” from the FDA before
introducing the products into the market. If the FDA declines
to issue a so-called “substantial equivalence order” for a
product or if the manufacturer itself determines that the
product does not meet the substantial equivalence
requirements, the product would need to undergo the New
Product Application Process.
26
The FDA began announcing its decisions on substantial
equivalence reports in the second quarter of 2013. However,
there are a significant number of substantial equivalence
reports for which the FDA has not announced decisions. At
this time, it is not possible to predict how long reviews by the
FDA of substantial equivalence reports or new product
applications will take. “Not substantially equivalent”
determinations could have a material adverse impact on the
business results of Altria Group, Inc.’s tobacco subsidiaries.
In March 2015, the FDA issued a document entitled
“Guidance for Industry: Demonstrating the Substantial
Equivalence of a New Tobacco Product: Responses to
Frequently Asked Questions” (“Substantial Equivalence
Guidance”). In that document, the FDA announced that (i)
certain label changes and (ii) changes to the quantity of
tobacco product(s) in a package would each require
submission of newly required substantial equivalence reports
and authorization from the FDA prior to marketing tobacco
products with such changes, even when the tobacco product
itself is not changed. PM USA and USSTC market various
products that fall within the scope of the Substantial
Equivalence Guidance.
In April 2015, PM USA, USSTC and other tobacco
product manufacturers filed a lawsuit in the U.S. District
Court for the District of Columbia against the FDA, the
United States Department of Health and Human Services,
and the heads of both agencies seeking to declare these new
requirements invalid and to enjoin defendants from enforcing
them. In May 2015, the FDA announced that it was
continuing to consider the Substantial Equivalence Guidance
in light of comments received and that it would not enforce
the requirements under such guidance until further notice. In
light of the FDA’s announcement, the plaintiffs dismissed the
pending lawsuit without prejudice in June 2015.
In September 2015, the FDA issued a second edition of
the Substantial Equivalence Guidance (the “Revised SE
Guidance”), which continues to require FDA pre-
authorization for certain label changes and for product
quantity changes. PM USA, USSTC and other tobacco
product manufacturers filed a new lawsuit in the U.S. District
Court for the District of Columbia against the same
defendants named in the prior suit seeking to declare the
requirements of the Revised SE Guidance invalid and to
enjoin defendants from enforcing them. On October 30,
2015, plaintiffs filed a motion for summary judgment.
Defendants opposed the motion for summary judgment and
moved to dismiss the complaint on December 8, 2015.
Good Manufacturing Practices: The FSPTCA requires that
the FDA promulgate good manufacturing practice regulations
(referred to by the FDA as “Requirements for Tobacco
Product Manufacturing Practice”) for tobacco product
manufacturers, but does not specify a timeframe for such
regulations.
Proposed Deeming Regulations: As noted above in FSPTCA
and FDA Regulation - The Regulatory Framework, the FDA
proposed regulations in April 2014 that would impose the
FSPTCA regulatory framework on machine-made large
cigars, e-vapor products, pipe tobacco and chewable tobacco-
derived nicotine products. Nu Mark and Middleton
submitted comments on the proposed regulations in August
2014. Nu Mark’s submission covers a number of topics,
including its perspective on (1) the guiding principles that the
FDA should follow to help ensure successful implementation
of the deeming regulation, (2) the potential for e-vapor
products and other tobacco-derived nicotine products to
reduce tobacco-related harm and (3) the establishment of
product approval pathways that encourage innovation of
potentially reduced harm products. Middleton’s comments
covered its perspective on the overall regulation of cigars and
on the use of the word “mild” in the Black & Mild brand
name. The proposed regulations suggested that the FDA may
apply the descriptor prohibition to cigars and pipe tobacco,
which could potentially prohibit the use of the word “Mild”
in the Black & Mild brand name. As reflected in the
comments, Middleton believes neither the FDA’s regulatory
authority nor the First or Fifth Amendments to the United
States Constitution allow the FDA to ban words such as
“mild” regardless of the context and that the FDA can only
prohibit the word “mild” when used as a descriptor of
modified risk.
Excise Taxes
Tobacco products are subject to substantial excise taxes in the
United States. Significant increases in tobacco-related taxes or
fees have been proposed or enacted (including with respect to e-
vapor products) and are likely to continue to be proposed or
enacted at the federal, state and local levels within the United
States.
Federal, state and local excise taxes have increased
substantially over the past decade, far outpacing the rate of
inflation. By way of example, in 2009, the federal excise tax
(“FET”) on cigarettes increased from $0.39 per pack to
approximately $1.01 per pack, in 2010, the New York state excise
tax increased by $1.60 to $4.35 per pack and in October 2014,
Philadelphia, Pennsylvania enacted a $2.00 per pack local
cigarette excise tax. Between the end of 1998 and February 22,
2016, the weighted-average state and certain local cigarette excise
taxes increased from $0.36 to $1.54 per pack. During 2015,
Alabama, Nevada, Kansas, Vermont, Louisiana, Ohio, Rhode
Island and Connecticut enacted legislation to increase their
cigarette excise taxes. As of February 22, 2016, no state has
increased its cigarette excise tax in 2016. The Federal Budget
released by the President in February 2016 proposes significant
increases in the FET for all tobacco products. The proposed
budget would increase the FET on a pack of cigarettes by $0.94
per pack, raising the total FET to $1.95 per pack, and would also
increase the tax on other tobacco products by a proportionate
amount. It is not possible to predict whether this proposed FET
increase will be enacted.
Tax increases are expected to continue to have an adverse
impact on sales of the tobacco products of our tobacco
subsidiaries through lower consumption levels and the potential
shift in adult consumer purchases from the premium to the non-
premium or discount segments or to other low-priced or low-
taxed tobacco products or to counterfeit and contraband products.
Such shifts may have an adverse impact on the sales volume and
reported share performance of tobacco products of Altria Group,
Inc.’s tobacco subsidiaries.
A majority of states currently tax smokeless tobacco products
using an ad valorem method, which is calculated as a percentage
of the price of the product, typically the wholesale price. This ad
valorem method results in more tax being paid on premium
products than is paid on lower-priced products of equal weight.
Altria Group, Inc.’s subsidiaries support legislation to convert ad
valorem taxes on smokeless tobacco to a weight-based
methodology because, unlike the ad valorem tax, a weight-based
tax subjects cans of equal weight to the same tax. As of February
22, 2016, the federal government, 22 states, Puerto Rico,
Philadelphia, Pennsylvania and Cook County, Illinois have
adopted a weight-based tax methodology for smokeless tobacco.
International Treaty on Tobacco Control
The World Health Organization’s Framework Convention on
Tobacco Control (the “FCTC”) entered into force in
February 2005. As of February 22, 2016, 179 countries, as well
as the European Community, have become parties to the FCTC.
While the United States is a signatory of the FCTC, it is not
currently a party to the agreement, as the agreement has not been
submitted to, or ratified by, the United States Senate. The FCTC
is the first international public health treaty and its objective is to
establish a global agenda for tobacco regulation with the purpose
of reducing initiation of tobacco use and encouraging cessation.
The treaty recommends (and in certain instances, requires)
signatory nations to enact legislation that would, among other
things: establish specific actions to prevent youth tobacco
product use; restrict or eliminate all tobacco product advertising,
marketing, promotion and sponsorship; initiate public education
campaigns to inform the public about the health consequences of
tobacco consumption and exposure to tobacco smoke and the
benefits of quitting; implement regulations imposing product
testing, disclosure and performance standards; impose health
warning requirements on packaging; adopt measures intended to
combat tobacco product smuggling and counterfeit tobacco
products, including tracking and tracing of tobacco products
through the distribution chain; and restrict smoking in public
places.
There are a number of proposals currently under
consideration by the governing body of the FCTC, some of which
call for substantial restrictions on the manufacture, marketing,
distribution and sale of tobacco products. In addition, the
Protocol to Eliminate Illicit Trade in Tobacco Products (the
“Protocol”) was approved by the Conference of Parties to the
FCTC in November 2012. It includes provisions related to the
tracking and tracing of tobacco products through the distribution
chain and numerous other provisions regarding the regulation of
the manufacture, distribution and sale of tobacco products. The
Protocol has not yet entered into force, but in any event will not
27
apply to the United States until the Senate ratifies the FCTC and
until the President signs, and the Senate ratifies, the Protocol. It
is not possible to predict the outcome of these proposals or the
impact of any FCTC actions on legislation or regulation in the
United States, either indirectly or as a result of the United States
becoming a party to the FCTC, or whether or how these actions
might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 18, during 1997 and 1998, PM USA and
other major domestic tobacco product manufacturers entered into
the State Settlement Agreements. These settlements require
participating manufacturers to make substantial annual payments,
which are adjusted for several factors, including inflation,
operating income, market share and industry volume. For a
discussion of the impact of the State Settlement Agreements on
Altria Group, Inc., see Financial Review - Off Balance Sheet
Arrangements and Aggregate Contractual Obligations -
Payments Under State Settlement and Other Tobacco Agreements,
and FDA Regulation below and Note 18. The State Settlement
Agreements also place numerous requirements and restrictions on
participating manufacturers’ business operations, including
prohibitions and restrictions on the advertising and marketing of
cigarettes and smokeless tobacco products. Among these are
prohibitions of outdoor and transit brand advertising, payments
for product placement and free sampling (except in adult-only
facilities). Restrictions are also placed on the use of brand name
sponsorships and brand name non-tobacco products. The State
Settlement Agreements also place prohibitions on targeting youth
and the use of cartoon characters. In addition, the State
Settlement Agreements require companies to affirm corporate
principles directed at reducing underage use of cigarettes; impose
requirements regarding lobbying activities; mandate public
disclosure of certain industry documents; limit the industry’s
ability to challenge certain tobacco control and underage use
laws; and provide for the dissolution of certain tobacco-related
organizations and place restrictions on the establishment of any
replacement organizations.
In November 1998, USSTC entered into the Smokeless
Tobacco Master Settlement Agreement (the “STMSA”) with the
attorneys general of various states and United States territories to
resolve the remaining health care cost reimbursement cases
initiated against USSTC. The STMSA required USSTC to adopt
various marketing and advertising restrictions. USSTC is the
only smokeless tobacco manufacturer to sign the STMSA.
Other Federal, State and Local Regulation and Activity
Federal, State and Local Regulation: A number of states
and localities have enacted or proposed legislation that imposes
restrictions on tobacco products (including innovative tobacco
products, such as e-vapor products), such as legislation that (1)
prohibits the sale of certain tobacco products with certain
characterizing flavors, (2) requires the disclosure of health
information separate from or in addition to federally-mandated
health warnings and (3) restricts commercial speech or imposes
additional restrictions on the marketing or sale of tobacco
products (including proposals to ban all tobacco product sales or
to increase the legal age to purchase tobacco products above the
current federal minimum age requirement of 18). The legislation
varies in terms of the type of tobacco products, the conditions
under which such products are or would be restricted or
prohibited, and exceptions to the restrictions or prohibitions. For
example, a number of proposals involving characterizing flavors
would prohibit smokeless tobacco products with characterizing
flavors without providing an exception for mint- or wintergreen-
flavored products.
Whether other states or localities will enact legislation in
these areas, and the precise nature of such legislation if enacted,
cannot be predicted. Altria Group, Inc.’s tobacco subsidiaries
have challenged and will continue to challenge certain state and
local legislation, including through litigation.
Health Effects of Tobacco Consumption and Exposure to
Environmental Tobacco Smoke (“ETS”): Altria Group, Inc.
and its tobacco subsidiaries believe that the public should be
guided by the messages of the United States Surgeon General and
public health authorities worldwide in making decisions
concerning the use of tobacco products.
Reports with respect to the health effects of smoking have
been publicized for many years, including in a January 2014
United States Surgeon General report titled “The Health
Consequences of Smoking - 50 Years of Progress” and in a June
2006 United States Surgeon General report on ETS titled “The
Health Consequences of Involuntary Exposure to Tobacco
Smoke.”
Most jurisdictions within the United States have restricted
smoking in public places. Some public health groups have called
for, and various jurisdictions have adopted or proposed, bans on
smoking in outdoor places, in private apartments and in cars
transporting minors. It is not possible to predict the results of
ongoing scientific research or the types of future scientific
research into the health risks of tobacco exposure and the impact
of such research on regulation.
Other Legislation or Governmental Initiatives: In
addition to the actions discussed above, other regulatory
initiatives affecting the tobacco industry have been adopted or are
being considered at the federal level and in a number of state and
local jurisdictions. For example, in recent years, legislation has
been introduced or enacted at the state or local level to subject
tobacco products to various reporting requirements and
performance standards (such as reduced cigarette ignition
propensity standards); establish educational campaigns relating to
tobacco consumption or tobacco control programs, or provide
additional funding for governmental tobacco control activities;
restrict the sale of tobacco products in certain retail
establishments and the sale of tobacco products in certain package
sizes; require tax stamping of MST products; require the use of
state tax stamps using data encryption technology; and further
restrict the sale, marketing and advertising of cigarettes and other
tobacco products. Such legislation may be subject to
constitutional or other challenges on various grounds, which may
or may not be successful.
28
It is not possible to predict what, if any, additional legislation,
regulation or other governmental action will be enacted or
implemented (and, if challenged, upheld) relating to the
manufacturing, design, packaging, marketing, advertising, sale or
use of tobacco products, or the tobacco industry generally. It is
possible, however, that legislation, regulation or other
governmental action could be enacted or implemented that would
materially adversely affect the business and volume of our
tobacco subsidiaries and our consolidated results of operations
and cash flows.
Governmental Investigations: From time to time, Altria
Group, Inc. and its subsidiaries are subject to governmental
investigations on a range of matters. Altria Group, Inc. and its
subsidiaries cannot predict whether new investigations may be
commenced.
Illicit Trade in Tobacco Products
Illicit trade in tobacco products can have an adverse impact on the
businesses of Altria Group, Inc. and its tobacco subsidiaries.
Illicit trade can take many forms, including the sale of counterfeit
tobacco products; the sale of tobacco products in the United
States that are intended for sale outside the country; the sale of
tobacco products over the Internet and by other means designed to
avoid the collection of applicable taxes; and diversion into one
taxing jurisdiction of tobacco products intended for sale in
another. Counterfeit tobacco products, for example, are
manufactured by unknown third parties in unregulated
environments. Counterfeit versions of PM USA, USSTC or
Middleton products can negatively affect adult tobacco consumer
experiences with and opinions of those brands. Illicit trade in
tobacco products also harms law-abiding wholesalers and retailers
by depriving them of lawful sales and undermines the significant
investment Altria Group, Inc.’s tobacco subsidiaries have made in
legitimate distribution channels. Moreover, illicit trade in tobacco
products results in federal, state and local governments losing tax
revenues. Losses in tax revenues can cause such governments to
take various actions, including increasing excise taxes; imposing
legislative or regulatory requirements that may adversely impact
Altria Group, Inc.’s consolidated results of operations and cash
flows and the businesses of its tobacco subsidiaries; or asserting
claims against manufacturers of tobacco products or members of
the trade channels through which such tobacco products are
distributed and sold.
Altria Group, Inc. and its tobacco subsidiaries devote
significant resources to help prevent illicit trade in tobacco
products and to protect legitimate trade channels. For example,
Altria Group, Inc.’s tobacco subsidiaries are engaged in a number
of initiatives to help prevent illicit trade in tobacco products,
including communication with wholesale and retail trade
members regarding illicit trade in tobacco products and how they
can help prevent such activities; enforcement of wholesale and
retail trade programs and policies that address illicit trade in
tobacco products; engagement with and support of law
enforcement and regulatory agencies; litigation to protect their
trademarks; and support for a variety of federal and state
legislative initiatives. Legislative initiatives to address illicit
trade in tobacco products are designed to protect the legitimate
channels of distribution, impose more stringent penalties for the
violation of illegal trade laws and provide additional tools for law
enforcement. Regulatory measures and related governmental
actions to prevent the illicit manufacture and trade of tobacco
products continue to evolve as the nature of illicit tobacco
products evolves.
Price, Availability and Quality of Agricultural Products
Shifts in crops (such as those driven by economic conditions and
adverse weather patterns), government mandated prices
and production control programs may increase or decrease the
cost or reduce the supply or quality of tobacco and other
agricultural products used to manufacture our products. As with
other agriculture commodities, the price of tobacco leaf can be
influenced by economic conditions and imbalances in supply and
demand and crop quality and availability can be influenced by
variations in weather patterns, including those caused by climate
change. Tobacco production in certain countries is subject to a
variety of controls, including government mandated prices and
production control programs. Changes in the patterns of demand
for agricultural products and the cost of tobacco production could
impact tobacco leaf prices and tobacco supply. Any significant
change in the price, quality or availability of tobacco leaf or other
agricultural products used to manufacture our products could
adversely affect our subsidiaries’ profitability and businesses.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are
subject to many influences that can impact the timing of sales to
customers, including the timing of holidays and other annual or
special events, the timing of promotions, customer incentive
programs and customer inventory programs, as well as the actual
or speculated timing of pricing actions and tax-driven price
increases.
Operating Results
The following table summarizes operating results for the
smokeable and smokeless products segments:
For the Years Ended December 31,
Net Revenues
Operating Companies
Income
(in millions)
2015
2014
2013
2015
2014
2013
Smokeable
products
Smokeless
products
Total
smokeable
and
smokeless
products
$ 22,792
$ 21,939 $ 21,868
$ 7,569
$ 6,873 $ 7,063
1,879
1,809
1,778
1,108
1,061
1,023
$ 24,671
$ 23,748 $ 23,646
$ 8,677
$ 7,934 $ 8,086
Smokeable Products Segment
The smokeable products segment’s net revenues, operating
companies income and operating companies income margin
29
increased during 2015 due primarily to higher pricing. PM
USA grew Marlboro’s and its total cigarette retail share versus
2014.
The following table summarizes the smokeable products
segment shipment volume performance:
(sticks in millions)
Cigarettes:
Marlboro
Other premium
Discount
Total cigarettes
Cigars:
Black & Mild
Other
Total cigars
Shipment Volume
For the Years Ended December 31,
2015
2014
2013
108,113
108,023
111,421
6,753
11,152
7,047
10,320
7,721
10,170
126,018
125,390
129,312
1,295
30
1,325
1,246
25
1,271
1,177
21
1,198
Total smokeable products
127,343
126,661
130,510
Cigarettes shipment volume includes Marlboro; Other
premium brands, such as Virginia Slims, Parliament and
Benson & Hedges; and Discount brands, which include L&M
and Basic. Cigarettes volume includes units sold as well as
promotional units, but excludes units sold for distribution to
and in Puerto Rico, and units sold in U.S. Territories, to
overseas military and by Philip Morris Duty Free Inc., none of
which, individually or in the aggregate, is material to the
smokeable products segment.
The following table summarizes the smokeable products
segment retail share performance:
Retail Share
For the Years Ended December 31,
2015
2014
2013
44.0%
43.8%
43.7%
2.8
4.5
2.9
4.2
3.1
3.9
51.3%
50.9%
50.7%
27.3%
0.4
27.7%
28.3%
0.4
28.7%
28.8%
0.2
29.0%
Cigarettes:
Marlboro
Other premium
Discount
Total cigarettes
Cigars:
Black & Mild
Other
Total cigars
Retail share results for cigarettes are based on data from
IRI/Management Science Associate Inc., a tracking service that
uses a sample of stores and certain wholesale shipments to
project market share and depict share trends. Retail share
results for cigars are based on data from IRI InfoScan, a
tracking service that uses a sample of stores to project market
share and depict share trends. Both services track sales in the
food, drug and mass merchandisers (including Wal-Mart),
convenience, military, dollar store and club trade classes. For
other trade classes selling cigarettes, retail share is based on
shipments from wholesalers to retailers through the Store
Tracking Analytical Reporting System (“STARS”). These
services are not designed to capture sales through other
channels, including the internet, direct mail and some illicitly
tax-advantaged outlets. Retail share results for cigars are based
on data for machine-made large cigars. Middleton defines
machine-made large cigars as cigars, made by machine, that
weigh greater than three pounds per thousand, except cigars
sold at retail in packages of 20 cigars. Because the cigars
service represents retail share performance only in key trade
channels, it should not be considered a precise measurement of
actual retail share. It is IRI’s standard practice to periodically
refresh its services, which could restate retail share results that
were previously released in these services.
PM USA and Middleton executed the following pricing
and promotional allowance actions during 2015, 2014 and
2013:
Effective November 15, 2015, PM USA increased the
list price on all of its cigarette brands by $0.07 per pack.
Effective May 17, 2015, PM USA increased the list price
on all of its cigarette brands by $0.07 per pack.
Effective November 16, 2014, PM USA reduced its
wholesale promotional allowance on L&M by $0.07 per
pack. In addition, PM USA increased the list price on all
of its other cigarette brands by $0.07 per pack.
Effective May 11, 2014, PM USA reduced its wholesale
promotional allowance on Marlboro and L&M by $0.06
per pack. In addition, PM USA increased the list price on
all of its other cigarette brands by $0.06 per pack, except
for Parliament, which PM USA increased by $0.11 per
pack.
Effective December 1, 2013, PM USA reduced its
wholesale promotional allowance on Marlboro and L&M
by $0.07 per pack. In addition, PM USA increased the list
price on all of its other cigarette brands by $0.07 per pack.
Effective June 10, 2013, PM USA reduced its wholesale
promotional allowance on Marlboro and L&M by $0.06
per pack. In addition, PM USA increased the list price on
all of its other cigarette brands by $0.06 per pack.
The following discussion compares operating results for
the smokeable products segment for the year ended December
31, 2015 with the year ended December 31, 2014.
Net revenues, which include excise taxes billed to customers,
increased $853 million (3.9%), due primarily to higher pricing,
which includes higher promotional investments, and higher
shipment volume ($133 million).
Operating companies income increased $696 million
(10.1%), due primarily to higher pricing, which includes higher
promotional investments, lower resolution expenses (due
principally to the end of the federal tobacco quota buy-out
payments after the third quarter of 2014), higher shipment volume
30
($68 million) and higher NPM Adjustment Items in 2015 ($54
million). These factors were partially offset by higher costs (due
primarily to higher pension and benefit costs, and marketing,
administration and research costs) and higher tobacco and health
litigation items ($100 million).
Marketing, administration and research costs for the
smokeable products segment include PM USA’s cost of
administering and litigating product liability claims. Litigation
defense costs are influenced by a number of factors, including
the number and types of cases filed, the number of cases tried
annually, the results of trials and appeals, the development of
the law controlling relevant legal issues, and litigation strategy
and tactics. For further discussion on these matters, see Note 18
and Item 3. For the years ended December 31, 2015, 2014 and
2013, product liability defense costs for PM USA were $228
million, $230 million and $247 million, respectively. The
factors that have influenced past product liability defense costs
are expected to continue to influence future costs. PM USA
does not expect future product liability defense costs to be
significantly different from product liability defense costs
incurred in the last few years.
For 2015, total smokeable products reported shipment
volume increased 0.5% versus 2014. PM USA’s 2015 reported
domestic cigarettes shipment volume increased 0.5%, due to a
moderation in the industry’s decline rate and retail share gains.
When adjusted for trade inventory movements and other factors,
PM USA estimates that its 2015 domestic cigarettes shipment
volume increased approximately 0.5%, and that total industry
cigarette volumes declined approximately 0.5%.
PM USA’s shipments of premium cigarettes accounted
for 91.2% of its reported domestic cigarettes shipment
volume for 2015, versus 91.8% for 2014.
Middleton’s reported cigars shipment volume for 2015
increased 4.2%, driven primarily by Black & Mild in the tipped
cigars segment.
Marlboro’s retail share for 2015 increased 0.2 share points
versus 2014.
PM USA grew its total retail share for 2015 by 0.4 share
points versus 2014, due to gains by Marlboro and L&M in
Discount, partially offset by share losses on other portfolio
brands.
In the machine-made large cigars category, while Black &
Mild’s retail share for 2015 declined 1.0 share point, Black &
Mild gained retail share in the more profitable tipped cigars
segment.
The following discussion compares operating results for the
smokeable products segment for the year ended December 31,
2014 with the year ended December 31, 2013.
Net revenues, which include excise taxes billed to
customers, increased $71 million (0.3%), due primarily to
higher pricing, partially offset by lower shipment volume ($724
million).
Operating companies income decreased $190 million (2.7%),
due primarily to higher NPM Adjustment Items in 2013 ($621
million), lower shipment volume ($360 million) and higher
marketing, administration and research costs, partially offset by
higher pricing.
For 2014, total smokeable products reported shipment
volume decreased 2.9% versus 2013. PM USA’s 2014 reported
domestic cigarettes shipment volume decreased 3.0%, due
primarily to the industry’s decline, partially offset by retail share
gains. When adjusted for trade inventory changes and other
factors, PM USA estimates that its 2014 domestic cigarettes
shipment volume decreased approximately 3%, and that total
industry cigarette volumes declined approximately 3.5%.
PM USA’s shipments of premium cigarettes accounted
for 91.8% of its reported domestic cigarettes shipment
volume for 2014, versus 92.1% for 2013.
Middleton’s reported cigars shipment volume for 2014
increased 6.1%, driven by Black & Mild’s performance in the
tipped cigars segment, including Black & Mild Jazz.
Marlboro’s retail share for 2014 increased 0.1 share point
versus 2013.
PM USA grew its total retail share for 2014 by 0.2 share
points versus 2013, driven by Marlboro, and L&M in Discount,
partially offset by share losses on other portfolio brands. In the
fourth quarter of 2014, PM USA expanded distribution of
Marlboro Menthol Rich Blue to 28 states, primarily in the eastern
U.S., to enhance Marlboro’s position in the menthol segment.
In the machine-made large cigars category, Black & Mild’s
retail share for 2014 declined 0.5 share points. In December
2014, Middleton announced the national expansion of Black &
Mild Casino, a dark tobacco blend, in the tipped segment.
Smokeless Products Segment
During 2015, the smokeless products segment grew net
revenues and operating companies income, primarily through
higher pricing. USSTC increased Copenhagen and Skoal’s
combined retail share versus 2014.
The following table summarizes smokeless products segment
shipment volume performance:
(cans and packs in millions)
Copenhagen
Skoal
Copenhagen and Skoal
Other
Total smokeless products
Shipment Volume
For the Years Ended December 31,
2015
474.7
267.9
742.6
70.9
813.5
2014
448.6
269.6
718.2
75.1
793.3
2013
426.1
283.8
709.9
77.6
787.5
Smokeless products shipment volume includes cans and
packs sold, as well as promotional units, but excludes
international volume, which is not material to the smokeless
products segment. Other includes certain USSTC and PM USA
smokeless products. New types of smokeless products, as well
as new packaging configurations of existing smokeless
products, may or may not be equivalent to existing MST
products on a can-for-can basis. To calculate volumes of cans
and packs shipped, one pack of snus, irrespective of the number
of pouches in the pack, is assumed to be equivalent to one can
of MST.
31
The following table summarizes smokeless products
segment retail share performance (excluding international
volume):
Copenhagen
Skoal
Copenhagen and Skoal
Other
Retail Share
For the Years Ended December 31,
2015
31.6%
19.7
51.3
3.6
2014
30.7%
20.3
51.0
4.0
2013
29.4%
21.3
50.7
4.2
Total smokeless products
54.9%
55.0%
54.9%
Retail share results for smokeless products are based on
data from IRI InfoScan, a tracking service that uses a sample of
stores to project market share and depict share trends. The
service tracks sales in the food, drug and mass merchandisers
(including Wal-Mart), convenience, military, dollar store and
club trade classes on the number of cans and packs sold.
Smokeless products is defined by IRI as moist smokeless and
spit-free tobacco products. Other includes certain USSTC and
PM USA smokeless products. New types of smokeless
products, as well as new packaging configurations of existing
smokeless products, may or may not be equivalent to existing
MST products on a can-for-can basis. One pack of snus,
irrespective of the number of pouches in the pack, is assumed to
be equivalent to one can of MST. All other products are
considered to be equivalent on a can-for-can basis. Because
this service represents retail share performance only in key
trade channels, it should not be considered a precise
measurement of actual retail share. It is IRI’s standard practice
to periodically refresh its InfoScan services, which could restate
retail share results that were previously released in this service.
USSTC executed the following pricing actions during
2015, 2014 and 2013:
Effective December 8, 2015, USSTC increased the list
price on Copenhagen and Skoal popular price products by
$0.12 per can. In addition, USSTC increased the list price
on all its brands, except for Copenhagen and Skoal popular
price products, by $0.07 per can.
Effective May 5, 2015, USSTC increased the list price
on all its brands by $0.07 per can.
Effective November 25, 2014, USSTC increased the list
price on all its brands by $0.07 per can.
Effective May 11, 2014, USSTC increased the list price
on all of its brands by $0.06 per can.
Effective December 8, 2013, USSTC increased the list
price on all of its brands by $0.06 per can.
Effective May 12, 2013, USSTC increased the list price
on all of its brands by $0.05 per can.
The following discussion compares operating results for
the smokeless products segment for the year ended December
31, 2015 with the year ended December 31, 2014.
Net revenues, which include excise taxes billed to customers,
increased $70 million (3.9%), due primarily to higher pricing,
which includes higher promotional investments.
Operating companies income increased $47 million (4.4%),
due primarily to higher pricing, which includes higher
promotional investments, partially offset by higher costs.
The smokeless products segment’s reported domestic
shipment volume for 2015 increased 2.5% as volume growth in
Copenhagen was partially offset by declines in Skoal and Other
portfolio brands. Copenhagen and Skoal’s combined reported
domestic shipment volume increased 3.4% for 2015.
After adjusting for trade inventory movements and other
factors, USSTC estimates that its domestic smokeless products
shipment volume grew approximately 2.5% for 2015. USSTC
estimates that the smokeless products category volume grew
approximately 2.5% over the six months ended December 31,
2015 as compared with approximately 2.0% for the six months
ended December 31, 2014.
Copenhagen and Skoal’s combined retail share increased 0.3
share points to 51.3% for 2015. Copenhagen’s retail share
increased 0.9 share points and Skoal’s retail share declined 0.6
share points.
Total smokeless products retail share declined 0.1 share point
to 54.9%.
The following discussion compares operating results for the
smokeless products segment for the year ended December 31,
2014 with the year ended December 31, 2013.
Net revenues, which include excise taxes billed to
customers, increased $31 million (1.7%), due primarily to
higher pricing, which includes higher promotional investments,
and higher volume, partially offset by mix due to growth in
popular priced products.
Operating companies income increased $38 million (3.7%),
due primarily to higher pricing ($43 million), which includes
higher promotional investments, and higher volume ($9 million),
partially offset by product mix.
Reported domestic smokeless products shipment volume for
2014 increased 0.7% as volume growth for Copenhagen was
mostly offset by volume declines in Skoal and Other portfolio
brands. Copenhagen and Skoal’s combined reported shipment
volume increased 1.2% for 2014.
After adjusting for trade inventory changes and other factors,
USSTC estimates that domestic smokeless products shipment
volume grew approximately 2.5% for 2014. USSTC estimates
that the smokeless products category volume grew approximately
2.0% over the six months ended December 31, 2014 as compared
with approximately 6.0% for the six months ended December 31,
2013.
Copenhagen and Skoal’s combined retail share increased 0.3
share points to 51.0% for 2014. Copenhagen’s retail share
increased 1.3 share points, while Skoal’s retail share declined 1.0
share point.
Retail share for the smokeless products segment increased
0.1 share point to 55.0%, as retail share gains for Copenhagen
were mostly offset by share losses for Skoal and Other portfolio
brands.
32
Wine Segment
volume performance:
The following table summarizes wine segment case shipment
Business Environment
Ste. Michelle is a leading producer of Washington state wines,
primarily Chateau Ste. Michelle, Columbia Crest and 14 Hands,
and owns wineries in or distributes wines from several other
domestic and foreign wine regions. Ste. Michelle holds an 85%
ownership interest in Michelle-Antinori, LLC, which owns Stag’s
Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn
Creek in Napa Valley and Erath in Oregon. In addition, Ste.
Michelle imports and markets Antinori, Torres and Villa Maria
Estate wines and Champagne Nicolas Feuillatte in the United
States. Key elements of Ste. Michelle’s strategy are expanded
domestic distribution of its wines, especially in certain account
categories such as restaurants, wholesale clubs, supermarkets,
wine shops and mass merchandisers, and a focus on improving
product mix to higher-priced, premium products.
Ste. Michelle’s business is subject to significant competition,
including competition from many larger, well-established
domestic and international companies, as well as from many
smaller wine producers. Wine segment competition is primarily
based on quality, price, consumer and trade wine tastings,
competitive wine judging, third-party acclaim and advertising.
Substantially all of Ste. Michelle’s sales occur in the United
States through state-licensed distributors. Ste. Michelle also sells
to domestic consumers through retail and e-commerce channels
and exports wines to international distributors.
Federal, state and local governmental agencies regulate the
beverage alcohol industry through various means, including
licensing requirements, pricing rules, labeling and advertising
restrictions, and distribution and production policies. Further
regulatory restrictions or additional excise or other taxes on the
manufacture and sale of alcoholic beverages may have an adverse
effect on Ste. Michelle’s wine business.
Operating Results
Ste. Michelle’s net revenues and operating companies income
increased in 2015, due primarily to higher shipment volume and
improved premium mix. Ste. Michelle expanded its operating
companies income margin in 2015. The following table
summarizes operating results for the wine segment:
(in millions)
Net revenues
Operating companies income
For the Years Ended December 31,
2015
692
152
$
$
2014
643 $
134 $
2013
609
118
$
$
(cases in thousands)
Chateau Ste. Michelle
Columbia Crest
14 Hands
Other
Total wine
Shipment Volume
For the Years Ended December 31,
2015
3,253
1,062
1,848
2,703
8,866
2014
3,035
1,032
1,662
2,622
8,351
2013
2,753
1,031
1,374
2,814
7,972
The following discussion compares operating results for the wine
segment for the year ended December 31, 2015 with the year
ended December 31, 2014.
Net revenues, which include excise taxes billed to customers,
increased $49 million (7.6%), due primarily to higher shipment
volume and improved premium mix. Operating companies
income increased $18 million (13.4%), due primarily to higher
shipment volume and improved premium mix, partially offset by
higher costs.
For 2015, Ste. Michelle’s reported wine shipment volume
increased 6.2%.
The following discussion compares operating results for the
wine segment for the year ended December 31, 2014 with the
year ended December 31, 2013.
Net revenues, which include excise taxes billed to customers,
and operating companies income increased $34 million (5.6%)
and $16 million (13.6%), respectively, due primarily to higher
shipment volume.
For 2014, Ste. Michelle’s reported wine shipment volume
increased 4.8% driven by increased volume of 14 Hands and
Chateau Ste. Michelle, partially offset by declines in Other
brands.
Financial Review
Net Cash Provided by Operating Activities
During 2015, net cash provided by operating activities was $5.8
billion compared with $4.7 billion during 2014. This increase
was due primarily to the following:
higher net revenues in the smokeable products segment
in 2015; and
the end of the federal tobacco quota buy-out payments
after the third quarter of 2014;
partially offset by:
higher settlement payments during 2015, driven by the
impact of NPM Adjustment Items in 2014.
During 2014, net cash provided by operating activities was
$4.7 billion compared with $4.4 billion during 2013. This
increase was due primarily to the following:
33
a voluntary $350 million contribution to Altria Group,
Inc.’s pension plans during 2013;
to higher capital expenditures during 2015 for the new USSTC
manufacturing facility expected to be completed in 2016.
Net Cash Used in Financing Activities
During 2015, net cash used in financing activities was $6.7 billion
compared with $4.7 billion during 2014. This increase was due
primarily to the following:
debt tender offer completed during 2015, which resulted
in the repurchase of $793 million of senior unsecured
long-term notes and a $226 million payment of
premiums and fees, as more fully described in Note 9;
$1.0 billion repayment of Altria Group, Inc. senior
unsecured notes at scheduled maturity in 2015;
debt issuance of $1.0 billion in 2014; and
higher dividends paid during 2015;
partially offset by:
$525 million repayment of Altria Group, Inc. senior
unsecured notes at scheduled maturity in 2014;
lower share repurchases during 2015; and
full redemption of UST senior notes of $300 million in
2014.
During 2014, net cash used in financing activities was $4.7
billion, essentially unchanged compared to 2013, which primarily
reflected the following:
higher repayments of debt in 2013 driven primarily by
the repurchase of senior unsecured notes in connection
with the 2013 debt tender offer; and
higher premiums and fees in 2013 in connection with the
2013 debt tender offer;
offset by:
debt issuances of $3.2 billion in 2013 used to repurchase
senior unsecured notes in connection with the 2013 debt
tender offer;
higher share repurchases during 2014; and
higher dividends paid during 2014.
lower interest payments in 2014, resulting from debt
maturities in 2013 and 2014, as well as debt refinancing
activities in 2013; and
higher earnings in 2014;
partially offset by:
higher income tax payments in 2014, resulting primarily
from the loss on early extinguishment of debt in 2013;
and
higher settlement payments during 2014, driven
primarily by the impact of higher NPM Adjustment
Items in 2013.
Altria Group, Inc. had a working capital deficit at December
31, 2015 and 2014. Altria Group, Inc.’s management believes
that it has the ability to fund these working capital deficits with
cash provided by operating activities and/or short-term
borrowings under its commercial paper program as discussed in
the Debt and Liquidity section below.
Net Cash Used in/Provided by Investing Activities
During 2015, net cash used in investing activities was $15 million
compared with net cash provided by investing activities of $177
million during 2014. This change was due primarily to the
following:
$132 million payment for a derivative financial
instrument during 2015;
the sale of PM USA’s Cabarrus, North Carolina
manufacturing facility during 2014; and
higher capital expenditures during 2015, due primarily to
a new USSTC manufacturing facility in Hopkinsville,
Kentucky that is expected to be completed in 2016;
partially offset by:
Nu Mark’s acquisition of the e-vapor business of Green
Smoke during 2014.
During 2014, net cash provided by investing activities was
$177 million compared with $602 million during 2013. This
decrease was due primarily to the following:
lower proceeds from asset sales in the financial services
business during 2014; and
Nu Mark’s acquisition of the e-vapor business of Green
Smoke during 2014.
Capital expenditures for 2015 increased 40.5% to $229
million, due primarily to the new USSTC manufacturing facility
noted above. Capital expenditures for 2016 are expected to be in
the range of $140 million to $180 million, and are expected to be
funded from operating cash flows. The decrease in expected
capital expenditures in 2016 compared with 2015 is due primarily
34
Debt and Liquidity
Credit Ratings - Altria Group, Inc.’s cost and terms of financing
and its access to commercial paper markets may be impacted by
applicable credit ratings. Under the terms of certain of Altria
Group, Inc.’s existing debt instruments, a change in a credit rating
could result in an increase or a decrease of the cost of borrowings.
For instance, as discussed in Note 9, the interest rate payable
on certain of Altria Group, Inc.’s outstanding notes is subject to
adjustment from time to time if the rating assigned to the notes of
such series by Moody’s Investors Service, Inc. (“Moody’s”) or
Standard & Poor’s Ratings Services (“Standard & Poor’s”) is
downgraded (or subsequently upgraded) as and to the extent set
forth in the notes. The impact of credit ratings on the cost of
borrowings under Altria Group, Inc.’s credit agreement is
discussed below.
At December 31, 2015, the credit ratings and outlook for
Altria Group, Inc.’s indebtedness by major credit rating agencies
were:
Moody’s
Standard & Poor’s
Fitch Ratings Ltd.
Short-term
Debt
P-2
A-2
F2
Long-term
Debt
Baa1
BBB+
BBB+
Outlook
Stable
Stable
Stable
Credit Lines - From time to time, Altria Group, Inc. has short-term
borrowing needs to meet its working capital requirements and
generally uses its commercial paper program to meet those needs.
At December 31, 2015, 2014 and 2013, Altria Group, Inc. had no
short-term borrowings.
During the third quarter of 2015, Altria Group, Inc. entered
into an extension agreement (the “Extension Agreement”) to
amend its $3.0 billion senior unsecured 5-year revolving credit
agreement, dated as of August 19, 2013 (the “Credit Agreement”).
The Extension Agreement extends the expiration date of the
Credit Agreement from August 19, 2019 to August 19, 2020
pursuant to the terms of the Credit Agreement. All other terms
and conditions of the Credit Agreement remain in full force and
effect. The Credit Agreement was previously amended in 2014 to
extend the expiration date from August 19, 2018 to August 19,
2019.
Pricing for interest and fees under the Credit Agreement may
be modified in the event of a change in the rating of Altria Group,
Inc.’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 Group,
Inc.’s long-term senior unsecured debt from Moody’s and
Standard & Poor’s. The applicable percentage based on Altria
Group, Inc.’s long-term senior unsecured debt ratings at
December 31, 2015 for borrowings under the Credit Agreement
was 1.25%. The Credit Agreement does not include any other
rating triggers, nor does it contain any provisions that could
require the posting of collateral. At December 31, 2015, credit
available to Altria Group, Inc. under the Credit Agreement was
$3.0 billion.
The Credit Agreement is used for general corporate purposes
and to support Altria Group, Inc.’s commercial paper issuances.
The Credit Agreement requires that Altria Group, Inc. maintain
(i) a ratio of debt to consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) of not more than 3.0
to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated
interest expense of not less than 4.0 to 1.0, each calculated as of
the end of the applicable quarter on a rolling four quarters basis.
At December 31, 2015, the ratios of debt to consolidated EBITDA
and consolidated EBITDA to consolidated interest expense,
calculated in accordance with the Credit Agreement, were 1.4 to
1.0 and 11.7 to 1.0, respectively. Altria Group, Inc. expects to
continue to meet its covenants associated with the Credit
Agreement. The terms “consolidated EBITDA,” “debt” and
“consolidated interest expense,” as defined in the Credit
Agreement, include certain adjustments. Exhibit 99.3 to Altria
Group, Inc.’s Quarterly Report on Form 10-Q for the period
ended September 30, 2013 sets forth the definitions of these terms
as they appear in the Credit Agreement and is incorporated herein
by reference.
