Altria Group, Inc.2016 Annual Report Our BrandsOur HeritageOver the last 170 years, Philip Morris USA has grown from a small tobacco shop on London’s Bond Street into the nation’s leading cigarette manufacturer. Its Marlboro brand is one of the most well-known brands in the consumer products industry and is the leading cigarette brand in all 50 states.U.S. Smokeless Tobacco Co. traces its lineage back to 1822 when George Weyman, inventor of Copenhagen, opened a tobacco shop in Pittsburgh.Today, USSTC is the world’s largest smokeless tobacco company, and Copenhagen and Skoal combined represent more than half of the smokeless products category.John Middleton Co. was born over 160 years ago when its namesake opened a tobacco shop in downtown Philadelphia. It has since evolved into one of America’s largest cigar manufacturers, and the Black & Mild brand has become the best-selling tipped machine-made large cigar in the country.The wineries that eventually became Ste. Michelle Wine Estates were among the irst to make wines and plant classic vinifera varieties in Washington state. Today Ste. Michelle ranks among the top 10 producers of premium wine in the U.S., and its wineries produce some of the best wines in the world. Nu Mark was established in 2013. Its focus is on developing and marketing innovative tobacco products for adult tobacco consumers. Nu Mark’s long-term strategy is to attain a leading position in the U.S. e-vapor market.EST 1934EST 2013EST 1967EST 1847EST 1822EST 1856 1967an Altria Companyan Altria Companyan Altria CompanyAn Altria Innovation Companyan Altria Company 1Adjusted Diluted EPS Growth2 +8.2%20152016$3.03$2.80AnnualizedDividend Growth3 +8.0%August2015August2016$2.26$2.44Total ShareholderReturn4■ Altria ■ S&P 500■ S&P, Food, Beverage & Tobacco Index 20.5%12.0%8.8%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 general corporate expenses and amortization of intangibles. 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 16. Segment Reporting to the consolidated financial statements in Item 8 of the enclosed Annual Report on Form 10-K.1 Certain 2016 amounts include the impact of the Gain on AB InBev/SABMiller business combination. For further information, see Note 7. Investment in AB InBev/SABMiller to the consolidated financial statements in Item 8 of the enclosed Annual Report on Form 10-K. 2 Explanations and reconciliations of adjusted measures to corresponding GAAP financial measures are provided on the Disclosure of Non-GAAP Financial Measures pages at the back of this report. 3 Source: Altria company reports4 Note: Assumes quarterly reinvestment of dividends as of ex-dividend date. Source: Bloomberg Daily Return (December 31, 2015 - December 31, 2016)Results by Reportable SegmentConsolidated Results (dollars in millions, except per share data) 2016 2015 ChangeNet revenues $ 25,744 $ 25,434 1.2%Operating income 8,762 8,361 4.8% Net earnings attributable to Altria Group, Inc.1 14,239 5,241 171.7%Basic and diluted earnings per share (EPS) attributable to Altria Group, Inc.1 7.28 2.67 172.7%Cash dividends declared per share 2.35 2.17 8.3% 2016 2015 ChangeSmokeable Products Net revenues $ 22,851 $ 22,792 0.3% Operating companies income 7,768 7,569 2.6%Smokeless Products Net revenues $ 2,051 $ 1,879 9.2% Operating companies income 1,177 1,108 6.2%Wine Net revenues $ 746 $ 692 7.8% Operating companies income 164 152 7.9% Financial Highlights 2We are pleased to report to you another outstanding year for Altria and its companies. We met our inancial goals and achieved important milestones against an ambitious strategic plan. We also returned signiicant cash to you, our shareholders, strengthened our balance sheet, and improved our organizational culture and capability. In 2016 Altria: n Grew adjusted diluted EPS by 8.2%, in line with our long-term inancial objective to consistently grow adjusted diluted EPS at an average annual rate of 7% to 9%; n Delivered total shareholder returns of 20.5%, far outpacing the S&P 500 and S&P Food, Beverage & Tobacco Index and marking the fourth consecutive year that total shareholder return exceeded 20%;n Paid shareholders over $4.5 billion in dividends, and increased our dividend by 8.0%, marking the 50th increase in the past 47 years; and n Repurchased over $1 billion of Altria shares under an expanded and extended $3 billion share repurchase program. Maximizing Our Core Tobacco BusinessesOur core tobacco businesses form the foundation of our success, with their rich heritage, leading premium brands, and deep connections with adult tobacco consumers. The smokeable products segment performed well in 2016, growing adjusted operating companies income (OCI) 5.3% despite dificult year-ago comparisons. Marlboro remains the preeminent cigarette brand, with 44.0% market share and industry-leading equity