Any commercial paper issued by Altria Group, Inc. and
borrowings under the Credit Agreement are guaranteed by PM
USA as further discussed in Note 19. Condensed Consolidating
Financial Information to the consolidated financial statements in
Item 8 (“Note 19”).
Financial Market Environment - Altria Group, Inc. believes it
has adequate liquidity and access to financial resources to meet its
anticipated obligations and ongoing business needs in the
foreseeable future. Altria Group, Inc. continues to monitor the
credit quality of its bank group and is not aware of any potential
non-performing credit provider in that group. Altria Group, Inc.
believes the lenders in its bank group will be willing and able to
advance funds in accordance with their legal obligations. See Item
1A for certain risk factors associated with the foregoing
discussion.
Debt - At December 31, 2015 and 2014, Altria Group, Inc.’s
total debt was $12.9 billion and $14.7 billion, respectively.
As discussed in Note 9, during 2015, Altria Group, Inc.
repaid in full at maturity senior unsecured notes in the aggregate
principal amount of $1.0 billion. Additionally, during 2015,
Altria Group, Inc. completed a debt tender offer to purchase for
cash $793 million aggregate principal amount of its senior
unsecured 9.700% notes due 2018.
All of Altria Group, Inc.’s debt was fixed-rate debt at
December 31, 2015 and 2014. The weighted-average coupon
interest rate on total debt was approximately 5.5% and
5.7% at December 31, 2015 and 2014, respectively. For further
details on long-term debt, see Note 9.
In October 2014, Altria Group, Inc. filed a registration
statement on Form S-3 with the SEC, under which Altria Group,
Inc. may offer debt securities or warrants to purchase debt
securities from time to time over a three-year period
from the date of filing.
35
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual
obligations that are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 18, Altria Group, Inc. and certain of its subsidiaries had unused letters
of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling
interest outstanding at December 31, 2015. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated
entities. In addition, as discussed in Note 19, PM USA has issued guarantees relating to Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program.
These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.
Aggregate Contractual Obligations - The following table summarizes Altria Group, Inc.’s contractual obligations at December 31,
2015:
(in millions)
Long-term debt (1)
Interest on borrowings (2)
Operating leases (3)
Purchase obligations: (4)
Inventory and production costs
Other
Other long-term liabilities (5)
Payments Due
Total
2016
2017 - 2018
2019 - 2020
$
12,965
$
4 $
871 $
2,148 $
10,031
309
3,218
729
3,947
2,443
716
58
989
555
1,544
152
1,432
97
1,336
142
1,478
325
1,146
60
565
32
597
311
$
29,695
$
2,474 $
4,203 $
4,262 $
2021 and
Thereafter
9,942
6,737
94
328
—
328
1,655
18,756
(1) Amounts represent the expected cash payments of Altria Group, Inc.’s long-term debt.
(2) Amounts represent the expected cash payments of Altria Group, Inc.’s interest expense on its long-term debt. Interest on Altria Group, Inc.’s debt, which
was all fixed-rate debt at December 31, 2015, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts
and premiums, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net on the
consolidated statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, storage and distribution) are
commitments for projected needs to be used in the normal course of business. Other purchase obligations include commitments for marketing, capital
expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant
terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are
cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts
payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table
above for accrued pension costs consist of the actuarially determined anticipated minimum funding requirements for each year from 2016 through 2020.
Contributions beyond 2020 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term
liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax
contingencies, and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee
payments, and payments for FDA user fees, as discussed below
and in Note 18 and Item 3, are excluded from the table above, as
the payments are subject to adjustment for several factors,
including inflation, operating income, market share and industry
volume. Litigation escrow deposits, as discussed below and in
Note 18, are also excluded from the table above since these
deposits will be returned to PM USA should it prevail on appeal.
Payments Under State Settlement and Other Tobacco
Agreements, and FDA Regulation - As discussed previously and
in Note 18 and Item 3, PM USA has entered into State Settlement
Agreements with the states and territories of the United States that
call for certain payments. PM USA, Middleton and USSTC were
also subject to payment obligations imposed by FETRA. The
FETRA payment obligations expired after the third quarter of
2014. In addition, in June 2009, PM USA and USSTC became
subject to quarterly user fees imposed by the FDA as a result of
the FSPTCA. Payments under the State Settlement Agreements
and the FDA user fees are based on variable factors, such as
volume, operating income, market share and inflation, depending
on the subject payment. Altria Group, Inc.’s subsidiaries account
for the cost of the State Settlement Agreements, FETRA and FDA
36
Litigation-Related Deposits and Payments - With respect to
certain adverse verdicts currently on appeal, to obtain stays of
judgments pending appeals, as of December 31, 2015, PM USA
had posted various forms of security totaling approximately $77
million, the majority of which have been collateralized with cash
deposits. These cash deposits are included in other assets on the
consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse
outcome or settlement of litigation could have a material adverse
effect on the financial position, cash flows or results of operations
of PM USA, UST or Altria Group, Inc. in a particular fiscal
quarter or fiscal year, as more fully disclosed in Note 18, Item 3
and Item 1A, management expects cash flow from operations,
together with Altria Group, Inc.’s access to capital markets, to
provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 11. Stock Plans to the consolidated financial
statements in Item 8 (“Note 11”), during 2015 Altria Group, Inc.
granted an aggregate of 1.2 million shares of restricted stock units
(also known as deferred stock) to eligible employees.
At December 31, 2015, the number of shares to be issued
upon vesting of restricted stock units was not significant.
Dividends paid in 2015 and 2014 were approximately $4.2
billion and $3.9 billion, respectively, an increase of 7.4%,
reflecting a higher dividend rate, partially offset by fewer shares
outstanding as a result of shares repurchased by Altria Group, Inc.
under its share repurchase programs.
During the third quarter of 2015, the Board of Directors
approved an 8.7% increase in the quarterly dividend rate to
$0.565 per common share versus the previous rate of $0.52 per
common share. Altria Group, Inc. expects to continue to maintain
a dividend payout ratio target of approximately 80% of its
adjusted diluted EPS. The current annualized dividend rate is
$2.26 per Altria Group, Inc. common share. Future dividend
payments remain subject to the discretion of the Board of
Directors.
During 2015, 2014 and 2013 the Board of Directors
authorized Altria Group, Inc. to repurchase shares of its
outstanding common stock under several share repurchase
programs.
At December 31, 2015, Altria Group, Inc. had approximately
$965 million remaining in the July 2015 share repurchase
program, which it expects to complete by the end of 2016. For
further discussion of Altria Group, Inc.’s share repurchase
programs, see Note 10. Capital Stock to the consolidated financial
statements in Item 8 and Part II, Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities of this Annual Report on Form 10-K.
user fees as a component of cost of sales. As a result of the State
Settlement Agreements, FETRA and FDA user fees, Altria Group,
Inc.’s subsidiaries recorded approximately $4.8 billion, $4.9
billion and $4.4 billion of charges to cost of sales for the years
ended December 31, 2015, 2014 and 2013, respectively. The
2015, 2014 and 2013 amounts included reductions to cost of sales
of $97 million, $43 million and $664 million, respectively, for the
NPM Adjustment Items. In addition, the 2015 and 2014 amounts
reflected decreases in the charge to cost of sales of approximately
$300 million and $100 million, respectively, for the expiration of
the obligations imposed by FETRA after the third quarter of 2014.
In connection with the settlement with the 24 signatory states
of certain NPM Adjustment disputes under the MSA, the formula
for allocating the revised NPM Adjustments applicable to the
signatory states for 2013 and subsequent years among the tobacco
product manufacturers that are original signatories to the MSA
(“OPMs”) has been modified in a manner favorable to PM USA,
although the extent to which it remains favorable to PM USA will
depend upon future developments. Similarly, in connection with
the settlement with New York of certain NPM Adjustment
disputes under the MSA, the formula for allocating among the
OPMs the revised NPM Adjustments applicable to New York for
years after 2014 has been modified in a manner favorable to PM
USA, although the extent to which it remains favorable to PM
USA will depend upon future developments. For a detailed
discussion of settlements of, and determinations made in
connection with, disputes with certain states and territories related
to the NPM Adjustment provision under the MSA for the years
2003-2012, see Health Care Cost Recovery Litigation - NPM
Adjustment Disputes in Note 18.
Based on current agreements, 2015 market share and
historical annual industry volume decline rates, the estimated
amounts that Altria Group, Inc.’s subsidiaries may charge to cost
of sales for payments related to State Settlement Agreements and
FDA user fees approximate $4.9 billion in 2016 and each year
thereafter. The increase in these amounts compared with
approximately $4.8 billion charged to cost of sales in 2015
reflects the impact of the NPM Adjustments recorded in 2015.
These amounts exclude the potential impact of the NPM
Adjustment provision applicable under the MSA and the revised
NPM Adjustment provisions applicable under the settlements of
the NPM Adjustment disputes with the 24 signatory states and
with New York, respectively, for years after 2014 discussed
above.
The estimated amounts due under the State Settlement
Agreements charged to cost of sales in each year would generally
be paid in the following year. The amounts charged to cost of
sales for FDA user fees are generally paid in the quarter in which
the fees are incurred. As previously stated, the payments due
under the terms of the State Settlement Agreements and FDA user
fees are subject to adjustment for several factors, including
volume, operating income, inflation and certain contingent events
and, in general, are allocated based on each manufacturer’s
market share. The future payment amounts discussed above are
estimates, and actual payment amounts will differ to the extent
underlying assumptions differ from actual future results.
37
Recent Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of recent accounting guidance issued
but not yet adopted.
Contingencies
See Note 18 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
At December 31, 2015 and 2014, the fair value of Altria
Group, Inc.’s total debt was $14.5 billion and $17.0 billion,
respectively. The fair value of Altria Group, Inc.’s debt is
subject to fluctuations resulting from changes in market
interest rates. A 1% increase in market interest rates at
December 31, 2015 and 2014 would decrease the fair value
of Altria Group, Inc.’s total debt by approximately $1.1
billion and $1.3 billion, respectively. A 1% decrease in
market interest rates at December 31, 2015 and 2014 would
increase the fair value of Altria Group, Inc.’s total debt by
approximately $1.3 billion and $1.5 billion, respectively.
Interest rates on borrowings under the Credit Agreement
are expected to be based on LIBOR plus a percentage based
on the higher of the ratings of Altria Group, Inc.’s long-term
senior unsecured debt from Moody’s and Standard & Poor’s.
The applicable percentage based on Altria Group, Inc.’s long-
term senior unsecured debt ratings at December 31, 2015 for
borrowings under the Credit Agreement was 1.25%. At
December 31, 2015, Altria Group, Inc. had no borrowings
under the Credit Agreement.
At December 31, 2015, the fair value of Altria Group,
Inc.’s derivative financial instrument in the form of a put
option (the “option”) included in other current assets was
$152 million. A 10% devaluation of the United States dollar
against the British pound would decrease the fair value of the
option by approximately $97 million, with a corresponding
decrease to Altria Group, Inc.’s pre-tax earnings. A 10%
appreciation of the United States dollar against the British
pound would increase the fair value of the option by
approximately $172 million, with a corresponding increase to
Altria Group, Inc.’s pre-tax earnings.
38
Item 8. Financial Statements and Supplementary Data.
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
at December 31,
Assets
at December 31,
Assets
Cash and cash equivalents
Receivables
Inventories:
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Leaf tobacco
Other raw materials
Work in process
Deferred income taxes
Finished product
Other current assets
Total current assets
Deferred income taxes
Other current assets
Property, plant and equipment, at cost:
Total current assets
Land and land improvements
Buildings and building equipment
Property, plant and equipment, at cost:
Machinery and equipment
Land and land improvements
Construction in progress
Buildings and building equipment
Machinery and equipment
Construction in progress
Less accumulated depreciation
Less accumulated depreciation
Goodwill
Other intangible assets, net
Investment in SABMiller
Goodwill
Finance assets, net
Other intangible assets, net
Other assets
Investment in SABMiller
Finance assets, net
See notes to consolidated financial statements.
Other assets
Total Assets
Total Assets
See notes to consolidated financial statements.
2015
2014
$
2,369
124
2015
$
3,321
124
2014
$
957
181
444
449
2,031
1,175
387
6,086
2,369
124
957
181
444
449
2,031
1,175
387
6,086
295
1,406
2,969
207
4,877
2,895
1,982
295
1,406
2,969
207
4,877
2,895
1,982
5,285
12,028
5,483
1,239
432
32,535
5,285
12,028
5,483
1,239
432
32,535
$
991
200
429
420
2,040
1,143
250
6,878
3,321
124
991
200
429
420
2,040
1,143
250
6,878
293
1,323
2,986
153
4,755
2,772
1,983
293
1,323
2,986
153
4,755
2,772
1,983
5,285
12,049
6,183
1,614
483
34,475
$
5,285
12,049
6,183
1,614
483
34,475
$
$
$
39
39
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
Consolidated Balance Sheets (Continued)
____________________________________________
(in millions of dollars, except share and per share data)
____________________________________________
$
$
$
$
2015
2015
4
400
4
400
695
198
695
3,590
198
1,081
3,590
1,110
1,081
7,078
1,110
7,078
12,915
5,663
12,915
1,277
5,663
2,245
1,277
447
2,245
29,625
447
29,625
37
37
2014
2014
1,000
416
1,000
416
618
186
618
3,500
186
925
3,500
1,028
925
7,673
1,028
7,673
13,693
6,088
13,693
1,012
6,088
2,461
1,012
503
2,461
31,430
503
31,430
35
35
935
5,813
935
27,257
5,813
(3,280)
27,257
(3,280)
(27,845)
2,880
(27,845)
(7)
2,880
2,873
(7)
32,535
2,873
32,535
$
$
935
5,735
935
26,277
5,735
(2,682)
26,277
(2,682)
(27,251)
3,014
(27,251)
(4)
3,014
3,010
(4)
34,475
3,010
34,475
$
$
at December 31,
Liabilities
at December 31,
Liabilities
Current portion of long-term debt
Accounts payable
Current portion of long-term debt
Accrued liabilities:
Accounts payable
Marketing
Accrued liabilities:
Employment costs
Marketing
Settlement charges
Employment costs
Other
Settlement charges
Other
Dividends payable
Dividends payable
Total current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Accrued pension costs
Accrued postretirement health care costs
Other liabilities
Long-term debt
Deferred income taxes
Accrued pension costs
Accrued postretirement health care costs
Other liabilities
Total liabilities
Total liabilities
Contingencies (Note 18)
Redeemable noncontrolling interest
Contingencies (Note 18)
Stockholders’ Equity
Redeemable noncontrolling interest
Stockholders’ Equity
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued)
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued)
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses
Cost of repurchased stock
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses
Cost of repurchased stock
(845,901,836 shares at December 31, 2015 and
834,486,794 shares at December 31, 2014)
(845,901,836 shares at December 31, 2015 and
834,486,794 shares at December 31, 2014)
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total stockholders’ equity
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
See notes to consolidated financial statements.
40
40
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
____________________________________
for the years ended December 31,
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Marketing, administration and research costs
Asset impairment and exit costs
Operating income
Interest and other debt expense, net
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Other income, net
Earnings before income taxes
Provision for income taxes
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Per share data:
2015
$ 25,434
7,740
6,580
11,114
2,708
41
4
8,361
817
228
(757)
(5)
8,078
2,835
5,243
(2)
5,241
$
2014
$ 24,522
2013
$ 24,466
7,785
6,577
10,160
2,539
2
(1)
7,620
808
44
(1,006)
—
7,774
2,704
5,070
—
7,206
6,803
10,457
2,340
22
11
8,084
1,049
1,084
(991)
—
6,942
2,407
4,535
—
$
5,070
$
4,535
Basic and diluted earnings per share attributable to Altria Group, Inc.
$
2.67
$
2.56
$
2.26
See notes to consolidated financial statements.
41
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
(in millions of dollars)
Consolidated Statements of Comprehensive Earnings
Consolidated Statements of Comprehensive Earnings
_______________________
(in millions of dollars)
(in millions of dollars)
_______________________
_______________________
2015
5,243
2015
2015
5,243
5,243
(3)
30
(3)
(3)
(625)
30
30
(598)
(625)
(625)
(598)
(598)
4,645
(2)
4,645
4,645
4,643
(2)
(2)
4,643
4,643
$
$
$
$
$
$
2014
5,070
2014
2014
5,070
5,070
(2)
(767)
(2)
(2)
(535)
(767)
(767)
(1,304)
(535)
(535)
(1,304)
(1,304)
3,766
—
3,766
3,766
3,766
—
—
3,766
3,766
$
$
$
$
$
$
2013
4,535
2013
2013
4,535
4,535
(2)
1,141
(2)
(2)
(477)
1,141
1,141
662
(477)
(477)
662
662
5,197
—
5,197
5,197
5,197
—
—
5,197
5,197
$
$
$
$
$
$
for the years ended December 31,
Net earnings
for the years ended December 31,
for the years ended December 31,
Other comprehensive earnings (losses), net of deferred income taxes:
Net earnings
Net earnings
Other comprehensive earnings (losses), net of deferred income taxes:
Other comprehensive earnings (losses), net of deferred income taxes:
Currency translation adjustments
Benefit plans
Currency translation adjustments
Currency translation adjustments
SABMiller
Benefit plans
Benefit plans
SABMiller
SABMiller
Other comprehensive (losses) earnings, net of deferred income taxes
Other comprehensive (losses) earnings, net of deferred income taxes
Other comprehensive (losses) earnings, net of deferred income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings
Comprehensive earnings
Comprehensive earnings attributable to Altria Group, Inc.
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to Altria Group, Inc.
Comprehensive earnings attributable to Altria Group, Inc.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
42
42
42
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
for the years ended December 31,
Cash Provided by (Used in) Operating Activities
Net earnings
Adjustments to reconcile net earnings to operating cash flows:
2015
2014
2013
$
5,243
$
5,070 $
4,535
Depreciation and amortization
Deferred income tax benefit
Earnings from equity investment in SABMiller
Dividends from SABMiller
Loss on early extinguishment of debt
Cash effects of changes, net of the effects from acquisition of Green Smoke:
Receivables, net
Inventories
Accounts payable
Income taxes
Accrued liabilities and other current assets
Accrued settlement charges
Pension plan contributions
Pension provisions and postretirement, net
Other
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Acquisition of Green Smoke, net of acquired cash
Proceeds from finance assets
Payment for derivative financial instrument
Other
Net cash (used in) provided by investing activities
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Long-term debt repaid
Repurchases of common stock
Dividends paid on common stock
Premiums and fees related to early extinguishment of debt
Other
Net cash used in financing activities
Cash and cash equivalents:
(Decrease) increase
Balance at beginning of year
Balance at end of year
Cash paid: Interest
Income taxes
See notes to consolidated financial statements.
$
$
$
43
225
(132)
(757)
495
228
3
(33)
(7)
(12)
199
90
(28)
114
182
5,810
(229)
—
354
(132)
(8)
(15)
—
(1,793)
(554)
(4,179)
(226)
5
(6,747)
(952)
3,321
2,369
776
3,029
208
(129)
(1,006)
456
44
(8)
(184)
(5)
1
(107)
109
(15)
21
208
4,663
(163)
(102)
369
—
73
177
999
(825)
(939)
(3,892)
(44)
7
(4,694)
146
3,175
3,321 $
820 $
2,765 $
$
$
$
212
(86)
(991)
439
1,084
78
(133)
(76)
(95)
(107)
(225)
(393)
177
(44)
4,375
(131)
—
716
—
17
602
4,179
(3,559)
(634)
(3,612)
(1,054)
(22)
(4,702)
275
2,900
3,175
1,099
2,448
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
____________________________________
Balances, December 31, 2012
Net earnings (losses) (1)
Other comprehensive earnings, net
of deferred income taxes
Stock award activity
Cash dividends declared ($1.84 per share)
Repurchases of common stock
Balances, December 31, 2013
Net earnings (losses)(1)
Other comprehensive losses, net
of deferred income taxes
Stock award activity
Cash dividends declared ($2.00 per share)
Repurchases of common stock
Balances, December 31, 2014
Net earnings (losses) (1)
Other comprehensive losses, net
of deferred income taxes
Stock award activity
Cash dividends declared ($2.17 per share)
Repurchases of common stock
Balances, December 31, 2015
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
$
935 $
5,688 $
24,316 $
(2,040) $
(25,731) $
2 $
—
—
—
—
—
935
—
—
—
—
—
935
—
—
—
—
—
—
—
26
—
—
5,714
—
—
21
—
—
5,735
—
—
78
—
—
4,535
—
—
(3,683)
—
25,168
5,070
—
—
(3,961)
—
26,277
5,241
—
—
(4,261)
—
—
662
—
—
—
—
—
11
—
(600)
(1,378)
(26,320)
—
(1,304)
—
—
—
—
—
8
—
(939)
(2,682)
(27,251)
—
(598)
—
—
—
(40)
— —
—
(554)
(3)
—
—
—
—
(1)
(3)
—
—
—
—
(4)
(3)
—
—
—
—
$
935 $
5,813 $
27,257 $
(3,280) $
(27,845) $
(7) $
3,170
4,532
662
37
(3,683)
(600)
4,118
5,067
(1,304)
29
(3,961)
(939)
3,010
5,238
(598)
38
(4,261)
(554)
2,873
(1) Net losses attributable to noncontrolling interests for the years ended December 31, 2015, 2014 and 2013 exclude net earnings of $5 million, $3 million and $3 million,
respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in the consolidated
balance sheets at December 31, 2015, 2014 and 2013, respectively. See Note 18.
See notes to consolidated financial statements.
44
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 1. Background and Basis of Presentation
Background: At December 31, 2015, Altria Group, Inc.’s
wholly-owned subsidiaries included Philip Morris USA Inc. (“PM
USA”), which is engaged predominantly in the manufacture and
sale of cigarettes in the United States; John Middleton Co.
(“Middleton”), which is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco, and is a wholly-
owned subsidiary of PM USA; and UST LLC (“UST”), which
through its wholly-owned subsidiaries, including U.S. Smokeless
Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine
Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and
sale of smokeless tobacco products and wine. Altria Group, Inc.’s
other operating companies included Nu Mark LLC (“Nu Mark”),
a wholly-owned subsidiary that is engaged in the manufacture and
sale of innovative tobacco products, and Philip Morris Capital
Corporation (“PMCC”), a wholly-owned subsidiary that
maintains a portfolio of finance assets, substantially all of which
are leveraged leases. Other Altria Group, Inc. wholly-owned
subsidiaries included Altria Group Distribution Company, which
provides sales, distribution and consumer engagement services to
certain Altria Group, Inc. operating subsidiaries, and Altria Client
Services LLC, which provides various support services in areas
such as legal, regulatory, finance, human resources and external
affairs to Altria Group, Inc. and its subsidiaries. Altria Group,
Inc.’s access to the operating cash flows of its wholly-owned
subsidiaries consists of cash received from the payment of
dividends and distributions, and the payment of interest on
intercompany loans by its subsidiaries. At December 31, 2015,
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 December 31, 2015, Altria Group, Inc. also held
approximately 27% of the economic and voting interest of
SABMiller plc (“SABMiller”), which Altria Group, Inc. accounts
for under the equity method of accounting. Altria Group, Inc.
receives cash dividends on its interest in SABMiller if and when
SABMiller pays such dividends. On November 11, 2015,
Anheuser-Busch InBev SA/NV (“AB InBev”) announced its firm
offer to effect a business combination with SABMiller in a cash
and stock transaction. For further discussion, see Note 6.
Investment in SABMiller.
Basis of Presentation: The consolidated financial statements
include Altria Group, Inc., as well as its wholly-owned and
majority-owned subsidiaries. Investments in which Altria Group,
Inc. has the ability to exercise significant influence are accounted
for under the equity method of accounting. All intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the dates of
the financial statements and the reported amounts of net revenues
and expenses during the reporting periods. Significant estimates
and assumptions include, among other things, pension and benefit
plan assumptions, lives and valuation assumptions for goodwill
and other intangible assets, marketing programs, income taxes,
and the allowance for losses and estimated residual values of
finance leases. Actual results could differ from those estimates.
Note 2. Summary of Significant Accounting Policies
Cash and Cash Equivalents: Cash equivalents include
demand deposits with banks and all highly liquid investments
with original maturities of three months or less. Cash equivalents
are stated at cost plus accrued interest, which approximates fair
value.
Depreciation, Amortization, Impairment Testing and
Asset Valuation: Property, plant and equipment are stated at
historical costs and depreciated by the straight-line method over
the estimated useful lives of the assets. Machinery and equipment
are depreciated over periods up to 25 years, and buildings and
building improvements over periods up to 50 years. Definite-
lived intangible assets are amortized over their estimated useful
lives up to 25 years.
Altria Group, Inc. reviews long-lived assets, including
definite-lived intangible assets, for impairment whenever events
or changes in business circumstances indicate that the carrying
value of the assets may not be fully recoverable. Altria Group,
Inc. performs undiscounted operating cash flow analyses to
determine if an impairment exists. For purposes of recognition
and measurement of an impairment for assets held for use, Altria
Group, Inc. groups assets and liabilities at the lowest level for
which cash flows are separately identifiable. If an impairment is
determined to exist, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed
of, if any, are based on the estimated proceeds to be received, less
costs of disposal. Altria Group, Inc. also reviews the estimated
remaining useful lives of long-lived assets whenever events or
changes in business circumstances indicate the lives may have
changed.
Altria Group, Inc. conducts a required annual review of
goodwill and indefinite-lived intangible assets for potential
impairment, and more frequently if an event occurs or
circumstances change that would require Altria Group, Inc. to
perform an interim review. If the carrying value of goodwill
exceeds its fair value, which is determined using discounted cash
flows, goodwill is considered impaired. The amount of
impairment loss is measured as the difference between the
carrying value and the implied fair value. If the carrying value of
an indefinite-lived intangible asset exceeds its fair value, which is
determined using discounted cash flows, the intangible asset is
considered impaired and is reduced to fair value.
Derivative Financial Instruments: Derivative financial
instruments are recorded at fair value on the consolidated balance
sheets as either assets or liabilities. Changes in the fair value of
derivatives are recorded each period either in accumulated other
comprehensive earnings (losses) or in earnings, depending on the
45
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
type of derivative and whether the derivative qualifies for hedge
accounting treatment. Gains and losses on derivative instruments
reported in accumulated other comprehensive earnings (losses)
are reclassified to the consolidated statements of earnings in the
periods in which operating results are affected by the respective
hedged item. Cash flows from hedging instruments are classified
in the same manner as the respective hedged item in the
consolidated statements of cash flows. Altria Group, Inc. does
not enter into or hold derivative financial instruments for trading
or speculative purposes.
Employee Benefit Plans: Altria Group, Inc. provides a range
of benefits to its employees and retired employees, including
pension, postretirement health care and postemployment benefits.
Altria Group, Inc. records annual amounts relating to these plans
based on calculations specified by U.S. GAAP, which include
various actuarial assumptions as to discount rates, assumed rates
of return on plan assets, mortality, compensation increases,
turnover rates and health care cost trend rates.
Altria Group, Inc. recognizes the funded status of its defined
benefit pension and other postretirement plans on the consolidated
balance sheet and records as a component of other comprehensive
earnings (losses), net of deferred income taxes, the gains or losses
and prior service costs or credits that have not been recognized as
components of net periodic benefit cost. The gains or losses and
prior service costs or credits recorded as components of other
comprehensive earnings (losses) are subsequently amortized into
net periodic benefit cost in future years.
Environmental Costs: Altria Group, Inc. is subject to laws
and regulations relating to the protection of the environment.
Altria Group, Inc. provides for expenses associated with
environmental remediation obligations on an undiscounted basis
when such amounts are probable and can be reasonably estimated.
Such accruals are adjusted as new information develops or
circumstances change.
Compliance with environmental laws and regulations,
including the payment of any remediation and compliance costs
or damages and the making of related expenditures, has not had,
and is not expected to have, a material adverse effect on Altria
Group, Inc.’s consolidated results of operations, capital
expenditures, financial position or cash flows (see Note 18.
Contingencies - Environmental Regulation).
Fair Value Measurements: Altria Group, Inc. measures
certain assets and liabilities at fair value. Fair value is defined as
the exchange price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Altria Group, Inc. uses a fair value hierarchy, which gives the
highest priority to unadjusted quoted prices in active markets for
identical assets and liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).
The three levels of inputs used to measure fair value are:
Level 1 Unadjusted quoted prices in active markets for
identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs
that are observable or can be corroborated by
observable market data for substantially the full term
of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value
of the assets or liabilities.
Finance Leases: Income attributable to leveraged leases is
initially recorded as unearned income and subsequently
recognized as revenue over the terms of the respective leases at
constant after-tax rates of return on the positive net investment
balances. Investments in leveraged leases are stated net of related
nonrecourse debt obligations.
Finance leases include unguaranteed residual values that
represent PMCC’s estimates at lease inception as to the fair values
of assets under lease at the end of the non-cancelable lease terms.
The estimated residual values are reviewed at least annually by
PMCC’s management. This review includes analysis of a number
of factors, including activity in the relevant industry. If necessary,
revisions are recorded to reduce the residual values.
PMCC considers rents receivable past due when they are
beyond the grace period of their contractual due date. PMCC
stops recording income (“non-accrual status”) on rents receivable
when contractual payments become 90 days past due or earlier if
management believes there is significant uncertainty of
collectability of rent payments, and resumes recording income
when collectability of rent payments is reasonably certain.
Payments received on rents receivable that are on non-accrual
status are used to reduce the rents receivable balance. Write-offs
to the allowance for losses are recorded when amounts are
deemed to be uncollectible.
Guarantees: Altria Group, Inc. recognizes a liability for the
fair value of the obligation of qualifying guarantee activities. See
Note 18. Contingencies for a further discussion of guarantees.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Altria Group, Inc.
records a valuation allowance when it is more-likely-than-not that
some portion or all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax
positions when a tax position taken or expected to be taken in a
tax return is more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. Altria Group,
Inc. recognizes accrued interest and penalties associated with
uncertain tax positions as part of the provision for income taxes
on its consolidated statements of earnings.
46
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Inventories: Inventories are stated at the lower of cost or
market. The last-in, first-out (“LIFO”) method is used to
determine the cost of substantially all tobacco inventories. The
cost of the remaining inventories is determined using the first-in,
first-out and average cost methods. It is a generally recognized
industry practice to classify leaf tobacco and wine inventories as
current assets although part of such inventory, because of the
duration of the curing and aging process, ordinarily would not be
used within one year.
Litigation Contingencies and Costs: Altria Group, Inc.
and its subsidiaries record provisions in the consolidated financial
statements for pending litigation when it is determined that an
unfavorable outcome is probable and the amount of the loss can
be reasonably estimated. Litigation defense costs are expensed as
incurred and included in marketing, administration and research
costs on the consolidated statements of earnings.
Marketing Costs: Altria Group, Inc.’s businesses promote
their products with consumer engagement programs, consumer
incentives and trade promotions. Such programs include
discounts, coupons, rebates, in-store display incentives, event
marketing and volume-based incentives. Consumer engagement
programs are expensed as incurred. Consumer incentive and
trade promotion activities are recorded as a reduction of 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.
For interim reporting purposes, consumer engagement programs
and certain consumer incentive expenses are charged to
operations as a percentage of sales, based on estimated sales and
related expenses for the full year.
Revenue Recognition: Altria Group, Inc.’s businesses
recognize revenues, net of sales incentives and sales returns, and
including shipping and handling charges billed to customers,
upon shipment of goods when title and risk of loss pass to
customers. Payments received in advance of revenue recognition
are deferred and recorded in other accrued liabilities until revenue
is recognized. Altria Group, Inc.’s businesses also include excise
taxes billed to customers in net revenues. Shipping and handling
costs are classified as part of cost of sales.
Stock-Based Compensation: Altria Group, Inc. measures
compensation cost for all stock-based awards at fair value on date
of grant and recognizes compensation expense over the service
periods for awards expected to vest. The fair value of restricted
stock and restricted stock units (also known as deferred stock) is
determined based on the number of shares granted and the market
value at date of grant.
New Accounting Standards: In May 2014, the Financial
Accounting Standards Board (“FASB”) issued authoritative
guidance for recognizing revenue from contracts with customers.
The objective of this guidance is to establish principles for
reporting information about the nature, amount, timing and
uncertainty of revenue and cash flows arising from an entity’s
contracts with customers. As a result of an August 2015 FASB
update, the new guidance will be effective for Altria Group, Inc.
for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. Early
adoption is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim reporting
periods within that reporting period. Altria Group, Inc. is in the
process of evaluating the impact of this guidance on its
consolidated financial statements and related disclosures.
In April 2015, the FASB issued authoritative guidance to
simplify the presentation of debt issuance costs by requiring that
debt issuance costs related to a recognized debt liability be
presented on the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts, rather than as a deferred charge (an asset). For Altria
Group, Inc., the new guidance will be effective for annual
reporting periods beginning after December 15, 2015, including
interim periods within that reporting period. The guidance
requires all prior period balance sheets to be adjusted
retrospectively and early adoption is permitted. Altria Group, Inc.
will adopt the new guidance in the first quarter of 2016. At
December 31, 2015 and 2014, Altria Group, Inc. had $72 million
and $83 million, respectively, of debt issuance costs included in
other assets on its consolidated balance sheets.
In November 2015, the FASB issued authoritative guidance
to simplify the presentation of deferred income taxes by requiring
that deferred tax liabilities and assets be classified as noncurrent
in a classified statement of financial position. This guidance does
not change the current requirement that deferred tax liabilities and
assets for each tax-paying jurisdiction be offset and presented as a
single amount. For Altria Group, Inc., the new guidance will be
effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period.
Early adoption is permitted. The guidance may be applied either
prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. Altria Group, Inc. will
adopt the new guidance by the first quarter of 2017. Under the
new guidance, at December 31, 2015, current deferred income tax
assets of approximately $1.2 billion would have been reclassified
to noncurrent deferred income tax liabilities ($1.0 billion) and
noncurrent deferred income tax assets ($0.2 billion).
On January 5, 2016, the FASB issued authoritative guidance
to address certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. For Altria
Group, Inc., the new guidance will be effective for annual
reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. Early adoption of
the guidance is not permitted, except for a certain provision of the
guidance. Altria Group, Inc. is in the process of evaluating the
impact of this guidance on its consolidated financial statements
and related disclosures.
Note 3. Acquisition of Green Smoke
In April 2014, Nu Mark acquired the e-vapor business of Green
Smoke, Inc. and its affiliates (“Green Smoke”) for a total
purchase price of approximately $130 million. The acquisition
47
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
complements Nu Mark’s capabilities and enhances its competitive
position by adding e-vapor experience, broadening product
offerings and strengthening supply chain capabilities.
Green Smoke’s financial position and results of operations
have been consolidated with Altria Group, Inc. as of April 1,
2014.
Pro forma results, as well as net revenues and net earnings
for Green Smoke subsequent to the acquisition, have not been
presented because the acquisition of Green Smoke is not material
to Altria Group, Inc.’s consolidated results of operations.
The purchase price allocation has been completed, and there
were no changes subsequent to the acquisition date.
Costs incurred to effect the acquisition, as well as integration
costs, were recognized as expenses in the periods in which the
costs were incurred. For the years ended December 31, 2015 and
2014, Altria Group, Inc. incurred $7 million and $28 million,
respectively, of pre-tax integration and acquisition-related costs,
consisting primarily of contract termination costs, transaction
costs and inventory adjustments, which were included in Altria
Group, Inc.’s consolidated statements of earnings.
Note 4. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows:
(in millions)
Smokeable products
Smokeless products
Wine
Other
Total
Goodwill
Other Intangible Assets, net
December 31, 2015
$
77
5,023
74
111
5,285
$
December 31, 2014
77
$
5,023
74
111
5,285
$
December 31, 2015
2,919
$
8,831
267
11
12,028
$
December 31, 2014
2,937
$
8,833
268
11
12,049
$
Goodwill relates to Altria Group, Inc.’s 2014 acquisition of Green Smoke, 2009 acquisition of UST and 2007 acquisition of
Middleton.
Other intangible assets consisted of the following:
December 31, 2015
December 31, 2014
Gross Carrying
Amount
11,711
$
465
12,176 $
$
$
Accumulated
Amortization
— $
148
148
$
Gross Carrying
Amount
11,711
465
12,176 $
$
Accumulated
Amortization
—
127
127
Note 5. Inventories
The cost of approximately 65% and 66% of inventories at
December 31, 2015 and 2014, respectively, was determined using
the LIFO method. The stated LIFO amounts of inventories were
approximately $0.7 billion lower than the current cost of
inventories at December 31, 2015 and 2014.
Note 6. Investment in SABMiller
At December 31, 2015, Altria Group, Inc. held approximately
27% of the economic and voting interest of SABMiller. Altria
Group, Inc. accounts for its investment in SABMiller under the
equity method of accounting.
Pre-tax earnings from Altria Group, Inc.’s equity investment
in SABMiller were $757 million, $1,006 million and $991 million
for the years ended December 31, 2015, 2014 and 2013,
respectively.
(in millions)
Indefinite-lived intangible assets
Definite-lived intangible assets
Total other intangible assets
Indefinite-lived intangible assets consist substantially of
trademarks from Altria Group, Inc.’s 2009 acquisition of UST
($9.1 billion) and 2007 acquisition of Middleton ($2.6 billion).
Definite-lived intangible assets, which consist primarily of
customer relationships and certain cigarette trademarks, are
amortized over periods up to 25 years. Pre-tax amortization
expense for definite-lived intangible assets during the years ended
December 31, 2015, 2014 and 2013, was $21 million, $20 million
and $20 million, respectively. Annual amortization expense for
each of the next five years is estimated to be approximately $20
million, assuming no additional transactions occur that require the
amortization of intangible assets.
During 2015, 2014 and 2013, Altria Group, Inc. completed its
quantitative annual impairment test of goodwill and indefinite-
lived intangible assets, and no impairment charges resulted.
For the years ended December 31, 2015, 2014 and 2013,
there have been no changes in goodwill and the gross carrying
amount of other intangible assets except for the 2014 acquisition
of Green Smoke. In addition, there were no accumulated
impairment losses related to goodwill and other intangible assets,
net at December 31, 2015 and 2014.
48
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Summary financial data of SABMiller is as follows:
The Restricted Shares of NewCo will:
(in millions)
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Noncontrolling interests
(in millions)
Net revenues
Operating profit
Net earnings
At December 31,
2015
$
4,266
$ 38,425
$
6,282
$ 13,960
1,235
$
2014
$
5,878
$ 43,812
$ 10,051
$ 14,731
1,241
$
2014
For the Years Ended December 31,
2013
$ 22,380 $ 22,684
4,201
$
3,375
$
2015
$ 20,188
3,690
$
2,838
$
4,478 $
3,532 $
The fair value of Altria Group, Inc.’s equity investment in
SABMiller is based on unadjusted quoted prices in active markets
and is classified in Level 1 of the fair value hierarchy. The fair
value of Altria Group, Inc.’s equity investment in SABMiller at
December 31, 2015 and 2014, was $25.8 billion and $22.5 billion,
respectively, as compared with its carrying value of $5.5 billion
and $6.2 billion, respectively.
At December 31, 2015, Altria Group, Inc.’s earnings
reinvested in the business on its consolidated balance sheet
included approximately $3.2 billion of undistributed earnings
from its equity investment in SABMiller.
AB InBev and SABMiller Business Combination: On
November 11, 2015, AB InBev announced its firm offer to effect
a business combination with SABMiller in a cash and stock
transaction valued at approximately $107 billion. Under the
terms of the transaction, SABMiller shareholders will receive 44
British pounds in cash for each SABMiller share, with a partial
share alternative (“PSA”) available for approximately 41% of the
SABMiller shares.
Under the terms of the PSA, SABMiller shareholders may
elect to receive for each SABMiller share held (i) 0.483969
restricted shares (the “Restricted Shares”) in a newly formed
Belgian company (“NewCo”) that will own the combined
SABMiller and AB InBev business plus (ii) 3.7788 British
pounds (“GBP”) in cash. On November 10, 2015, the Board of
Directors of Altria Group, Inc. (the “Board of Directors”)
authorized Altria Group, Inc. to provide an irrevocable
undertaking to vote Altria Group, Inc.’s shares of SABMiller in
favor of the proposed transaction and to elect the PSA (the
“Irrevocable Undertaking”). Altria Group, Inc. delivered the
Irrevocable Undertaking on November 11, 2015.
If the transaction is completed, NewCo will acquire
SABMiller and, following the closing of that acquisition, AB
InBev will merge into NewCo. Altria Group, Inc. expects to
exchange its approximate 27% economic and voting interest in
SABMiller for an interest that will be converted into Restricted
Shares representing an approximate 10.5% economic and voting
interest in NewCo plus approximately $2.5 billion in pre-tax cash
(subject to proration as further described below).
49
be unlisted and not admitted to trading on any stock
exchange;
be subject to a five-year lock-up from closing (subject to
limited exceptions);
be convertible into ordinary shares of NewCo on a one-
for-one basis after the end of this five-year lock-up
period;
rank equally with ordinary shares of NewCo with
regards to dividends and voting rights; and
have director nomination rights with respect to NewCo.
Altria Group, Inc. expects that its gain on the transaction will
be deferred for United States corporate income tax purposes,
except to the extent of cash consideration received. Altria Group,
Inc. and AB InBev have entered into a tax matters agreement
providing for certain covenants, representations and warranties
and indemnification obligations of AB InBev and NewCo in
connection with the transaction and the provision of information
necessary to assist Altria Group, Inc. in connection with its
United States federal income tax reporting.
Based on the anticipated structure of the transaction, Altria
Group, Inc. expects to account for its investment in NewCo under
the equity method of accounting. Altria Group, Inc. and AB
InBev have entered into an information rights agreement pursuant
to which, following completion of the transaction, NewCo will
provide Altria Group, Inc. with certain financial information
necessary to assist Altria Group, Inc. in connection with its
financial reporting, financial controls and financial planning.
Upon closing of the transaction, Altria Group, Inc. estimates
that it will record a one-time pre-tax accounting gain of
approximately $12 billion, or $8 billion after-tax. This estimate is
based on the AB InBev share price, GBP to United States dollar
(“USD”) exchange rate and book value of Altria Group, Inc.’s
investment in SABMiller at December 31, 2015. The actual gain
recorded at closing may vary significantly from this estimate
based on changes to these factors and any proration of Restricted
Shares as discussed further below.
If the transaction is completed, Altria Group, Inc. expects to
receive Restricted Shares representing an economic and voting
interest in NewCo of approximately 10.5%; however, the number
of shares that Altria Group, Inc. receives and its corresponding
percentage ownership of NewCo at closing are subject to
proration because the PSA limits the maximum number of shares
that may be issued under the offer to 326 million NewCo
Restricted Shares. To the extent that elections for the PSA exceed
this maximum number and cannot be satisfied in full, the equity
portion of all PSA elections will be adjusted downwards on a pro
rata basis. It is possible that significant proration could (i) reduce
Altria Group, Inc.’s projected percentage ownership of NewCo;
(ii) increase the amount of cash that Altria Group, Inc. receives;
(iii) increase the amount of the pre-tax gain recorded by Altria
Group, Inc.; (iv) impose additional tax liabilities on Altria Group,
Inc.; and (v) impact Altria Group, Inc.’s ability to account for its
investment in NewCo under the equity method of accounting.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The transaction is subject to certain closing conditions,
including shareholder approvals of both SABMiller and AB
InBev, and receipt of the required regulatory approvals.
Derivative Financial Instrument: On November 11, 2015, Altria
Group, Inc. entered into a derivative financial instrument in the
form of a put option (the “option”) to hedge Altria Group, Inc.’s
exposure to foreign currency exchange rate movements for the
GBP, which would impact the USD cash consideration that Altria
Group, Inc. expects to receive under the PSA. Altria Group, Inc.
has the ability to exercise or terminate the option up to its
expiration date of May 11, 2017. The notional amount of the
option is $2,467 million (1,625 million GBP). The option does
not qualify for hedge accounting; therefore, changes in the fair
value of the option will be recorded as a pre-tax gain or loss in
Altria Group, Inc.’s consolidated statement of earnings for the
periods in which the changes occur. For the year ended
December 31, 2015, Altria Group, Inc. recorded a pre-tax gain of
$20 million for the change in the fair value of the option, which
was included in other income, net.
The fair value of the option is determined using a binomial
option pricing model, which reflects the contractual terms of the
option and other observable market-based inputs, and is classified
in Level 2 of the fair value hierarchy. At December 31, 2015, the
fair value of the option of $152 million was recorded in other
current assets in Altria Group, Inc.’s consolidated balance sheet.
Note 7. Finance Assets, net
In 2003, PMCC ceased making new investments and began
focusing exclusively on managing its portfolio of finance assets in
order to maximize its operating results and cash flows from its
existing lease portfolio activities and asset sales. Accordingly,
PMCC’s operating companies income will fluctuate over time as
investments mature or are sold.
At December 31, 2015, finance assets, net, of $1,239 million
were comprised of investments in finance leases of $1,281
million, reduced by the allowance for losses of $42 million. At
December 31, 2014, finance assets, net, of $1,614 million were
comprised of investments in finance leases of $1,656 million,
reduced by the allowance for losses of $42 million.
A summary of the net investments in finance leases,
substantially all of which were leveraged leases, at December
31, 2015 and 2014, before allowance for losses was as
follows:
(in millions)
Rents receivable, net
Unguaranteed residual values
Unearned income
Investments in finance leases
Deferred income taxes
$
$
2015
923
674
(316)
1,281
(928)
2014
1,241
827
(412)
1,656
(1,135)
Net investments in finance leases
$
353
$
521
Rents receivable, net, represent unpaid rents, net of principal
and interest payments on third-party nonrecourse debt. PMCC’s
rights to rents receivable are subordinate to the third-party
nonrecourse debtholders and the leased equipment is pledged as
collateral to the debtholders. The repayment of the nonrecourse
debt is collateralized by lease payments receivable and the leased
property, and is nonrecourse to the general assets of PMCC. As
required by U.S. GAAP, the third-party nonrecourse debt of $1.2
billion and $2.1 billion at December 31, 2015 and 2014,
respectively, has been offset against the related rents receivable.
There were no leases with contingent rentals in 2015 and 2014.
In 2015 and 2014, PMCC’s review of estimated residual
values resulted in a decrease of $65 million and $63 million,
respectively, to unguaranteed residual values. These decreases in
unguaranteed residual values resulted in a reduction to PMCC’s
net revenues of $41 million and $26 million in 2015 and 2014,
respectively. There were no such adjustments in 2013.
At December 31, 2015, PMCC’s investments in finance
leases were principally comprised of the following investment
categories: aircraft (45%), electric power (24%), railcar (12%),
real estate (12%) and manufacturing (7%). There were no
investments located outside the United States at December 31,
2015 and 2014.
Rents receivable in excess of debt service requirements on
third-party nonrecourse debt at December 31, 2015 were as
follows:
(in millions)
2016
2017
2018
2019
2020
Thereafter
Total
$
$
42
64
155
192
136
334
923
Included in net revenues for the years ended December 31,
2015, 2014 and 2013 were leveraged lease revenues of $46
million, $80 million and $209 million, respectively. Income tax
expense, excluding interest on tax underpayments, on leveraged
lease revenues for the years ended December 31, 2015, 2014 and
2013 was $17 million, $30 million and $80 million, respectively.
PMCC maintains an allowance for losses that provides for
estimated credit losses on its investments in finance leases.
PMCC’s portfolio consists substantially of leveraged leases to a
diverse base of lessees participating in a variety of industries.
Losses on such leases are recorded when probable and estimable.
PMCC regularly performs a systematic assessment of each
individual lease in its portfolio to determine potential credit or
collection issues that might indicate impairment. Impairment
takes into consideration both the probability of default and the
likelihood of recovery if default were to occur. PMCC considers
both quantitative and qualitative factors of each investment when
performing its assessment of the allowance for losses.
Quantitative factors that indicate potential default are tied
most directly to public debt ratings. PMCC monitors publicly
available information on its obligors, including financial
50
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
statements and credit rating agency reports. Qualitative factors
that indicate the likelihood of recovery if default were to occur
include underlying collateral value, other forms of credit support,
and legal/structural considerations impacting each lease. Using
available information, PMCC calculates potential losses for each
lease in its portfolio based on its default and recovery rating
assumptions for each lease. The aggregate of these potential
losses forms a range of potential losses which is used as a
guideline to determine the adequacy of PMCC’s allowance for
losses.
PMCC assesses the adequacy of its allowance for losses
relative to the credit risk of its leasing portfolio on an ongoing
basis. During 2014 and 2013, PMCC determined that its
allowance for losses exceeded the amount required based on
management’s assessment of the credit quality and size of
PMCC’s leasing portfolio. As a result, PMCC reduced its
allowance for losses by $10 million and $47 million for the years
ended December 31, 2014 and 2013, respectively. These
decreases to the allowance for losses were recorded as a reduction
to marketing, administration and research costs on Altria Group,
Inc.’s consolidated statements of earnings. PMCC believes that,
as of December 31, 2015, the allowance for losses of $42 million
was adequate. PMCC continues to monitor economic and credit
conditions, and the individual situations of its lessees and their
respective industries, and may increase or decrease its allowance
for losses if such conditions change in the future.
The activity in the allowance for losses on finance assets for
the years ended December 31, 2015, 2014 and 2013 was as
follows:
(in millions)
Balance at beginning of year
Decrease to allowance
Balance at end of year
2015
42
—
42
$
$
2014
52
(10)
42
$
$
2013
99
(47)
52
$
$
All PMCC lessees were current on their lease payment
obligations as of December 31, 2015.
The credit quality of PMCC’s investments in finance leases
as assigned by Standard & Poor’s Ratings Services (“Standard &
Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at
December 31, 2015 and 2014 was as follows:
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
“AAA/Aaa” to “A-/A3”
“BBB+/Baa1” to “BBB-/Baa3”
“BB+/Ba1” and Lower
Total
2015
2014
$
212
702
367
$ 1,281
$
417
833
406
$ 1,656
Note 8. Short-Term Borrowings and Borrowing
Arrangements
At December 31, 2015 and December 31, 2014, Altria Group, Inc.
had no short-term borrowings. The credit line available to Altria
Group, Inc. at December 31, 2015 under the Credit Agreement (as
defined below) was $3.0 billion.
During the third quarter of 2015, Altria Group, Inc. entered
into an extension agreement (the “Extension Agreement”) to
amend its $3.0 billion senior unsecured 5-year revolving credit
agreement, dated as of August 19, 2013 (the “Credit Agreement”).
The Extension Agreement extends the expiration date of the
Credit Agreement from August 19, 2019 to August 19, 2020
pursuant to the terms of the Credit Agreement. All other terms
and conditions of the Credit Agreement remain in full force and
effect. The Credit Agreement was previously amended in 2014 to
extend the expiration date from August 19, 2018 to August 19,
2019.
The Credit Agreement provides for borrowings up to an
aggregate principal amount of $3.0 billion. Pricing for interest
and fees under the Credit Agreement may be modified in the
event of a change in the rating of Altria Group, Inc.’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 Group, Inc.’s long-term senior
unsecured debt from Moody’s and Standard & Poor’s. The
applicable percentage based on Altria Group, Inc.’s long-term
senior unsecured debt ratings at December 31, 2015 for
borrowings under the Credit Agreement was 1.25%. The Credit
Agreement does not include any other rating triggers, nor does it
contain any provisions that could require the posting of collateral.
The Credit Agreement is used for general corporate purposes
and to support Altria Group, Inc.’s commercial paper issuances.
The Credit Agreement requires that Altria Group, Inc. maintain
(i) a ratio of debt to consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) of not more than 3.0
to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated
interest expense of not less than 4.0 to 1.0, each calculated as of
the end of the applicable quarter on a rolling four quarters basis.
At December 31, 2015, the ratios of debt to consolidated EBITDA
and consolidated EBITDA to consolidated interest expense,
calculated in accordance with the Credit Agreement, were 1.4 to
1.0 and 11.7 to 1.0, respectively. Altria Group, Inc. expects to
continue to meet its covenants associated with the Credit
Agreement. The terms “consolidated EBITDA,” “debt” and
“consolidated interest expense,” as defined in the Credit
Agreement, include certain adjustments.
Any commercial paper issued by Altria Group, Inc. and
borrowings under the Credit Agreement are guaranteed by
PM USA as further discussed in Note 19. Condensed
Consolidating Financial Information.
51
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
During 2015, Altria Group, Inc. repaid in full at maturity
senior unsecured notes in the aggregate principal amount of $1.0
billion.
The obligations of Altria Group, Inc. under the notes are
guaranteed by PM USA as further discussed in Note 19.
Condensed Consolidating Financial Information.
Debt Tender Offers and Redemption: During 2015 and
2013, Altria Group, Inc. completed debt tender offers to purchase
for cash certain of its senior unsecured notes in aggregate
principal amounts of $0.8 billion and $2.1 billion, respectively.
Details of these debt tender offers were as follows:
(in millions)
Notes Purchased
9.95% Notes due 2038
10.20% Notes due 2039
9.70% Notes due 2018
9.25% Notes due 2019
Total
2015
2013
$
— $
—
793
—
793
$
818
782
293
207
$
2,100
During 2014, UST redeemed in full its $300 million
(aggregate principal amount) 5.75% senior notes due 2018.
As a result of the Altria Group, Inc. debt tender offers and the
UST debt redemption, pre-tax losses on early extinguishment of
debt were recorded as follows:
(in millions)
2015
2014
2013
Premiums and fees
$
226
$
44
$ 1,054
Write-off of unamortized debt
discounts and debt issuance costs
2
Total
$
228
$
—
44
30
$ 1,084
Note 9. Long-Term Debt
At December 31, 2015 and 2014, Altria Group, Inc.’s long-term
debt consisted of the following:
(in millions)
Notes, 2.625% to 10.20%, interest payable
semi-annually, due through 2044 (1)
Debenture, 7.75%, interest payable semi-
annually, due 2027
2015
2014
$ 12,861
$ 14,651
42
42
Other
Less current portion of long-term debt
—
14,693
1,000
$ 13,693
(1) Weighted-average coupon interest rate of 5.5% and 5.7% at December
31, 2015 and 2014, respectively.
16
12,919
4
$ 12,915
Aggregate maturities of long-term debt are as follows:
(in millions)
2016
2017
2018
2019
2020
2021
Thereafter
Less debt discounts
$
$
4
4
867
1,148
1,000
1,500
8,442
12,965
46
12,919
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 December 31, 2015 and 2014, was $14.5 billion
and $17.0 billion, respectively, as compared with its carrying
value of $12.9 billion and $14.7 billion, respectively.
Altria Group, Inc. Senior Notes: The notes of Altria
Group, Inc. are senior unsecured obligations and rank equally in
right of payment with all of Altria Group, Inc.’s existing and
future senior unsecured indebtedness. Upon the occurrence of
both (i) a change of control of Altria Group, Inc. and (ii) the notes
ceasing to be rated investment grade by each of Moody’s,
Standard & Poor’s and Fitch Ratings Ltd. within a specified time
period, Altria Group, Inc. will be required to make an offer to
purchase the notes at a price equal to 101% of the aggregate
principal amount of such notes, plus accrued and unpaid interest
to the date of repurchase as and to the extent set forth in the terms
of the notes.
With respect to $3.4 billion aggregate principal amount of
Altria Group, Inc.’s senior unsecured long-term notes issued in
2009 and 2008, the interest rate payable on each series of notes is
subject to adjustment from time to time if the rating assigned to
the notes of such series by Moody’s or Standard & Poor’s is
downgraded (or subsequently upgraded) as and to the extent set
forth in the terms of the notes.
52
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 10. Capital Stock
At December 31, 2015, Altria Group, Inc. had 12 billion shares of
authorized common stock; issued, repurchased and outstanding
shares of common stock were as follows:
Balances,
December 31,
2012
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2013
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2014
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2015
Shares Issued
Shares
Repurchased
Shares
Outstanding
2,805,961,317
(796,221,021) 2,009,740,296
—
391,899
391,899
—
(16,652,913)
(16,652,913)
2,805,961,317
(812,482,035) 1,993,479,282
—
447,840
447,840
—
(22,452,599)
(22,452,599)
2,805,961,317
(834,486,794) 1,971,474,523
—
(732,623)
(732,623)
—
(10,682,419)
(10,682,419)
2,805,961,317
(845,901,836) 1,960,059,481
At December 31, 2015, 42,209,751 shares of common stock
were reserved for stock-based awards under Altria Group, Inc.’s
stock plans, and 10 million shares of serial preferred stock, $1.00
par value, were authorized. No shares of serial preferred stock
have been issued.
Dividends: During the third quarter of 2015, the Board of
Directors approved an 8.7% increase in the quarterly dividend
rate to $0.565 per common share versus the previous rate of $0.52
per common share. The current annualized dividend rate is $2.26
per Altria Group, Inc. common share. Future dividend payments
remain subject to the discretion of the Board of Directors.
Share Repurchases: In October 2011, the Board of
Directors authorized a $1.0 billion share repurchase program and
expanded it to $1.5 billion in October 2012 (as expanded, the
“October 2011 share repurchase program”). During the first
quarter of 2013, Altria Group, Inc. completed the October 2011
share repurchase program, under which Altria Group, Inc.
repurchased a total of 48.3 million shares of its common stock at
an average price of $31.06 per share.
In April 2013, the Board of Directors authorized a $300
million share repurchase program and expanded it to $1.0 billion
in August 2013 (as expanded, the “April 2013 share repurchase
program”). During the third quarter of 2014, Altria Group, Inc.
completed the April 2013 share repurchase program, under which
Altria Group, Inc. repurchased a total of 27.1 million shares of its
common stock at an average price of $36.97 per share.
In July 2014, the Board of Directors authorized a $1.0
billion share repurchase program (the “July 2014 share
repurchase program”). During the third quarter of 2015,
Altria Group, Inc. completed the July 2014 share repurchase
program, under which Altria Group, Inc. repurchased a total
of 20.4 million shares of its common stock at an average price
of $48.90 per share.
In July 2015, the Board of Directors authorized a $1.0
billion share repurchase program (the “July 2015 share
repurchase program”). During 2015, Altria Group, Inc.
repurchased 0.6 million shares of its common stock (at an
aggregate cost of approximately $35 million, and at an
average price of $57.66 per share) under the July 2015 share
repurchase program. At December 31, 2015, Altria Group,
Inc. had approximately $965 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.
For the years ended December 31, 2015, 2014 and 2013,
Altria Group, Inc.’s total share repurchase activity was as follows:
2015
2014
2013
(in millions, except per share data)
10.7
22.5
16.7
554 $
939 $
600
51.83 $
41.79 $
36.05
Total number of shares
repurchased
Aggregate cost of shares
repurchased
Average price per share of
shares repurchased
$
$
Note 11. Stock Plans
In 2015, the Board of Directors adopted, and shareholders
approved, the Altria Group, Inc. 2015 Performance Incentive Plan
(the “2015 Plan”). The 2015 Plan succeeded the 2010
Performance Incentive Plan, under which no new awards were
permitted after April 30, 2015. Under the 2015 Plan, Altria
Group, Inc. may grant stock options, stock appreciation rights,
restricted stock, restricted and deferred stock units, and other
stock-based awards, as well as cash-based annual and long-term
incentive awards to employees of Altria Group, Inc. or any of its
subsidiaries or affiliates. Up to 40 million shares of common
stock may be issued under the 2015 Plan.
In addition, in 2015, the Board of Directors adopted, and
shareholders approved, the 2015 Stock Compensation Plan for
Non-Employee Directors (the “Directors Plan”). The Directors
Plan succeeded the Stock Compensation Plan for Non-Employee
Directors, as amended and restated effective January 29, 2014,
under which no new awards were permitted after May 20, 2015.
Under the Directors Plan, Altria Group, Inc. may grant up to one
million shares of common stock to members of the Board of
Directors who are not employees of Altria Group, Inc.
Shares available to be granted under the 2015 Plan and the
Directors Plan at December 31, 2015, were 39,994,482 and
993,284, respectively.
53
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 12. Earnings per Share
Basic and diluted earnings per share (“EPS”) were calculated
using the following:
(in millions)
Net earnings attributable to
Altria Group, Inc.
Less: Distributed and
undistributed earnings
attributable to unvested
restricted shares and restricted
stock units
Earnings for basic and diluted
EPS
Weighted-average shares for
basic and diluted EPS
For the Years Ended December 31,
2015
2014
2013
$
5,241
$
5,070 $
4,535
(10)
(12)
(12)
$
5,231
$
5,058 $
4,523
1,961
1,978
1,999
Restricted Stock and Restricted Stock Units: Altria
Group, Inc. may grant shares of restricted stock and restricted
stock units to employees of Altria Group, Inc. or any of its
subsidiaries or affiliates. During the vesting period, these shares
include nonforfeitable rights to dividends or dividend equivalents
and may not be sold, assigned, pledged or otherwise encumbered.
Such shares are subject to forfeiture if certain employment
conditions are not met. Shares of restricted stock and restricted
stock units generally vest three years after the grant date.
The fair value of the shares of restricted stock and restricted
stock units at the date of grant is amortized to expense ratably
over the restriction period, which is generally three years. Altria
Group, Inc. recorded pre-tax compensation expense related to
restricted stock and restricted stock units granted to employees for
the years ended December 31, 2015, 2014 and 2013 of $51
million, $46 million and $49 million, respectively. The deferred
tax benefit recorded related to this compensation expense was $20
million, $18 million and $19 million for the years ended
December 31, 2015, 2014 and 2013, respectively. The
unamortized compensation expense related to Altria Group, Inc.
restricted stock and restricted stock units was $68 million at
December 31, 2015 and is expected to be recognized over a
weighted-average period of approximately two years.
Altria Group, Inc.’s restricted stock and restricted stock units
activity was as follows for the year ended December 31, 2015:
Number of
Shares
Weighted-Average
Grant Date Fair
Value Per Share
Balance at December 31, 2014
4,511,911 $
Granted
Vested
Forfeited
1,195,088
(1,567,474)
(201,840)
Balance at December 31, 2015
3,937,685
32.83
54.54
28.61
37.53
40.86
The weighted-average grant date fair value of Altria Group,
Inc. restricted stock and restricted stock units granted during the
years ended December 31, 2015, 2014 and 2013 was $65 million,
$53 million and $49 million, respectively, or $54.54, $36.75 and
$33.76 per restricted share or restricted stock unit, respectively.
The total fair value of Altria Group, Inc. restricted stock and
restricted stock units that vested during the years ended December
31, 2015, 2014 and 2013 was $85 million, $86 million and $89
million, respectively.
54
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 13. 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.:
(in millions)
Balances, December 31, 2012
Other comprehensive (losses) earnings before reclassifications
Deferred income taxes
Other comprehensive (losses) earnings before reclassifications,
net of deferred income taxes
Amounts reclassified to net earnings
Deferred income taxes
Amounts reclassified to net earnings, net of
deferred income taxes
Other comprehensive (losses) earnings, net of deferred
income taxes
Balances, December 31, 2013
Other comprehensive losses before reclassifications
Deferred income taxes
Other comprehensive losses before reclassifications, net of
deferred income taxes
Amounts reclassified to net earnings
Deferred income taxes
Amounts reclassified to net earnings, net of
deferred income taxes
Other comprehensive losses, net of deferred income taxes
Balances, December 31, 2014
Other comprehensive losses before reclassifications
Deferred income taxes
Other comprehensive losses before reclassifications, net of
deferred income taxes
Amounts reclassified to net earnings
Deferred income taxes
Amounts reclassified to net earnings, net of
deferred income taxes
Other comprehensive (losses) earnings, net of deferred
income taxes
Currency
Translation
Adjustments
Benefit Plans
SABMiller
$
2 $
(2,414) $
372
$
(2)
—
(2)
—
—
—
(2)
—
(2)
—
(2)
—
—
—
(2)
(2)
(4)
1
(3)
—
—
—
(3)
1,559
(609)
950
311
(120)
191
1,141
(1,273)
(1,411)
550
(740)
259
(481)
6
(2)
4
(1)
(477)
(105)
(881)
308
(861)
(573)
154
(60)
94
(767)
(2,040)
(223)
86
(137)
272
(105)
167
59
(21)
38
(1)
(535)
(640)
(983)
344
(639)
21
(7)
14
30
(1)
(625)
Balances, December 31, 2015
$
(1) For the years ended December 31, 2015, 2014 and 2013, Altria Group, Inc.’s proportionate share of SABMiller’s other
comprehensive losses consisted primarily of currency translation adjustments.
(2,010) $
(1,265)
(5) $
$
55
Accumulated
Other
Comprehensive
Losses
(2,040)
817
(350)
467
317
(122)
195
662
(1,378)
(2,294)
858
(1,436)
213
(81)
132
(1,304)
(2,682)
(1,210)
431
(779)
293
(112)
181
(598)
(3,280)
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
(in millions)
Benefit Plans: (1)
Net loss
Prior service cost/credit
SABMiller (2)
For the Years Ended December 31,
2015
2014
2013
$
304
(32)
272
21
$
187
$
(33)
154
59
346
(35)
311
6
317
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
293
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.
(2) Amounts are included in earnings from equity investment in SABMiller. For further information on Altria Group, Inc.’s equity
investment in SABMiller, see Note 6. Investment in SABMiller.
213
$
$
$
Note 14. Income Taxes
Earnings before income taxes and provision for income taxes
consisted of the following for the years ended December 31,
2015, 2014 and 2013:
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31, 2015,
2014 and 2013 was as follows:
(in millions)
Earnings before income taxes:
2015
2014
2013
(in millions)
2015
2014
2013
Balance at beginning of year
$
258
$
227 $
262
United States
$ 8,078
$ 7,763 $ 6,929
Outside United States
—
11
13
Additions based on tax positions
related to the current year
Total
$ 8,078
$ 7,774 $ 6,942
Additions for tax positions of
Provision for income taxes:
Current:
Federal
$ 2,516
$ 2,350 $ 2,066
prior years
Reductions for tax positions due to
lapse of statutes of limitations
Reductions for tax positions of
State and local
Outside United States
451
—
480
3
423
4
prior years
Settlements
15
57
(4)
(86)
(82)
15
29
(2)
—
(11)
15
35
(1)
—
(84)
Deferred:
Federal
State and local
2,967
2,833
2,493
Balance at end of year
$
158
$
258 $
227
(140)
8
(132)
(124)
(5)
(129)
(77)
(9)
(86)
Unrecognized tax benefits and Altria Group, Inc.’s
consolidated liability for tax contingencies at December 31, 2015
and 2014, were as follows:
Total provision for income taxes
$ 2,835
$ 2,704 $ 2,407
(in millions)
2015
2014
Altria Group, Inc.’s U.S. subsidiaries join in the filing of a
U.S. federal consolidated income tax return. The U.S. federal
statute of limitations remains open for the year 2007 and forward,
with years 2010 to 2013 currently under examination by the IRS
as part of an audit conducted in the ordinary course of business.
With the exception of corresponding federal audit adjustments,
state statutes of limitations generally remain open for the year
2011 and forward. Certain of Altria Group, Inc.’s state tax returns
are currently under examination by various states as part of
routine audits conducted in the ordinary course of business.
Unrecognized tax benefits — Altria Group, Inc.
$
158
$
228
Unrecognized tax benefits — PMI
Unrecognized tax benefits
Accrued interest and penalties
Tax credits and other indirect benefits
—
158
14
(3)
30
258
57
(17)
Liability for tax contingencies
$
169
$
298
56
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
not entirely within the control of Altria Group, Inc. 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 $6 million.
The effective income tax rate on pre-tax earnings differed
from the U.S. federal statutory rate for the following reasons for
the years ended December 31, 2015, 2014 and 2013:
U.S. federal statutory rate
35.0%
35.0%
35.0%
2015
2014
2013
Increase (decrease) resulting from:
State and local income taxes, net
of federal tax benefit
Uncertain tax positions
SABMiller dividend benefit
Domestic manufacturing deduction
Other
Effective tax rate
3.7
(0.8)
(0.5)
(2.0)
(0.3)
4.0
0.5
(2.3)
(2.4)
—
3.8
0.7
(2.0)
(2.7)
(0.1)
35.1%
34.8%
34.7%
The tax provision in 2015 included net tax benefits of (i) $59
million from the reversal of tax reserves and associated interest
due primarily to the closure in the third quarter of 2015 of the IRS
and PMI tax
2007-2009 Audit; and (ii) $41 million for
matters discussed above, partially offset by the reversal of foreign
tax credits primarily associated with SABMiller dividends that
were recorded during the third quarter of 2015 ($41 million) and
fourth quarter of 2015 ($24 million). The tax provision in 2015
also included decreased recognition of foreign tax credits
associated with SABMiller dividends.
The tax provision in 2014 included net tax benefits of (i) $14
million from the reversal of tax accruals no longer required that
was recorded during the third quarter of 2014 ($19 million),
partially offset by additional tax provisions recorded during the
fourth quarter of 2014 ($5 million); and (ii) $2 million for
tax matters discussed above.
The tax provision in 2013 included net tax benefits of (i) $39
million from the reversal of tax accruals no longer required that
was recorded during the third quarter of 2013 ($25 million) and
fourth quarter of 2013 ($14 million); (ii) $25 million related to the
recognition of previously unrecognized foreign tax credits
primarily associated with SABMiller dividends that were
recorded during the fourth quarter of 2013; and (iii) $22 million
for
tax matters discussed above. The tax provision in
2013 also included a reduction in certain consolidated tax benefits
resulting from the 2013 debt tender offer that is discussed further
in Note 9. Long-Term Debt.
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate at December 31, 2015 was
$109 million, along with $49 million affecting deferred taxes.
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate at December 31, 2014 was
$207 million, along with $51 million affecting deferred taxes.
However, the impact on net earnings at December 31, 2014 would
be $177 million, as a result of the tax-related net receivable from
Altria Group, Inc.’s former subsidiary, Philip Morris International
Inc. (“PMI”), of $30 million pursuant to the tax sharing
agreements discussed below.
Under tax sharing agreements entered into in connection with
the 2007 and 2008 spin-offs between Altria Group, Inc. and its
former subsidiaries Kraft Foods Inc. (now known as
International, Inc.
and PMI, respectively,
and PMI are responsible for their respective pre-spin-
off tax obligations. Altria Group, Inc., however, remains
severally liable for
s and PMI’s pre-spin-off federal tax
obligations pursuant to regulations governing federal consolidated
income tax returns, and continued to include the pre-spin-off
and PMI in its liability
federal income tax reserves of
for uncertain tax positions. As of December 31, 2015, there are
and PMI.
no remaining pre-spin-off tax reserves for
During 2015, 2014 and 2013, Altria Group, Inc. recorded net
and PMI tax matters, primarily
tax benefits of $41 million, $2 million and $22 million,
respectively, for
relating to the IRS audit of Altria Group, Inc. and its consolidated
subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”).
and
These net tax benefits were offset by changes to
PMI tax-related receivables/payables, which were recorded as
decreases to operating income on Altria Group, Inc.’s
consolidated statements of earnings. Due to the respective
offsets, the
Altria Group, Inc.’s net earnings for the years ended December
31, 2015, 2014 and 2013.
and PMI tax matters had no impact on
Altria Group, Inc. recognizes accrued interest and penalties
associated with uncertain tax positions as part of the tax
provision. At December 31, 2015, Altria Group, Inc. had $14
million of accrued interest and penalties. At December 31, 2014,
Altria Group, Inc. had $57 million of accrued interest and
penalties, of which approximately $7 million related to PMI, for
which PMI is responsible under its tax sharing agreement. The
corresponding receivable from PMI was included in other assets
on Altria Group, Inc.’s consolidated balance sheet at December
31, 2014.
For the years ended December 31, 2015, 2014 and 2013,
Altria Group, Inc. recognized in its consolidated statements of
earnings $(36) million, $14 million and $5 million, respectively,
of gross interest (income) expense associated with uncertain tax
positions.
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
57
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The tax effects of temporary differences that gave rise to
deferred income tax assets and liabilities consisted of the
following at December 31, 2015 and 2014:
(in millions)
Deferred income tax assets:
Accrued postretirement and
postemployment benefits
Settlement charges
Accrued pension costs
Net operating losses and tax credit
carryforwards
Total deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Intangible assets
Investment in SABMiller
Finance assets, net
Other
Total deferred income tax liabilities
Valuation allowances
2015
2014
$
953
$
1,393
512
335
3,193
(441)
(3,968)
(1,794)
(909)
(116)
(7,228)
(260)
1,054
1,379
410
357
3,200
(468)
(3,915)
(2,039)
(1,123)
(190)
(7,735)
(211)
Net deferred income tax liabilities
$
(4,295) $
(4,746)
At December 31, 2015, Altria Group, Inc. had estimated
gross state tax net operating losses of $610 million that, if unused,
will expire in 2016 through 2035, state tax credit carryforwards of
$57 million that, if unused, will expire in 2016 through 2017, and
foreign tax credit carryforwards of $301 million that, if unused,
will expire in 2020 through 2025. Realization of these benefits is
dependent upon various factors such as generating sufficient
taxable income in the applicable states and receiving sufficient
amounts of lower-taxed foreign dividends from SABMiller. A
valuation allowance of $260 million has been established for
those benefits that more-likely-than-not will not be realized.
Note 15. Segment Reporting
The products of Altria Group, Inc.’s subsidiaries include
smokeable tobacco products comprised of cigarettes
manufactured and sold by PM USA and machine-made large
cigars and pipe tobacco manufactured and sold by Middleton;
smokeless tobacco products, substantially all of which are
manufactured and sold by USSTC; and wine produced and/or
distributed by Ste. Michelle. The products and services of these
subsidiaries constitute Altria Group, Inc.’s reportable segments of
smokeable products, smokeless products and wine. The financial
services and the innovative tobacco products businesses are
included in all other.
Altria Group, Inc.’s chief operating decision maker reviews
operating companies income to evaluate the performance of, and
allocate resources to, the segments. Operating companies income
for the segments is defined as operating income before
amortization of intangibles and general corporate expenses.
Interest and other debt expense, net, and provision for income
taxes are centrally managed at the corporate level and,
accordingly, such items are not presented by segment since they
are excluded from the measure of segment profitability reviewed
by Altria Group, Inc.’s chief operating decision maker.
Information about total assets by segment is not disclosed because
such information is not reported to or used by Altria Group, Inc.’s
chief operating decision maker. Segment goodwill and other
intangible assets, net, are disclosed in Note 4. Goodwill and Other
Intangible Assets, net. The accounting policies of the segments
are the same as those described in Note 2. Summary of Significant
Accounting Policies.
Segment data were as follows:
(in millions)
Net revenues:
Smokeable products
Smokeless products
Wine
All other
Net revenues
For the Years Ended December 31,
2013
2014
2015
$ 22,792
1,879
692
71
$ 25,434
$ 21,939 $ 21,868
1,778
609
211
$ 24,522 $ 24,466
1,809
643
131
Earnings before income taxes:
Operating companies
income (loss):
Smokeable products
Smokeless products
Wine
All other
Amortization of intangibles
General corporate expenses
$
PMI tax-related
receivables/payables
Operating income
Interest and other debt
expense, net
Loss on early extinguishment
of debt
Earnings from equity
investment in SABMiller
Other income, net
Earnings before income taxes
$
$
7,569
1,108
152
(169)
(21)
(237)
(41)
8,361
6,873 $
1,061
134
(185)
(20)
(241)
(2)
7,620
7,063
1,023
118
157
(20)
(235)
(22)
8,084
(817)
(808)
(1,049)
(228)
(44)
(1,084)
757
5
8,078
$
1,006
—
7,774 $
991
—
6,942
The smokeable products segment included net revenues of
$22,193 million, $21,363 million and $21,308 million for the
years ended December 31, 2015, 2014 and 2013, respectively,
related to cigarettes and net revenues of $599 million, $576
million and $560 million for the years ended December 31, 2015,
2014 and 2013, respectively, related to cigars.
PM USA, USSTC and Middleton’s largest customer, McLane
Company, Inc., accounted for approximately 26% of Altria
Group, Inc.’s consolidated net revenues for the year ended
December 31, 2015 and 27% for each of the years ended
December 31, 2014 and 2013. In addition, Core-Mark Holding
Company, Inc. accounted for approximately 10% of Altria Group,
Inc.’s consolidated net revenues for the year ended December 31,
58
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
2015. Substantially all of these net revenues were reported in the
smokeable products and smokeless products segments. Sales to
three distributors accounted for approximately 66%, 67% and
66% of net revenues for the wine segment for the years ended
December 31, 2015, 2014 and 2013, respectively.
Details of Altria Group, Inc.’s depreciation expense and
capital expenditures were as follows:
(in millions)
Depreciation expense:
Smokeable products
Smokeless products
Wine
General corporate and other
Total depreciation expense
Capital expenditures:
Smokeable products
Smokeless products
Wine
General corporate and other
$
$
For the Years Ended December 31,
2013
2015
2014
$
117
$
112 $
113
27
32
28
22
30
24
25
30
24
204
$
188 $
192
56
$
49
$
113
42
18
40
46
28
39
32
42
18
Total capital expenditures
$
229
$
163 $
131
The comparability of operating companies income for the
reportable segments was affected by the following:
Non-Participating Manufacturer (“NPM”) Adjustment
Items: For the years ended December 31, 2015, 2014 and 2013,
pre-tax income for NPM adjustment items was recorded in Altria
Group, Inc.’s consolidated statements of earnings as follows:
(in millions)
2015
2014
2013
Smokeable products segment
$
97
$ 43 $ 664
Interest and other debt expense, net
(13)
47
—
(in millions)
2015
2014
2013
Smokeable products segment
$
127
$
27
$
18
General corporate
Interest and other debt expense, net
—
23
15
2
—
4
Total
$
150
$
44
$
22
During 2015, PM USA recorded pre-tax charges in
marketing, administration and research costs related to tobacco
and health judgments in seven state Engle progeny lawsuits and
Schwarz of $59 million and $25 million, respectively, as well as
$14 million and $9 million, respectively, in interest costs related
to these cases. Additionally in 2015, PM USA and certain other
cigarette manufacturers reached an agreement to resolve
approximately 415 pending federal Engle progeny cases. As a
result of the agreement, PM USA recorded a pre-tax provision of
approximately $43 million in marketing, administration and
research costs. For further discussion, see Smoking and Health
Litigation in Note 18. Contingencies.
During 2014, Altria Group, Inc. and PM USA recorded an
aggregate pre-tax charge of $31 million in marketing,
administration and research costs for the estimated costs of
implementing the corrective communications remedy in
connection with the federal government’s lawsuit against Altria
Group, Inc. and PM USA. For further discussion, see Health
Care Cost Recovery Litigation - Federal Government’s Lawsuit in
Note 18. Contingencies.
Asset Impairment and Exit Costs: During 2014, PM USA
sold its Cabarrus, North Carolina manufacturing facility for
approximately $66 million in connection with the previously
completed manufacturing optimization program associated with
PM USA’s closure of the manufacturing facility in 2009. As a
result, during 2014, PM USA recorded a pre-tax gain of $10
million.
Total
$
84
$ 90 $ 664
Note 16. Benefit Plans
These adjustments resulted from the settlement of, and
determinations made in connection with, disputes with certain
states and territories related to the NPM adjustment provision
under the 1998 Master Settlement Agreement (such settlements
and determinations are referred to collectively as “NPM
Adjustment Items” and are more fully described in Health Care
Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.
Contingencies). The amounts shown in the table above for the
smokeable products segment were recorded by PM USA as
reductions to cost of sales, which increased operating companies
income in the smokeable products segment.
Tobacco and Health Litigation Items: For the years ended
December 31, 2015, 2014 and 2013, pre-tax charges related to
certain tobacco and health litigation items were recorded in Altria
Group, Inc.’s consolidated statements of earnings as follows:
Subsidiaries of Altria Group, Inc. sponsor noncontributory
defined benefit pension plans covering the majority of all
employees of Altria Group, Inc. However, employees hired on or
after a date specific to their employee group are not eligible to
participate in these noncontributory defined benefit pension plans
but are instead eligible to participate in a defined contribution
plan with enhanced benefits. This transition for new hires
occurred from October 1, 2006 to January 1, 2008. In addition,
effective January 1, 2010, certain employees of UST and
Middleton who were participants in noncontributory defined
benefit pension plans ceased to earn additional benefit service
under those plans and became eligible to participate in a defined
contribution plan with enhanced benefits. Altria Group, Inc. and
its subsidiaries also provide postretirement health care and other
benefits to the majority of retired employees.
The plan assets and benefit obligations of Altria Group, Inc.’s
pension plans and the benefit obligations of Altria Group, Inc.’s
postretirement plans are measured at December 31 of each year.
Altria Group, Inc.’s postretirement plans are not funded.
59
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The discount rates for Altria Group, Inc.’s plans were based
on a yield curve developed from a model portfolio of high-quality
corporate bonds with durations that match the expected future
cash flows of the pension and postretirement benefit obligations.
At December 31, 2015, Altria Group, Inc. changed the
approach used to estimate the service and interest cost
components of net periodic benefit costs for Altria Group, Inc.’s
pension and postretirement plans. In 2015 and prior years, Altria
Group, Inc. estimated the service and interest cost components
using a single weighted-average discount rate derived from the
yield curve used to measure the pension and postretirement plans
benefit obligations. Beginning in 2016, Altria Group, Inc. will
use a spot rate approach in the estimation of these components of
net periodic benefit costs by applying the specific spot rates along
the yield curve to the relevant projected cash flows, as Altria
Group, Inc. believes that this approach provides a more precise
estimate of service and interest costs. Altria Group, Inc. is
accounting for this change prospectively as a change in
accounting estimate. This change will not affect the measurement
of Altria Group, Inc.’s pension and postretirement benefit
obligations as the change in the service and interest costs will be
offset by a corresponding change in actuarial gains/losses.
Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and
postretirement plans at December 31, 2015 and 2014 were as follows:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial losses (gains)
Other
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at December 31
Amounts recognized in Altria Group, Inc.’s consolidated
balance sheets were as follows:
Other accrued liabilities
Accrued pension costs
Accrued postretirement health care costs
Pension
Postretirement
2015
2014
2015
2014
$
$
$
$
$
8,330
86
337
(431)
(317)
6
8,011
7,297
(188)
28
(431)
6,706
(1,305) $
7,137
68
345
(410)
1,190
—
8,330
7,077
615
15
(410)
7,297
(1,033)
(28) $
(1,277)
—
(1,305) $
(21)
(1,012)
—
(1,033)
$
$
$
$
$
2,613
18
100
(141)
(192)
(6)
2,392
—
—
—
—
—
(2,392) $
(147) $
—
(2,245)
(2,392) $
2,317
15
107
(132)
306
—
2,613
—
—
—
—
—
(2,613)
(152)
—
(2,461)
(2,613)
The table above presents the projected benefit obligation for
Altria Group, Inc.’s pension plans. The accumulated benefit
obligation, which represents benefits earned to date, for the
pension plans was $7.7 billion and $7.9 billion at December 31,
2015 and 2014, respectively.
At December 31, 2015 and 2014, the accumulated benefit
obligations were in excess of plan assets for all pension plans.
The Patient Protection and Affordable Care Act (“PPACA”),
as amended by the Health Care and Education Reconciliation Act
of 2010, was signed into law in March 2010. The PPACA
mandates health care reforms with staggered effective dates from
2010 to 2020, including the imposition of an excise tax on high
cost health care plans effective in 2020. The additional
accumulated postretirement liability resulting from the PPACA,
which is not material to Altria Group, Inc., has been included in
Altria Group, Inc.’s accumulated postretirement benefit obligation
at December 31, 2015 and 2014. Given the complexity of the
PPACA and the extended time period during which
implementation is expected to occur, future adjustments to Altria
Group, Inc.’s accumulated postretirement benefit obligation may
be necessary.