scores. The brand achieved these results by staying true to its values while evolving over time to maintain relevance and vibrancy. In 2016, Marlboro expanded its presence in the growing menthol segment with the national expansion of Marlboro Menthol Slate, which includes an innovative soft touch pack. Marlboro also continues to enrich its connections with adult smokers through online and mobile engagement. In 2016, the brand connected with adult smokers 21 and older over 100 million times through digital channels, and Marlboro.com remains one of the top consumer packaged goods websites. The smokeless products segment delivered terriic results in 2016, growing adjusted OCI 11.0%. This strong performance was driven by Copenhagen, the largest and fastest growing smokeless tobacco brand in the U.S. Today, Copenhagen accounts for roughly one out of every three cans of moist smokeless tobacco sold in the U.S., and its growth further accelerated in 2016 with the successful national expansion of Copenhagen Mint. Together, Copenhagen and Skoal reached a 52.2% retail share in 2016, the highest full-year combined share since Altria’s acquisition of USSTC. Innovating for Our FutureWe continue to develop a portfolio of innovative tobacco products to meet Our core tobacco businesses form the foundation of our success, with their rich heritage, leading premium brands, and deep connections with adult tobacco consumers.Dear Fellow ShareholdersMartin J. Barrington, Chairman of the Board, CEO and President 3Martin J. BarringtonChairman of the Board, CEO and PresidentMarch 3, 2017evolving adult tobacco consumer desires. Nu Mark is making excellent progress toward achieving its long-term aspiration of becoming a leader in the e-vapor category. In 2016 Nu Mark expanded distribution of MarkTen XL, enhanced its pipeline of promising e-vapor products, and prepared to comply with the U.S. Food and Drug Administration’s (FDA) deeming regulations, which took effect in August. In heated tobacco, Altria continues to partner with Philip Morris International Inc. (PMI) on its FDA applications for IQOS. PM USA now has a commercial-ization team dedicated to preparing for the IQOS launch in the U.S., pending FDA approval. The team is working closely with PMI as it gains trade and consumer insights from other markets. Managing Our Diverse Income Streams and Strong Balance SheetOur diverse business model, including our positions in the wine and beer categories, helps us maintain consistent inancial performance over time. In the wine category, Ste. Michelle grew adjusted OCI nearly 10% in 2016 and continued to earn critical acclaim. For the second consecutive year, Ste. Michelle’s premium wines received over 260 ratings of 90 or better. Washington State’s oldest and largest winery, Chateau Ste. Michelle, received a “Top 100 Wineries of the Year” award for the 22nd time, more than any other U.S. producer.Our company irst entered the beer category in 1969-70 when it acquired Miller Brewing Co. for $230 million. In 2016, with Altria’s support of Anheuser-Busch InBev SA/NV’s (AB InBev) landmark business combination with SABMiller plc (SABMiller), we enhanced the value of our beer investment and our position in the global brewing proit pool. At the end of 2016, the fair market value of Altria’s 10.2% ownership of AB InBev was nearly $21 billion.Championing Responsibility and Harm Reduction We achieve our business success responsibly, including strict adherence to our company values. Responsibility is embedded in our Mission and foundational to how we do business. We are working diligently to develop innovative tobacco products with the potential to reduce harm and engaging with the FDA, scientiic community and public health experts to advocate for policies and actions that support harm reduction. For adult tobacco consumers who wish to stop using tobacco, we continue to provide cessation information and resources. And we continue to help reduce underage tobacco use by supporting proven and effective positive youth development programs and underage access prevention initiatives. We also invest in the communities where we live and work, funding local organizations that support education and youth development, protect the environment, provide arts and cultural programming, and support our military. Our employees volunteered nearly 45,000 hours to their communities and 95% of our executives served on community non-proit boards. In recognition of our efforts, Altria was again named one of America’s most community-minded companies by The Civic 50 in 2016, and ranked 31st on Corporate Responsibility Magazine’s 100 Best Corporate Citizens List. Creating a Diverse and Inclusive Culture We seek and value differences in our people, communities, and suppliers to drive our business success. We are diversifying our