The following assumptions were used to determine Altria
Group, Inc.’s pension benefit obligations at December 31:
Discount rate
Rate of compensation increase
2015
4.4%
4.0
2014
4.1%
4.0
60
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31:
Discount rate
Health care cost trend rate assumed for next year
Ultimate trend rate
Year that the rate reaches the ultimate trend rate
2015
4.4%
6.5
5.0
2019
2014
4.0%
7.0
5.0
2019
Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31,
2015, 2014 and 2013:
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization:
Net loss
Prior service cost (credit)
Termination and settlement
Net periodic benefit cost
Pension
2014
68
345
(518)
$
147
10
—
52
$
2015
86
337
(539)
234
7
8
133
$
$
$
$
2013
86
314
(493)
271
10
7
195
$
$
Postretirement
2014
15
107
—
$
2015
18
100
—
$
43
(39)
—
122
$
22
(43)
—
101 $
2013
18
99
—
51
(45)
—
123
The amounts included in termination and settlement in the
table above were comprised of the following changes:
(in millions)
Benefit obligation
Other comprehensive earnings/losses:
Net loss
2015
$ — $
2013
1
8
8
$
6
7
$
At December 31, 2014, Altria Group, Inc. updated its
mortality assumptions to reflect longer life expectancy for its
pension plan and postretirement plan participants,
resulting in an increase of approximately $60 million and $10
million to its 2015 pre-tax pension and postretirement net periodic
benefit cost, respectively.
The estimated net loss and prior service cost (credit) that are
expected to be amortized from accumulated other comprehensive
losses into net periodic benefit cost during 2016 is as follows:
(in millions)
Net loss
Prior service cost (credit)
$
Pension
Postretirement
30
(40)
183 $
5
The following assumptions were used to determine Altria Group, Inc.’s net periodic benefit cost for the years ended December 31:
Discount rate
Expected rate of return on plan assets
Rate of compensation increase
Health care cost trend rate
Pension
2014
4.9%
8.0
4.0
—
2015
4.1%
8.0
4.0
—
2013
4.0%
8.0
4.0
—
Postretirement
2014
4.8%
—
—
7.0
2015
4.0%
—
—
7.0
2013
3.9%
—
—
7.5
Assumed health care cost trend rates have a significant effect on
the amounts reported for the postretirement health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have had the following effects as of December 31,
2015:
One-
Percentage-
Point Increase
One-
Percentage-
Point Decrease
Effect on total of postretirement
service and interest cost
Effect on postretirement benefit
6.8%
obligation 7.5%
(5.8)%
(6.1)%
61
Defined Contribution Plans: Altria Group, Inc. sponsors
deferred profit-sharing plans covering certain salaried, non-union
and union employees. Contributions and costs are determined
generally as a percentage of earnings, as defined by the plans.
Amounts charged to expense for these defined contribution plans
totaled $85 million, $82 million and $80 million in 2015, 2014
and 2013, respectively.
Pension Plan Assets: Altria Group, Inc.’s pension plans
investment strategy is based on an expectation that equity
securities will outperform debt securities over the long term.
Altria Group, Inc. believes that it implements the investment
strategy in a prudent and risk-controlled manner, consistent with
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
the fiduciary requirements of the Employee Retirement Income
Security Act of 1974, by investing retirement plan assets in a
well-diversified mix of equities, fixed income and other securities
that reflects the impact of the demographic mix of plan
participants on the benefit obligation using a target asset
allocation between equity securities and fixed income investments
of 55%/45%. The composition of Altria Group, Inc.’s plan assets
at December 31, 2015 was broadly characterized as an allocation
between equity securities (56%), corporate bonds (32%), U.S.
Treasury and foreign government securities (8%) and all other
types of investments (4%). Virtually all pension assets can be
used to make monthly benefit payments.
Altria Group, Inc.’s pension plans investment objective is
accomplished by investing in U.S. and international equity index
strategies that are intended to mirror indices such as the Standard
& Poor’s 500 Index, Russell Small Cap Completeness Index,
Research Affiliates Fundamental Index (“RAFI”) Low Volatility
U.S. Index, and Morgan Stanley Capital International (“MSCI”)
Europe, Australasia, and the Far East (“EAFE”) Index. Altria
Group, Inc.’s pension plans also invest in actively managed
international equity securities of large, mid and small cap
companies located in developed and emerging markets, as well as
long duration fixed income securities that primarily include
corporate bonds of companies from diversified industries. The
allocation to below investment grade securities represented 18%
of the fixed income holdings or 8% of total plan assets at
December 31, 2015. The allocation to emerging markets
represented 4% of the equity holdings or 2% of total plan assets at
December 31, 2015. The allocation to real estate and private
equity investments was immaterial at December 31, 2015.
Altria Group, Inc.’s pension plans risk management practices
include ongoing monitoring of asset allocation, investment
performance and investment managers’ compliance with their
investment guidelines, periodic rebalancing between equity and
debt asset classes and annual actuarial re-measurement of plan
liabilities.
Altria Group, Inc.’s expected rate of return on pension plan
assets is determined by the plan assets’ historical long-term
investment performance, current asset allocation and estimates of
future long-term returns by asset class. The forward-looking
estimates are consistent with the overall long-term averages
exhibited by returns on equity and fixed income securities.
The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2015 and 2014 were as follows:
(in millions)
Common/collective trusts:
U.S. large cap
U.S. small cap
International developed markets
U.S. and foreign government securities or their
agencies:
U.S. government and agencies
U.S. municipal bonds
Foreign government and agencies
Corporate debt instruments:
Above investment grade
Below investment grade and no rating
Common stock:
International equities
U.S. equities
Registered investment companies
Other, net
2015
2014
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$ — $ 1,762 $ — $ 1,762
$ — $ 1,870 $ — $ 1,870
—
—
—
—
—
—
—
907
605
58
16
360
78
331
102
252
1,660
502
—
—
—
58
—
—
—
—
—
—
—
2
—
—
13
360
78
331
102
252
1,660
502
909
605
58
87
—
—
—
—
—
—
—
1,000
556
63
74
442
79
296
124
281
1,765
527
—
—
113
91
—
—
—
—
—
—
—
1
—
—
15
442
79
296
124
281
1,765
527
1,001
556
176
180
Total investments at fair value, net
$ 1,586 $ 5,105 $
15 $ 6,706
$ 1,693 $ 5,588 $
16 $ 7,297
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2015 and 2014.
For a description of the fair value hierarchy and the three
levels of inputs used to measure fair value, see Note 2. Summary
of Significant Accounting Policies.
Following is a description of the valuation methodologies
used for investments measured at fair value.
Common/Collective Trusts: Common/collective trusts consist
of funds that are intended to mirror indices such as
Standard & Poor’s 500 Index, Russell Small Cap
Completeness Index and MSCI EAFE Index. They are
valued on the basis of the relative interest of each
participating investor in the fair value of the underlying
assets of each of the respective common/collective trusts.
62
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The underlying assets are valued based on the net asset value
(“NAV”), which is provided by the investment account
manager as a practical expedient to estimate fair value.
U.S. and Foreign Government Securities: U.S. and foreign
government securities consist of investments in Treasury
Nominal Bonds and Inflation Protected Securities and
municipal securities. Government securities are valued at a
price that is based on a compilation of primarily observable
market information, such as broker quotes. Matrix pricing,
yield curves and indices are used when broker quotes are not
available.
Corporate Debt Instruments: Corporate debt instruments are
valued at a price that is based on a compilation of primarily
observable market information, such as broker quotes.
Matrix pricing, yield curves and indices are used when
broker quotes are not available.
Common Stock: Common stocks are valued based on the
price of the security as listed on an open active exchange on
last trade date.
Registered Investment Companies: Investments in mutual
funds sponsored by a registered investment company are
valued based on exchange listed prices and are classified in
Level 1. Registered investment company funds that are
designed specifically to meet Altria Group, Inc.’s pension
plans investment strategies, but are not traded on an active
market, are valued based on the NAV of the underlying
securities and are classified in Level 2. The NAV is provided
by the investment account manager as a practical expedient
to estimate fair value.
Cash Flows: 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 IRS regulations.
Currently, Altria Group, Inc. anticipates making employer
contributions to its pension plans of approximately $30 million to
$75 million in 2016 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.
Estimated future benefit payments at December 31, 2015 were as follows:
(in millions)
2016
2017
2018
2019
2020
2021-2025
$
Pension
436 $
440
442
437
446
2,348
Postretirement
147
149
149
148
144
686
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2015 consisted of the following:
(in millions)
Net loss
Prior service (cost) credit
Deferred income taxes
$
Pension
(2,805) $
(22)
1,101
Post-
retirement
Post-
employment
(588) $
231
141
(108) $
—
40
Total
(3,501)
209
1,282
Amounts recorded in accumulated other comprehensive losses
$
(1,726) $
(216) $
(68) $
(2,010)
The amounts recorded in accumulated other comprehensive losses at December 31, 2014 consisted of the following:
(in millions)
Net loss
Prior service (cost) credit
Deferred income taxes
Pension
Post-
retirement
Post-
employment
Total
$
(2,637) $
(823) $
(122) $
(3,582)
(23)
1,037
264
218
—
46
241
1,301
Amounts recorded in accumulated other comprehensive losses
$
(1,623) $
(341) $
(76) $
(2,040)
63
$
$
$
43
43
(39)
43
(39)
(39)
—
—
(2)
—
(2)
2
(2)
2
2
192
192
6
192
6
(75)
6
(75)
123
(75)
123
125
123
125
125
$
$
$
$
$
$
22
22
(43)
22
(43)
8
(43)
8
(13)
8
(13)
(13)
(306)
(306)
120
(306)
120
(186)
120
(186)
(199) $
(186)
(199) $
(199) $
19
19
—
19
—
—
—
—
(7)
—
(7)
12
(7)
12
12
(5)
(5)
—
(5)
—
1
—
1
(4)
1
(4)
8
(4)
8
8
$
$
$
$
$
$
$
$
$
18
18
—
18
—
(7)
—
(7)
11
(7)
11
11
(12)
(12)
5
(12)
5
(7)
5
(7)
4 $
(7)
4
$
4 $
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Notes to Consolidated Financial Statements
_________________________
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:
Pension
Pension
Pension
Post-
Post-
retirement
Post-
retirement
retirement
Post-
Post-
employment
Post-
employment
employment
(in millions)
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Amortization:
Net loss
Amortization:
Net loss
Prior service cost/credit
Net loss
Prior service cost/credit
Other expense:
Prior service cost/credit
Other expense:
Net loss
Other expense:
Net loss
Deferred income taxes
Net loss
Deferred income taxes
Deferred income taxes
$
$
$
Other movements during the year:
Other movements during the year:
Other movements during the year:
Net loss
Net loss
Prior service cost/credit
Net loss
Prior service cost/credit
Deferred income taxes
Prior service cost/credit
Deferred income taxes
Deferred income taxes
$
$
$
234
234
7
234
7
7
8
8
(96)
8
(96)
153
(96)
153
153
(410)
(410)
(6)
(410)
(6)
160
(6)
160
(256)
160
(256)
(103) $
(256)
(103) $
(103) $
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
$
$
$
The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:
Pension
Pension
Pension
Post-
Post-
retirement
Post-
retirement
retirement
Post-
Post-
employment
Post-
employment
employment
(in millions)
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Amortization:
Net loss
Amortization:
Net loss
Prior service cost/credit
Net loss
Prior service cost/credit
Prior service cost/credit
Deferred income taxes
Deferred income taxes
Deferred income taxes
$
$
$
Other movements during the year:
Other movements during the year:
Other movements during the year:
Net loss
Net loss
Deferred income taxes
Net loss
Deferred income taxes
Deferred income taxes
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
$
$
$
$
$
$
147
147
10
147
10
(61)
10
(61)
96
(61)
96
96
(1,093)
(1,093)
425
(1,093)
425
(668)
425
(668)
(572) $
(668)
(572) $
(572) $
The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:
The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:
(in millions)
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Amortization:
Net loss
Amortization:
Net loss
Prior service cost/credit
Net loss
Prior service cost/credit
Other expense:
Prior service cost/credit
Other expense:
Net loss
Other expense:
Net loss
Deferred income taxes
Net loss
Deferred income taxes
Deferred income taxes
Other movements during the year:
Other movements during the year:
Other movements during the year:
Net loss
Net loss
Prior service cost/credit
Net loss
Prior service cost/credit
Deferred income taxes
Prior service cost/credit
Deferred income taxes
Deferred income taxes
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
Total movements in other comprehensive earnings/losses
Pension
Pension
Pension
$
$
$
271
271
10
271
10
10
6
6
(111)
6
(111)
176
(111)
176
176
1,218
1,218
(7)
1,218
(7)
(470)
(7)
(470)
741
(470)
741
917 $
741
917
$
917 $
$
$
$
$
$
$
64
64
64
Post-
Post-
retirement
Post-
retirement
retirement
Post-
Post-
employment
Post-
employment
employment
$
$
$
51
51
(45)
51
(45)
(45)
—
—
(2)
—
(2)
4
(2)
4
4
327
327
(2)
327
(2)
(129)
(2)
(129)
196
(129)
196
200 $
196
200
$
200 $
$
$
$
18
18
—
18
—
—
—
—
(7)
—
(7)
11
(7)
11
11
23
23
—
23
—
(10)
—
(10)
13
(10)
13
24 $
13
24
$
24 $
Total
Total
Total
296
296
(32)
296
(32)
(32)
8
8
(105)
8
(105)
167
(105)
167
167
(223)
(223)
—
(223)
—
86
—
86
(137)
86
(137)
30
(137)
30
30
Total
Total
Total
187
187
(33)
187
(33)
(60)
(33)
(60)
94
(60)
94
94
(1,411)
(1,411)
550
(1,411)
550
(861)
550
(861)
(767)
(861)
(767)
(767)
Total
Total
Total
340
340
(35)
340
(35)
(35)
6
6
(120)
6
(120)
191
(120)
191
191
1,568
1,568
(9)
1,568
(9)
(609)
(9)
(609)
950
(609)
950
1,141
950
1,141
1,141
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 17. Additional Information
(in millions)
Research and development expense
Advertising expense
Interest and other debt expense, net:
Interest expense
Interest income
Interest related to NPM Adjustment Items
Rent expense
For the Years Ended December 31,
2015
186
25
$
$
808
$
(4)
13
817
48
$
$
2014
167 $
30
$
857 $
(2)
(47)
808 $
$
52
2013
153
7
1,053
(4)
—
1,049
49
$
$
$
$
$
Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2015 were as
follows:
(in millions)
2016
2017
2018
2019
2020
Thereafter
Rental Commitments
58
$
52
45
32
28
94
309
$
$
$
Sublease Income
6
5
5
5
5
23
49
The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2015, 2014 and
2013 was as follows:
(in millions)
Balance at beginning of year
Charged to costs and expenses
Deductions (1)
Discounts
$
— $
618
(618)
2015
2014
2013
Returned
Goods
Discounts
Returned
Goods
Discounts
Returned
Goods
46
217
(195)
$
— $
41
$
— $
599
(599)
179
(174)
610
(610)
— $
46
$
— $
42
150
(151)
41
Balance at end of year
(1) Represents the recording of discounts and returns for which allowances were created.
— $
68
$
$
Note 18. Contingencies
Legal proceedings covering a wide range of matters are pending
or threatened in various United States and foreign jurisdictions
against Altria Group, Inc. and its subsidiaries, including PM USA
and UST and its subsidiaries, as well as their respective
indemnitees. Various types of claims may be raised in these
proceedings, including product liability, consumer protection,
antitrust, tax, contraband shipments, patent infringement,
employment matters, claims for contribution and claims of
competitors or distributors.
Litigation is subject to uncertainty and it is possible that there
could be adverse developments in pending or future cases. An
unfavorable outcome or settlement of pending tobacco-related or
other litigation could encourage the commencement of additional
litigation. Damages claimed in some tobacco-related and other
litigation are or can be significant and, in certain cases, range in
the billions of dollars. The variability in pleadings in multiple
jurisdictions, together with the actual experience of management
in litigating claims, demonstrate that the monetary relief that may
be specified in a lawsuit bears little relevance to the ultimate
outcome. In certain cases, plaintiffs claim that defendants’
liability is joint and several. In such cases, Altria Group, Inc. or
its subsidiaries may face the risk that one or more co-defendants
decline or otherwise fail to participate in the bonding required for
an appeal or to pay their proportionate or jury-allocated share of a
judgment. As a result, Altria Group, Inc. or its subsidiaries under
certain circumstances may have to pay more than their
proportionate share of any bonding- or judgment-related amounts.
Furthermore, in those cases where plaintiffs are successful, Altria
Group, Inc. or its subsidiaries may also be required to pay interest
and attorneys’ fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
verdicts have been appealed, there remains a risk that such relief
65
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico limit
the dollar amount of bonds or require no bond at all. As
discussed below, however, tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. Although Altria
Group, Inc. cannot predict the outcome of such challenges, it is
possible that the consolidated results of operations, cash flows or
financial position of Altria Group, Inc., or one or more of its
subsidiaries, could be materially affected in a particular fiscal
quarter or fiscal year by an unfavorable outcome of one or more
such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the
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 18. 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 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 December 31, 2015, 2014 and
2013:
Individual Smoking and Health Cases (1)
Smoking and Health Class Actions and
Aggregated Claims Litigation (2)
Health Care Cost Recovery Actions (3)
“Lights/Ultra Lights” Class Actions
2015
2014
2013
65
5
1
11
67
5
1
12
67
6
1
15
(1) Does not include 2,499 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).
(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 has 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. The first trial is currently
scheduled to begin May 1, 2017. Dates for the five remaining consolidated trials
have not been scheduled.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit
below.
International Tobacco-Related Cases: As of January 26,
2016, PM USA is a named defendant in ten 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
66
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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 PMI that provides for
indemnities for certain liabilities concerning tobacco products.
Tobacco-Related Cases Set for Trial: As of January 26,
2016, five Engle progeny cases, no individual smoking and health
case and one “Lights/Ultra Lights” class action against PM USA
are set for trial through March 31, 2016. One medical monitoring
class action against PM USA is currently in trial. Cases against
other companies in the tobacco industry are also 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 57 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 38 of the 57 cases. These 38 cases were tried in
Alaska (1), California (7), Florida (10), Louisiana (1),
Massachusetts (1), Mississippi (1), Missouri (3), 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. On December 18, 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. 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 19 non-Engle progeny cases in which verdicts were
returned in favor of plaintiffs, 15 have reached final resolution. A
verdict against defendants in one health care cost recovery case
(Blue Cross/Blue Shield) was reversed and all claims were
dismissed with prejudice. In addition, a verdict against
defendants in a purported “Lights” class action in Illinois (Price)
was reversed and the case was dismissed with prejudice in
December 2006, but plaintiffs sought to reinstate the verdict,
which an intermediate appellate court ordered in April 2014. On
November 4, 2015, the Illinois Supreme Court vacated the Fifth
Judicial District’s decision, finding that the plaintiffs filed the
wrong motion in the wrong court. On November 18, 2015, the
plaintiffs filed a new motion with the Illinois Supreme Court
seeking to recall its original mandate, which the court denied on
January 11, 2016. See “Lights/Ultra Lights” Cases - The Price
Case below for a discussion of developments in Price.
As of January 26, 2016, 92 state and federal Engle progeny
cases involving PM USA have resulted in verdicts since the
Florida Supreme Court’s Engle decision as follows: 51 verdicts
were returned in favor of plaintiffs; 39 verdicts were returned in
favor of PM USA; and two verdicts that were initially returned in
favor of plaintiffs were reversed on appeal and remain pending.
See Smoking and Health Litigation - Engle Progeny Trial Court
Results below for a discussion of these verdicts.
67
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 related costs
and fees) totaling approximately $323 million and interest totaling
approximately $144 million as of December 31, 2015. These
amounts include payments for Engle progeny judgments (and
related costs and fees) totaling approximately $22 million, interest
totaling approximately $3 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 years ended December 31, 2015, 2014 and 2013
were as follows:
(in millions)
2015
2014
2013
Accrued liability for tobacco and
health litigation items at
beginning of year
Pre-tax charges for:
Tobacco and health
judgments
Related interest costs
Agreement to resolve federal
Engle progeny cases
Implementation of corrective
communications remedy
pursuant to the federal
government’s lawsuit
Payments
Accrued liability for tobacco and
health litigation items at end of
year
$
39
$
3
$
—
84
23
43
—
(57)
11
2
—
31
(8)
18
4
—
—
(19)
$
132
$
39
$
3
The accrued liability for tobacco and health litigation items,
including related interest costs, was included in liabilities on
Altria Group, Inc.’s consolidated balance sheets. Pre-tax charges
for tobacco and health judgments, the agreement to resolve
federal Engle progeny cases (discussed below under “Agreement
to Resolve Federal Engle Progeny Cases”) and corrective
communications were included in marketing, administration and
research costs on Altria Group, Inc.’s 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
consolidated statements of earnings.
Security for Judgments: To obtain stays of judgments
pending current appeals, as of December 31, 2015, PM USA has
posted various forms of security totaling approximately $77
million, the majority of which has been collateralized with cash
deposits that are included in other assets on the consolidated
balance sheet.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
2015 in which verdicts were returned in favor of plaintiffs and
against PM USA. Charts listing the verdicts for plaintiffs in the
Engle progeny cases can be found in Smoking and Health
Litigation - Engle Progeny Trial Results below.
Bullock: On December 10, 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
January 8, 2016, the plaintiff moved for a new trial.
Schwarz: In March 2002, an Oregon jury awarded $168,500 in
compensatory damages and $150 million in punitive damages
against PM USA. In May 2002, the trial court reduced the
punitive damages award to $100 million. In May 2006, the
Oregon Court of Appeals affirmed the compensatory damages
verdict, reversed the award of punitive damages and remanded the
case to the trial court for a second trial to determine the amount of
punitive damages, if any. In June 2010, the Oregon Supreme
Court affirmed the court of appeals’ decision and remanded the
case to the trial court for a new trial limited to the question of
punitive damages. In December 2010, the Oregon Supreme Court
reaffirmed its earlier ruling and awarded PM USA approximately
$500,000 in costs. Trial on the amount of punitive damages
began in January 2012. In February 2012, the jury awarded
plaintiff $25 million in punitive damages. In July 2015, the
Oregon Court of Appeals affirmed the judgment in favor of
plaintiff and in September 2015, PM USA filed a petition for
review with the Oregon Supreme Court, which the court denied
on November 12, 2015. In the fourth quarter of 2015, PM USA
recorded a provision on its consolidated balance sheet of
approximately $34 million for the judgment plus interest and
associated costs.
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
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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 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 January 26, 2016,
approximately 3,040 state court cases were pending against PM
USA or Altria Group, Inc. asserting individual claims by or on
behalf of approximately 4,000 state court plaintiffs. While the
Federal Engle Agreement (discussed below) resolved nearly all
Engle progeny cases pending in federal court, as of January 26,
2016, 23 cases were pending against PM USA in federal court
representing the cases excluded from that agreement. Because of
a number of factors, including, but not limited to, docketing
delays, duplicated filings and overlapping dismissal orders, these
numbers are estimates.
Agreement to Resolve Federal Engle Progeny Cases: In
February 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J.
Reynolds”) and Lorillard Tobacco Company (“Lorillard”) reached
a tentative agreement to resolve approximately 415 pending
federal Engle progeny cases (the “Federal Engle Agreement”).
Under the terms of the Federal Engle Agreement, PM USA paid
into escrow approximately $43 million in March 2015. PM USA
recorded a pre-tax provision of approximately $43 million in the
first quarter of 2015. Federal cases that were in trial as of
February 25, 2015 and those that have previously reached final
verdict were not included in the Federal Engle Agreement. The
Federal Engle Agreement was conditioned on approval by all
federal court plaintiffs in the cases resolved by the Federal Engle
Agreement or as the parties otherwise agree. The parties satisfied
all conditions and, in December 2015, the cases subject to the
Federal Engle Agreement were dismissed, thereby entitling
plaintiffs to the $43 million escrow amount.
Engle Progeny Trial Results: As of January 26, 2016, 92
federal and state Engle progeny cases involving PM USA have
resulted in verdicts since the Florida Supreme Court Engle
decision. Fifty-one verdicts were returned in favor of plaintiffs
and two verdicts (Graham and Skolnick) that were initially
returned in favor of plaintiffs were reversed on appeal and remain
pending.
Thirty-nine verdicts were returned in favor of PM USA, of
which 30 were state cases (Gelep, Kalyvas, Gil de Rubio,
Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr,
Espinosa, Oliva, Weingart, Junious, Szymanski, Hancock, D.
Cohen, LaMotte, J. Campbell, Dombey, Haldeman, Blasco,
Gonzalez, Banks, Surico, Baum, Bishop, Vila, McMannis, Collar,
Suarez and Shulman) and 9 were federal cases (Gollihue,
McCray, Denton, Wilder, Jacobson, Reider, Davis, Starbuck and
Sowers). In addition, there have been a number of mistrials, only
some of which have resulted in new trials as of January 26, 2016.
The juries in the Reider and Banks cases returned zero damages
verdicts in favor of PM USA. The juries in the Weingart and
Hancock cases returned verdicts against PM USA awarding no
damages, but the trial court in each case granted an additur. In
the Russo case (formerly Frazier), however, the Florida Third
District Court of Appeal reversed the judgment in defendants’
favor in April 2012 and remanded the case for a new trial. In
April 2015, the Florida Supreme Court affirmed the reversal,
rejecting defendants’ argument that the statute of repose applies to
fraud and conspiracy claims in Engle progeny cases. In the trial
court, the case was retried and, in April 2015, the jury returned a
verdict in favor of defendants.
The charts below list the verdicts and post-trial developments
in certain Engle progeny cases in which verdicts were returned in
favor of plaintiffs (including Hancock, where the verdict
originally was returned in favor of PM USA). The first chart lists
such cases that are pending as of January 26, 2016; the second
chart lists such cases that were pending within the previous 12
months, but that are now concluded.
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Currently-Pending Cases
_________________________________________________________________________________________________________________________________________
Plaintiff: Ledoux
Date: December 2015
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in
compensatory damages and allocating 47% of the fault to PM USA. The jury also awarded plaintiff $12.5 million in punitive damages
against each defendant.
Post-Trial Developments:
On January 4, 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new
trial. On January 6, 2016, the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s
comparative fault.
_________________________________________________________________________________________________________________________________________
Plaintiff: Barbose
Date: November 2015
Verdict:
A Pasco County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in
compensatory damages and allocating 42.5% of the fault to PM USA. The jury also awarded plaintiff $500,000 in punitive damages
against each defendant.
Post-Trial Developments:
On November 23, 2015, the court entered final judgment in favor of plaintiff without any deduction for plaintiff’s comparative fault. On
December 2, 2015, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new
trial, which the court denied on January 21, 2016.
_________________________________________________________________________________________________________________________________________
Plaintiff: Tognoli
Date: November 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding $1.05 million in compensatory damages
and allocating 15% of the fault to PM USA (an amount of $157,500).
Post-Trial Developments:
On December 3, 2015, PM USA filed a motion to set aside the verdict and for judgment in accordance with its motion for directed
verdict. On January 14, 2016, the trial court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault.
On January 15, 2016, plaintiff filed an appeal to the Florida Fourth District Court of Appeal. On January 19, 2016, the trial court denied
PM USA’s post-trial motions and, on January 25, 2016, PM USA cross-appealed.
_________________________________________________________________________________________________________________________________________
Plaintiff: Danielson
Date: November 2015
Verdict:
An Escambia County jury returned a verdict in favor of plaintiff and against PM USA awarding $325,000 in compensatory damages and
allocating 49% of the fault to PM USA. The jury also awarded plaintiff $325,000 in punitive damages.
Post-Trial Developments:
On November 17, 2015, plaintiff filed a motion to enforce the parties’ pretrial stipulation of $2.3 million in economic damages. The
plaintiff also filed a motion for an additur or, in the alternative, for a new trial. On November 19, 2015, PM USA filed post-trial
motions, including a motion concerning the proper form of judgment and for a new trial. On December 31, 2015, the trial court granted
plaintiff’s motion for a new trial on damages and denied PM USA’s post-trial motions. On January 13, 2016, PM USA filed a notice of
appeal to the Florida First District Court of Appeal.
_________________________________________________________________________________________________________________________________________
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Plaintiff: Marchese
Date: October 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $1 million in
compensatory damages and allocating 22.5% of the fault to PM USA. The jury also awarded plaintiff $250,000 in punitive damages
against each defendant.
Post-Trial Developments:
In October 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. On
November 5, 2015, the court entered final judgment in favor of plaintiff. The post-trial motions remain pending.
_________________________________________________________________________________________________________________________________________
Plaintiff: Duignan
Date: September 2015
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $6 million in
compensatory damages and allocating 37% of the fault to PM USA. The jury also awarded plaintiff $3.5 million in punitive damages
against PM USA.
Post-Trial Developments:
In September 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA filed
various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in October 2015. On
November 12, 2015, PM USA and R.J. Reynolds filed a notice of appeal to the Florida Second District Court of Appeal and, on
November 16, 2015, PM USA posted a bond in the amount of approximately $2.7 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Cooper
Date: September 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $4.5 million in
compensatory damages and allocating 10% of the fault to PM USA (an amount of $450,000).
Post-Trial Developments:
In September 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a directed verdict. On
January 4, 2016, the trial court denied PM USA’s post-trial motions.
_________________________________________________________________________________________________________________________________________
Plaintiff: Jordan
Date: August 2015
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $7.8 million in compensatory
damages and allocating 60% of the fault to PM USA. The jury also awarded approximately $3.2 million in punitive damages.
Post-Trial Developments:
In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, but reduced the
compensatory damages to approximately $6.4 million. PM USA filed various post-trial motions, including motions to set aside the
verdict and for a new trial, which the court denied on December 3, 2015. On December 28, 2015, PM USA filed a notice of appeal to
the Florida First District Court of Appeal.
_________________________________________________________________________________________________________________________________________
Plaintiff: Merino
Date: July 2015
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding $8 million in compensatory damages
and allocating 70% of the fault to PM USA. The jury also awarded $6.5 million in punitive damages.
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Post-Trial Developments:
In August 2015, the trial court denied all post-trial motions, including motions to set aside the verdict and for a new trial, and entered
final judgment without any deduction for plaintiff’s comparative fault. In September 2015, PM USA filed a notice of appeal to the
Florida Third District Court of Appeal and posted a bond in the amount of $5 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: McCoy
Date: July 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $1.5 million
in compensatory damages and allocating 20% of the fault to PM USA (an amount of $300,000). The jury also awarded $3 million in
punitive damages against each defendant.
Post-Trial Developments:
In July 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In August 2015,
the trial court entered final judgment without any deduction for plaintiff’s comparative fault. On January 4, 2016, the trial court denied
defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. On January 20, 2016,
defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. On January 22, 2016, PM USA posted a bond in the
amount of approximately $1.65 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: M. Brown
Date: May 2015
Verdict:
In May 2015, a Duval County jury returned a verdict in favor of plaintiff and against PM USA in a partial retrial. In 2013, a jury
returned a partial verdict against PM USA, but was deadlocked as to (i) the amount of compensatory damages, (ii) whether punitive
damages should be awarded and, if so, (iii) the amount of punitive damages. In the partial retrial, the jury was asked to address these
issues. In May 2015, the jury awarded $6.375 million in compensatory damages, but did not award any punitive damages.
Post-Trial Developments:
In May 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA posted a bond
in the amount of $5 million. Additionally, PM USA filed post-trial motions, including motions to set aside the verdict and for a new
trial, as well as filed a notice of appeal to the Florida First District Court of Appeal. In August 2015, the trial court denied the last of PM
USA’s post-trial motions and plaintiff cross-appealed.
_________________________________________________________________________________________________________________________________________
Plaintiff: Gore
Date: March 2015
Verdict:
An Indian River County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $2 million in
compensatory damages and allocating 23% of the fault to PM USA (an amount of $460,000).
Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In September 2015, the
trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2015, defendants filed a notice of appeal
to the Florida Fourth District Court of Appeal and PM USA subsequently posted a bond in the amount of $460,000.
_________________________________________________________________________________________________________________________________________
Plaintiff: Pollari
Date: March 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in
compensatory damages and allocating 42.5% of the fault to PM USA (an amount of $4.25 million). The jury also awarded $1.5 million
in punitive damages against each defendant.
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Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court
entered final judgment without any deduction for plaintiff’s comparative fault. On January 4, 2016, the trial court denied defendants’
post-trial motions and amended the final judgment to apply the comparative fault deduction. On January 27, 2016, defendants filed a
notice of appeal to the Florida Fourth District Court of Appeal.
_________________________________________________________________________________________________________________________________________
Plaintiff: Zamboni
Date: February 2015
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J.
Reynolds awarding $340,000 in compensatory damages and allocating 10% of the fault to PM USA (an amount of $34,000).
Post-Trial Developments:
In April 2015, PM USA and R.J. Reynolds filed a motion for judgment in defendants’ favor in accordance with the Eleventh Circuit’s
decision in Graham. In June 2015, the trial court stayed the case pending the Eleventh Circuit’s final disposition in the Graham case,
discussed below.
_________________________________________________________________________________________________________________________________________
Plaintiff: Caprio
Date: February 2015
Verdict:
A Broward County jury returned a partial verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group
LLC (“Liggett Group”). The jury found against defendants on class membership, allocating 25% of the fault to PM USA. The jury also
found $559,172 in economic damages. The jury deadlocked with respect to the intentional torts, certain elements of compensatory
damages and punitive damages.
Post-Trial Developments:
In March 2015, PM USA filed post-trial motions, including motions to set aside the partial verdict and for a new trial. In May 2015, the
court denied all of PM USA’s post-trial motions and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal.
_________________________________________________________________________________________________________________________________________
Plaintiff: McKeever
Date: February 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $5.8 million in
compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded plaintiff approximately $11.63 million in
punitive damages. However, the jury found in favor of PM USA on the statute of repose defense to plaintiff’s intentional tort and
punitive damages claims.
Post-Trial Developments:
In March 2015, PM USA filed various post-trial motions, including motions to set aside the verdict and motions for a new trial. In April
2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In June 2015, the trial court denied
PM USA’s post-trial motions, and PM USA posted a bond in the amount of $5 million. PM USA also filed a notice of appeal to the
Florida Fourth District Court of Appeal in June 2015.
_________________________________________________________________________________________________________________________________________
Plaintiff: D. Brown
Date: January 2015
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff approximately
$8.3 million in compensatory damages and allocating 55% of the fault to PM USA. The jury also awarded plaintiff $9 million in
punitive damages.
Post-Trial Developments:
In February 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In March 2015, PM
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USA filed various post-trial motions, including motions to alter or amend the judgment and for a new trial or, in the alternative,
remittitur of the damages awards, all of which the court denied. In July 2015, PM USA filed a notice of appeal to the U.S. Court of
Appeals for the Eleventh Circuit. In August 2015, the Court of Appeals granted PM USA’s motion to stay the appeal pending disposition
of Graham.
_________________________________________________________________________________________________________________________________________
Plaintiff: Allen
Date: November 2014
Verdict:
A Duval County jury returned a verdict against PM USA and R.J. Reynolds awarding plaintiff approximately $3.1 million in
compensatory damages and allocating 6% of the fault to PM USA. The jury also awarded approximately $7.76 million in punitive
damages against each defendant. This was a retrial of a 2011 trial that awarded plaintiff $6 million in compensatory damages and $17
million in punitive damages against each defendant.
Post-Trial Developments:
In December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial,
which the court denied in July 2015. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s
comparative fault. Defendants filed a notice of appeal to the Florida First District Court of Appeal in September 2015 and PM USA
posted a bond in the amount of approximately $2.5 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Perrotto
Date: November 2014
Verdict:
A Palm Beach County jury returned a verdict against PM USA, R.J. Reynolds, Lorillard and Liggett Group awarding plaintiff
approximately $4.1 million in compensatory damages and allocating 25% of the fault to PM USA (an amount of approximately $1.02
million).
Post-Trial Developments:
In December 2014, the trial court entered final judgment with a deduction for plaintiff’s comparative fault, and plaintiff filed a motion
for a new trial. In addition, in December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and
motions for a new trial.
_________________________________________________________________________________________________________________________________________
Plaintiff: Boatright
Date: November 2014
Verdict:
A Polk County jury returned a verdict against PM USA and Liggett Group awarding plaintiff $15 million in compensatory damages and
allocating 85% of the fault to PM USA (an amount of approximately $12.75 million). In addition, in November 2014, the jury awarded
plaintiff approximately $19.7 million in punitive damages against PM USA and $300,000 in punitive damages against Liggett Group.
Post-Trial Developments:
In November 2014, PM USA filed various post-trial motions and, in January 2015, the trial court denied PM USA’s motions for a new
trial and for remittitur, but entered final judgment with a deduction for plaintiff’s comparative fault. In February 2015, defendants filed
a notice of appeal to the Florida Second District Court of Appeal, and PM USA posted a bond in the amount of $3.98 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Kerrivan
Date: October 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA and R.J. Reynolds awarding
plaintiff $15.8 million in compensatory damages and allocating 50% of the fault to PM USA. The jury also awarded plaintiff $25.3
million in punitive damages and allocated $15.7 million to PM USA.
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Post-Trial Developments:
The trial court entered final judgment without any deduction for plaintiff’s comparative fault. In December 2014, defendants filed
various post-trial motions, including a renewed motion for judgment or for a new trial. Plaintiff agreed to waive the bond for the appeal.
In May 2015, the trial court deferred further briefing on the post-trial motions pending the Eleventh Circuit’s final disposition in the
Graham and Searcy cases, discussed below.
_________________________________________________________________________________________________________________________________________
Plaintiff: Lourie
Date: October 2014
Verdict:
A Hillsborough County jury returned a verdict against PM USA, R.J. Reynolds and Lorillard awarding plaintiff approximately $1.37
million in compensatory damages and allocating 27% of the fault to PM USA (an amount of approximately $370,000).
Post-Trial Developments:
In October 2014, defendants filed a motion for judgment and a motion for a new trial. In November 2014, the trial court denied
defendants’ post-trial motions and entered final judgment with a deduction for plaintiff’s comparative fault. Later in November 2014,
defendants filed a notice of appeal to the Florida Second District Court of Appeal, and PM USA posted a bond in the amount of
$370,318.
_________________________________________________________________________________________________________________________________________
Plaintiff: Berger
Date: September 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff $6.25 million in
compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded $20.76 million in punitive damages.
Post-Trial Developments:
The trial court entered final judgment in September 2014 without any deduction for plaintiff’s comparative fault. In October 2014,
plaintiff agreed to waive the bond for the appeal. Also in October 2014, PM USA filed a motion for a new trial or, in the alternative,
remittitur of the jury’s damages awards. In April 2015, the trial court granted PM USA’s post-verdict motion in part and vacated the
punitive damages award. With respect to the compensatory damages award, the court stayed the judgment pending the Eleventh
Circuit’s final disposition in the Graham case, discussed below. In May 2015, plaintiff filed a motion for reconsideration of the order on
the post-verdict motion, which the court denied and lifted the stay on November 18, 2015. On November 19, 2015, the court entered
final judgment with a deduction for plaintiff’s comparative fault. On November 23, 2015, PM USA filed a motion to continue to stay
the judgment pending final disposition in Graham, which the court denied on November 24, 2015. On December 18, 2015, PM USA
filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
_________________________________________________________________________________________________________________________________________
Plaintiff: Harris
Date: July 2014
Verdict:
The U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and
Lorillard awarding approximately $1.73 million in compensatory damages and allocating 15% of the fault to PM USA.
Post-Trial Developments:
Defendants filed motions for a defense verdict because the jury’s findings indicated that plaintiff was not a member of the Engle class.
In December 2014, the trial court entered final judgment without any deduction for plaintiff’s comparative fault and, in January 2015,
defendants filed a renewed motion for judgment as a matter of law or, in the alternative, a motion for a new trial. Defendants also filed a
motion to alter or amend the final judgment. In April 2015, the trial court stayed the post-trial proceedings pending the Eleventh
Circuit’s final disposition in the Graham case, discussed below.
_________________________________________________________________________________________________________________________________________
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Plaintiff: Griffin
Date: June 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA awarding
approximately $1.27 million in compensatory damages and allocating 50% of the fault to PM USA (an amount of approximately
$630,000).
Post-Trial Developments:
The trial court entered final judgment against PM USA in July 2014 with a deduction for plaintiff’s comparative fault. In August 2014,
PM USA filed a motion to amend the judgment to reduce plaintiff’s damages by the amount paid by collateral sources, which the court
denied in September 2014. In October 2014, PM USA posted a bond in the amount of $640,543 and filed a notice of appeal to the U.S.
Court of Appeals for the Eleventh Circuit. In May 2015, the Eleventh Circuit stayed the appeal pending final disposition in the Graham
case, discussed below.
_________________________________________________________________________________________________________________________________________
Plaintiff: Burkhart
Date: May 2014
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J.
Reynolds and Lorillard awarding $5 million in compensatory damages and allocating 15% of the fault to PM USA. The jury also
awarded plaintiff $2.5 million in punitive damages, allocating $750,000 to PM USA.
Post-Trial Developments:
In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or remittitur
of the damages awards, which the court denied in September 2014. The trial court entered final judgment without any deduction for
plaintiff’s comparative fault. In October 2014, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
_________________________________________________________________________________________________________________________________________
Plaintiff: Bowden
Date: March 2014
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $5
million in compensatory damages and allocated 30% of the fault to PM USA (an amount of $1.5 million).
Post-Trial Developments:
The trial court entered final judgment in March 2014 with a deduction for plaintiff’s comparative fault. In April 2014, defendants filed
post-trial motions, including motions for a new trial and to set aside the verdict. In May 2014, the court denied defendants’ post-trial
motions. In June 2014, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in
the amount of $1.5 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Greene (formerly Rizzuto)
Date: August 2013
Verdict:
A Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded plaintiff
$12.55 million in compensatory damages and allocated 55% of the fault to PM USA.
Post-Trial Developments:
In September 2013, defendants filed post-trial motions, including a motion to reduce damages. In September 2013, the trial court
granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1
million in compensatory damages. The trial court entered final judgment without a deduction for plaintiff’s comparative fault. The
court denied all other motions except for defendants’ motion for a juror interview, which was granted. In October 2013, defendants filed
a notice of appeal to the Florida Fifth District Court of Appeal, which ordered resolution of the juror issue prior to appeal. In December
2013, subsequent to the juror interview, the court entered an order that granted no relief with respect to the alleged misconduct of the
juror. In July 2015, the Florida Fifth District Court of Appeal found that the trial court should have applied the comparative fault
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deduction to the compensatory damages award. As a result, the judgment against PM USA was reduced to approximately $6.1 million.
In September 2015, the Fifth District Court of Appeal denied PM USA’s motion for rehearing. In October 2015, PM USA posted a bond
in the amount of $6.1 million. In the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of
approximately $6.7 million for the judgment plus interest and associated costs.
_________________________________________________________________________________________________________________________________________
Plaintiff: Skolnick
Date: June 2013
Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff
$2.555 million in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).
Post-Trial Developments:
In June 2013, defendants and plaintiff filed post-trial motions. The trial court entered final judgment with a deduction for plaintiff’s
comparative fault. In November 2013, the trial court denied plaintiff’s post-trial motion and, in December 2013, denied defendants’
post-trial motions. Defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, and plaintiffs cross-appealed in
December 2013. Also in December 2013, PM USA posted a bond in the amount of $766,500. In July 2015, the District Court of Appeal
reversed the compensatory damages award and ordered judgment in favor of defendants on the strict liability and negligence claims, but
remanded plaintiff’s conspiracy and concealment claims for a new trial. In August 2015, defendants filed a motion for rehearing, and
plaintiff filed a motion for clarification, which the District Court of Appeal denied in September 2015.
_________________________________________________________________________________________________________________________________________
Plaintiff: Starr-Blundell
Date: June 2013
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff
$500,000 in compensatory damages and allocated 10% of the fault to each defendant (an amount of $50,000).
Post-Trial Developments:
In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed
verdict or, in the alternative, for a new trial, which was denied in October 2013. In November 2013, the trial court entered final
judgment with a deduction for plaintiff’s comparative fault. In December 2013, plaintiff filed a notice of appeal to the Florida First
District Court of Appeal. Plaintiff agreed to waive the bond for the appeal. In May 2015, the Florida First District Court of Appeal
affirmed the final judgment. In June 2015, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
In July 2015, the Florida Supreme Court stayed the case pending the outcome of Soffer, discussed below.
_________________________________________________________________________________________________________________________________________
Plaintiff: Graham
Date: May 2013
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J.
Reynolds. The jury awarded $2.75 million in compensatory damages and allocated 10% of the fault to PM USA (an amount of
$275,000).
Post-Trial Developments:
In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which
the trial court denied in September 2013. The trial court entered final judgment with a deduction for plaintiff’s comparative fault. In
October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit arguing that Engle progeny
plaintiffs’ product liability claims are impliedly preempted by federal law, and PM USA posted a bond in the amount of $277,750. In
April 2015, the U.S. Court of Appeals for the Eleventh Circuit found in favor of defendants on the basis of federal preemption, reversed
the trial court’s denial of judgment as a matter of law, and plaintiff filed a petition for rehearing en banc or panel rehearing. On January
21, 2016, the Eleventh Circuit granted a rehearing en banc.
_________________________________________________________________________________________________________________________________________
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Plaintiff: Searcy
Date: April 2013
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J.
Reynolds. The jury awarded $6 million in compensatory damages (allocating 30% of the fault to each defendant) and $10 million in
punitive damages against each defendant.
Post-Trial Developments:
In June 2013, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In July 2013, defendants
filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the
compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court
denied all other post-trial motions. Plaintiffs filed a motion to reconsider the district court’s remittitur and, in the alternative, to certify
the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied in October 2013. In November 2013,
defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In December 2013, defendants filed an
amended notice of appeal after the district court corrected a clerical error in the final judgment, and PM USA posted a bond in the
amount of approximately $2.2 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Buchanan
Date: December 2012
Verdict:
A Leon County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded $5.5 million in
compensatory damages and allocated 37% of the fault to each of the defendants.
Post-Trial Developments:
In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March
2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group without any deduction for
plaintiff’s comparative fault. In April 2013, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM
USA posted a bond in the amount of $2.5 million. In July 2014, the Florida First District Court of Appeal affirmed the judgment, but
certified to the Florida Supreme Court the issue of the statute of repose, which was before the court in Hess. In August 2014, defendants
filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In September 2014, the Florida Supreme Court
stayed the case pending the outcome of Hess. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess,
and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In
the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $4.1 million for
the judgment plus interest and associated costs.
_________________________________________________________________________________________________________________________________________
Plaintiff: Hancock
Date: August 2012
Verdict:
A Broward County jury returned a verdict in the amount of zero damages and allocated 5% of the fault to each of the defendants (PM
USA and R.J. Reynolds). The trial court granted an additur of approximately $110,000, which is subject to the jury’s comparative fault
finding.
Post-Trial Developments:
In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict.
Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the
damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012,
the trial court entered final judgment with a deduction for plaintiff’s comparative fault (PM USA’s portion of the damages was
approximately $700) and PM USA filed a motion to amend the judgment to award PM USA attorneys’ fees of approximately $20,000.
In November 2012, both sides filed notices of appeal to the Florida Fourth District Court of Appeal. Plaintiff agreed to waive the bond
for the appeal. In April 2015, the Florida Fourth District Court of Appeal affirmed the trial court’s verdict. In May 2015, plaintiff filed a
motion for rehearing and for a written opinion and rehearing en banc, which the Court of Appeal denied in June 2015. PM USA’s
motion for a fee award remains pending.
_________________________________________________________________________________________________________________________________________
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Plaintiff: Calloway
Date: May 2012
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The
jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA. The jury also
awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J.
Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against
Liggett Group.
Post-Trial Developments:
In May and June 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the
remaining post-trial motions, reduced the compensatory damages to $16.1 million and entered final judgment without any deduction for
plaintiff’s comparative fault. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of
appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in
the trial court on the ground that the bond cap statute is unconstitutional, which the court denied. On January 6, 2016, the Florida Fourth
District Court of Appeal vacated the punitive damages award and remanded the case for retrial on plaintiff’s claims of concealment and
conspiracy, and punitive damages. The court also found that the trial court should have applied the comparative fault deduction,
reducing the compensatory damages against PM USA to $4.025 million.
_________________________________________________________________________________________________________________________________________
Plaintiff: Hallgren
Date: January 2012
Verdict:
A Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded
approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000).
The jury also awarded $750,000 in punitive damages against each of the defendants.
Post-Trial Developments:
The trial court entered final judgment in March 2012 with a deduction for plaintiff’s comparative fault. In April 2012, PM USA posted a
bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District
Court of Appeal. In October 2013, the Second District Court of Appeal affirmed the judgment. In November 2013, defendants filed a
notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the case
pending the outcome of Russo (presenting the same statute of repose issue as Hess). In April 2015, the Florida Supreme Court rejected
the statute of repose defense in the Hess and Russo cases, and defendants moved for a rehearing. Additionally, in April 2015, the Florida
Supreme Court stayed the case pending the outcome of Soffer (presenting the issue of whether Engle progeny plaintiffs may seek
punitive damages on their negligence and strict liability claims). In September 2015, the Florida Supreme Court denied PM USA’s
rehearing petition in Hess and Russo. In October 2015, the Florida Supreme Court lifted its stay of the case and ordered defendants to
show cause why the court should not decline to exercise jurisdiction, to which defendants responded. On January 12, 2016, the Florida
Supreme Court denied defendants’ petition for discretionary review. On January 20, 2016, PM USA amended its bond to post an
additional amount of approximately $500,000. In the first quarter of 2016, PM USA will record a provision on its condensed
consolidated balance sheet of approximately $2.2 million for the judgment plus interest, fees and associated costs.
_________________________________________________________________________________________________________________________________________
Plaintiff: Kayton (formerly Tate)
Date: July 2010
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $8 million in compensatory
damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately
$16.2 million in punitive damages against PM USA.
Post-Trial Developments:
In August 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault, and PM USA filed its notice of
appeal and posted a $5 million bond. In November 2012, the Florida Fourth District Court of Appeal reversed the punitive damages
award and remanded the case for a new trial on plaintiff’s conspiracy claim. PM USA filed a motion for rehearing, which was denied in
January 2013. In January 2013, plaintiff and defendant each filed a notice to invoke the discretionary jurisdiction of the Florida
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Supreme Court. In June 2013, the Florida Supreme Court stayed the appeal pending the outcome of Hess. In April 2015, the Florida
Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing. In September 2015, the Florida
Supreme Court denied PM USA’s rehearing petition in Hess. In the third quarter of 2015, PM USA recorded a provision on its
condensed consolidated balance sheet of approximately $28.2 million for the judgment plus interest and associated costs.
_________________________________________________________________________________________________________________________________________
Plaintiff: Putney
Date: April 2010
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury
awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately
$2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA.
Post-Trial Developments:
In August 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. PM USA filed its notice of
appeal to the Florida Fourth District Court of Appeal and, in November 2010, posted a $1.6 million bond. In June 2013, the Fourth
District Court of Appeal reversed and remanded the case for further proceedings, holding that the trial court erred in (1) not reducing the
compensatory damages award as excessive and (2) not instructing the jury on the statute of repose in connection with plaintiff’s
conspiracy claim that resulted in the $2.5 million punitive damages award. In July 2013, plaintiff filed a motion for rehearing, which the
Fourth District Court of Appeal denied in August 2013. In September 2013, both parties filed notices to invoke the discretionary
jurisdiction of the Florida Supreme Court. In December 2013, the Florida Supreme Court stayed the appeal pending the outcome of the
Hess case. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing.
In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. The case remains subject to further
proceedings on compensatory damages in the trial court.
_________________________________________________________________________________________________________________________________________
Plaintiff: R. Cohen
Date: March 2010
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in
compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also
awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant.
Post-Trial Developments:
In July 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In August 2010, PM USA filed its
notice of appeal. In October 2010, PM USA posted a $2.5 million bond. In September 2012, the Florida Fourth District Court of Appeal
affirmed the compensatory damages award but reversed and remanded the punitive damages verdict. The Fourth District returned the
case to the trial court for a new jury trial on plaintiff’s fraudulent concealment claim. In January 2013, plaintiff and defendants each
filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2013, the Fourth District granted
defendants’ motion to stay the mandate. In March 2013, plaintiff filed a motion for review of the stay order with the Florida Supreme
Court, which was denied in April 2013. In June 2013, plaintiff moved to consolidate with Hess and Kayton, which defendants did not
oppose, but in October 2013, plaintiff withdrew the motion for consolidation. In February 2014, the Florida Supreme Court stayed the
appeal pending the outcome of the Hess case. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess,
and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In
the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $17.9 million for
the judgment plus interest and associated costs.
_________________________________________________________________________________________________________________________________________
Plaintiff: Naugle
Date: November 2009
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in
compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.
Post-Trial Developments:
In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages
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and $26 million in punitive damages, but without any deduction for plaintiff’s comparative fault. In April 2010, PM USA filed its notice
of appeal and posted a $5 million bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment
of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical
error. In June 2012, the Fourth District Court of Appeal affirmed the amended final judgment. In July 2012, PM USA filed a motion for
rehearing. In December 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive
damages and returned the case to the trial court for a new trial on the question of damages. Upon retrial on the question of damages, in
October 2013, the new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. In
October 2013, PM USA filed post-trial motions, which the trial court denied in April 2014. In May 2014, PM USA filed a notice of
appeal to the Fourth District Court of Appeal and plaintiff cross-appealed. Also in May 2014, PM USA filed a rider with the Florida
Supreme Court to make the previously-posted Naugle bond applicable to the retrial judgment. On January 6, 2016, the Fourth District
Court of Appeal reversed the trial court’s decision and remanded the case to the trial court to conduct a juror interview.
_________________________________________________________________________________________________________________________________________
Plaintiff: Hess
Date: February 2009
Verdict:
A Broward County jury found in favor of plaintiff and against PM USA. The jury awarded $3 million in compensatory damages and
allocated 42% of the fault to PM USA (an amount of approximately $1.2 million). The jury also awarded $5 million in punitive
damages.
Post-Trial Developments:
In June 2009, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. PM USA filed a notice of appeal
to the Florida Fourth District Court of Appeal and posted a $7 million bond in July 2009. In May 2012, the Fourth District reversed and
vacated the punitive damages award on the basis that it was barred by the statute of repose and affirmed the judgment in all other
respects, upholding the compensatory damages award of $1.26 million. In June 2012, both parties filed rehearing motions with the
Fourth District, which were denied in September 2012. In October 2012, PM USA and plaintiff filed notices to invoke the Florida
Supreme Court’s discretionary jurisdiction. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated
balance sheet of approximately $3.2 million for the compensatory damages component of the judgment plus interest and associated
costs. In June 2013, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review, but declined to accept jurisdiction
of PM USA’s petition. In April 2015, the Florida Supreme Court rejected the statute of repose defense and reinstated the punitive
damages award against PM USA, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s
rehearing petition. In the third quarter of 2015, PM USA recorded an additional provision on its condensed consolidated balance sheet
of approximately $6.6 million for the punitive damages component of the judgment plus interest and associated costs.
_________________________________________________________________________________________________________________________________________
Concluded Cases
_________________________________________________________________________________________________________________________________________
Plaintiff: Goveia
Date: February 2014
Verdict:
An Orange County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $850,000 in
compensatory damages and allocated 35% of the fault against each defendant. The jury also awarded $2.25 million in punitive damages
against each defendant.
Post-Trial Developments:
In February 2014, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In April 2014, the
court denied defendants’ motions without a deduction for plaintiff’s comparative fault. In April 2014, defendants filed a notice of appeal
to the Florida Fifth District Court of Appeal. In May 2014, PM USA posted a bond in the amount of $2.5 million. In June 2015, the
Fifth District Court of Appeal affirmed without opinion the trial court’s judgment in favor of plaintiff. On August 3, 2015, the Fifth
District Court of Appeal denied PM USA’s motion to issue a written opinion. In the third quarter of 2015, PM USA recorded a provision
on its condensed consolidated balance sheet of approximately $3.2 million for the judgment plus interest and associated costs, and paid
this amount in August 2015.
_________________________________________________________________________________________________________________________________________
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Plaintiff: Ruffo
Date: May 2013
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and Lorillard. The jury awarded plaintiff $1.5
million in compensatory damages and allocated 12% of the fault to PM USA (an amount of $180,000).
Post-Trial Developments:
In May 2013, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict, which the trial
court denied in October 2013 and entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In
October 2013, PM USA and Lorillard appealed to the Florida Third District Court of Appeal, and PM USA posted a bond in the amount
of $180,000. In November 2014, the Florida Third District Court of Appeal affirmed the final judgment and, in the fourth quarter of
2014, PM USA recorded a provision on its consolidated balance sheet of approximately $193,000 for the judgment plus interest. In June
2015, PM USA paid the judgment plus interest and associated costs in the amount of $200,212.
_________________________________________________________________________________________________________________________________________
Plaintiff: Cuculino
Date: January 2014
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded plaintiff $12.5 million in
compensatory damages and allocated 40% of the fault to PM USA (an amount of $5 million).
Post-Trial Developments:
In January 2014, the court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault, and PM USA filed
post-trial motions, including motions to set aside the verdict and for a new trial. In March 2014 and April 2014, the court denied PM
USA’s post-trial motions. Also in April 2014, PM USA filed a notice of appeal to the Florida Third District Court of Appeal, plaintiff
cross-appealed and PM USA posted a bond in the amount of $5 million. In May 2015, the Florida Third District Court of Appeal
affirmed the final judgment. In the second quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet
of approximately $5.3 million for the judgment plus interest and associated costs and paid this amount in June 2015.
_________________________________________________________________________________________________________________________________________
Plaintiff: Landau
Date: February 2015
Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J.
Reynolds and Lorillard awarding $100,000 in compensatory damages. One defendant settled the case, which resolved all claims against
all defendants, including PM USA.
_________________________________________________________________________________________________________________________________________
Engle Progeny Appellate Issues: Three Florida federal
district courts (in the Merlob, B. Brown and Burr cases) ruled in
2008 that the findings in the first phase of the Engle proceedings
cannot be used to satisfy elements of plaintiffs’ claims, and two of
those rulings (B. Brown and Burr) were certified by the trial court
for interlocutory review. The certification in both cases was
granted by the U.S. Court of Appeals for the Eleventh Circuit and
the appeals were consolidated. The appeal in Burr was dismissed
for lack of prosecution, and the case was ultimately dismissed on
statute of limitations grounds.
In July 2010, the Eleventh Circuit ruled in B. Brown that, as a
matter of Florida law, plaintiffs do not have an unlimited right to
use the findings from the original Engle trial to meet their burden
of establishing the elements of their claims at trial. The Eleventh
Circuit did not reach the issue of whether the use of the Engle
findings violates defendants’ due process rights. Rather, the court
held that plaintiffs may only use the findings to establish those
specific facts, if any, that they demonstrate with a reasonable
degree of certainty were actually decided by the original Engle
jury. The Eleventh Circuit remanded the case to the district court
to determine what specific factual findings the Engle jury actually
made.
After the remand of B. Brown, several state appellate rulings
superseded the Eleventh Circuit’s ruling on Florida state law.
These cases include Martin, a case against R.J. Reynolds in
Escambia County, and J. Brown, a case against R.J. Reynolds in
Broward County. In December 2011, petitions for writ of
certiorari were filed with the United States Supreme Court by
R.J. Reynolds in Campbell, Martin, Gray and Hall and by PM
USA and Liggett Group in Campbell. The United States Supreme
Court denied defendants’ certiorari petitions in March 2012.
In Douglas, in March 2012, the Florida Second District Court
of Appeal issued a decision affirming the judgment of the trial
court in favor of the plaintiff and upholding the use of the Engle
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jury findings with respect to strict liability claims but certified to
the Florida Supreme Court the question of whether granting res
judicata effect to the Engle jury findings violates defendants’
federal due process rights. In March 2013, the Florida Supreme
Court affirmed the final judgment entered in favor of plaintiff
upholding the use of the Engle jury findings with respect to strict
liability and negligence claims. PM USA filed its petition for writ
of certiorari with the United States Supreme Court in August
2013, which the court denied in October 2013.
Meanwhile, in the Waggoner case, the U.S. District Court for
the Middle District of Florida ruled in December 2011 that
application of the Engle findings to establish the wrongful
conduct elements of plaintiffs’ claims consistent with Martin or J.
Brown did not violate defendants’ due process rights. PM USA
and the other defendants sought appellate review of the due
process ruling. In February 2012, the district court denied the
motion for interlocutory appeal, but did apply the ruling to all
active pending federal Engle progeny cases. As a result, R.J.
Reynolds appealed the rulings in the Walker and Duke cases to the
Eleventh Circuit, which ultimately rejected the due process
defense. In March 2014, R.J. Reynolds filed petitions for writ of
certiorari to the United States Supreme Court in the Walker and
Duke cases, as well as in J. Brown. Defendants filed petitions for
writ of certiorari in eight other Engle progeny cases that were
tried in Florida state courts, including one case, Barbanell, in
which PM USA was the defendant. In these eight petitions,
defendants asserted questions similar to those in Walker, Duke
and J. Brown. In June 2014, the United States Supreme Court
denied defendants’ petitions for writ of certiorari in all 11 cases.
In Graham, an Engle progeny case against PM USA and R.J.
Reynolds on appeal to the U.S. Court of Appeals for the Eleventh
Circuit, defendants argued that the Engle progeny plaintiffs’
product liability claims are impliedly preempted by federal law.
In April 2015, the U.S. Court of Appeals for the Eleventh Circuit
found in favor of defendants on the basis of federal preemption,
reversing the trial court’s denial of judgment as a matter of law.
Also in April 2015, plaintiff filed a petition for rehearing en banc,
which the Eleventh Circuit granted on January 21, 2016. On
January 6, 2016, in Marotta, a case against R.J. Reynolds on
appeal to the Florida Fourth District Court of Appeal, the court
rejected R.J. Reynolds’s federal preemption defense, but noted the
conflict with Graham and certified the preemption question to the
Florida Supreme Court.
In Searcy, an Engle progeny case against PM USA and R.J.
Reynolds on appeal to the Eleventh Circuit, defendants argued
that application of the Engle findings to the Engle progeny
plaintiffs’ concealment and conspiracy claims violated
defendants’ due process rights. The appeal is pending.
In Soffer, an Engle progeny case against R.J. Reynolds, the
Florida First District Court of Appeal held that Engle progeny
plaintiffs can recover punitive damages only on their intentional
tort claims. In February 2014, the Florida Supreme Court
accepted jurisdiction over plaintiff’s appeal from the Florida First
District Court of Appeal’s holding and heard oral argument in
December 2014.
In Ciccone, an Engle progeny case against R.J. Reynolds, the
Florida Fourth District Court of Appeal held that Engle progeny
plaintiffs could establish class membership by showing that they
developed symptoms during the Engle class period that could, in
hindsight, be attributed to their smoking-related disease. The
court certified a conflict with Castleman, a Florida First District
Court of Appeal decision, which held that manifestation requires
Engle progeny plaintiffs to have been aware during the class
period that they had a disease caused by smoking in order to
establish class membership. The Florida Supreme Court accepted
jurisdiction in the Ciccone case in June 2014 and heard oral
argument in December 2014.
Florida Bond Statute: In June 2009, Florida amended its
existing bond cap statute by adding a $200 million bond cap that
applies to all state Engle progeny lawsuits in the aggregate and
establishes individual bond caps for individual Engle progeny
cases in amounts that vary depending on the number of judgments
in effect at a given time. Plaintiffs in three state Engle progeny
cases against R.J. Reynolds in Alachua County, Florida
(Alexander, Townsend and Hall) and one case in Escambia
County (Clay) challenged the constitutionality of the bond cap
statute. The Florida Attorney General intervened in these cases in
defense of the constitutionality of the statute.
Trial court rulings were rendered in Clay, Alexander,
Townsend and Hall rejecting the plaintiffs’ bond cap statute
challenges in those cases. The plaintiffs unsuccessfully appealed
these rulings. In Alexander, Clay and Hall, the District Court of
Appeal for the First District of Florida affirmed the trial court
decisions and certified the decision in Hall for appeal to the
Florida Supreme Court, but declined to certify the question of the
constitutionality of the bond cap statute in Clay and Alexander.
The Florida Supreme Court granted review of the Hall decision,
but, in September 2012, the court dismissed the appeal as moot.
In October 2012, the Florida Supreme Court denied the plaintiffs’
rehearing petition. In August 2013, in Calloway, discussed
further above, plaintiff filed a motion in the trial court to
determine the sufficiency of the bond posted by defendants on the
ground that the bond cap statute is unconstitutional, which was
denied.
No federal court has yet addressed the constitutionality of the
bond cap statute or the applicability of the bond cap to Engle
progeny cases tried in federal court.
Other Smoking and Health Class Actions
Since the dismissal in May 1996 of a purported nationwide class
action brought on behalf of allegedly addicted smokers, plaintiffs
have filed numerous putative smoking and health class action
suits in various state and federal courts. In general, these cases
purport to be brought on behalf of residents of a particular state or
states (although a few cases purport to be nationwide in scope)
and raise addiction claims and, in many cases, claims of physical
injury as well.
Class certification has been denied or reversed by courts in
60 smoking and health class actions involving PM USA in
Arkansas (1), California (1), the District of Columbia (2), Florida
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(2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1),
Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New
York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1),
Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).
As of January 26, 2016, PM USA and Altria Group, Inc. are
named as defendants, along with other cigarette manufacturers, in
seven class actions filed in the Canadian provinces of Alberta,
Manitoba, Nova Scotia, Saskatchewan, British Columbia and
Ontario. In Saskatchewan, British Columbia (two separate cases)
and Ontario, plaintiffs seek class certification on behalf of
individuals who suffer or have suffered from various diseases,
including chronic obstructive pulmonary disease, emphysema,
heart disease or cancer, after smoking defendants’ cigarettes. In
the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs
seek certification of classes of all individuals who smoked
defendants’ cigarettes. See Guarantees and Other Similar
Matters below for a discussion of the Distribution Agreement
between Altria Group, Inc. and PMI that provides for indemnities
for certain liabilities concerning tobacco products.
Medical Monitoring Class Actions
In medical monitoring actions, plaintiffs seek to recover the cost
for, or otherwise the implementation of, court-supervised
programs for ongoing medical monitoring purportedly on behalf
of a class of individual plaintiffs. Plaintiffs in these cases seek to
impose liability under various product-based causes of action and
the creation of a court-supervised program providing members of
the purported class Low Dose CT (“LDCT”) scanning in order to
identify and diagnose lung cancer. Plaintiffs in these cases do not
seek punitive damages, although plaintiffs in Donovan have
sought permission from the court to seek to treble any damages
awarded, which the court denied. The future defense of these
cases may be negatively impacted by evolving medical standards
and practice.
One medical monitoring class action is currently pending
against PM USA. In Donovan, filed in December 2006 in the
U.S. District Court for the District of Massachusetts, plaintiffs
purportedly brought the action on behalf of the state’s residents
who are: age 50 or older; have smoked the Marlboro brand for 20
pack-years or more; and have neither been diagnosed with lung
cancer nor are under investigation by a physician for suspected
lung cancer. The Supreme Judicial Court of Massachusetts, in
answering questions certified to it by the district court, held in
October 2009 that under certain circumstances state law
recognizes a claim by individual smokers for medical monitoring
despite the absence of an actual injury. The court also ruled that
whether or not the case is barred by the applicable statute of
limitations is a factual issue to be determined at trial. The case
was remanded to federal court for further proceedings. In June
2010, the district court granted in part the plaintiffs’ motion for
class certification, certifying the class as to plaintiffs’ claims for
breach of implied warranty and violation of the Massachusetts
Consumer Protection Act, but denying certification as to
plaintiffs’ negligence claim. In July 2010, PM USA petitioned the
U.S. Court of Appeals for the First Circuit for appellate review of
the class certification decision. The petition was denied in
September 2010. As a remedy, plaintiffs have proposed a 28-year
medical monitoring program with a cost in excess of $190
million. In October 2011, PM USA filed a motion for class
decertification, which motion was denied in March 2012. In
February 2013, the district court amended the class definition to
extend to individuals who satisfy the class membership criteria
through February 26, 2013, and to exclude any individual who
was not a Massachusetts resident as of February 26, 2013.
Trial began January 26, 2016 and will take place in multiple
phases. Phase I will address liability. To the extent a Phase II is
necessary, it would be tried to the court and address common
questions of remedies and costs. In July 2015, both parties filed
various motions relating to Phase I, including motions for partial
summary judgment and to exclude certain evidence. In October
2015, the district court granted PM USA’s motion for partial
summary judgment holding that e-vapor products may not be
deemed an alternative design for ordinary cigarettes.
Health Care Cost Recovery Litigation
Overview: In the health care cost recovery litigation,
governmental entities seek reimbursement of health care cost
expenditures allegedly caused by tobacco products and, in some
cases, of future expenditures and damages. Relief sought by
some but not all plaintiffs includes punitive damages, multiple
damages and other statutory damages and penalties, injunctions
prohibiting alleged marketing and sales to minors, disclosure of
research, disgorgement of profits, funding of anti-smoking
programs, additional disclosure of nicotine yields, and payment of
attorney and expert witness fees.
The claims asserted include the claim that cigarette
manufacturers were “unjustly enriched” by plaintiffs’ payment of
health care costs allegedly attributable to smoking, as well as
claims of indemnity, negligence, strict liability, breach of express
and implied warranty, violation of a voluntary undertaking or
special duty, fraud, negligent misrepresentation, conspiracy,
public nuisance, claims under federal and state statutes governing
consumer fraud, antitrust, deceptive trade practices and false
advertising, and claims under federal and state anti-racketeering
statutes.
Defenses raised include lack of proximate cause, remoteness
of injury, failure to state a valid claim, lack of benefit, adequate
remedy at law, “unclean hands” (namely, that plaintiffs cannot
obtain equitable relief because they participated in, and benefited
from, the sale of cigarettes), lack of antitrust standing and injury,
federal preemption, lack of statutory authority to bring suit and
statutes of limitations. In addition, defendants argue that they
should be entitled to “set off” any alleged damages to the extent
the plaintiffs benefit economically from the sale of cigarettes
through the receipt of excise taxes or otherwise. Defendants also
argue that these cases are improper because plaintiffs must
proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as
an insurer) can seek recovery of health care costs from a third
party solely by “standing in the shoes” of the injured party.
Defendants argue that plaintiffs should be required to bring any
actions as subrogees of individual health care recipients and
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should be subject to all defenses available against the injured
party.
Although there have been some decisions to the contrary,
most judicial decisions in the United States have dismissed all or
most health care cost recovery claims against cigarette
manufacturers. Nine federal circuit courts of appeals and eight
state appellate courts, relying primarily on grounds that plaintiffs’
claims were too remote, have ordered or affirmed dismissals of
health care cost recovery actions. The United States Supreme
Court has refused to consider plaintiffs’ appeals from the cases
decided by five circuit courts of appeals.
Individuals and associations have also sued in purported class
actions or as private attorneys general under the Medicare as
Secondary Payer (“MSP”) provisions of the Social Security Act to
recover from defendants Medicare expenditures allegedly
incurred for the treatment of smoking-related diseases. Cases
were brought in New York (2), Florida (2) and Massachusetts (1).
All were dismissed by federal courts.
In addition to the cases brought in the United States, health
care cost recovery actions have also been brought against tobacco
industry participants, including PM USA and Altria Group, Inc.,
in Israel (dismissed), the Marshall Islands (dismissed) and Canada
(10), and other entities have stated that they are considering filing
such actions.
In September 2005, in the first of several health care cost
recovery cases filed in Canada, the Canadian Supreme Court
ruled that legislation passed in British Columbia permitting the
lawsuit is constitutional, and, as a result, the case, which had
previously been dismissed by the trial court, was permitted to
proceed. PM USA’s and other defendants’ challenge to the
British Columbia court’s exercise of jurisdiction was rejected by
the Court of Appeals of British Columbia and, in April 2007, the
Supreme Court of Canada denied review of that decision.
Since the beginning of 2008, the Canadian Provinces of
British Columbia, New Brunswick, Ontario, Newfoundland and
Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince
Edward Island and Nova Scotia have brought health care
reimbursement claims against cigarette manufacturers. PM USA
is named as a defendant in the British Columbia and Quebec
cases, while both Altria Group, Inc. and PM USA are named as
defendants in the New Brunswick, Ontario, Newfoundland and
Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward
Island and Nova Scotia cases. The Nunavut Territory and
Northwest Territory have passed similar legislation. See
Guarantees and Other Similar Matters below for a discussion of
the Distribution Agreement between Altria Group, Inc. and PMI
that provides for indemnities for certain liabilities concerning
tobacco products.
Settlements of Health Care Cost Recovery Litigation: In
November 1998, PM USA and certain other United States tobacco
product manufacturers entered into the 1998 Master Settlement
Agreement (the “MSA”) with 46 states, the District of Columbia,
Puerto Rico, Guam, the United States Virgin Islands, American
Samoa and the Northern Marianas to settle asserted and
unasserted health care cost recovery and other claims. PM USA
and certain other United States tobacco product manufacturers
had previously entered into agreements to settle similar claims
brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the “State Settlement Agreements”). The State
Settlement Agreements require that the original participating
manufacturers or “OPMs” (PM USA, R.J. Reynolds and
Lorillard) make annual payments of approximately $9.4 billion,
subject to adjustments for several factors, including inflation,
market share and industry volume. R.J. Reynolds has since
acquired Lorillard with the result that PM USA and R.J. Reynolds
are the two remaining OPMs. In addition, the original
participating manufacturers are required to pay settling plaintiffs’
attorneys’ fees, subject to an annual cap of $500 million. For the
years ended December 31, 2015, 2014 and 2013, the aggregate
amount recorded in cost of sales with respect to the State
Settlement Agreements and the Fair and Equitable Tobacco
Reform Act of 2004 (“FETRA”) was approximately $4.5 billion,
$4.6 billion and $4.2 billion, respectively. The 2015 amount
included a reduction to cost of sales of approximately $126
million related to the New York NPM Adjustment settlement
discussed below partially offset by an increase to cost of sales of
approximately $29 million as a result of the denial by the
Supreme Court of Pennsylvania of PM USA’s petition for review
of the intermediate appellate court ruling discussed below. The
2014 and 2013 amounts included a reduction to cost of sales of
approximately $43 million and $664 million, respectively, related
to the NPM Adjustment Items discussed below.
The State Settlement Agreements also include provisions
relating to advertising and marketing restrictions, public
disclosure of certain industry documents, limitations on
challenges to certain tobacco control and underage use laws,
restrictions on lobbying activities and other provisions.
NPM Adjustment Disputes: PM USA is participating in
proceedings regarding potential downward adjustments (the
“NPM Adjustment”) to MSA payments made by manufacturers
that are signatories to the MSA (the “participating manufacturers”
or “PMs”) for 2003-2014. The NPM Adjustment is a reduction in
MSA payments that applies if the PMs collectively lose at least a
specified level of market share to non-participating manufacturers
(“NPMs”) between 1997 and the year at issue, subject to certain
conditions and defenses. The independent auditor appointed
under the MSA calculates the maximum amount, if any, of the
NPM Adjustment for any year in respect of which such NPM
Adjustment is potentially applicable.
2003-2014 NPM Adjustment Disputes - Settlement with 24 States
and Territories and Settlement with New York: PM USA has
settled the NPM Adjustment disputes for the years 2003-2012
with 24 of the 52 MSA states and territories (these 24 states and
territories are referred to as the “signatory states,” and the
remaining MSA states and territories are referred to as the “non-
signatory states”). Pursuant to the settlement with these 24
signatory states, PM USA has received a total of $599 million for
2003-2012 in the form of reductions to its MSA payments in
2013, 2014 and 2015.
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PM USA recorded $519 million of the $599 million as a
reduction to cost of sales that increased its reported pre-tax
earnings by $483 million and $36 million in the first quarter of
2013 and second quarter of 2013, respectively. The remainder of
the $599 million consists of $80 million attributable to two states
that joined the settlement after having been found subject to the
2003 NPM Adjustment by an arbitration panel in the third quarter
of 2013, as discussed below. As a result of the arbitration panel’s
findings, however, PM USA had already recorded $54 million in
pre-tax earnings in respect of those two states for the 2003 NPM
Adjustment before they joined the settlement, leaving an
additional $26 million to be recorded when they joined the
settlement. The $54 million already recorded consisted of $37
million recorded as a reduction to cost of sales and $17 million
recorded as interest income. Because the $80 million settlement
recovery would all be recorded as a reduction to cost of sales,
upon these two states’ joinder of the settlement in the second
quarter of 2014, PM USA recorded a further $43 million
reduction to cost of sales while also recording a $17 million
reduction in interest income to reverse the earlier recording of
interest income in that amount. The result was a net increase in
reported pre-tax earnings of $26 million in the second quarter of
2014.
In addition, the settlement provides that the NPM Adjustment
provision will be revised and streamlined as to the signatory states
for the years after 2012. Under the revised provision, the 2013
and 2014 NPM Adjustments are “transition years,” for which the
PMs receive specified payments. PM USA has already received
$35 million for the 2013 transition year pursuant to this revised
provision in the form of a reduction to its MSA payment in 2014,
resulting in a reduction to cost of sales in the first quarter of 2014.
PM USA also received an additional $3 million for the 2013
transition year as a result of the two additional states joining the
settlement in the form of a reduction to its MSA payment in 2015.
In addition, PM USA received $41 million for the 2014 transition
year in the form of a reduction to its MSA payment in 2015. The
original participating manufacturers have agreed that the amounts
they receive under the settlement for the transition years and
subsequent years will be allocated among them pursuant to a
formula that modifies the MSA allocation formula in a manner
favorable to PM USA, although the extent to which it remains
favorable to PM USA will depend upon future developments.
Many of the non-signatory states objected to the settlement
before the arbitration panel hearing the 2003 NPM Adjustment
dispute. In March 2013, the panel issued a stipulated partial
settlement and award (the “Stipulated Award”) rejecting the
objections and permitting the settlement to proceed. In the
Stipulated Award, the arbitration panel also ruled that the total
2003 NPM Adjustment would be reduced pro rata by the
aggregate allocable share of the signatory states to determine the
maximum amount of the 2003 NPM Adjustment potentially
available from the non-signatory states whose diligent
enforcement claims the PMs continued to contest (the “pro rata
judgment reduction”).
Fourteen of the non-signatory states filed motions in their
state courts to vacate and/or modify the Stipulated Award in
whole or part. Decisions by the Pennsylvania, Missouri and
Maryland courts on such motions, and the subsequent appeals of
those rulings, are discussed below. One state’s motion was denied
without an appeal by the state. Another state’s motions remain
pending in its state trial court. As for the remaining states, rulings
rejecting their motions to vacate the Stipulated Award have been
affirmed on appeal, or the motions have been voluntarily
dismissed or stayed pending further state action.
In October 2015, PM USA, along with the other MSA
participating manufacturers, settled the 2004-2014 NPM
Adjustment disputes with New York. The New York settlement is
separate from the settlement with the 24 signatory states and is
different from that settlement in certain respects. Pursuant to the
New York settlement, PM USA expects to receive approximately
$126 million for 2004-2014 in the form of a reduction to its MSA
payment in 2016. This amount is subject to verification by the
MSA independent auditor. PM USA recorded $126 million as a
reduction to cost of sales in the third quarter of 2015 to reflect this
new information in its estimate of MSA expenses related to prior
years. In addition, the New York settlement provides that the
NPM Adjustment provision will be revised as to New York for the
years after 2014. The revised provision with respect to NPM
cigarettes on which New York Excise Tax is paid is largely
similar to the revised provision in the settlement with the 24
signatory states. As to other NPM cigarettes, the New York
settlement provides that, in lieu of the NPM Adjustment provision
for years after 2014, New York will make annual payments tied to
the number of NPM cigarettes on which New York did not collect
New York Excise Tax that were sold on or through Native
American reservations located in New York (or otherwise met the
standard in the settlement agreement) during the year at issue to
New York consumers. These annual payments will be made in
the form of reductions to future MSA payments by the
participating manufacturers, beginning with the MSA payment in
2017. The OPMs have agreed that the amounts they receive
under the New York settlement for the years after 2014 will be
allocated among them pursuant to a formula that modifies the
MSA allocation formula in a manner favorable to PM USA,
although the extent to which it remains favorable to PM USA will
depend upon future developments. Under the New York
settlement, in return for the payments described above and other
consideration described in the New York settlement, the MSA
participating manufacturers have released New York from the
NPM Adjustment provision for all years except as provided in the
New York settlement.
2003-2014 NPM Adjustment Disputes - Continuing Disputes with
Non-Signatory States other than New York: PM USA has
continued to pursue the NPM Adjustments for 2003 and
subsequent years with respect to the non-signatory states. Under
the MSA, once all conditions for the NPM Adjustment for a
particular year are met (including the condition that the
disadvantages of the MSA were a “significant factor” contributing
to the PMs’ collective loss of market share), each state may avoid
an NPM Adjustment to its share of the PMs’ MSA payments for
that year by establishing that it diligently enforced a qualifying
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escrow statute during the entirety of that year. Such a state’s
share of the NPM Adjustment would then be reallocated to any
states that are found not to have diligently enforced for that year.
For 2003-2014, all conditions for the NPM Adjustment have been
met, either by determination or agreement among the parties
(although the parties’ agreement provides that the “significant
factor” condition for 2013 and 2014 will become effective in
February 2016 and February 2017), respectively.
2003 NPM Adjustment. With one exception (Montana), the
courts have ruled that the states’ claims of diligent enforcement
are to be submitted to arbitration. PM USA and other PMs
entered into an agreement with most of the MSA states and
territories concerning the 2003 NPM Adjustment, under which
such states and territories would receive a partial liability
reduction of 20% for the 2003 NPM Adjustment in the event the
arbitration panel determined that they did not diligently enforce
during 2003. The Montana state courts ruled that Montana may
litigate its diligent enforcement claims in state court, rather than
in arbitration. In June 2012, the PMs and Montana entered a
consent decree pursuant to which Montana would not be subject
to the 2003 NPM Adjustment.
In September 2013, the arbitration panel issued rulings
regarding the 15 states and territories whose diligent enforcement
the PMs contested that had not as of that time joined the
settlement, ruling that six of them (Indiana, Kentucky, Maryland,
Missouri, New Mexico and Pennsylvania) did not diligently
enforce during 2003 and that nine of them did. Based on this
ruling, the PMs were entitled to receive from the six non-diligent
states the entire 2003 NPM Adjustment remaining after the pro
rata judgment reduction. PM USA believed it was entitled to
receive an NPM Adjustment for 2003 based on this ruling, after
reflecting the 20% partial liability reduction noted above, of
approximately $145 million. PM USA recorded this $145 million
as a reduction to cost of sales, which increased its reported pre-tax
earnings in the third quarter of 2013. In addition, PM USA
believed it would be entitled to interest on this amount of
approximately $89 million. PM USA recorded $64 million of this
amount as interest income, which reduced interest and other debt
expense, net in the first quarter of 2014, but did not yet record the
remaining $25 million based on its assessment of a certain dispute
concerning interest discussed below.