workforce at all levels and creating a more inclusive culture. We now have nine employee resource groups, which help activate our diverse talent as resources for employee development, engagement and business success. And our “Unleash Our Potential” cultural campaign encourages employees to learn from one another and celebrate successes in fostering diversity and inclusion, driving innovation, and simplifying our business. These efforts are yielding returns for the business and gaining external recognition. For the fourth straight year, Altria was named to DiversityInc’s list of 25 Noteworthy Companies for Diversity, and Minority Business News USA named Altria one of America’s most admired corporations for supplier diversity.In summary, we continue to deliver strong, consistent business performance and excellent shareholder returns. Thank you for your ongoing interest in and commitment to Altria, and for the continuing privilege of leading this great company.Responsibility is embedded in our Mission and foundational to how we do business.Our Goalsn Invest In Leadershipn Satisfy Adult Consumersn Align With Society n Create Substantial Value for ShareholdersOur Valuesn Integrity, Trust & Respectn Passion to Succeedn Executing With Quality n Driving Creativity Into Everything We Don Sharing With OthersOur MissionOur Mission is to own and develop inancially disciplined businesses that are leaders in responsibly providing adult tobacco and wine consumers with superior branded products. 4Gerald L. Baliles2,3,5,6 Retired Director and Chief Executive Officer, Miller Center of Public Affairs at the University of Virginia and former Governor of the Commonwealth of VirginiaDirector since 2008Martin J. Barrington3 Chairman of the Board, Chief Executive Officer and President, Altria Group, Inc. Director since 2012John T. Casteen III1,5,6 President Emeritus, University of VirginiaDirector since 2010Dinyar S. Devitre4,5 Former Chief Financial Officer, Altria Group, Inc.Director since 2008Thomas F. Farrell II2,3,6Chairman, President and Chief Executive Officer, Dominion Resources, Inc.Director since 2008Thomas W. Jones1,2,3,4Senior Partner, TWJ Capital LLC Director since 2002 Debra J. Kelly-Ennis1,5,6Retired President and Chief Executive Officer, Diageo Canada, Inc.Director since 2013 W. Leo Kiely III2,3,4,5Retired Chief Executive Officer, MillerCoors LLC Director since 2011 Kathryn B. McQuade1,2,4Retired Executive Vice President and Chief Financial Officer, Canadian Pacific Railway Limited Director since 2012George Muñoz1,3,4,6Principal, Muñoz Investment Banking Group, LLCPartner, Tobin & Muñoz Director since 2004Nabil Y. Sakkab3,4,5,6Retired Senior Vice President, Corporate Research and Development, The Procter & Gamble CompanyDirector since 2008Board of Directors4 Member of Finance Committee, Thomas W. Jones, Chair5 Member of Innovation Committee, Nabil Y. Sakkab, Chair6 Member of Nominating, Corporate Governance and Social Responsibility Committee, Gerald L. Baliles, Chair Committees Presiding Director, Thomas F. Farrell II1 Member of Audit Committee, George Muñoz, Chair2 Member of Compensation Committee, W. Leo Kiely III, Chair 3 Member of Executive Committee, Martin J. Barrington, ChairThe primary responsibility of the Board of Directors is to foster the long-term success of the company. The Board is responsible for establishing broad corporate policies, setting strategic direction, and overseeing management, which is responsible for Altria’s day-to-day operations. After 15 distinguished years of service, Thomas W. Jones will retire from Altria’s Board of Directors following the completion of his current term. We thank him for his long-standing service and his signiicant contributions to Altria over many years. 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, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia
(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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $135 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class
Common Stock, $0.33 1/3 par value
Outstanding at February 13, 2017
1,939,420,437 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 18, 2017, to be filed with the Securities and Exchange Commission on or about April 6, 2017, are incorporated by reference
into Part III hereof.
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TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings Mine
Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Item 16.
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
b
In January 2017, Altria Group, Inc. acquired the privately-
held Sherman Group Holdings, LLC and its subsidiaries (“Nat
Sherman”). Nat Sherman sells super-premium cigarettes and
premium cigars and joins PM USA and Middleton as part of
Altria Group, Inc.’s smokeable products segment.