After PM USA recorded these amounts, two of the six non-
diligent states (Indiana and Kentucky) joined the settlement and
became signatory states. Those two states account for (i) $37
million of the $145 million NPM Adjustment for 2003 that PM
USA recorded and (ii) $17 million of the interest that PM USA
recorded. PM USA has retained those amounts from the two
states, and has received additional amounts as part of the
settlement recoveries for the 2003-2012 NPM Adjustment
disputes described above. The remaining four states account for
approximately (i) $108 million of the $145 million 2003 NPM
Adjustment that PM USA recorded and (ii) $66 million of the $89
million of interest to which PM USA believes it would be entitled
on the $145 million (and $47 million of the $64 million of interest
that PM USA recorded). Each of these four states has filed a
motion in its state court to (i) vacate the panel’s ruling as to its
diligence and (ii) to modify the pro rata judgment reduction and
to substitute a reduction method more favorable to the state.
These four states have also raised a dispute concerning the
independent auditor’s calculation of interest. In addition, another
OPM has raised a dispute concerning the allocation of the interest
and disputed payments account earnings among the OPMs.
In April 2014, a Pennsylvania state trial court denied
Pennsylvania’s motion to vacate the arbitration panel’s ruling that
Pennsylvania had not diligently enforced, but granted
Pennsylvania’s motion to modify, with respect to Pennsylvania,
the pro rata judgment reduction. In April 2015, a Pennsylvania
intermediate appellate court affirmed the trial court’s
modification, with respect to Pennsylvania, of the pro rata
judgment reduction. On December 23, 2015, the Supreme Court
of Pennsylvania denied PM USA’s petition for further judicial
review of the Pennsylvania intermediate appellate court decision.
In May 2014, a Missouri state trial court denied Missouri’s
motion to vacate the arbitration panel’s ruling that Missouri had
not diligently enforced, but granted Missouri’s motion to modify,
with respect to Missouri, the pro rata judgment reduction. In
September 2015, however, a Missouri intermediate appellate
court reversed the Missouri state trial court’s ruling that modified
the pro rata judgment reduction, effectively reinstating the
application of that reduction method to Missouri. The Supreme
Court of Missouri granted Missouri’s request for review of the
intermediate appellate court decision. In July 2014, a Maryland
state trial court denied both Maryland’s motion to vacate the
arbitration panel’s ruling that Maryland had not diligently
enforced and Maryland’s motion to vacate or modify the pro rata
judgment reduction. Maryland appealed both decisions. In
October 2015, a Maryland intermediate appellate court reversed
the Maryland trial court’s ruling on the pro rata judgment
reduction method and applied a judgment reduction method that
is more favorable to the state. PM USA is seeking further
discretionary review of this decision of the Maryland intermediate
appellate court. The motions filed by the fourth state, New
Mexico, remain pending in its state trial court.
As a result of the Pennsylvania state trial court ruling, the
total 2014 MSA payment credit PM USA received on account of
the 2003 NPM Adjustment from the four states was reduced from
$108 million to $79 million, and the interest PM USA received
from the four states was $48 million rather than the $66 million in
interest to which PM USA believed it would be entitled from
those four states. As a result of the denial by the Supreme Court
of Pennsylvania of PM USA’s petition for review of the
intermediate appellate court ruling on the modification of the pro
rata judgment reduction method, PM USA reversed $29 million
of the reduction to cost of sales and $13 million of the interest
income that had been previously recorded in respect of
Pennsylvania for the 2003 NPM Adjustment, which reduced its
reported pre-tax earnings by approximately $42 million in the
fourth quarter of 2015. Because the Missouri state trial court
ruling post-dated PM USA’s April 2014 MSA payment, that
ruling did not reduce the credit that PM USA received against that
payment. If Missouri is successful on further judicial review of
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the Missouri intermediate appellate court’s ruling reversing the
Missouri trial court ruling, PM USA will be required to return
approximately $12 million of the 2003 NPM Adjustment and $7
million of the interest it received (in each case subject to
confirmation by the independent auditor), plus applicable interest,
and would need to make corresponding reversals to amounts
previously recorded. In connection with its appeal of the
Missouri state trial court’s ruling, PM USA posted a bond in the
amount of $22 million, which will remain in place despite the
reversal of the Missouri state trial court’s ruling by the
intermediate appellate court until all appeals are exhausted.
Because the Maryland intermediate appellate court ruling post-
dated PM USA’s April 2014 MSA payment, that ruling did not
reduce the credit that PM USA received against that payment. If
PM USA is not successful in obtaining further discretionary
review of the Maryland intermediate appellate court ruling, or if
PM USA is not successful in any further discretionary review that
may be granted, it will be required to return approximately $12
million of the 2003 NPM Adjustment and $7 million of the
interest it received (plus interest on those amounts) and would
need to make corresponding reversals to amounts previously
recorded. In addition, the other litigation and disputes discussed
above could further reduce PM USA’s recovery on the 2003 NPM
Adjustment or recovery of interest and potentially require PM
USA to return amounts previously received and/or reverse
amounts previously recorded. No assurance can be given that the
outcome of Missouri’s appeal to the Supreme Court of Missouri
of the Missouri intermediate appellate court decision, PM USA’s
request for discretionary review of the Maryland intermediate
appellate decision (or the outcome of any further discretionary
review that may be granted) or the other litigation and disputes
discussed above will be resolved in a manner favorable to PM
USA.
2004-2014 NPM Adjustments. Proceedings regarding state
diligent enforcement claims for 2004-2014 have not yet been
scheduled. PM USA believes that the MSA requires these claims
to be determined in a multi-state arbitration, although a number of
non-signatory states have filed motions in their state courts
contending that the claims are to be determined in separate
arbitrations for individual states or that there is no arbitrable
dispute for 2004. In September 2015, a Missouri intermediate
appellate court ruled that Missouri was entitled to a single-state
arbitration to determine whether Missouri diligently enforced for
2004. PM USA appealed this ruling, and the Supreme Court of
Missouri granted review. No assurance can be given that the
outcome of such appeal will be favorable to PM USA. On
December 9, 2015, a Wisconsin trial court ruled that Wisconsin
must arbitrate its claim of diligent enforcement for 2004. No
assurance can be given as to when proceedings for 2004-2014
will be scheduled or the precise form those proceedings will take.
In June 2015, PM USA entered into an agreement with 17 of
the non-signatory states to form an arbitration panel to conduct an
arbitration regarding the 2004 NPM Adjustment. Pursuant to that
agreement, in July 2015 PM USA and the 17 states each
appointed its respective side’s arbitrator for that arbitration panel.
On December 29, 2015, the two appointed arbitrators selected the
third arbitrator for a three-arbitrator panel required by the MSA.
Other PMs declined to participate in appointing the arbitrators,
and instead filed motions in courts in each of the 17 states seeking
to compel these states to participate in an arbitration of the 2004
NPM Adjustment dispute between the states and the PMs that
would also include disputes solely between the OPMs regarding
the allocation of NPM Adjustments as between them. Several of
the 17 states and PM USA have filed cross-motions objecting to
the motions filed by the other PMs and seeking to confirm the
arbitrators selected by them in July 2015 as properly selected
pursuant to the MSA to resolve the 2004 NPM Adjustment
dispute between the 17 states and the PMs. This litigation
currently is ongoing. No assurance can be given as to how these
motions and cross-motions ultimately will be resolved, when the
full arbitration panel for 2004 will be empanelled, when that
arbitration will commence or whether that arbitration will include
the disputes between the OPMs regarding allocation of NPM
Adjustments.
The independent auditor has calculated that PM USA’s share
of the maximum potential NPM Adjustments for these years is
(exclusive of interest or earnings): $388 million for 2004, $181
million for 2005, $154 million for 2006, $185 million for 2007,
$250 million for 2008, $211 million for 2009, $218 million for
2010, $166 million for 2011, $211 million for 2012, $219 million
for 2013 and $247 million for 2014. These maximum amounts
will be reduced by a judgment reduction to reflect the settlement
with the signatory states and the New York settlement. The
judgment reduction for the 2004-2014 NPM Adjustments has not
yet been determined. In addition, these maximum amounts may
also be further reduced by other developments, including
agreements that may be entered in the future, disputes that may
arise or recalculation of the NPM Adjustment amounts by the
independent auditor. Further, the maximum amount for 2004 may
also be reduced due to a dispute raised by another OPM regarding
the allocation of the maximum potential 2004 NPM Adjustment
among the OPMs. Finally, PM USA’s recovery of these amounts,
even as reduced, is dependent upon subsequent determinations of
non-signatory states’ diligent enforcement claims. The
availability and amount of any NPM Adjustment for 2004-2014
from the non-signatory states will not be finally determined in the
near term. There is no assurance that the OPMs and other MSA-
participating manufacturers will ultimately receive any
adjustment from the non-signatory states as a result of these
proceedings. PM USA’s receipt of amounts on account of the
2003 NPM Adjustment and interest from non-signatory states
does not provide any assurance that PM USA will receive any
NPM Adjustment amounts (or associated interest or earnings) for
2004 or any subsequent year. PM USA may enter into settlement
discussions regarding the NPM Adjustment disputes with any
non-signatory state if PM USA believes it is in its best interests to
do so.
Other Disputes Under the State Settlement Agreements:
The payment obligations of the tobacco product manufacturers
that are parties to the State Settlement Agreements, as well as the
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allocations of any NPM Adjustments received by them pursuant
to the MSA or the settlements of NPM Adjustment disputes with
certain states described above, may be affected by R.J. Reynolds’s
acquisition of Lorillard and the related divestiture of certain
cigarette brands by R.J. Reynolds to Imperial Tobacco. PM USA
intends carefully to review all calculations reflecting such
payment obligations and allocations, and to determine whether to
dispute any calculation that it believes improperly increases PM
USA’s payment obligations under the State Settlement
Agreements or improperly decreases PM USA’s allocation of
NPM Adjustments received pursuant to the MSA or any such
settlement in a manner inconsistent with the respective applicable
agreements. PM USA can neither predict the amount by which its
payment obligations may be increased or its allocation of NPM
Adjustments decreased, nor provide any assurance that it will be
successful in any such dispute that it may raise.
Other MSA-Related Litigation: Since the MSA’s
inception, NPMs and/or their distributors or customers have filed
a number of challenges to the MSA and related legislation. They
have named as defendants the states and their officials, in an
effort to enjoin enforcement of important parts of the MSA and
related legislation, and/or participating manufacturers, in an effort
to obtain damages. To date, no such challenge has been
successful, and the U.S. Courts of Appeals for the Second, Third,
Fourth, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have
affirmed judgments in favor of defendants in 16 such cases.
Federal Government’s Lawsuit: In 1999, the United States
government filed a lawsuit in the U.S. District Court for the
District of Columbia against various cigarette manufacturers,
including PM USA, and others, including Altria Group, Inc.,
asserting claims under three federal statutes, namely the Medical
Care Recovery Act (“MCRA”), the MSP provisions of the Social
Security Act and the civil provisions of RICO. Trial of the case
ended in June 2005. The lawsuit sought to recover an unspecified
amount of health care costs for tobacco-related illnesses allegedly
caused by defendants’ fraudulent and tortious conduct and paid
for by the government under various federal health care programs,
including Medicare, military and veterans’ health benefits
programs, and the Federal Employees Health Benefits Program.
The complaint alleged that such costs total more than $20 billion
annually. It also sought what it alleged to be equitable and
declaratory relief, including disgorgement of profits that arose
from defendants’ allegedly tortious conduct, an injunction
prohibiting certain actions by defendants, and a declaration that
defendants are liable for the federal government’s future costs of
providing health care resulting from defendants’ alleged past
tortious and wrongful conduct. The case ultimately proceeded
only under the civil provisions of RICO.
The government alleged that disgorgement by defendants of
approximately $280 billion is an appropriate remedy and the trial
court agreed. In February 2005, however, a panel of the U.S.
Court of Appeals for the District of Columbia Circuit held that
disgorgement is not a remedy available to the government under
the civil provisions of RICO. In October 2005, the United States
Supreme Court denied the government’s petition for writ of
certiorari.
In August 2006, the federal trial court entered judgment in
favor of the government. The court held that certain defendants,
including Altria Group, Inc. and PM USA, violated RICO and
engaged in seven of the eight “sub-schemes” to defraud that the
government had alleged. Specifically, the court found that:
defendants falsely denied, distorted and minimized the
significant adverse health consequences of smoking;
defendants hid from the public that cigarette smoking
and nicotine are addictive;
defendants falsely denied that they control the level of
nicotine delivered to create and sustain addiction;
defendants falsely marketed and promoted “low tar/
light” cigarettes as less harmful than full-flavor
cigarettes;
defendants falsely denied that they intentionally
marketed to youth;
defendants publicly and falsely denied that ETS is
hazardous to non-smokers; and
defendants suppressed scientific research.
The court did not impose monetary penalties on defendants,
but ordered the following relief: (i) an injunction against
“committing any act of racketeering” relating to the
manufacturing, marketing, promotion, health consequences or
sale of cigarettes in the United States; (ii) an injunction against
participating directly or indirectly in the management or control
of the Council for Tobacco Research, the Tobacco Institute, or the
Center for Indoor Air Research, or any successor or affiliated
entities of each; (iii) an injunction against “making, or causing to
be made in any way, any material false, misleading, or deceptive
statement or representation or engaging in any public relations or
marketing endeavor that is disseminated to the United States
public and that misrepresents or suppresses information
concerning cigarettes”; (iv) an injunction against conveying any
express or implied health message or health descriptors on
cigarette packaging or in cigarette advertising or promotional
material, including “lights,” “ultra lights” and “low tar,” which
the court found could cause consumers to believe one cigarette
brand is less hazardous than another brand; (v) the issuance of
“corrective statements” in various media regarding the adverse
health effects of smoking, the addictiveness of smoking and
nicotine, the lack of any significant health benefit from smoking
“low tar” or “light” cigarettes, defendants’ manipulation of
cigarette design to ensure optimum nicotine delivery and the
adverse health effects of exposure to environmental tobacco
smoke; (vi) the disclosure on defendants’ public document
websites and in the Minnesota document repository of all
documents produced to the government in the lawsuit or produced
in any future court or administrative action concerning smoking
and health until 2021, with certain additional requirements as to
documents withheld from production under a claim of privilege or
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confidentiality; (vii) the disclosure of disaggregated marketing
data to the government in the same form and on the same
schedule as defendants now follow in disclosing such data to the
Federal Trade Commission (“FTC”) for a period of 10 years;
(viii) certain restrictions on the sale or transfer by defendants of
any cigarette brands, brand names, formulas or cigarette
businesses within the United States; and (ix) payment of the
government’s costs in bringing the action.
Defendants appealed and, in May 2009, a three judge panel
of the Court of Appeals for the District of Columbia Circuit
issued a per curiam decision largely affirming the trial court’s
judgment against defendants and in favor of the government.
Although the panel largely affirmed the remedial order that was
issued by the trial court, it vacated the following aspects of the
order:
its application to defendants’ subsidiaries;
the prohibition on the use of express or implied health
messages or health descriptors, but only to the extent of
extraterritorial application;
its point-of-sale display provisions; and
its application to Brown & Williamson Holdings.
The Court of Appeals panel remanded the case for the trial court
to reconsider these four aspects of the injunction and to
reformulate its remedial order accordingly. Furthermore, the
Court of Appeals panel rejected all of the government’s and
intervenors’ cross-appeal arguments and refused to broaden the
remedial order entered by the trial court. The Court of Appeals
panel also left undisturbed its prior holding that the government
cannot obtain disgorgement as a permissible remedy under RICO.
In July 2009, defendants filed petitions for a rehearing before
the panel and for a rehearing by the entire Court of Appeals.
Defendants also filed a motion to vacate portions of the trial
court’s judgment on the grounds of mootness because of the
passage of the Family Smoking Prevention and Tobacco Control
Act (“FSPTCA”), granting the U.S. Food and Drug
Administration (the “FDA”) broad authority over the regulation
of tobacco products. In September 2009, the Court of Appeals
entered three per curiam rulings. Two of them denied defendants’
petitions for panel rehearing or for rehearing en banc. In the third
per curiam decision, the Court of Appeals denied defendants’
suggestion of mootness and motion for partial vacatur. In
February 2010, PM USA and Altria Group, Inc. filed their
certiorari petitions with the United States Supreme Court. In
addition, the federal government and the intervenors filed their
own certiorari petitions, asking the court to reverse an earlier
Court of Appeals decision and hold that civil RICO allows the
trial court to order disgorgement as well as other equitable relief,
such as smoking cessation remedies, designed to redress
continuing consequences of prior RICO violations. In June 2010,
the United States Supreme Court denied all of the parties’
petitions. In July 2010, the Court of Appeals issued its mandate
lifting the stay of the trial court’s judgment and remanding the
case to the trial court. As a result of the mandate, except for those
matters remanded to the trial court for further proceedings,
defendants are now subject to the injunction discussed above and
the other elements of the trial court’s judgment.
In February 2011, the government submitted its proposed
corrective statements and the trial court referred issues relating to
a document repository to a special master. Defendants filed a
response to the government’s proposed corrective statements and
filed a motion to vacate the trial court’s injunction in light of the
FSPTCA, which motion was denied in June 2011. Defendants
appealed the trial court’s ruling to the U.S. Court of Appeals for
the District of Columbia Circuit. In July 2012, the Court of
Appeals affirmed the district court’s denial of defendants’ motion
to vacate the district court’s injunction.
Remaining issues pending include: (i) the content of the
court-ordered corrective communications and (ii) the
requirements related to point-of-sale signage. In November 2012,
the district court issued its order specifying the content of the
corrective communications described above. The district court’s
order required the parties to engage in negotiations with the
special master regarding implementation of the corrective
communications remedy for television, newspapers, cigarette
pack onserts and websites. In January 2013, defendants filed a
notice of appeal from the order on the content and vehicles of the
corrective communications and a motion to hold the appeal in
abeyance pending completion of the negotiations, which the U.S.
Court of Appeals granted in February 2013. In January 2014, the
parties submitted a motion for entry of a consent order in the
district court, setting forth their agreement on the implementation
details of the corrective communications remedy. The agreement
provides that the “trigger date” for implementation is after the
appeal on the content of the communications has been exhausted.
Also in January 2014, the district court convened a hearing and
ordered further briefing. A number of amici who sought
modification or rejection of the agreement for a variety of reasons
were given leave to appear. In April 2014, the parties filed an
amended proposed consent order and accompanying submission
in the district court seeking entry of a revised agreement on the
implementation details of the corrective communications remedy.
In June 2014, the district court approved the April 2014 proposed
consent order. Also in June 2014, defendants filed a notice of
appeal of the consent order solely for the purpose of perfecting
the U.S. Court of Appeals’ jurisdiction over the pending appeal
relating to the content and vehicles of the corrective
communications and, in July 2014, defendants moved to
consolidate this appeal with the appeal filed in January 2013. The
U.S. Court of Appeals granted the motion to consolidate in
August 2014.
In May 2015, the U.S. Court of Appeals affirmed in part and
reversed in part, concluding that certain portions of the statements
exceeded the district court’s jurisdiction under RICO, but upheld
other portions challenged by defendants. The Court of Appeals
remanded the case to the trial court for further proceedings. In
July 2015, the government filed a petition for panel rehearing,
which the U.S. Court of Appeals denied on August 2015. In
October 2015, the district court ordered further briefing on the
content of the corrective communications reversed by the U.S.
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Court of Appeals and any implementation changes the parties
propose.
court denied plaintiffs’ motion for class certification, concluding
the litigation.
In the second quarter of 2014, Altria Group, Inc. and PM
USA recorded provisions on each of their respective balance
sheets totaling $31 million for the estimated costs of
implementing the corrective communications remedy. This
estimate is subject to change due to several factors, including the
outcome of further proceedings, though Altria Group, Inc. and
PM USA do not expect any change in this estimate to be material.
The consent order approved by the district court in June 2014
did not address the requirements related to point-of-sale signage.
In May 2014, the district court ordered further briefing by the
parties on the issue of corrective statements on point-of-sale
signage, which was completed in June 2014.
In December 2011, the parties to the lawsuit entered into an
agreement as to the issues concerning the document repository.
Pursuant to this agreement, PM USA agreed to deposit an amount
of approximately $3.1 million into the district court in
installments over a five-year period.
“Lights/Ultra Lights” Cases
Overview: Plaintiffs in certain pending matters seek
certification of their cases as class actions and allege, among
other things, that the uses of the terms “Lights” and/or “Ultra
Lights” constitute deceptive and unfair trade practices, common
law or statutory fraud, unjust enrichment or breach of warranty,
and seek injunctive and equitable relief, including restitution and,
in certain cases, punitive damages. These class actions have been
brought against PM USA and, in certain instances, Altria Group,
Inc. or its subsidiaries, on behalf of individuals who purchased
and consumed various brands of cigarettes, including Marlboro
Lights, Marlboro Ultra Lights, Virginia Slims Lights and
Superslims, Merit Lights and Cambridge Lights. Defenses raised
in these cases include lack of misrepresentation, lack of causation,
injury and damages, the statute of limitations, non-liability under
state statutory provisions exempting conduct that complies with
federal regulatory directives, and the First Amendment. As of
January 26, 2016, a total of 11 such cases are pending in various
U.S. state courts.
The Good Case: In May 2006, a federal trial court in Maine
granted PM USA’s motion for summary judgment in Good, a
purported “Lights” class action, on the grounds that plaintiffs’
claims are preempted by the Federal Cigarette Labeling and
Advertising Act (“FCLAA”) and dismissed the case. In
December 2008, the United States Supreme Court ruled that
plaintiffs’ claims are not barred by federal preemption. Although
the Court rejected the argument that the FTC’s actions were so
extensive with respect to the descriptors that the state law claims
were barred as a matter of federal law, the Court’s decision was
limited: it did not address the ultimate merits of plaintiffs’ claim,
the viability of the action as a class action or other state law
issues. The case was returned to the federal court in Maine and
consolidated with other federal cases in the multidistrict litigation
proceeding discussed below. In June 2011, the plaintiffs
voluntarily dismissed the case without prejudice after the district
Federal Multidistrict Proceeding and Subsequent
Developments: Since the December 2008 United States Supreme
Court decision in Good, and through January 26, 2016, 26
purported “Lights” class actions were served upon PM USA and,
in certain cases, Altria Group, Inc. These cases were filed in 15
states, the U.S. Virgin Islands and the District of Columbia. All
of these cases either were filed in federal court or were removed
to federal court by PM USA and were transferred and
consolidated by the Judicial Panel on Multidistrict Litigation
(“JPMDL”) before the U.S. District Court for the District of
Maine for pretrial proceedings (“MDL proceeding”).
In November 2010, the district court in the MDL proceeding
denied plaintiffs’ motion for class certification in four cases,
covering the jurisdictions of California, the District of Columbia,
Illinois and Maine. These jurisdictions were selected by the
parties as sample cases, with two selected by plaintiffs and two
selected by defendants. Plaintiffs sought appellate review of this
decision but, in February 2011, the U.S. Court of Appeals for the
First Circuit denied plaintiffs’ petition for leave to appeal. Later
that year, plaintiffs in 13 cases voluntarily dismissed their cases
without prejudice. In April 2012, the JPMDL remanded the
remaining four cases (Phillips, Tang, Wyatt and Cabbat) back to
the federal district courts in which the suits originated. These
cases were ultimately resolved in a manner favorable to PM USA.
“Lights” Cases Dismissed, Not Certified or Ordered De-
Certified: As of January 26, 2016, in addition to the federal
district court in the MDL proceeding, 19 courts in 20 “Lights”
cases have refused to certify class actions, dismissed class action
allegations, reversed prior class certification decisions or have
entered judgment in favor of PM USA.
Trial courts in Arizona, Hawaii, Illinois, Kansas, New Jersey,
New Mexico, Ohio, Oregon, Tennessee, Washington and
Wisconsin have refused to grant class certification or have
dismissed plaintiffs’ class action allegations. Plaintiffs
voluntarily dismissed a case in Michigan after a trial court
dismissed the claims plaintiffs asserted under the Michigan Unfair
Trade and Consumer Protection Act. Several appellate courts
have issued rulings that either affirmed rulings in favor of Altria
Group, Inc. and/or PM USA or reversed rulings entered in favor
of plaintiffs.
In Florida, an intermediate appellate court overturned an
order by a trial court that granted class certification in Hines. The
Florida Supreme Court denied review in January 2008. The
Supreme Court of Illinois overturned a judgment that awarded
damages to a certified class in the Price case, although plaintiffs
are seeking reinstatement of the judgment. See The Price Case
below for further discussion. In Louisiana, the U.S. Court of
Appeals for the Fifth Circuit dismissed a purported “Lights” class
action (Sullivan) on the grounds that plaintiffs’ claims were
preempted by the FCLAA. In New York, the U.S. Court of
Appeals for the Second Circuit overturned a trial court decision in
Schwab that granted plaintiffs’ motion for certification of a
nationwide class of all U.S. residents that purchased cigarettes in
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the United States that were labeled “Light” or “Lights.” In July
2010, plaintiffs in Schwab voluntarily dismissed the case with
prejudice. In Ohio, the Ohio Supreme Court overturned class
certifications in the Marrone and Phillips cases. Plaintiffs
voluntarily dismissed both cases without prejudice in August
2009, but refiled in federal court as the Phillips case discussed
above. The Supreme Court of Washington denied a motion for
interlocutory review filed by the plaintiffs in the Davies case that
sought review of an order by the trial court that refused to certify
a class. Plaintiffs subsequently voluntarily dismissed the Davies
case with prejudice. In August 2011, the U.S. Court of Appeals
for the Seventh Circuit affirmed the Illinois federal district court’s
dismissal of “Lights” claims brought against PM USA in the
Cleary case. In Curtis, a certified class action, in May 2012, the
Minnesota Supreme Court affirmed the trial court’s entry of
summary judgment in favor of PM USA, concluding this
litigation.
In Lawrence, in August 2012, the New Hampshire Supreme
Court reversed the trial court’s order to certify a class and
subsequently denied plaintiffs’ rehearing petition. In October
2012, the case was dismissed after plaintiffs filed a motion to
dismiss the case with prejudice, concluding this litigation.
State Trial Court Class Certifications: State trial courts
have certified classes against PM USA in several jurisdictions.
Over time, several such cases have been dismissed by the courts
at the summary judgment stage, but others remain pending.
Significant developments in these pending cases include:
Aspinall: In August 2004, the Massachusetts Supreme Judicial
Court affirmed the class certification order. In August 2006, the
trial court denied PM USA’s motion for summary judgment and
granted plaintiffs’ cross-motion for summary judgment on the
defenses of federal preemption and a state law exemption to
Massachusetts’ consumer protection statute. On motion of the
parties, the trial court subsequently reported its decision to deny
summary judgment to the appeals court for review and stayed
further proceedings pending completion of the appellate review.
In March 2009, the Massachusetts Supreme Judicial Court
affirmed the order denying summary judgment to PM USA and
granting the plaintiffs’ cross-motion. In January 2010, plaintiffs
moved for partial summary judgment as to liability claiming
collateral estoppel from the findings in the case brought by the
Department of Justice (see Health Care Cost Recovery Litigation
- Federal Government’s Lawsuit described above). In March
2012, the trial court denied plaintiffs’ motion. In February 2013,
the trial court, upon agreement of the parties, dismissed without
prejudice plaintiffs’ claims against Altria Group, Inc. PM USA is
now the sole defendant in the case. In September 2013, the case
was transferred to the Business Litigation Session of the
Massachusetts Superior Court. Also in September 2013, plaintiffs
filed a motion for partial summary judgment on the scope of
remedies available in the case, which the Massachusetts Superior
Court denied in February 2014, concluding that plaintiffs cannot
obtain disgorgement of profits as an equitable remedy and that
their recovery is limited to actual damages or $25 per class
member if they cannot prove actual damages greater than $25.
Plaintiffs filed a motion asking the trial court to report its
February 2014 ruling to the Massachusetts Appeals Court for
review, which the trial court denied. In March 2014, plaintiffs
petitioned the Massachusetts Appeals Court for review of the
ruling, which the appellate court denied. In August 2015, the trial
court denied various pre-trial motions filed by PM USA,
including a motion for summary judgment on the ground that
plaintiffs have no proof of injury. Trial began in October 2015
and concluded in November 2015. On December 18, 2015, PM
USA filed a motion to decertify the class.
Brown: In June 1997, plaintiffs filed suit in California state court
alleging that domestic cigarette manufacturers, including PM
USA and others, violated California law regarding unfair,
unlawful and fraudulent business practices. In May 2009, the
California Supreme Court reversed an earlier trial court decision
that decertified the class and remanded the case to the trial court.
At that time, the class consisted of individuals who, at the time
they were residents of California, (i) smoked in California one or
more cigarettes manufactured by PM USA that were labeled and/
or advertised with the terms or phrases “light,”
“medium,” “mild,” “low tar,” and/or “lowered tar and nicotine,”
but not including any cigarettes labeled or advertised with the
terms or phrases “ultra light” or “ultra low tar,” and (ii) who were
exposed to defendant’s marketing and advertising activities in
California. Plaintiffs are seeking restitution of a portion of the
costs of “light” cigarettes purchased during the class period and
injunctive relief ordering corrective communications. In
September 2012, at the plaintiffs’ request, the trial court dismissed
all defendants except PM USA from the lawsuit. Trial began in
April 2013. In May 2013 the plaintiffs redefined the class to
include California residents who smoked in California one or
more of defendant’s Marlboro Lights cigarettes between January
1, 1998 and April 23, 2001, and who were exposed to defendant’s
marketing and advertising activities in California. In June 2013,
PM USA filed a motion to decertify the class. Trial concluded in
July 2013. In September 2013, the court issued a final Statement
of Decision, in which the court found that PM USA violated
California law, but that plaintiffs had not established a basis for
relief. On this basis, the court granted judgment for PM USA.
The court also denied PM USA’s motion to decertify the class. In
October 2013, the court entered final judgment in favor of PM
USA. In November 2013, plaintiffs moved for a new trial, which
the court denied. In December 2013, plaintiffs filed a notice of
appeal and PM USA filed a conditional cross-appeal. In February
2014, the trial court awarded PM USA $764,553 in costs and
plaintiffs appealed the costs award. Oral argument occurred in
September 2015 and subsequently the Court of Appeal affirmed
the trial court judgment and dismissed PM USA’s conditional
cross-appeal as moot. The court also affirmed the cost award in
favor of PM USA. On November 6, 2015, plaintiffs filed a
petition for review with the California Supreme Court, which the
court denied on December 9, 2015.
Larsen: In August 2005, a Missouri Court of Appeals affirmed
the class certification order. In December 2009, the trial court
denied plaintiffs’ motion for reconsideration of the period during
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which potential class members can qualify to become part of the
class. The class period remains 1995-2003. In June 2010, PM
USA’s motion for partial summary judgment regarding plaintiffs’
request for punitive damages was denied. In April 2010, plaintiffs
moved for partial summary judgment as to an element of liability
in the case, claiming collateral estoppel from the findings in the
case brought by the Department of Justice (see Health Care Cost
Recovery Litigation - Federal Government’s Lawsuit described
above). The plaintiffs’ motion was denied in December 2010. In
June 2011, PM USA filed various summary judgment motions
challenging the plaintiffs’ claims. In August 2011, the trial court
granted PM USA’s motion for partial summary judgment, ruling
that plaintiffs could not present a damages claim based on
allegations that Marlboro Lights are more dangerous than
Marlboro Reds. The trial court denied PM USA’s remaining
summary judgment motions. Trial in the case began in September
2011 and, in October 2011, the court declared a mistrial after the
jury failed to reach a verdict. In January 2014, the trial court
reversed its prior ruling granting partial summary judgment
against plaintiffs’ “more dangerous” claim and allowed plaintiffs
to pursue that claim. In October 2014, PM USA filed motions to
decertify the class and for partial summary judgment on plaintiffs’
“more dangerous” claim, which the court denied in June 2015.
Re-trial is scheduled to begin on March 2, 2016.
Miner: In June 2007, the United States Supreme Court reversed
the lower court rulings in Miner (formerly known as Watson) that
denied plaintiffs’ motion to have the case heard in a state, as
opposed to federal, trial court. The Supreme Court rejected
defendants’ contention that the case must be tried in federal court
under the “federal officer” statute. Following remand, the case
was removed again to federal court in Arkansas and transferred to
the MDL proceeding discussed above. In November 2010, the
district court in the MDL proceeding remanded the case to
Arkansas state court. In December 2011, plaintiffs voluntarily
dismissed their claims against Altria Group, Inc. without
prejudice. In March 2013, plaintiffs filed a class certification
motion. In November 2013, the trial court granted class
certification. The certified class includes those individuals who,
from November 1, 1971 through June 22, 2010, purchased
Marlboro Lights and Marlboro Ultra Lights for personal
consumption in Arkansas. PM USA filed a notice of appeal of the
class certification ruling to the Arkansas Supreme Court in
December 2013. In February 2015, the Arkansas Supreme Court
affirmed the trial court’s class certification order. In May 2015,
PM USA filed a motion for partial summary judgment seeking to
foreclose any recovery for cigarette purchases prior to 1999, when
a private right of action was added to the consumer protection
statute under which plaintiffs are suing. The trial court denied the
motion in July 2015. Trial is currently scheduled to begin on
August 2, 2016.
Other Developments: In Oregon (Pearson), a state court
denied plaintiffs’ motion for interlocutory review of the trial
court’s refusal to certify a class. In February 2007, PM USA filed
a motion for summary judgment based on federal preemption and
the Oregon statutory exemption. In September 2007, the district
court granted PM USA’s motion based on express preemption
under the FCLAA, and plaintiffs appealed this dismissal and the
class certification denial to the Oregon Court of Appeals. In June
2013, the Oregon Court of Appeals reversed the trial court’s
denial of class certification and remanded to the trial court for
further consideration of class certification. In July 2013, PM USA
filed a petition for reconsideration with the Oregon Court of
Appeals, which was denied in August 2013. PM USA filed its
petition for review to the Oregon Supreme Court in October 2013,
which the court accepted in January 2014. In October 2015, the
Oregon Supreme Court affirmed the trial court’s order denying
class certification, thereby reversing the decision of the Oregon
Court of Appeals. On November 5, 2015, plaintiffs filed a motion
for reconsideration with the Oregon Supreme Court, which the
court denied on December 10, 2015. On December 28, 2015, the
Oregon Supreme Court entered its judgment denying class
certification and remanding the claims of the individual plaintiffs
for further proceedings.
In December 2009, the state trial court in Carroll (formerly
known as Holmes) (pending in Delaware) denied PM USA’s
motion for summary judgment based on an exemption provision
in the Delaware Consumer Fraud Act. In January 2011, the trial
court allowed the plaintiffs to file an amended complaint
substituting class representatives and naming Altria Group, Inc.
and PMI as additional defendants. In February 2013, the trial
court approved the parties’ stipulation to the dismissal without
prejudice of Altria Group, Inc. and PMI, leaving PM USA as the
sole defendant in the case. In March 2015, plaintiffs moved for
class certification and, in July 2015, PM USA filed a summary
judgment motion seeking to dismiss plaintiffs’ claims in their
entirety on preemption grounds.
The Price Case: Trial in Price commenced in state court in
Illinois in January 2003 and, in March 2003, the judge found in
favor of the plaintiff class and awarded $7.1 billion in
compensatory damages and $3.0 billion in punitive damages
against PM USA. In December 2005, the Illinois Supreme Court
reversed the trial court’s judgment in favor of the plaintiffs. In
November 2006, the United States Supreme Court denied
plaintiffs’ petition for writ of certiorari and, in December 2006,
the Circuit Court of Madison County enforced the Illinois
Supreme Court’s mandate and dismissed the case with prejudice.
In December 2008, plaintiffs filed with the trial court a
petition for relief from the final judgment that was entered in
favor of PM USA. Specifically, plaintiffs sought to vacate the
judgment entered by the trial court on remand from the 2005
Illinois Supreme Court decision overturning the verdict on the
ground that the United States Supreme Court’s December 2008
decision in Good demonstrated that the Illinois Supreme Court’s
decision was “inaccurate.” PM USA filed a motion to dismiss
plaintiffs’ petition and, in February 2009, the trial court granted
PM USA’s motion on the basis that the petition was not timely
filed. In March 2009, the Price plaintiffs filed a notice of appeal
with the Fifth Judicial District of the Appellate Court of Illinois.
In February 2011, the intermediate appellate court ruled that the
petition was timely filed and reversed the trial court’s dismissal of
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the plaintiffs’ petition and, in September 2011, the Illinois
Supreme Court declined PM USA’s petition for review. As a
result, the case was returned to the trial court for proceedings on
whether the court should grant the plaintiffs’ petition to reopen
the prior judgment. In February 2012, plaintiffs filed an amended
petition, which PM USA opposed. Subsequently, in responding to
PM USA’s opposition to the amended petition, plaintiffs asked the
trial court to reinstate the original judgment. The trial court
denied plaintiffs’ petition in December 2012. In January 2013,
plaintiffs filed a notice of appeal with the Fifth Judicial District.
In January 2013, PM USA filed a motion asking the Illinois
Supreme Court to immediately exercise its jurisdiction over the
appeal. In February 2013, the Illinois Supreme Court denied PM
USA’s motion. In April 2014, the Fifth Judicial District reversed
and ordered reinstatement of the original $10.1 billion trial court
judgment against PM USA. In May 2014, PM USA filed in the
Illinois Supreme Court a petition for a supervisory order and a
petition for leave to appeal. The filing of the petition for leave to
appeal automatically stayed the Fifth District’s mandate pending
disposition by the Illinois Supreme Court. Also in May 2014,
plaintiffs filed a motion seeking recusal of Justice Karmeier, one
of the Illinois Supreme Court justices, which PM USA opposed.
In September 2014, the Illinois Supreme Court granted PM USA’s
motion for leave to appeal and took no action on PM USA’s
motion for a supervisory order. Justice Karmeier denied
plaintiffs’ motion seeking his recusal. In February 2015, plaintiffs
filed a new motion seeking recusal or disqualification of Justice
Karmeier. In March 2015, the Illinois Supreme Court denied
plaintiffs’ request that it order the disqualification of Justice
Karmeier and referred the recusal request to Justice Karmeier to
decide. On November 4, 2015, the Illinois Supreme Court
vacated the Fifth Judicial District’s decision, finding that the
plaintiffs’ petition was improper, and dismissed the cause of
action without prejudice to plaintiffs to file a motion to recall the
mandate in the Illinois Supreme Court. On the same day, Justice
Karmeier denied the recusal motion. On November 18, 2015, the
plaintiffs filed motions in the Illinois Supreme Court seeking to
recall the 2005 mandate issued in PM USA’s favor and for recusal
of Justice Karmeier, both of which the court denied on January
11, 2016. On January 22, 2016, plaintiffs filed a petition for writ
of certiorari with the United States Supreme Court on the
question of whether Justice Karmeier should have recused
himself.
In June 2009, the plaintiff in an individual smoker lawsuit
(Kelly) brought on behalf of an alleged smoker of “Lights”
cigarettes in Madison County, Illinois state court filed a motion
seeking a declaration that his claims under the Illinois Consumer
Fraud Act are not (i) barred by the exemption in that statute based
on his assertion that the Illinois Supreme Court’s decision in
Price is no longer good law in light of the decisions by the United
States Supreme Court in Good and Watson, and (ii) preempted in
light of the United States Supreme Court’s decision in Good. In
September 2009, the court granted plaintiff’s motion as to federal
preemption, but denied it with respect to the state statutory
exemption.
Certain Other Tobacco-Related Litigation
Ignition Propensity Cases: PM USA and Altria Group, Inc.
are currently facing litigation alleging that a fire caused by
cigarettes led to individuals’ deaths. In a Kentucky case (Walker),
the federal district court denied plaintiffs’ motion to remand the
case to state court and dismissed plaintiffs’ claims in February
2009. Plaintiffs subsequently filed a notice of appeal. In October
2011, the U.S. Court of Appeals for the Sixth Circuit reversed the
portion of the district court decision that denied remand of the
case to Kentucky state court and remanded the case to Kentucky
state court. The Sixth Circuit did not address the merits of the
district court’s dismissal order. Defendants’ petition for rehearing
with the Sixth Circuit was denied in December 2011. Defendants
filed a renewed motion to dismiss in state court in March 2013.
Based on new evidence, in June 2013, defendants removed the
case for a second time to the U.S. District Court for the Western
District of Kentucky and re-filed their motion to dismiss in June
2013. In July 2013, plaintiffs filed a motion to remand the case to
Kentucky state court, which was granted in March 2014.
False Claims Act Case: PM USA is a defendant in a qui tam
action filed in the U.S. District Court for the District of Columbia
(United States ex rel. Anthony Oliver) alleging violation of the
False Claims Act in connection with sales of cigarettes to the U.S.
military. The relator contends that PM USA violated “most
favored customer” provisions in government contracts and
regulations by selling cigarettes to non-military customers in
overseas markets at more favorable prices than it sold to the U.S.
military exchange services for resale on overseas military bases in
those same markets. The relator has dropped Altria Group, Inc. as
a defendant and has dropped claims related to post-MSA price
increases on cigarettes sold to the U.S. military. In July 2012, PM
USA filed a motion to dismiss, which was granted on
jurisdictional grounds in June 2013, and the case was dismissed
with prejudice. In July 2013, the relator appealed the dismissal to
the U.S. Court of Appeals for the District of Columbia Circuit. In
August 2014, the Court of Appeals reversed the jurisdictional
issue and remanded the case to the district court for further
proceedings, including consideration of PM USA’s alternative
grounds for dismissal. In October 2014, PM USA filed a second
motion to dismiss in the U.S. District Court for the District of
Columbia for lack of subject matter jurisdiction based on issues
left unresolved by the opinion of the Court of Appeals for the
District of Columbia Circuit. In April 2015, the district court
granted PM USA’s second motion to dismiss for lack of subject
matter jurisdiction and again dismissed the case with prejudice.
The relator appealed the latest dismissal to the Court of Appeals
for the District of Columbia Circuit in May 2015. Oral argument
occurred on January 15, 2016 at the U.S. Court of Appeals for the
District of Columbia Circuit.
Argentine Grower Cases: PM USA is a defendant in six
cases (Hupan, Chalanuk, Rodriguez Da Silva, Aranda, Taborda
and Biglia) filed in Delaware state court against multiple
defendants by the parents of Argentine children born with alleged
birth defects. Plaintiffs in these cases allege that they grew
94
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
tobacco in Argentina under contract with Tabacos Norte S.A., an
alleged subsidiary of PMI, and that they and their infant children
were exposed directly and in utero to hazardous herbicides and
pesticides used in the production and cultivation of tobacco.
Plaintiffs seek compensatory and punitive damages against all
defendants. In December 2012, Altria Group, Inc. and certain
other defendants were dismissed from the Hupan, Chalanuk and
Rodriguez Da Silva cases. Altria Group, Inc. and certain other
defendants were dismissed from Aranda, Taborda and Biglia in
May 2013, October 2013 and February 2014, respectively. The
three remaining defendants in the six cases are PM USA, Philip
Morris Global Brands Inc. (a subsidiary of PMI) and Monsanto
Company. Following discussions regarding indemnification for
these cases pursuant to the Distribution Agreement between PMI
and Altria Group, Inc., PMI and PM USA have agreed to resolve
conflicting indemnity demands after final judgments are entered.
See Guarantees and Other Similar Matters below for a discussion
of the Distribution Agreement. In April 2014, all three defendants
in the Hupan case filed motions to dismiss for failure to state a
claim, and PM USA and Philip Morris Global Brands filed
separate motions to dismiss based on the doctrine of forum non
conveniens. All proceedings in the other five cases were stayed
pending the court’s resolution of the motions to dismiss filed in
Hupan. On December 1, 2015, the trial court granted PM USA’s
motion to dismiss on forum non conveniens grounds. Plaintiff
filed a motion for clarification or re-argument on December 7,
2015.
UST Litigation
Claims related to smokeless tobacco products generally fall
within the following categories:
First, UST and/or its tobacco subsidiaries have been named
in certain actions in West Virginia (See In re: Tobacco Litigation
above) brought by or on behalf of individual plaintiffs against
cigarette manufacturers, smokeless tobacco manufacturers and
other organizations seeking damages and other relief in
connection with injuries allegedly sustained as a result of tobacco
usage, including smokeless tobacco products. Included among
the plaintiffs are five individuals alleging use of USSTC’s
smokeless tobacco products and alleging the types of injuries
claimed to be associated with the use of smokeless tobacco
products. USSTC, along with other non-cigarette manufacturers,
has remained severed from such proceedings since December
2001.
Second, UST and/or its tobacco subsidiaries has been named
in a number of other individual tobacco and health suits over
time. Plaintiffs’ allegations of liability in these cases are based on
various theories of recovery, such as negligence, strict liability,
fraud, misrepresentation, design defect, failure to warn, breach of
implied warranty, addiction and breach of consumer protection
statutes. Plaintiffs seek various forms of relief, including
compensatory and punitive damages, and certain equitable relief,
including but not limited to disgorgement. Defenses raised in
these cases include lack of causation, assumption of the risk,
comparative fault and/or contributory negligence, and statutes of
limitations. USSTC is currently named in one such action in
Florida (Vassallo). There is currently no trial date set in this case.
Environmental Regulation
Altria Group, Inc. and its subsidiaries (and former subsidiaries)
are subject to various federal, state and local laws and regulations
concerning the discharge of materials into the environment, or
otherwise related to environmental protection, including, in the
United States: the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act
(commonly known as “Superfund”), which can impose joint and
several liability on each responsible party. Subsidiaries (and
former subsidiaries) of Altria Group, Inc. are involved in several
matters subjecting them to potential costs of remediation and
natural resource damages under Superfund or other laws and
regulations. Altria Group, Inc.’s subsidiaries expect to continue to
make capital and other expenditures in connection with
environmental laws and regulations.
Altria Group, Inc. provides for expenses associated with
environmental remediation obligations on an undiscounted basis
when such amounts are probable and can be reasonably estimated.
Such accruals are adjusted as new information develops or
circumstances change. Other than those amounts, it is not
possible to reasonably estimate the cost of any environmental
remediation and compliance efforts that subsidiaries of Altria
Group, Inc. may undertake in the future. In the opinion of
management, however, compliance with environmental laws and
regulations, including the payment of any remediation costs or
damages and the making of related expenditures, has not had, and
is not expected to have, a material adverse effect on Altria Group,
Inc.’s consolidated results of operations, capital expenditures,
financial position or cash flows.
Guarantees and Other Similar Matters
In the ordinary course of business, certain subsidiaries of Altria
Group, Inc. have agreed to indemnify a limited number of third
parties in the event of future litigation. At December 31, 2015,
Altria Group, Inc. and certain of its subsidiaries (i) had $62
million of unused letters of credit obtained in the ordinary course
of business; (ii) were contingently liable for $21 million of
guarantees, consisting primarily of surety bonds, related to their
own performance; and (iii) had a redeemable noncontrolling
interest of $37 million recorded on its consolidated balance sheet.
In addition, from time to time, subsidiaries of Altria Group, Inc.
issue lines of credit to affiliated entities. These items have not
had, and are not expected to have, a significant impact on Altria
Group, Inc.’s liquidity.
Under the terms of a distribution agreement between Altria
Group, Inc. and PMI (the “Distribution Agreement”), entered into
as a result of Altria Group, Inc.’s 2008 spin-off of its former
subsidiary PMI, liabilities concerning tobacco products will be
allocated based in substantial part on the manufacturer. PMI will
indemnify Altria Group, Inc. and PM USA for liabilities related to
tobacco products manufactured by PMI or contract manufactured
for PMI by PM USA, and PM USA will indemnify PMI for
95
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
liabilities related to tobacco products manufactured by PM USA,
excluding tobacco products contract manufactured for PMI.
Altria Group, Inc. does not have a related liability recorded on its
consolidated balance sheet at December 31, 2015 as the fair value
of this indemnification is insignificant.
As more fully discussed in Note 19. Condensed
Consolidating Financial Information, PM USA has issued
guarantees relating to Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under the Credit
Agreement and amounts outstanding under its commercial paper
program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of
Stag’s Leap Wine Cellars through one of its consolidated
subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in
which Ste. Michelle holds an 85% ownership interest with a 15%
noncontrolling interest held by Antinori California (“Antinori”).
In connection with the acquisition of Stag’s Leap Wine Cellars,
Ste. Michelle entered into a put arrangement with Antinori. The
put arrangement, as later amended, provides Antinori with the
right to require Ste. Michelle to purchase its 15% ownership
interest in Michelle-Antinori at a price equal to Antinori’s initial
investment of $27 million. The put arrangement became
exercisable in September 2010 and has no expiration date. As of
December 31, 2015, the redemption value of the put arrangement
did not exceed the noncontrolling interest balance. Therefore, no
adjustment to the value of the redeemable noncontrolling interest
was recognized on the consolidated balance sheet for the put
arrangement.
The noncontrolling interest put arrangement is accounted for
as mandatorily redeemable securities because redemption is
outside of the control of Ste. Michelle. As such, the redeemable
noncontrolling interest is reported in the mezzanine equity section
on the consolidated balance sheets at December 31, 2015 and
2014.
Note 19. Condensed Consolidating Financial
Information
PM USA, which is a 100% owned subsidiary of Altria Group,
Inc., has guaranteed Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under its Credit
Agreement and amounts outstanding under its commercial paper
program (the “Guarantees”). Pursuant to the Guarantees, PM
USA fully and unconditionally guarantees, as primary obligor, the
payment and performance of Altria Group, Inc.’s obligations
under the guaranteed debt instruments (the “Obligations”), subject
to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the
punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of the Obligations. The liability of PM
USA under the Guarantees is absolute and unconditional
irrespective of: any lack of validity, enforceability or genuineness
of any provision of any agreement or instrument relating thereto;
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other
96
amendment or waiver of or any consent to departure from any
agreement or instrument relating thereto; any exchange, release or
non-perfection of any collateral, or any release or amendment or
waiver of or consent to departure from any other guarantee, for all
or any of the Obligations; or any other circumstance that might
otherwise constitute a defense available to, or a discharge of,
Altria Group, Inc. or PM USA.
The obligations of PM USA under the Guarantees are limited
to the maximum amount as will not result in PM USA’s
obligations under the Guarantees constituting a fraudulent transfer
or conveyance, after giving effect to such maximum amount and
all other contingent and fixed liabilities of PM USA that are
relevant under Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any
similar federal or state law to the extent applicable to the
Guarantees. For this purpose, “Bankruptcy Law” means Title 11,
U.S. Code, or any similar federal or state law for the relief of
debtors.
PM USA will be unconditionally released and discharged
from the Obligations upon the earliest to occur of:
the date, if any, on which PM USA consolidates with or
merges into Altria Group, Inc. or any successor;
the date, if any, on which Altria Group, Inc. or any
successor consolidates with or merges into PM USA;
the payment in full of the Obligations pertaining to such
Guarantees; and
the rating of Altria Group, Inc.’s long-term senior
unsecured debt by Standard & Poor’s of A or higher.
At December 31, 2015, the respective principal 100% owned
subsidiaries of Altria Group, Inc. and PM USA 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.
The following sets forth the condensed consolidating balance
sheets as of December 31, 2015 and 2014, condensed
consolidating statements of earnings and comprehensive earnings
for the years ended December 31, 2015, 2014 and 2013, and
condensed consolidating statements of cash flows for the years
ended December 31, 2015, 2014 and 2013 for Altria Group, Inc.,
PM USA and, collectively, Altria Group, Inc.’s other subsidiaries
that are not guarantors of Altria Group, Inc.’s debt instruments
(the “Non-Guarantor Subsidiaries”). The financial information is
based on Altria Group, Inc.’s understanding of the Securities and
Exchange Commission (“SEC”) interpretation and application of
Rule 3-10 of SEC Regulation S-X.
The financial information may not necessarily be indicative
of results of operations or financial position had PM USA and the
Non-Guarantor Subsidiaries operated as independent entities.
Altria Group, Inc. and PM USA account for investments in their
subsidiaries under the equity method of accounting.
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
_________________________
_________________________
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Condensed Consolidating Balance Sheets
Condensed Consolidating Balance Sheets
_________________________
(in millions of dollars)
(in millions of dollars)
Condensed Consolidating Balance Sheets
____________________________
____________________________
(in millions of dollars)
Altria
____________________________
Altria
PM USA
Group, Inc.
PM USA
Group, Inc.
at December 31, 2015
at December 31, 2015
Assets
Assets
at December 31, 2015
Assets
Cash and cash equivalents
Cash and cash equivalents
Receivables
Receivables
Inventories:
Inventories:
Cash and cash equivalents
Receivables
Inventories:
Total current assets
Total current assets
Leaf tobacco
Leaf tobacco
Other raw materials
Other raw materials
Work in process
Work in process
Leaf tobacco
Finished product
Finished product
Other raw materials
Work in process
Due from Altria Group, Inc. and subsidiaries
Due from Altria Group, Inc. and subsidiaries
Finished product
Deferred income taxes
Deferred income taxes
Other current assets
Other current assets
Due from Altria Group, Inc. and subsidiaries
Deferred income taxes
Property, plant and equipment, at cost
Property, plant and equipment, at cost
Other current assets
Less accumulated depreciation
Less accumulated depreciation
Property, plant and equipment, at cost
Goodwill
Goodwill
Less accumulated depreciation
Other intangible assets, net
Other intangible assets, net
Investment in SABMiller
Goodwill
Investment in SABMiller
Investment in consolidated subsidiaries
Other intangible assets, net
Investment in consolidated subsidiaries
Finance assets, net
Investment in SABMiller
Finance assets, net
Due from Altria Group, Inc. and subsidiaries
Investment in consolidated subsidiaries
Due from Altria Group, Inc. and subsidiaries
Other assets
Other assets
Finance assets, net
Total Assets
Total Assets
Due from Altria Group, Inc. and subsidiaries
Other assets
Total current assets
Total Assets
Consolidated
Consolidated
$
Non-
Non-
Guarantor
Guarantor
Subsidiaries
Subsidiaries
Non-
Guarantor
56
56
Subsidiaries
117
117
56
395
395
117
58
58
439
439
395
328
328
58
1,220
1,220
439
1,807
1,807
328
7
7
1,220
112
112
1,807
3,319
3,319
7
1,775
1,775
112
738
738
3,319
1,037
1,037
1,775
5,285
5,285
738
12,026
12,026
1,037
—
5,285
—
—
12,026
—
1,239
—
1,239
—
—
—
131
131
1,239
23,037 $
$
23,037
—
131
23,037 $
Total
Total
Consolidating
Consolidating
Adjustments
Adjustments
Total
Consolidating
— $
$
— $
$
Adjustments
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,628)
(5,628)
—
(100)
(100)
—
(74)
(74)
(5,628)
(5,802)
(5,802)
(100)
—
—
(74)
—
—
(5,802)
—
—
—
—
—
—
—
—
—
—
—
—
(14,363)
—
(14,363)
—
—
—
(4,790)
(14,363)
(4,790)
(327)
(327)
—
(25,282) $
(25,282) $
(4,790)
(327)
(25,282) $
2,369
Consolidated
2,369
124
124
2,369
957
957
124
181
181
444
444
957
449
449
181
2,031
2,031
444
—
—
449
1,175
1,175
2,031
387
387
—
6,086
6,086
1,175
4,877
4,877
387
2,895
2,895
6,086
1,982
1,982
4,877
5,285
5,285
2,895
12,028
12,028
1,982
5,483
5,285
5,483
—
12,028
—
1,239
5,483
1,239
—
—
—
432
432
1,239
32,535
32,535
—
432
32,535
— $
PM USA
— $
7
7
— $
562
562
7
123
123
5
5
562
121
121
123
811
811
5
3,821
3,821
121
1,268
1,268
811
65
65
3,821
5,972
5,972
1,268
3,102
3,102
65
2,157
2,157
5,972
945
945
3,102
—
—
2,157
2
2
945
—
—
—
2,715
2
2,715
—
—
—
—
2,715
—
536
536
—
10,170 $
$
10,170
—
536
10,170 $
$
$
$
Altria
2,313
Group, Inc.
2,313
—
—
2,313
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
284
284
—
2,597
2,597
—
—
—
284
—
—
2,597
—
—
—
—
—
—
—
—
—
5,483
—
5,483
11,648
—
11,648
—
5,483
—
4,790
11,648
4,790
92
92
—
24,610 $
$
24,610
4,790
92
24,610 $
$
$
$
$
$
$
97
97
97
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
at December 31, 2015
Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities:
Marketing
Employment costs
Settlement charges
Other
Dividends payable
Due to Altria Group, Inc. and subsidiaries
Total current liabilities
Long-term debt
Deferred income taxes
Accrued pension costs
Accrued postretirement health care costs
Due to Altria Group, Inc. and subsidiaries
Other liabilities
Total Liabilities
Contingencies
Redeemable noncontrolling interest
Stockholders’ Equity
Common stock
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses
Cost of repurchased stock
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total stockholders’ equity
Altria
Group, Inc.
PM USA
Non-
Guarantor
Subsidiaries
Total
Consolidating
Adjustments
Consolidated
$
— $
3
— $
104
$
4
293
— $
—
—
18
—
354
1,110
5,427
6,912
12,903
1,547
215
—
—
153
21,730
586
11
3,585
616
—
191
5,093
—
—
—
1,460
—
126
6,679
109
169
5
285
—
10
875
12
4,443
1,062
785
4,790
168
12,135
—
—
—
(174)
—
(5,628)
(5,802)
—
(327)
—
—
(4,790)
—
(10,919)
4
400
695
198
3,590
1,081
1,110
—
7,078
12,915
5,663
1,277
2,245
—
447
29,625
—
—
37
—
37
935
5,813
27,257
(3,280)
(27,845)
2,880
—
2,880
—
3,310
436
(255)
—
3,491
—
3,491
9
11,456
1,099
(1,692)
—
10,872
(7)
10,865
(9)
(14,766)
(1,535)
1,947
—
(14,363)
—
(14,363)
935
5,813
27,257
(3,280)
(27,845)
2,880
(7)
2,873
Total Liabilities and Stockholders’ Equity
$
24,610 $
10,170 $
23,037 $
(25,282) $
32,535
98
at December 31, 2014
Assets
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Due from Altria Group, Inc. and subsidiaries
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation
Goodwill
Other intangible assets, net
Investment in SABMiller
Investment in consolidated subsidiaries
Finance assets, net
Due from Altria Group, Inc. and subsidiaries
Other assets
Total Assets
$
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
Altria
Group, Inc.
PM USA
Non-
Guarantor
Subsidiaries
Total
Consolidating
Adjustments
Consolidated
$
3,281 $
—
3 $
6
37 $
118
— $
—
3,321
124
991
200
429
420
2,040
—
1,143
250
6,878
4,755
2,772
1,983
5,285
12,049
6,183
—
1,614
—
483
34,475
—
—
—
—
—
568
—
54
3,903
—
—
—
—
—
6,183
10,665
—
4,790
148
25,689 $
616
132
4
134
886
3,535
1,190
101
5,721
3,112
2,091
1,021
—
2
—
2,775
—
—
541
10,060 $
375
68
425
286
1,154
1,279
9
122
2,719
1,643
681
962
5,285
12,047
—
—
1,614
—
121
22,748 $
—
—
—
—
—
(5,382)
(56)
(27)
(5,465)
—
—
—
—
—
—
(13,440)
—
(4,790)
(327)
(24,022) $
99
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
_________________________
_________________________
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
(in millions of dollars)
Condensed Consolidating Balance Sheets (Continued)
____________________________
____________________________
(in millions of dollars)
____________________________
Altria
Altria
Group, Inc.
Group, Inc.
PM USA
PM USA
at December 31, 2014
at December 31, 2014
Liabilities
Liabilities
at December 31, 2014
Current portion of long-term debt
Current portion of long-term debt
Liabilities
Accounts payable
Accounts payable
Current portion of long-term debt
Accrued liabilities:
Accrued liabilities:
Accounts payable
Marketing
Marketing
Accrued liabilities:
Employment costs
Employment costs
Marketing
Settlement charges
Settlement charges
Employment costs
Other
Other
Settlement charges
Other
Total current liabilities
Total current liabilities
Total current liabilities
Dividends payable
Dividends payable
Due to Altria Group, Inc. and subsidiaries
Due to Altria Group, Inc. and subsidiaries
Dividends payable
Due to Altria Group, Inc. and subsidiaries
Long-term debt
Long-term debt
Deferred income taxes
Deferred income taxes
Long-term debt
Accrued pension costs
Accrued pension costs
Deferred income taxes
Accrued postretirement health care costs
Accrued postretirement health care costs
Accrued pension costs
Due to Altria Group, Inc. and subsidiaries
Due to Altria Group, Inc. and subsidiaries
Accrued postretirement health care costs
Other liabilities
Other liabilities
Due to Altria Group, Inc. and subsidiaries
Other liabilities
Total Liabilities
Total Liabilities
Contingencies
Contingencies
Total Liabilities
Redeemable noncontrolling interest
Redeemable noncontrolling interest
Contingencies
Stockholders’ Equity
Stockholders’ Equity
Redeemable noncontrolling interest
Common stock
Common stock
Stockholders’ Equity
Additional paid-in capital
Additional paid-in capital
Common stock
Earnings reinvested in the business
Earnings reinvested in the business
Additional paid-in capital
Accumulated other comprehensive losses
Accumulated other comprehensive losses
Earnings reinvested in the business
Cost of repurchased stock
Cost of repurchased stock
Accumulated other comprehensive losses
Cost of repurchased stock
Noncontrolling interests
Noncontrolling interests
Non-
Non-
Guarantor
Guarantor
Subsidiaries
Subsidiaries
Non-
Guarantor
Subsidiaries
Total
Total
Consolidating
Consolidating
Adjustments
Adjustments
Total
Consolidating
Adjustments
$
$
$
$
Altria
Group, Inc.
1,000 $
1,000
18
18
1,000 $
18
—
—
18
18
—
—
—
18
321
321
—
1,028
1,028
321
4,414
4,414
1,028
6,799
6,799
4,414
13,693
13,693
6,799
1,754
1,754
13,693
233
233
1,754
—
—
233
—
—
—
196
196
—
22,675
22,675
196
22,675
—
—
PM USA
— $
— $
118
118
— $
118
505
505
10
10
505
3,495
3,495
10
400
400
3,495
—
—
400
402
402
—
4,930
4,930
402
—
—
4,930
—
—
—
—
—
—
1,608
1,608
—
—
—
1,608
151
151
—
6,689
6,689
151
6,689
—
—
— $
— $
280
280
— $
280
113
113
158
158
113
5
5
158
287
287
5
—
—
287
566
566
—
1,409
1,409
566
—
—
1,409
4,661
4,661
—
779
779
4,661
853
853
779
4,790
4,790
853
156
156
4,790
12,648
12,648
156
12,648
35
35
Consolidated
Consolidated
— $
— $
—
—
— $
—
—
—
—
—
—
—
—
—
(83)
(83)
—
—
—
(83)
(5,382)
(5,382)
—
(5,465)
(5,465)
(5,382)
—
—
(5,465)
(327)
(327)
—
—
—
(327)
—
—
—
(4,790)
(4,790)
—
—
—
(4,790)
(10,582)
(10,582)
—
(10,582)
—
—
Consolidated
1,000
1,000
416
416
1,000
416
618
618
186
186
618
3,500
3,500
186
925
925
3,500
1,028
1,028
925
—
—
1,028
7,673
7,673
—
13,693
13,693
7,673
6,088
6,088
13,693
1,012
1,012
6,088
2,461
2,461
1,012
—
—
2,461
503
503
—
31,430
31,430
503
31,430
35
35
—
935
935
5,735
5,735
935
26,277
26,277
5,735
(2,682)
(2,682)
26,277
(27,251)
(27,251)
(2,682)
3,014
3,014
(27,251)
—
—
3,014
3,014
3,014
—
25,689 $ 10,060 $
25,689
3,014
—
—
—
3,310
3,310
—
402
402
3,310
(341)
(341)
402
—
—
(341)
3,371
3,371
—
—
—
3,371
3,371
3,371
—
3,371
10,060
$
$
35
9
9
10,688
10,688
9
995
995
10,688
(1,623)
(1,623)
995
—
—
(1,623)
10,069
10,069
—
(4)
(4)
10,069
10,065
10,065
(4)
22,748 $
$
22,748
10,065
—
(9)
(9)
(13,998)
(13,998)
(9)
(1,397)
(1,397)
(13,998)
1,964
1,964
(1,397)
—
—
1,964
(13,440)
(13,440)
—
—
—
(13,440)
(13,440)
(13,440)
—
(24,022) $
(24,022) $
(13,440)
35
935
935
5,735
5,735
935
26,277
26,277
5,735
(2,682)
(2,682)
26,277
(27,251)
(27,251)
(2,682)
3,014
3,014
(27,251)
(4)
(4)
3,014
3,010
3,010
(4)
34,475
34,475
3,010
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity
Total stockholders’ equity
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
$
$
Total Liabilities and Stockholders’ Equity
$
25,689 $ 10,060 $
22,748 $
(24,022) $
34,475
100
100
100
$
$
$
for the year ended December 31, 2015
for the year ended December 31, 2015
Net revenues
Net revenues
for the year ended December 31, 2015
Cost of sales
Cost of sales
Net revenues
Excise taxes on products
Excise taxes on products
Cost of sales
Gross profit
Gross profit
Excise taxes on products
Marketing, administration and research costs
Marketing, administration and research costs
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
_________________________
_________________________
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
(in millions of dollars)
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
_____________________________
_____________________________
(in millions of dollars)
_____________________________
Altria
Altria
Group, Inc.
Group, Inc.
— $
Altria
— $
Group, Inc.
—
—
— $
—
—
—
—
—
—
189
189
—
41
41
189
—
—
41
(230)
(230)
—
560
560
(230)
228
228
560
(757)
(757)
228
(5)
(5)
(757)
(256)
(5)
(256)
(184)
(184)
(256)
5,313
5,313
(184)
5,241
5,241
5,313
—
—
5,241
5,241 $
5,241
—
5,241 $
Non-
Non-
Guarantor
Guarantor
Subsidiaries
Subsidiaries
Non-
3,342 $
Guarantor
3,342
Subsidiaries
1,117
1,117
3,342 $
211
211
1,117
2,014
2,014
211
425
425
2,014
—
—
425
4
4
—
1,585
1,585
4
224
224
1,585
—
—
224
—
—
—
—
—
—
1,361
—
1,361
483
483
1,361
—
—
483
878
878
—
(2)
(2)
878
876 $
876
(2)
876 $
Total
Total
Consolidating
Consolidating
Adjustments
Adjustments
Total
(41) $
Consolidating
(41) $
$
Adjustments
(41)
(41)
(41) $
—
—
(41)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,581)
(5,581)
—
(5,581)
(5,581)
(5,581)
—
—
(5,581)
(5,581) $
(5,581) $
—
(5,581) $
PM USA
PM USA
22,133 $
22,133
PM USA
6,664
6,664
22,133 $
6,369
6,369
6,664
9,100
9,100
6,369
2,094
2,094
9,100
—
—
2,094
—
—
—
7,006
7,006
—
33
33
7,006
—
—
33
—
—
—
—
—
—
6,973
—
6,973
2,536
2,536
6,973
268
268
2,536
4,705
4,705
268
—
—
4,705
4,705 $
4,705
—
4,705 $
Marketing, administration and research costs
Asset impairment and exit costs
Asset impairment and exit costs
Operating (expense) income
Operating (expense) income
Asset impairment and exit costs
Interest and other debt expense, net
Interest and other debt expense, net
Operating (expense) income
Loss on early extinguishment of debt
Loss on early extinguishment of debt
Interest and other debt expense, net
Earnings from equity investment in SABMiller
Earnings from equity investment in SABMiller
Loss on early extinguishment of debt
Other income, net
Other income, net
Earnings from equity investment in SABMiller
subsidiaries
Other income, net
subsidiaries
(Benefit) provision for income taxes
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Equity earnings of subsidiaries
(Benefit) provision for income taxes
Net earnings
Net earnings
Equity earnings of subsidiaries
Net earnings attributable to noncontrolling interests
Net earnings attributable to noncontrolling interests
Net earnings
Net earnings attributable to Altria Group, Inc.
Net earnings attributable to Altria Group, Inc.
(Loss) Earnings before income taxes and equity earnings of
(Loss) Earnings before income taxes and equity earnings of
(Loss) Earnings before income taxes and equity earnings of
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Gross profit
subsidiaries
$
$
$
$
$
$
$
Consolidated
Consolidated
25,434
25,434
Consolidated
7,740
7,740
25,434
6,580
6,580
7,740
11,114
11,114
6,580
2,708
2,708
11,114
41
41
2,708
4
4
41
8,361
8,361
4
817
817
8,361
228
228
817
(757)
(757)
228
(5)
(5)
(757)
8,078
(5)
8,078
2,835
2,835
8,078
—
—
2,835
5,243
5,243
—
(2)
(2)
5,243
5,241
5,241
(2)
5,241
income taxes
income taxes
Net earnings
Net earnings
Other comprehensive (losses) earnings, net of deferred
Other comprehensive (losses) earnings, net of deferred
Net earnings
Comprehensive earnings
Other comprehensive (losses) earnings, net of deferred
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings
income taxes
interests
interests
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to
Comprehensive earnings attributable to
interests
Altria Group, Inc.
Altria Group, Inc.
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
$
$
$
5,241 $
5,241
$
4,705 $
4,705
$
878 $
878
$
(5,581) $
(5,581) $
5,243
5,243
5,241 $
(598)
(598)
4,643
4,643
(598)
4,643
—
—
4,705 $
86
86
4,791
4,791
86
4,791
—
—
878 $
(69)
(69)
809
809
(69)
809
(2)
(2)
(5,581) $
(17)
(17)
(5,598)
(5,598)
(17)
(5,598)
—
—
—
4,643 $
4,643
$
—
4,791 $
4,791
$
(2)
807 $
807
$
—
(5,598) $
(5,598) $
5,243
(598)
(598)
4,645
4,645
(598)
4,645
(2)
(2)
(2)
4,643
4,643
4,643 $
4,791 $
807 $
(5,598) $
4,643
101
101
101
$
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
_________________________
Altria Group, Inc. and Subsidiaries
_________________________
Notes to Consolidated Financial Statements
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
(in millions of dollars)
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
_____________________________
_____________________________
(in millions of dollars)
Total
Non-
Total
Non-
_____________________________
Altria
Consolidating
Guarantor
Altria
Consolidating
Guarantor
PM USA
Group, Inc.
Adjustments
Subsidiaries
PM USA
Group, Inc.
Subsidiaries
Adjustments
Total
Non-
(43) $
3,267 $
21,298 $
(43) $
3,267
21,298
$
$
Consolidating
Guarantor
PM USA
(43)
1,106
6,722
Adjustments
Subsidiaries
1,106
6,722
(43)
—
219
6,358
(43) $
3,267 $
21,298 $
—
219
6,358
—
1,942
8,218
6,722
(43)
1,106
—
1,942
8,218
—
419
1,889
—
219
6,358
419
1,889
—
—
1,942
8,218
—
—
—
—
—
—
—
419
1,889
—
5
(6)
—
5
(6)
—
—
—
—
1,518
6,335
—
1,518
6,335
—
240
(46)
—
5
(6)
240
(46)
—
—
44
—
—
1,518
6,335
—
44
—
—
—
—
—
240
(46)
—
—
—
—
44
—
—
1,234
6,381
—
1,234
6,381
—
—
—
—
442
2,381
—
442
2,381
6,381
—
1,234
(5,036)
—
244
(5,036)
—
244
(5,036)
792
4,244
—
442
2,381
(5,036)
792
4,244
—
—
—
(5,036)
—
244
—
—
—
(5,036) $
792 $
4,244 $
(5,036)
792
4,244
(5,036) $
792
4,244
$
$
—
—
—
(5,036) $
4,244 $
(5,036) $
4,244 $
(5,036) $
4,244
$
— $
$
Altria
$
— $
Group, Inc.
—
—
—
— $
—
—
—
—
231
—
231
—
2
2
231
—
—
2
(233)
(233)
614
—
614
—
(233)
—
(1,006)
614
(1,006)
—
159
159
(1,006)
(119)
(119)
159
4,792
4,792
5,070
(119)
5,070
—
4,792
—
5,070 $
5,070
5,070
$
—
5,070 $
5,070 $
5,070
$
792 $
792 $
792
$
$
$
$
$
$
Consolidated
Consolidated
24,522
24,522
Consolidated
7,785
7,785
6,577
24,522
6,577
10,160
7,785
10,160
2,539
6,577
2,539
10,160
2
2
2,539
(1)
(1)
2
7,620
7,620
808
(1)
808
44
7,620
44
(1,006)
808
(1,006)
44
7,774
7,774
(1,006)
2,704
2,704
7,774
—
—
5,070
2,704
5,070
—
—
—
5,070
5,070
5,070
—
5,070
5,070
5,070
for the year ended December 31, 2014
for the year ended December 31, 2014
Net revenues
Net revenues
for the year ended December 31, 2014
Cost of sales
Cost of sales
Excise taxes on products
Net revenues
Excise taxes on products
Gross profit
Cost of sales
Gross profit
Marketing, administration and research costs
Excise taxes on products
Marketing, administration and research costs
Gross profit
subsidiaries
subsidiaries
Marketing, administration and research costs
Asset impairment and exit costs
Asset impairment and exit costs
Operating (expense) income
Operating (expense) income
Interest and other debt expense (income), net
Asset impairment and exit costs
Interest and other debt expense (income), net
Loss on early extinguishment of debt
Operating (expense) income
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Interest and other debt expense (income), net
Earnings from equity investment in SABMiller
Earnings before income taxes and equity earnings of
Loss on early extinguishment of debt
Earnings before income taxes and equity earnings of
Earnings from equity investment in SABMiller
(Benefit) provision for income taxes
(Benefit) provision for income taxes
Earnings before income taxes and equity earnings of
Equity earnings of subsidiaries
subsidiaries
Equity earnings of subsidiaries
Net earnings
(Benefit) provision for income taxes
Net earnings
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Net earnings attributable to Altria Group, Inc.
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Net earnings
Other comprehensive losses, net of deferred
Other comprehensive losses, net of deferred
Net earnings
Comprehensive earnings
Other comprehensive losses, net of deferred
Comprehensive earnings
income taxes
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings
interests
Comprehensive earnings attributable to
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to
Altria Group, Inc.
interests
Altria Group, Inc.
income taxes
income taxes
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
$
(1,304)
5,070 $
(1,304)
3,766
3,766
(1,304)
—
3,766
—
(110)
4,244 $
(110)
4,134
4,134
(110)
—
4,134
—
(642)
792 $
(642)
150
150
(642)
—
150
—
752
(5,036) $
752
(4,284)
(4,284)
752
—
(4,284)
—
(1,304)
5,070
(1,304)
3,766
3,766
(1,304)
—
3,766
—
3,766 $
—
3,766
$
4,134 $
—
4,134
$
150 $
—
150
$
(4,284) $
—
(4,284) $
3,766
—
3,766
3,766 $
4,134 $
150 $
(4,284) $
3,766
102
102
102
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
_________________________
Notes to Consolidated Financial Statements
_________________________
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
(in millions of dollars)
_____________________________
(in millions of dollars)
_____________________________
_____________________________
_____________________________
Altria
Altria
Group, Inc.
Altria
Group, Inc.
Group, Inc.
Altria
— $
$
— $
$
Group, Inc.
— $
$
—
—
— $
$
—
—
—
—
—
—
—
—
—
223
223
—
223
25
25
223
25
—
—
25
—
(248)
(248)
—
(248)
643
643
(248)
643
1,084
1,084
643
1,084
(991)
(991)
1,084
(991)
(991)
(984)
(984)
(984)
(488)
(488)
(984)
(488)
5,031
5,031
(488)
5,031
4,535
4,535
5,031
4,535
—
—
4,535
—
4,535 $
4,535 $
—
4,535 $
4,535 $
Non-
Non-
Guarantor
Non-
Guarantor
Subsidiaries
Guarantor
Non-
Subsidiaries
Subsidiaries
3,269 $
Guarantor
3,269 $
Subsidiaries
3,269 $
959
959
3,269 $
959
250
250
959
250
2,060
2,060
250
2,060
280
280
2,060
280
—
—
280
—
8
8
—
8
1,772
1,772
8
1,772
404
404
1,772
404
—
—
404
—
—
—
—
—
—
1,368
1,368
1,368
489
489
1,368
489
—
—
489
—
879
879
—
879
—
—
879
—
879 $
879 $
—
879 $
879 $
for the year ended December 31, 2013
for the year ended December 31, 2013
for the year ended December 31, 2013
Net revenues
Net revenues
for the year ended December 31, 2013
Net revenues
Cost of sales
Cost of sales
Net revenues
Cost of sales
Excise taxes on products
Excise taxes on products
Cost of sales
Excise taxes on products
Gross profit
Gross profit
Excise taxes on products
Gross profit
Marketing, administration and research costs
Marketing, administration and research costs
Gross profit
Marketing, administration and research costs
Marketing, administration and research costs
Asset impairment and exit costs
Asset impairment and exit costs
Asset impairment and exit costs
Operating (expense) income
Operating (expense) income
Asset impairment and exit costs
Operating (expense) income
Interest and other debt expense, net
Interest and other debt expense, net
Operating (expense) income
Interest and other debt expense, net
Loss on early extinguishment of debt
Loss on early extinguishment of debt
Interest and other debt expense, net
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Earnings from equity investment in SABMiller
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
(Loss) earnings before income taxes and equity earnings of
(Loss) earnings before income taxes and equity earnings of
Earnings from equity investment in SABMiller
(Loss) earnings before income taxes and equity earnings of
(Loss) earnings before income taxes and equity earnings of
(Benefit) provision for income taxes
(Benefit) provision for income taxes
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Equity earnings of subsidiaries
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Net earnings
Net earnings
Equity earnings of subsidiaries
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to noncontrolling interests
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings attributable to Altria Group, Inc.
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings attributable to Altria Group, Inc.
PM USA
PM USA
PM USA
21,231 $
21,231 $
PM USA
21,231 $
6,281
6,281
21,231 $
6,281
6,553
6,553
6,281
6,553
8,397
8,397
6,553
8,397
1,837
1,837
8,397
1,837
(3)
(3)
1,837
(3)
3
3
(3)
3
6,560
6,560
3
6,560
2
2
6,560
2
—
—
2
—
—
—
—
—
—
6,558
6,558
6,558
2,406
2,406
6,558
2,406
216
216
2,406
216
4,368
4,368
216
4,368
—
—
4,368
—
4,368 $
4,368 $
—
4,368 $
4,368 $
Total
Total
Consolidating
Total
Consolidating
Adjustments
Consolidating
Total
Adjustments
Adjustments
(34) $
Consolidating
(34) $
Adjustments
(34) $
(34)
(34)
(34) $
(34)
—
—
(34)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,247)
(5,247)
—
(5,247)
(5,247)
(5,247)
(5,247)
(5,247)
—
—
(5,247)
—
(5,247) $
(5,247) $
—
(5,247) $
(5,247) $
subsidiaries
subsidiaries
subsidiaries
subsidiaries
$
$
$
$
Consolidated
Consolidated
Consolidated
24,466
24,466
Consolidated
24,466
7,206
7,206
24,466
7,206
6,803
6,803
7,206
6,803
10,457
10,457
6,803
10,457
2,340
2,340
10,457
2,340
22
22
2,340
22
11
11
22
11
8,084
8,084
11
8,084
1,049
1,049
8,084
1,049
1,084
1,084
1,049
1,084
(991)
(991)
1,084
(991)
(991)
6,942
6,942
6,942
2,407
2,407
6,942
2,407
—
—
2,407
—
4,535
4,535
—
4,535
—
—
4,535
—
4,535
4,535
—
4,535
4,535
income taxes
income taxes
income taxes
income taxes
Net earnings
Net earnings
Net earnings
Other comprehensive earnings, net of deferred
Other comprehensive earnings, net of deferred
Net earnings
Other comprehensive earnings, net of deferred
Other comprehensive earnings, net of deferred
Comprehensive earnings
Comprehensive earnings
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to noncontrolling
Comprehensive earnings attributable to
Comprehensive earnings attributable to
Comprehensive earnings attributable to
Comprehensive earnings attributable to
interests
interests
interests
interests
Altria Group, Inc.
Altria Group, Inc.
Altria Group, Inc.
Altria Group, Inc.
$
$
$
$
$
$
$
$
4,535 $
4,535 $
4,535 $
4,535 $
662
662
662
5,197
5,197
662
5,197
5,197
—
—
—
—
5,197 $
5,197 $
5,197 $
5,197 $
4,368 $
4,368 $
4,368 $
4,368 $
198
198
198
4,566
4,566
198
4,566
4,566
—
—
—
—
4,566 $
4,566 $
4,566 $
4,566 $
879 $
879 $
879 $
879 $
910
910
910
1,789
1,789
910
1,789
1,789
—
—
—
—
1,789 $
1,789 $
1,789 $
1,789 $
(5,247) $
(5,247) $
(5,247) $
(5,247) $
(1,108)
(1,108)
(1,108)
(6,355)
(6,355)
(1,108)
(6,355)
(6,355)
—
—
—
—
(6,355) $
(6,355) $
(6,355) $
(6,355) $
4,535
4,535
4,535
4,535
662
662
662
5,197
5,197
662
5,197
5,197
—
—
—
—
5,197
5,197
5,197
5,197
103
103
103
103
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
_________________________
_________________________
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
_____________________________
(in millions of dollars)
_____________________________
for the year ended December 31, 2015
for the year ended December 31, 2015
Cash Provided by Operating Activities
Cash Provided by Operating Activities
for the year ended December 31, 2015
Net cash provided by operating activities
Net cash provided by operating activities
Cash Provided by Operating Activities
Cash Provided by (Used in) Investing Activities
Cash Provided by (Used in) Investing Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Capital expenditures
Proceeds from finance assets
Proceeds from finance assets
Capital expenditures
Payment for derivative financial instrument
Payment for derivative financial instrument
Proceeds from finance assets
Other
Other
Payment for derivative financial instrument
Other
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Cash Provided by (Used in) Financing Activities
Long-term debt repaid
Long-term debt repaid
Repurchases of common stock
Repurchases of common stock
Long-term debt repaid
Dividends paid on common stock
Dividends paid on common stock
Repurchases of common stock
Changes in amounts due to/from Altria Group, Inc.
Changes in amounts due to/from Altria Group, Inc.
Dividends paid on common stock
and subsidiaries
and subsidiaries
and subsidiaries
Premiums and fees related to early extinguishment of debt
Changes in amounts due to/from Altria Group, Inc.
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Cash dividends paid to parent
Premiums and fees related to early extinguishment of debt
Other
Other
Cash dividends paid to parent
Other
Net cash used in financing activities
Net cash used in financing activities
Cash and cash equivalents:
Cash and cash equivalents:
Net cash used in financing activities
Cash and cash equivalents:
(Decrease) increase
(Decrease) increase
Balance at beginning of year
Balance at beginning of year
(Decrease) increase
Balance at end of year
Balance at end of year
Balance at beginning of year
Balance at end of year
$
$
$
$
$
$
Altria
Altria
Group, Inc.
Group, Inc.
Altria
Group, Inc.