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, 2016,
Altria Group, Inc.’s principal wholly-owned subsidiaries were not
limited by long-term debt or other agreements in their ability to
pay cash dividends or make other distributions with respect to
their equity interests. In addition, Altria Group, Inc. receives cash
dividends on its interest in AB InBev if and when AB InBev 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
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 (the
“CODM”) reviews operating companies income to evaluate the
performance of, and allocate resources to, the segments.
Operating companies income for the segments is defined as
operating income before general corporate expenses and
amortization of intangibles. Interest and other debt expense, net,
and provision for income taxes are centrally managed at the
corporate level and, accordingly, such items are not presented by
segment since they are excluded from the measure of segment
profitability reviewed by the CODM. 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 16. Segment Reporting to
the consolidated financial statements in Item 8 (“Note 16”).
Information about total assets by segment is not disclosed because
such information is not reported to or used by the CODM.
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”).
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, 2016, Altria Group, Inc.’s wholly-owned
subsidiaries included Philip Morris USA Inc. (“PM USA”), which
is engaged in the manufacture and sale of cigarettes in the United
States; John Middleton Co. (“Middleton”), which is engaged in
the manufacture and sale of machine-made large cigars and pipe
tobacco and is a wholly-owned subsidiary of PM USA; 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 September 30, 2016, Altria Group, Inc. had an
approximate 27% ownership of SABMiller plc (“SABMiller”),
which Altria Group, Inc. accounted for under the equity method
of accounting. On October 10, 2016, Anheuser-Busch InBev SA/
NV (“Legacy AB InBev”) completed a business combination with
SABMiller in a cash and stock transaction (the “Transaction”). A
newly formed Belgian company, which retained the name
Anheuser-Busch InBev SA/NV (“AB InBev”), became the
holding company for the combined SABMiller and Legacy AB
InBev businesses. Upon completion of the Transaction, Altria
Group, Inc. had a 9.6% ownership of AB InBev based on AB
InBev’s shares outstanding at October 10, 2016. Following
completion of the Transaction, Altria Group, Inc. purchased
12,341,937 ordinary shares of AB InBev for a total cost of
approximately $1.6 billion, thereby increasing Altria Group, Inc.’s
ownership to approximately 10.2%. At December 31, 2016,
Altria Group, Inc. had an approximate 10.2% ownership of AB
InBev, which Altria Group, Inc. accounts for under the equity
method of accounting using a one-quarter lag. As a result of the
one-quarter lag and the timing of the completion of the
Transaction, no earnings from Altria Group, Inc.’s equity
investment in AB InBev were recorded for the year ended
December 31, 2016. For further discussion, see Note 7.
Investment in AB InBev/SABMiller to the consolidated financial
statements in Item 8. Financial Statements and Supplementary
Data of this Annual Report on Form 10-K (“Item 8”).
1
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
2016
2015
2014
86.2%
87.4%
87.2%
13.1
1.8
(1.1)
12.8
1.8
(2.0)
13.4
1.7
(2.3)
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 16.
Narrative Description of Business
Portions of the information called for by this Item are included in
Operating Results by Business Segment 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”).
Tobacco Space
Altria Group, Inc.’s tobacco operating companies include PM
USA, USSTC and other subsidiaries of UST, Middleton, Nu Mark
and Nat Sherman. 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, consisting of cigarettes
manufactured and sold by PM USA and Nat Sherman, machine-
made large cigars and pipe tobacco manufactured and sold by
Middleton and premium cigars sold by Nat Sherman; smokeless
tobacco products manufactured and sold by USSTC; and
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 122.9 billion units in 2016, a decrease of
2.5% from 2015. Marlboro, the principal cigarette brand of PM
USA, has been the largest-selling cigarette brand in the United
States for over 40 years. Nat Sherman sells substantially all of its
super-premium cigarettes in the United States.
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 1.4 billion units in
2016, an increase of 5.9% from 2015. Black & Mild is the
principal cigar brand of Middleton. Nat Sherman sources its
premium cigars from importers through third-party contract
manufacturing arrangements and sells substantially all of its
cigars in the United States.
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, and value brands, Red Seal and
Husky. Substantially all of the smokeless tobacco products are
manufactured and sold to customers in the United States. Total
smokeless products shipment volume was 853.5 million units in
2016, an increase of 4.9% from 2015.
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 began selling e-vapor products in 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 Nu Mark’s 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 platforms 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.’s subsidiaries and PMI will
collaborate to develop e-vapor products for commercialization in
the United States by Altria Group, Inc.’s subsidiaries 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.
In the fourth quarter of 2016, PMI submitted a Modified Risk
Tobacco Product (“MRTP”) application for an electronically
heated tobacco product with the United States Food and Drug
Administration’s (“FDA”) Center for Tobacco Products and
announced that it plans to file its corresponding pre-market
tobacco product application during the first quarter of 2017. The
FDA must determine whether to accept the applications for
substantive review. Upon regulatory authorization by the FDA,
Altria Group, Inc.’s subsidiaries will have an exclusive license to
sell this heated tobacco product in the United States.
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
2
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 FDA with broad
authority to regulate the design, manufacture, packaging,
advertising, promotion, sale and distribution of tobacco products;
the authority to require disclosures of related information; and the
authority to enforce the FSPTCA and related regulations. The
FSPTCA went into effect in 2009 for cigarettes, cigarette tobacco
and smokeless tobacco products and in August 2016 for all other
tobacco products, including cigars, e-vapor products, pipe tobacco
and oral tobacco-derived nicotine products (“Other Tobacco
Products”). The FSPTCA imposes restrictions on the advertising,
promotion, sale and distribution of tobacco products, including at
retail. 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 tobacco requirements through leaf
merchants. Nat Sherman purchases its tobacco requirements
through leaf merchants.
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, dark air-cured and flue-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 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 2016 wine shipment volume
of approximately 9.3 million cases increased 5.3% from 2015.
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, Patz
& Hall in Sonoma 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. 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.
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 8. Finance
Assets, net to the consolidated financial statements in Item 8
(“Note 8”).
Other Matters
Customers: The largest customer of PM USA, USSTC and
Middleton, McLane Company, Inc., accounted for approximately
25%, 26% and 27% of Altria Group, Inc.’s consolidated net
revenues for the years ended December 31, 2016, 2015 and 2014,
respectively. In addition, Core-Mark Holding Company, Inc.
3
accounted for approximately 14% and 10% of Altria Group, Inc.’s
consolidated net revenues for the years ended December 31, 2016
and 2015, respectively. Substantially all of these net revenues
were reported in the smokeable products and smokeless products
segments.
Sales to three distributors accounted for approximately 69%,
66% and 67% of net revenues for the wine segment for the years
ended December 31, 2016, 2015 and 2014, respectively.
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.
Employees: At December 31, 2016, Altria Group, Inc. and
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.
Available Information
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.
its subsidiaries employed approximately 8,300 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 13, 2017 of this Annual Report on Form
10-K.
Research and Development: Research and development
expense for the years ended December 31, 2016, 2015 and 2014
is set forth in Note 18. 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, 2016, the portfolio of over 700 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, 2016. 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
4
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
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. 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
_____________________________________________________
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.
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 19. Contingencies to the consolidated financial
statements in Item 8 (“Note 19”), 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, Altria Group, Inc. and its subsidiaries
may face potentially significant non-monetary remedies. For
example, in the lawsuit brought by the United States Department
of Justice, discussed in Note 19, 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
5
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 19 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 and sales volumes.
As described in Tobacco Space - Business Environment in Item 7,
our cigarette subsidiaries face significant governmental and
private sector actions, including efforts aimed at reducing the
incidence of tobacco use and efforts seeking to hold these
subsidiaries 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 adult tobacco consumer acceptability of or access
to tobacco products (for example, through product standards
including those that our tobacco companies may be unable to
achieve), 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.
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.
6
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 e-vapor products. Growth of
this product category could contribute to reductions in cigarette
consumption levels and cigarette industry sales volume and could
adversely affect the growth rates of other tobacco products.
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, real estate and
manufacturing equipment. Its lessees are subject to significant
competition and uncertain 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
do succeed, our tobacco subsidiaries may be at a competitive
disadvantage.
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.’s subsidiaries could decide or be required
to recall products, which 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
subsidiaries.
7
In addition to a recall required by the FDA, as referenced above,
our subsidiaries could decide, or laws or regulations could require
them, to recall products due to the failure to meet quality
standards or specifications, suspected or confirmed and deliberate
or unintentional product contamination, or other adulteration,
product misbranding or product tampering. In January 2017,
USSTC announced that it was voluntarily recalling certain of its
smokeless tobacco products manufactured at a USSTC facility
due to product tampering. USSTC will record a charge during the
first quarter of 2017 related to this recall. While this charge is not
expected to be material to Altria Group, Inc.’s financial
statements, future recalls (if any) 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.