5,085 $
$
5,085
PM USA
PM USA
PM USA
5,204 $
5,204
$
Non-
Non-
Guarantor
Guarantor
Subsidiaries
Subsidiaries
Non-
Guarantor
Subsidiaries
961 $
961
$
Total
Total
Consolidating
Consolidating
Adjustments
Adjustments
Total
Consolidating
Adjustments
Consolidated
Consolidated
(5,440) $
(5,440) $
Consolidated
5,810
5,810
5,085 $
—
—
—
—
—
(132)
(132)
—
—
—
(132)
(132)
(132)
—
(132)
(1,793)
(1,793)
(554)
(554)
(1,793)
(4,179)
(4,179)
(554)
814
(4,179)
814
(226)
(226)
814
—
—
(226)
17
17
—
(5,921)
(5,921)
17
(5,921)
(968)
(968)
3,281
3,281
(968)
2,313
2,313
3,281
2,313
$
$
$
5,204 $
(51)
(51)
—
—
(51)
—
—
—
10
10
—
(41)
(41)
10
(41)
—
—
—
—
—
—
—
—
(495)
—
(495)
—
—
(495)
(4,671)
(4,671)
—
—
—
(4,671)
(5,166)
(5,166)
—
(5,166)
(3)
(3)
3
3
(3)
— $
— $
3
— $
961 $
(178)
(178)
354
354
(178)
—
—
354
(18)
(18)
—
158
158
(18)
158
—
—
—
—
—
—
—
—
(319)
—
(319)
—
—
(319)
(769)
(769)
—
(12)
(12)
(769)
(1,100)
(1,100)
(12)
(1,100)
19
19
37
37
19
56
56
37
56
$
$
$
(5,440) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,440
5,440
—
—
—
5,440
5,440
5,440
—
5,440
—
—
—
—
—
— $
— $
—
— $
5,810
(229)
(229)
354
354
(229)
(132)
(132)
354
(8)
(8)
(132)
(15)
(15)
(8)
(15)
(1,793)
(1,793)
(554)
(554)
(1,793)
(4,179)
(4,179)
(554)
—
(4,179)
—
(226)
(226)
—
—
—
(226)
5
5
—
(6,747)
(6,747)
5
(6,747)
(952)
(952)
3,321
3,321
(952)
2,369
2,369
3,321
2,369
104
104
104
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
_________________________
Notes to Consolidated Financial Statements
_________________________
_________________________
_________________________
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
(in millions of dollars)
(in millions of dollars)
(in millions of dollars)
_____________________________
_____________________________
_____________________________
_____________________________
for the year ended December 31, 2014
for the year ended December 31, 2014
for the year ended December 31, 2014
for the year ended December 31, 2014
Cash Provided by Operating Activities
Cash Provided by Operating Activities
Cash Provided by Operating Activities
Cash Provided by Operating Activities
Net cash provided by operating activities
Net cash provided by operating activities
Net cash provided by operating activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Cash Provided by (Used in) Investing Activities
Cash Provided by (Used in) Investing Activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Capital expenditures
Capital expenditures
Capital expenditures
Acquisition of Green Smoke, net of acquired cash
Acquisition of Green Smoke, net of acquired cash
Acquisition of Green Smoke, net of acquired cash
Acquisition of Green Smoke, net of acquired cash
Proceeds from finance assets
Proceeds from finance assets
Proceeds from finance assets
Proceeds from finance assets
Other
Other
Other
Other
Net cash provided by investing activities
Net cash provided by investing activities
Net cash provided by investing activities
Net cash provided by investing activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Long-term debt issued
Long-term debt issued
Long-term debt issued
Long-term debt repaid
Long-term debt repaid
Long-term debt repaid
Long-term debt repaid
Repurchases of common stock
Repurchases of common stock
Repurchases of common stock
Repurchases of common stock
Dividends paid on common stock
Dividends paid on common stock
Dividends paid on common stock
Dividends paid on common stock
Changes in amounts due to/from Altria Group, Inc.
Changes in amounts due to/from Altria Group, Inc.
Changes in amounts due to/from Altria Group, Inc.
Changes in amounts due to/from Altria Group, Inc.
Premiums and fees related to early extinguishment of debt
Premiums and fees related to early extinguishment of debt
Premiums and fees related to early extinguishment of debt
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Cash dividends paid to parent
Cash dividends paid to parent
Cash dividends paid to parent
Other
Other
Other
Other
and subsidiaries
and subsidiaries
and subsidiaries
and subsidiaries
Net cash used in financing activities
Net cash used in financing activities
Net cash used in financing activities
Net cash used in financing activities
Cash and cash equivalents:
Cash and cash equivalents:
Cash and cash equivalents:
Cash and cash equivalents:
Increase (decrease)
Increase (decrease)
Increase (decrease)
Increase (decrease)
Balance at beginning of year
Balance at beginning of year
Balance at beginning of year
Balance at beginning of year
Balance at end of year
Balance at end of year
Balance at end of year
Balance at end of year
Altria
Altria
Altria
Group, Inc.
Altria
Group, Inc.
Group, Inc.
Group, Inc.
PM USA
PM USA
PM USA
PM USA
Non-
Non-
Non-
Guarantor
Non-
Guarantor
Guarantor
Subsidiaries
Guarantor
Subsidiaries
Subsidiaries
Subsidiaries
Total
Total
Total
Consolidating
Total
Consolidating
Consolidating
Adjustments Consolidated
Consolidating
Adjustments Consolidated
Adjustments Consolidated
Adjustments Consolidated
$
$
$
$
4,924 $
4,924 $
4,924 $
4,924 $
4,451 $
4,451 $
4,451 $
4,451 $
707 $
707 $
707 $
707 $
(5,419) $
(5,419) $
(5,419) $
(5,419) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
999
999
999
999
(525)
(525)
(525)
(525)
(939)
(939)
(939)
(939)
(3,892)
(3,892)
(3,892)
(3,892)
(411)
(411)
(411)
(411)
—
—
—
—
—
—
—
—
11
11
11
11
(4,757)
(4,757)
(4,757)
(4,757)
(44)
(44)
(44)
(44)
—
—
—
—
—
—
—
—
70
70
70
70
26
26
26
26
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(351)
(351)
(351)
(351)
—
—
—
—
(4,124)
(4,124)
(4,124)
(4,124)
—
—
—
—
(4,475)
(4,475)
(4,475)
(4,475)
(119)
(119)
(119)
(119)
(102)
(102)
(102)
(102)
369
369
369
369
3
3
3
3
151
151
151
151
—
—
—
—
(300)
(300)
(300)
(300)
—
—
—
—
—
—
—
—
762
762
762
762
(44)
(44)
(44)
(44)
(1,295)
(1,295)
(1,295)
(1,295)
(4)
(4)
(4)
(4)
(881)
(881)
(881)
(881)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,419
5,419
5,419
5,419
—
—
—
—
5,419
5,419
5,419
5,419
167
167
167
167
3,114
3,114
3,114
3,114
3,281 $
3,281 $
3,281 $
3,281 $
$
$
$
$
2
2
2
2
1
1
1
1
3 $
3 $
3 $
3 $
(23)
(23)
(23)
(23)
60
60
60
60
37 $
37 $
37 $
37 $
—
—
—
—
—
—
—
—
— $
— $
— $
— $
4,663
4,663
4,663
4,663
(163)
(163)
(163)
(163)
(102)
(102)
(102)
(102)
369
369
369
369
73
73
73
73
177
177
177
177
999
999
999
999
(825)
(825)
(825)
(825)
(939)
(939)
(939)
(939)
(3,892)
(3,892)
(3,892)
(3,892)
—
—
—
—
(44)
(44)
(44)
(44)
—
—
—
—
7
7
7
7
(4,694)
(4,694)
(4,694)
(4,694)
146
146
146
146
3,175
3,175
3,175
3,175
3,321
3,321
3,321
3,321
105
105
105
105
for the year ended December 31, 2013
for the year ended December 31, 2013
for the year ended December 31, 2013
Cash Provided by Operating Activities
for the year ended December 31, 2013
Cash Provided by Operating Activities
Cash Provided by Operating Activities
Net cash provided by operating activities
Cash Provided by Operating Activities
Net cash provided by operating activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Cash Provided by (Used in) Investing Activities
Capital expenditures
Capital expenditures
Proceeds from finance assets
Capital expenditures
Proceeds from finance assets
Proceeds from finance assets
Other
Proceeds from finance assets
Other
Other
Other
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Long-term debt issued
Long-term debt repaid
Long-term debt issued
Long-term debt repaid
Long-term debt repaid
Repurchases of common stock
Long-term debt repaid
Repurchases of common stock
Repurchases of common stock
Dividends paid on common stock
Repurchases of common stock
Dividends paid on common stock
Dividends paid on common stock
Changes in amounts due to/from Altria Group, Inc. and
Dividends paid on common stock
Changes in amounts due to/from Altria Group, Inc. and
Changes in amounts due to/from Altria Group, Inc. and
Changes in amounts due to/from Altria Group, Inc. and
Premiums and fees related to early extinguishment of debt
Premiums and fees related to early extinguishment of debt
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Cash dividends paid to parent
Other
Cash dividends paid to parent
Other
Other
Other
subsidiaries
subsidiaries
subsidiaries
subsidiaries
Net cash used in financing activities
Net cash used in financing activities
Net cash used in financing activities
Net cash used in financing activities
Cash and cash equivalents:
Cash and cash equivalents:
Cash and cash equivalents:
Increase
Cash and cash equivalents:
Increase
Increase
Balance at beginning of year
Increase
Balance at beginning of year
Balance at beginning of year
Balance at end of year
Balance at beginning of year
Balance at end of year
Balance at end of year
Balance at end of year
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
_________________________
Notes to Consolidated Financial Statements
_________________________
_________________________
_________________________
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
(in millions of dollars)
_____________________________
(in millions of dollars)
_____________________________
_____________________________
_____________________________
Altria
Group, Inc.
Altria
Altria
Altria
Group, Inc.
Group, Inc.
Group, Inc.
PM USA
PM USA
PM USA
PM USA
Non-
Guarantor
Non-
Non-
Non-
Subsidiaries
Guarantor
Guarantor
Guarantor
Subsidiaries
Subsidiaries
Subsidiaries
Total
Consolidating
Total
Total
Total
Adjustments
Consolidating
Consolidating
Consolidating
Adjustments
Adjustments
Adjustments
Consolidated
Consolidated
Consolidated
Consolidated
4,375
4,375
4,375
4,375
(131)
(131)
(131)
716
(131)
716
716
17
716
17
17
602
17
602
602
602
4,179
4,179
4,179
(3,559)
4,179
(3,559)
(3,559)
(634)
(3,559)
(634)
(634)
(3,612)
(634)
(3,612)
(3,612)
(3,612)
—
—
—
(1,054)
—
(1,054)
(1,054)
—
(1,054)
—
—
(22)
—
(22)
(22)
(4,702)
(22)
(4,702)
(4,702)
(4,702)
275
275
275
2,900
275
2,900
2,900
3,175
2,900
3,175
3,175
3,175
(4,724) $
(4,724) $
(4,724) $
(4,724) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,724
—
4,724
4,724
—
4,724
—
—
4,724
—
4,724
4,724
4,724
—
—
—
—
—
—
—
— $
—
— $
— $
— $
$
$
$
$
$
$
$
$
4,520 $
4,520 $
4,520 $
4,520 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,179
4,179
4,179
(3,559)
4,179
(3,559)
(3,559)
(634)
(3,559)
(634)
(634)
(3,612)
(634)
(3,612)
(3,612)
(3,612)
432
432
432
(1,054)
432
(1,054)
(1,054)
—
(1,054)
—
—
(20)
—
(20)
(20)
(4,268)
(20)
(4,268)
(4,268)
(4,268)
252
252
252
2,862
252
2,862
2,862
3,114 $
2,862
3,114 $
3,114 $
3,114 $
4,192 $
4,192 $
4,192 $
4,192 $
(31)
(31)
(31)
—
(31)
—
—
—
—
—
—
(31)
—
(31)
(31)
(31)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
240
240
240
—
240
—
—
(4,400)
—
(4,400)
(4,400)
—
(4,400)
—
—
(4,160)
—
(4,160)
(4,160)
(4,160)
1
1
1
—
1
—
—
1 $
—
1 $
1 $
1 $
387 $
387 $
387 $
387 $
(100)
(100)
(100)
716
(100)
716
716
17
716
17
17
633
17
633
633
633
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(672)
(672)
(672)
—
(672)
—
—
(324)
—
(324)
(324)
(2)
(324)
(2)
(2)
(998)
(2)
(998)
(998)
(998)
22
22
22
38
22
38
38
60 $
38
60 $
60 $
60 $
106
106
106
106
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 20. Quarterly Financial Data (Unaudited)
(in millions, except per share data)
Net revenues
Gross profit
Net earnings
Net earnings attributable to Altria Group, Inc.
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.
(in millions, except per share data)
Net revenues
Gross profit
Net earnings
Net earnings attributable to Altria Group, Inc.
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.
1st
5,804 $
2,475 $
1,018 $
1,018 $
2015 Quarters
2nd
6,613 $
2,871 $
1,449 $
1,448 $
3rd
6,699 $
3,046 $
1,528 $
1,528 $
4th
6,318
2,722
1,248
1,247
0.52 $
0.74 $
0.78 $
0.64
1st
5,517 $
2,256 $
1,175 $
1,175 $
2014 Quarters
2nd
6,256 $
2,603 $
1,262 $
1,262 $
3rd
6,491 $
2,674 $
1,397 $
1,397 $
4th
6,258
2,627
1,236
1,236
0.59 $
0.64 $
0.71 $
0.63
$
$
$
$
$
$
$
$
$
$
During 2015 and 2014, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.:
(in millions)
NPM Adjustment Items
Tobacco and health litigation items, including accrued interest
Asset impairment, exit and integration costs
Loss on early extinguishment of debt
Other income, net
SABMiller special items
(in millions)
NPM Adjustment Items
Tobacco and health litigation items, including accrued interest
Asset impairment, exit, integration and acquisition-related costs
Loss on early extinguishment of debt
SABMiller special items
2015 Quarters
1st
— $
$
2nd
— $
3rd
(126) $
43
—
228
—
86
5
7
—
—
2
67
1
—
—
8
4th
42
35
3
—
(5)
30
$
357 $
14 $
(50) $
105
2014 Quarters
1st
(64) $
2nd
4th
3rd
(26) $ — $ —
$
4
2
—
9
31
(1)
—
23
4
15
—
(42)
$
(49) $
27 $
(23) $
5
5
44
35
89
As discussed in Note 14. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated
statements of earnings during 2015 and 2014 as a result of various tax events.
Note 21. Subsequent Event
On January 27, 2016, the Board of Directors approved a
productivity initiative designed to maintain Altria Group, Inc.’s
operating companies’ leadership and cost competitiveness. The
initiative, which will reduce spending on certain selling, general
and administrative infrastructure and implement a leaner
organizational structure, is expected to deliver approximately
$300 million in annualized productivity savings by the end of
2017. Altria Group, Inc. estimates total pre-tax restructuring
charges in connection with the initiative of approximately $140
million, or $0.05 per share, substantially all of which is expected
to be recorded in the first quarter of 2016. The estimated charges,
substantially all of which will result in cash expenditures, relate
primarily to employee separation costs of approximately $120
million and other associated costs of approximately $20 million.
These estimated charges do not reflect the non-cash impact that
may result from pension settlement and curtailment accounting.
107
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 28, 2016
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Stockholders of Altria Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings, comprehensive
earnings, stockholders’ equity, and cash flows, present fairly, in
all material respects, the financial position of Altria Group, Inc.
and its subsidiaries at December 31, 2015 and 2014, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2015 in conformity
with accounting principles generally accepted in the United States
of America. Also in our opinion, Altria Group, Inc. maintained,
in all material respects, effective internal control over financial
reporting as of December 31, 2015, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Altria Group, Inc.’s management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management
on Internal Control over Financial Reporting. Our responsibility
is to express opinions on these financial statements and on Altria
Group, Inc.’s internal control over financial reporting based on
our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
108
Based on this assessment, management determined that, as of
December 31, 2015, Altria Group, Inc. maintained effective
internal control over financial reporting.
PricewaterhouseCoopers LLP, an independent registered
public accounting firm, who audited and reported on the
consolidated financial statements of Altria Group, Inc. included in
this report, has audited the effectiveness of Altria Group, Inc.’s
internal control over financial reporting as of December 31, 2015,
as stated in their report herein.
January 28, 2016
Report of Management On Internal Control Over
Financial Reporting
Management of Altria Group, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended. Altria Group, Inc.’s internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over
financial reporting includes those written policies and procedures
that:
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of Altria Group, Inc.;
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America;
provide reasonable assurance that receipts and expenditures of
Altria Group, Inc. are being made only in accordance with the
authorization of management and directors of Altria Group, Inc.;
and
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of assets
that could have a material effect on the consolidated financial
statements.
Internal control over financial reporting includes the controls
themselves, monitoring and internal auditing practices and actions
taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Altria Group,
Inc.’s internal control over financial reporting as of December 31,
2015. Management based this assessment on criteria for effective
internal control over financial reporting described in Internal
Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO). Management’s assessment included an evaluation of the
design of Altria Group, Inc.’s internal control over financial
reporting and testing of the operational effectiveness of its
internal control over financial reporting. Management reviewed
the results of its assessment with the Audit Committee of our
Board of Directors.
109
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Altria Group, Inc. carried out an evaluation, with the participation
of Altria Group, Inc.’s management, including Altria Group, Inc.’s
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of Altria Group, Inc.’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act,
as amended) as of the end of the period covered by this Annual
Report on Form 10-K. Based upon that evaluation, Altria Group,
Inc.’s Chief Executive Officer and Chief Financial Officer
concluded that Altria Group, Inc.’s disclosure controls and
procedures are effective.
There have been no changes in Altria Group, Inc.’s internal
control over financial reporting during the most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, Altria Group, Inc.’s internal control over
financial reporting.
The Report of Independent Registered Public Accounting
Firm and the Report of Management on Internal Control over
Financial Reporting are included in Item 8.
Item 9B. Other Information.
None.
Part III
Except for the information relating to the executive officers set forth in Item 10, the information called for by Items 10-14 is hereby
incorporated by reference to Altria Group, Inc.’s definitive proxy statement for use in connection with its Annual Meeting of
Shareholders to be held on May 19, 2016 that will be filed with the SEC on or about April 7, 2016 (the “proxy statement”), and,
except as indicated therein, made a part hereof.
Item 10. Directors, Executive Officers and Corporate Governance.
Refer to “Proposals Requiring Your Vote - Proposal 1 - Election of Directors,” “Ownership of Equity Securities of the Company -
Section 16(a) Beneficial Ownership Reporting Compliance” and “Board and Governance Matters - Committees of the Board of
Directors” sections of the proxy statement.
Executive Officers as of February 12, 2016:
Name
Martin J. Barrington
Daniel J. Bryant
Office
Chairman, Chief Executive Officer and President
Vice President and Treasurer
James E. Dillard III
Ivan S. Feldman
Clifford B. Fleet
William F. Gifford, Jr.
Craig A. Johnson
Denise F. Keane
Salvatore Mancuso
Brian W. Quigley
W. Hildebrandt Surgner, Jr. Corporate Secretary and Senior Assistant General Counsel
Charles N. Whitaker
Senior Vice President, Research, Development and Regulatory Affairs
Vice President and Controller
President and Chief Executive Officer, Philip Morris USA Inc.
Executive Vice President and Chief Financial Officer
President and Chief Executive Officer, Altria Group Distribution Company
Executive Vice President and General Counsel
Senior Vice President, Strategy, Planning and Accounting
President and Chief Executive Officer, U.S. Smokeless Tobacco Company LLC
Senior Vice President, Human Resources, Compliance & Information Services and Chief
Howard A. Willard III
Executive Vice President and Chief Operating Officer
Compliance Officer
Age
62
46
52
49
45
45
63
63
50
42
50
49
52
All of the above-mentioned officers have been employed
by Altria Group, Inc. or its subsidiaries in various capacities
during the past five years.
Effective January 1, 2016, Mr. Dillard, previously Senior
Vice President, Regulatory Affairs and Chief Innovation Officer,
Altria Client Services LLC, was appointed Senior Vice President,
Research, Development and Regulatory Affairs, Altria Group,
Inc.
Mr. Whitaker’s wife and Mr. Surgner’s wife are first
cousins.
110
Codes of Conduct and Corporate Governance
Altria Group, Inc. has adopted the Altria Code of Conduct for
Compliance and Integrity, which complies with requirements set
forth in Item 406 of Regulation S-K. This Code of Conduct
applies to all of its employees, including its principal executive
officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. Altria
Group, Inc. has also adopted a code of business conduct and
ethics that applies to the members of its Board of Directors.
These documents are available free of charge on Altria Group,
Inc.’s website at www.altria.com.
Any waiver granted by Altria Group, Inc. to its principal
executive officer, principal financial officer or controller under
the Code of Conduct, and certain amendments to the Code of
Item 11. Executive Compensation.
Conduct, will be disclosed on Altria Group, Inc.’s website at
www.altria.com within the time period required by applicable
rules.
In addition, Altria Group, Inc. has adopted corporate
governance guidelines and charters for its Audit, Compensation
and Nominating, Corporate Governance and Social Responsibility
Committees and the other committees of the Board of Directors.
All of these documents are available free of charge on Altria
Group, Inc.’s website at www.altria.com.
The information on the respective websites of Altria Group,
Inc. and its subsidiaries is not, and shall not be deemed to be, a
part of this Annual Report on Form 10-K or incorporated into any
other filings Altria Group, Inc. makes with the SEC.
Refer to “Executive Compensation,” “Compensation Committee Matters - Compensation Committee Interlocks and Insider
Participation,” “Compensation Committee Matters - Compensation Committee Report for the Year Ended December 31, 2015” and
“Board and Governance Matters - Directors - Director Compensation” sections of the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under Altria
Group, Inc.’s equity compensation plans at December 31, 2015, were as follows:
Number of Shares
to be Issued upon
Exercise of
Outstanding
Options and Vesting of
Deferred Stock
(a)
Weighted Average
Exercise Price of
Outstanding
Options
(b)
Number of Shares
Remaining Available for
Future Issuance Under Equity
Compensation
Plans
(c)
Equity compensation plans approved by shareholders (1)
1,221,985 (2)
$—
40,987,766 (3)
(1) The following plans have been approved by Altria Group, Inc. shareholders and have shares referenced in column (a) or column (c): the 2010
Performance Incentive Plan, the 2015 Performance Incentive Plan and the 2015 Stock Compensation Plan for Non-Employee Directors.
(2) Represents 1,221,985 shares of restricted stock units (also referred to as deferred stock).
(3)
Includes 39,994,482 shares available under the 2015 Performance Incentive Plan and 993,284 shares available under the 2015 Stock
Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a).
Refer to “Ownership of Equity Securities of the Company - Directors and Executive Officers” and “Ownership of Equity Securities
of the Company - Certain Other Beneficial Owners” sections of the proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Refer to “Related Person Transactions and Code of Conduct” and “Board and Governance Matters - Directors - Director Independence
Determinations” sections of the proxy statement.
Item 14. Principal Accounting Fees and Services.
Refer to “Audit Committee Matters - Independent Registered Public Accounting Firm’s Fees” and “Audit Committee Matters - Pre-
Approval Policy” sections of the proxy statement.
111
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Earnings for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting
Page
39
41
42
43
44
45
108
109
Schedules have been omitted either because such schedules are not required or are not applicable.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
2.1
Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as
2.2
2.3
2.4
3.1
3.2
4.1
Group, Inc.’s Current Report on Form 8-K filed on January 31, 2007 (File No. 1-08940).
Distribution Agreement by and between Altria Group, Inc. and Philip Morris International Inc.,
dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on
Form 8-K filed on January 30, 2008 (File No. 1-08940).
Agreement and Plan of Merger by and among UST Inc., Altria Group, Inc., and Armchair Merger
Sub, Inc., dated as of September 7, 2008. Incorporated by reference to Altria Group, Inc.’s Current
Report on Form 8-K filed on September 8, 2008 (File No. 1-08940).
Amendment No. 1 to the Agreement and Plan of Merger, dated as of September 7, 2008, by and
among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of October 2, 2008.
Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on October 3,
2008 (File No. 1-08940).
Articles of Amendment to the Restated Articles of Incorporation of Altria Group, Inc. and Restated
Articles of Incorporation of Altria Group, Inc. Incorporated by reference to Altria Group, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).
Amended and Restated By-laws of Altria Group, Inc., effective as of October 28, 2015.
Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on October 29,
2015 (File No. 1-08940).
Indenture between Altria Group, Inc. and The Bank of New York (as successor in interest to
JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of
December 2, 1996. Incorporated by reference to Altria Group, Inc.’s Registration Statement on
Form S-3/A filed on January 29, 1998 (No. 333-35143).
112
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
First Supplemental Indenture to Indenture, dated as of December 2, 1996, between Altria Group,
Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known
as The Chase Manhattan Bank), as Trustee, dated as of February 13, 2008. Incorporated by
reference to Altria Group, Inc.’s Current Report on Form 8-K filed on February 15, 2008 (File No.
1-08940).
Indenture among Altria Group, Inc., as Issuer, Philip Morris USA Inc., as Guarantor, and Deutsche
Bank Trust Company Americas, as Trustee, dated as of November 4, 2008. Incorporated by
reference to Altria Group, Inc.’s Registration Statement on Form S-3 filed on November 4, 2008
(No. 333-155009).
Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013, among
Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and
Citibank, N.A., as Administrative Agents. Incorporated by reference to Altria Group, Inc.’s Current
Report on Form 8-K filed on August 23, 2013 (File No. 1-08940).
Extension Agreement, effective August 19, 2014, among Altria Group, Inc. and the lenders thereto
and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by
reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 21, 2014 (File No.
1-08940).
Extension Agreement, effective August 19, 2015, among Altria Group, Inc. and the lenders thereto
and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by
reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 21, 2015 (File No.
1-08940).
The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-
term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the
total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.
Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care
cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).
Settlement Agreement related to settlement of Florida health care cost recovery action, dated August
25, 1997. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on
September 3, 1997 (File No. 1-08940).
Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost
recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.’s
Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940).
Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of
Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly
Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).
Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of
Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly
Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).
Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the
settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998. Incorporated
by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30,
1998 (File No. 1-08940).
Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the
settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998
(File No. 1-08940).
Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the
settlement of the Florida health care cost recovery action, dated as of September 11, 1998.
Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period
ended September 30, 1998 (File No. 1-08940).
113
10.9
10.10
10.11
Master Settlement Agreement relating to state health care cost recovery and other claims, dated as
of November 23, 1998. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-
K filed on November 25, 1998, as amended by Form 8-K/A filed on December 24, 1998 (File No.
1-08940).
Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters,
dated as of May 7, 2001. Incorporated by reference to Altria Group, Inc.’s Current Report on Form
8-K filed on May 8, 2001 (File No. 1-08940).
Term Sheet effective December 17, 2012, between Philip Morris USA Inc., the other participating
manufacturers, and various states and territories for settlement of the 2003 - 2012 Non-Participating
Manufacturer Adjustment with those states. Incorporated by reference to Altria Group, Inc.’s
Current Report on From 8-K filed on December 18, 2012 (File No. 1-08940).
10.12
Employee Matters Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known
Group, Inc.’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940).
10.13
Tax Sharing Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Group, Inc.’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940).
Intellectual Property Agreement by and between Philip Morris International Inc. and Philip Morris
USA Inc., dated as of January 1, 2008. Incorporated by reference to Altria Group, Inc.’s Current
Report on Form 8-K filed on March 28, 2008 (File No. 1-08940).
Employee Matters Agreement by and between Altria Group, Inc. and Philip Morris International
Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report
on Form 8-K filed on March 28, 2008 (File No. 1-08940).
Tax Sharing Agreement by and between Altria Group, Inc. and Philip Morris International Inc.,
dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on
Form 8-K filed on March 28, 2008 (File No. 1-08940).
Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 5-Year Revolving
Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc., the lenders named therein,
and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of June 30,
2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on June
30, 2011 (File No. 1-08940).
Financial Counseling Program. Incorporated by reference to Altria Group, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2009 (File No. 1-08940).*
Benefit Equalization Plan, effective September 2, 1974, as amended. Incorporated by reference to
Altria Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014 (File No.
1-08940).*
Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).*
Form of Supplemental Employee Grantor Trust Enrollment Agreement. Incorporated by reference
to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005 (File
No. 1-08940).*
Automobile Policy. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-08940).*
Supplemental Management Employees’ Retirement Plan of Altria Group, Inc., effective as of
October 1, 1987, as amended and in effect as of January 1, 2012. Incorporated by reference to Altria
Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No.
1-08940).*
Grantor Trust Agreement by and between Altria Client Services Inc. and Wells Fargo Bank,
National Association, dated February 23, 2011. Incorporated by reference to Altria Group, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).*
114
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Long-Term Disability Benefit Equalization Plan, effective as of January 1, 1989, as amended.
Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period
ended June 30, 2009 (File No. 1-08940).*
Survivor Income Benefit Equalization Plan, effective as of January 1, 1985, as amended and in
effect as of January 1, 2010. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on
Form 10-Q for the period ended June 30, 2011 (File No. 1-08940).*
Deferred Fee Plan for Non-Employee Directors, as amended and restated effective October 28,
2015.*
2015 Stock Compensation Plan for Non-Employee Directors, as amended and restated effective
October 28, 2015.*
2010 Performance Incentive Plan, effective on May 20, 2010. Incorporated by reference to Altria
Group, Inc.’s definitive proxy statement filed on April 9, 2010 (File No. 1-08940).*
2015 Performance Incentive Plan, effective on May 1, 2015. Incorporated by reference to Altria
Group, Inc.’s definitive proxy statement on Schedule 14A filed on April 9, 2015 (File No.
1-08940).*
(including First Amendment adding Supplement A), as amended and restated effective as of January
1, 1996. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2006 (File No. 1-08940).*
Form of Indemnity Agreement. Incorporated by reference to Altria Group, Inc.’s Current Report on
Form 8-K filed on October 30, 2006 (File No. 1-08940).
Form of Restricted Stock Agreement, dated as of January 25, 2012. Incorporated by reference to
Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).*
Form of Restricted Stock Agreement, dated as of May 16, 2012. Incorporated by reference to Altria
Group, Inc.’s Current Report on Form 8-K filed on May 17, 2012 (File No. 1-08940).*
Form of Restricted Stock Agreement, dated as of January 29, 2013. Incorporated by reference to
Altria Group, Inc.’s Current Report on Form 8-K filed on January 31, 2013 (File No. 1-08940).*
Form of Deferred Stock Agreement, dated as of January 29, 2013. Incorporated by reference to
Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2013 (File No.
1-08940).*
Form of Restricted Stock Agreement, dated as of January 28, 2014. Incorporated by reference to
Altria Group, Inc.’s Current Report on Form 8-K filed on January 30, 2014 (File No. 1-08940).*
Form of Deferred Stock Agreement, dated as of January 28, 2014. Incorporated by reference to
Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No.
1-08940).*
Form of Restricted Stock Unit Agreement, dated as of January 28, 2015. Incorporated by reference
to Altria Group, Inc.’s Current Report on Form 8-K filed on January 30, 2015 (File No. 1-08940).*
Form of Executive Confidentiality and Non-Competition Agreement. Incorporated by reference to
Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).*
Time Sharing Agreement between Altria Client Services LLC and Martin J. Barrington, dated as of
November 19, 2015.*
Time Sharing Agreement between Altria Client Services Inc. and David R. Beran, dated as of July
25, 2012. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the
period ended June 30, 2012 (File No. 1-08940).*
115
10.43
10.44
12
21
23
24
31.1
31.2
32.1
32.2
99.1
99.2
99.3
Time Sharing Termination Letter from Altria Client Services Inc. to David R. Beran, dated February
27, 2015. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the
period ended March 31, 2015 (File No. 1-08940).*
Agreement and General Release between Altria Group, Inc. and David R. Beran, dated March 12,
2015. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the
period ended March 31, 2015 (File No. 1-08940).*
Statements regarding computation of ratios of earnings to fixed charges.
Subsidiaries of Altria Group, Inc.
Consent of independent registered public accounting firm.
Powers of attorney.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certain Litigation Matters.
Trial Schedule for Certain Cases.
Definitions of Terms Related to Financial Covenants Included in Altria Group, Inc.’s Amended and
Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30,
2013 (File No. 1-08940).
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF XBRL Taxonomy Extension Definition Linkbase.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to
participate.
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALTRIA GROUP, INC.
By:
/s/ MARTIN J. BARRINGTON
(Martin J. Barrington
Chairman, Chief Executive Officer
and President)
Date: February 25, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated:
Signature Title Date
/s/ MARTIN J. BARRINGTON
(Martin J. Barrington)
Director, Chairman, Chief Executive Officer
and President
February 25, 2016
/s/ WILLIAM F. GIFFORD, JR.
(William F. Gifford, Jr.)
Executive Vice President and
Chief Financial Officer
February 25, 2016
/s/ IVAN S. FELDMAN
(Ivan S. Feldman)
* GERALD L. BALILES,
JOHN T. CASTEEN III,
DINYAR S. DEVITRE,
THOMAS F. FARRELL II,
THOMAS W. JONES,
DEBRA J. KELLY-ENNIS,
W. LEO KIELY III,
KATHRYN B. MCQUADE,
GEORGE MUÑOZ,
NABIL Y. SAKKAB
*By:
/s/ MARTIN J. BARRINGTON
(MARTIN J. BARRINGTON
ATTORNEY-IN-FACT)
Vice President and Controller
February 25, 2016
Directors
February 25, 2016
117
Disclosure of Non-GAAP Financial Measures
Altria reports its financial results in accordance with U.S.
generally accepted accounting principles (GAAP). Altria’s man-
agement reviews certain financial results, including OCI, OCI
margins and diluted EPS, on an adjusted basis, which excludes
certain income and expense items that management believes
are not part of underlying operations. These items may include,
for example, loss on early extinguishment of debt, restructuring
charges, SABMiller plc (SABMiller) special items, certain tax
items, charges associated with tobacco and health litigation items,
and settlements of, and determinations made in connection with,
certain non-participating manufacturer (NPM) adjustment dis-
putes (such settlements and determinations are referred to collec-
tively as NPM Adjustment Items). Altria’s management does not
view any of these special items to be part of Altria’s sustainable
results as they may be highly variable, are difficult to predict
and can distort underlying business trends and results. Altria’s
management believes that adjusted financial measures provide
useful insight into underlying business trends and results and
provide a more meaningful comparison of year-over-year results.
Altria’s management uses adjusted financial measures for plan-
ning, forecasting and evaluating business and financial perfor-
mance, including allocating resources and evaluating results rel-
ative to employee compensation targets. These adjusted financial
measures are not consistent with GAAP and may not be calculat-
ed the same as similarly titled measures used by other companies.
These adjusted financials measures should thus be considered
as supplemental in nature and not considered in isolation or as a
substitute for the related financial information prepared in accor-
dance with GAAP. Reconciliations of historical adjusted financial
measures to corresponding GAAP measures are provided below.
Reconciliations of Adjusted Diluted EPS for the Full Years ended December 31,
Reported diluted EPS
NPM Adjustment Items
Tobacco and health litigation items
SABMiller special items
Loss on early extinguishment of debt
Asset impairment, exit, integration and acquisition-related costs
Tax items
Adjusted diluted EPS
Annual Growth Rate (2015 vs 2014)
2015
$ 2.67
(0.03)
0.05
0.04
0.07
—
—
$ 2.80
8.9%
2014
$ 2.56
(0.03)
0.01
0.01
0.02
0.01
(0.01)
$ 2.57
Reconciliations of Adjusted OCI for the Full Years ended December 31,
(dollars in millions)
Smokeable Products
Net revenues
Excise taxes
Revenues net of excise taxes
Reported OCI
NPM Adjustment Items
Asset impairment and exit costs
Tobacco and health litigation items
Change
2015
$22,792
(6,423)
$16,369
$ 7,569
(97)
—
127
2014
$21,939
(6,416)
$15,523
$ 6,873
(43)
(6)
27
Adjusted OCI
$ 7,599
$ 6,851
10.9%
Smokeless Products
2015
$1,879
(133)
$1,746
$1,108
—
4
—
$1,112
2014
$ 1,809
(138)
$ 1,671
$ 1,061
—
(1)
—
$ 1,060
Change
4.9%
From the
1800’s to
Today…
You’d never know our companies
came from humble beginnings
by looking at them today. When
George Weyman opened up his
tobacconist shop in Pittsburgh in
1822, he had no idea he was taking
the first steps toward creating
U.S. Smokeless Tobacco Company,
the world’s largest smokeless
tobacco company. And when
John Middleton opened his Phila-
delphia tobacco shop in 1856, he
was paving the way to become one
of America’s largest cigar manufac-
turers. Ste. Michelle’s roots were
built on the 1912 estate owned by
Frederick Stimson, and today has
grown to 10 wineries across three
states. In 1929, when Philip Morris
& Co. leaders selected Richmond,
VA to manufacture their cigarettes,
they didn’t realize their focus on
quality would help the company
soon sell more than half of all
cigarettes sold in the United States.
We’re proud that we’ve provided
thousands of manufacturing jobs
right here in America for almost a
century. And we’re proud of the
focus on quality and consumers
that has helped make us the leader
in the tobacco industry for 30 years.
Shareholder Information
Shareholder Response Center:
Computershare Trust Company,
N.A. (Computershare), our
transfer agent, will be happy to
answer questions about your
accounts, certificates, dividends
or the Direct Stock Purchase and
Dividend Reinvestment Plan.
Within the U.S. and Canada,
shareholders may call toll-free:
1-800-442-0077
From outside the U.S. or Canada,
shareholders may call:
1-781-575-3572
Postal address:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
To eliminate duplicate mailings,
please contact Computershare (if
you are a registered shareholder)
or your broker (if you hold your
stock through a brokerage firm).
Direct Stock Purchase and
Dividend Reinvestment Plan:
Altria Group, Inc. offers a Direct
Stock Purchase and Dividend
Reinvestment Plan, administered
by Computershare. For more
information, or to purchase
shares directly through the Plan,
please contact Computershare.
Shareholder Publications:
Altria Group, Inc. makes a variety
of publications and reports avail-
able. These include the Annual
Report, news releases and other
publications. For copies, please
visit our website at:
www.altria.com/investors
Altria Group, Inc. makes available
free of charge its filings (such as
proxy statements and Reports
on Form 10-K, 10-Q and 8-K)
with the U.S. Securities and
Exchange Commission (SEC).
For copies, please visit our
website at:
www.altria.com/SECfilings
If you do not have Internet
access, you may call:
1-804-484-8222
Internet Access
Helps Reduce Costs:
As a convenience to shareholders
and an important cost-reduction
and environmentally friendly
measure, you can register to
receive future shareholder
materials (i.e., Annual Report and
proxy statement) electronically.
Shareholders also can vote their
proxies electronically.
For complete instructions, please
visit our website at:
www.altria.com/investors
2016 Annual Meeting:
The Altria Group, Inc. Annual
Meeting of Shareholders will be
held at 9:00 a.m. (Eastern Time)
on Thursday, May 19, 2016 at
The Greater Richmond
Convention Center,
403 North Third Street,
Richmond, VA 23219.
For further information, call:
1-804-484-8838
Download the Altria IR App
Stay up to date with the latest
investor information on our
App. Download at the Apple
Store and at Google Play.
Stock Exchange
Listing:
The principal stock
exchange on which
Altria Group, Inc.’s
common stock (par value $0.331⁄3
per share) is listed is the New
York Stock Exchange (ticker sym-
bol: MO). As of January 31, 2016,
there were approximately
71,000 holders of record of Altria
Group, Inc.’s common stock.
Additional Information:
The information on the respec-
tive websites of Altria Group, Inc.
and its subsidiaries is not, and
shall not be deemed to be, a part
of this report or incorporated into
any other filings Altria Group, Inc.
makes with the SEC.
Trademarks and service marks
in this report are the registered
property of or licensed by Altria
Group, Inc. or its subsidiaries.
Mailing Addresses
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
altria.com
Philip Morris USA Inc.
P.O. Box 26603
Richmond, VA 23261-6603
philipmorrisusa.com
U.S. Smokeless Tobacco
Company LLC
P.O. Box 85107
Richmond, VA 23285-5107
ussmokeless.com
John Middleton Co.
6601 W. Broad Street
Richmond, VA 23230-1723
johnmiddletonco.com
Ste. Michelle Wine
Estates Ltd.
P.O. Box 1976
Woodinville, WA 98072-1976
smwe.com
Philip Morris
Capital Corporation
225 High Ridge Road
Suite 300 West
Stamford, CT 06905-3000
philipmorriscapitalcorp.com
Nu Mark LLC
6603 West Broad Street
Richmond, VA 23230-1723
nu-mark.com
The 2015 annual report was printed on FSC®
certified paper. The FSC® is an independent,
non-governmental, not-for-profit global
organization established to promote the
responsible management of the world’s forests.
Independent Auditors:
PricewaterhouseCoopers LLP
1021 E. Cary St., Suite 1250
Richmond, VA 23219
Transfer Agent and Registrar:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Design: Andra Design andradesignllc.com
Photography: Casey Templeton
Printer: Stephenson Printing Inc.
© Copyright 2015 Altria Group, Inc.
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
Altria Group, Inc.
2015 Annual Report
Altria’s
Operating Companies
Philip Morris USA Inc. (PM USA)
PM USA is the largest tobacco company
in the U.S. and has about half of the U.S.
cigarette market’s retail share.
U.S. Smokeless Tobacco
Company LLC (USSTC)
USSTC is the largest producer and marketer
of moist smokeless tobacco, one of the
fastest growing tobacco segments in the U.S.
John Middleton Co. (Middleton)
Middleton is a leading manufacturer of
machine-made large cigars and pipe tobacco.
Ste. Michelle Wine Estates Ltd. (Ste. Michelle)
Ste. Michelle ranks among the top-ten
producers of premium wines in the U.S.
Nu Mark LLC (Nu Mark)
Nu Mark is focused on responsibly developing
and marketing innovative tobacco products
for adult tobacco consumers.
Philip Morris Capital Corporation (PMCC)
PMCC manages an existing portfolio of
leveraged and direct finance lease investments.
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an Altria Company
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