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.
From time to time, Altria Group, Inc. 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.
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
or that we will realize any of the anticipated benefits from an
acquisition.
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. 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. Certain events can also trigger an
immediate review of intangible assets. If an impairment is
determined to exist in either situation, 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,
8
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
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.
Altria Group, Inc.’s reported earnings from and carrying
value of its equity investment in AB InBev and the dividends
paid by AB InBev on shares owned by Altria Group, Inc. 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 AB InBev are
translated into U.S. dollars from various local currencies. In
addition, AB InBev pays dividends in euros, which we convert
into U.S. dollars. During times of a strengthening U.S. dollar
against these currencies, our reported earnings from and carrying
value of our equity investment in AB InBev will be reduced
because these currencies will translate into fewer U.S. dollars and
the dividends that we receive from AB InBev will convert into
fewer U.S. dollars. Dividends and earnings from and carrying
value of our equity investment in AB InBev are also subject to the
risks encountered by AB InBev in its business.
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 AB InBev.
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 Transaction. Any of these outcomes
could result in increased costs to AB InBev, and could adversely
affect AB InBev’s financial condition, results of operations or
cash flows and Altria Group, Inc.’s reported earnings from and
carrying value of our equity investment in AB InBev.
We received a substantial portion of our consideration from
the Transaction in the form of restricted shares subject to a
five-year lock-up. Furthermore, if our percentage ownership
in AB InBev were to be decreased below certain levels, we
may be subject to additional tax liabilities, suffer a reduction
in the number of directors that we can have appointed to the
AB InBev Board of Directors, and be unable to account for
our investment under the equity method of accounting.
Upon completion of the Transaction, we received a substantial
portion of our consideration in the form of restricted shares that
cannot be sold or transferred for a period of five years following
the Transaction, subject to limited exceptions. These transfer
restrictions will require us to bear the risks associated with our
investment in AB InBev for a five-year period that expires on
October 10, 2021. Further, in the event that our ownership
percentage in AB InBev were to be decreased below certain
levels, we may be subject to additional tax liabilities, the number
of directors that we have the right to have appointed to the AB
InBev Board of Directors could be reduced from two to one or
zero, and our use of the equity method of accounting for
investment in AB InBev could be challenged.
Our tax treatment of the Transaction consideration may be
challenged and the tax treatment of AB InBev dividends is not
expected to be as favorable as prior SABMiller dividends.
While we expect the equity consideration that we received from
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. We also anticipate that
the tax treatment of the dividends Altria Group, Inc. expects to
receive from AB InBev will not be as favorable as that associated
with the dividends we received from SABMiller.
Item 1B. Unresolved Staff Comments.
None.
9
Recent Developments
Smoking and Health Litigation
Engle Progeny Trial Results:
In McKeever, in February 2017, PM USA filed a notice to
invoke the discretionary jurisdiction of the Florida Supreme
Court.
In Pardue, in February 2017, the trial court granted PM USA’s
and R.J. Reynolds Tobacco Company’s (“R.J. Reynolds”) motion
for a remittitur, reducing the compensatory damages award from
approximately $5.9 million to approximately $5.2 million.
In Varner, in February 2017, PM USA paid plaintiff
approximately $600,000 to satisfy the judgment, interest and
related costs. PM USA will record a pre-tax provision of
approximately $600,000 in the first quarter of 2017.
In J. Brown, in February 2017, a Pinellas County jury returned
verdict in favor of plaintiff and against PM USA and R.J.
Reynolds awarding $5.4 million in compensatory damages and
allocating 35% of the fault to PM USA. The jury also awarded
plaintiff $200,000 in punitive damages against PM USA. The
court ruled that it will not apply the comparative fault reduction to
the compensatory damages.
In Martin, in February 2017, PM USA and R.J. Reynolds filed
a notice of appeal to the Florida Fourth District Court of Appeal.
In Allen, in February 2017, the Florida First District Court of
Appeal affirmed the trial court’s verdict.
Health Care Cost Recovery Litigation
NPM Adjustment Disputes: As discussed in Note 19, in 1998,
PM USA and certain other U.S. tobacco product manufacturers
entered into the 1998 Master Settlement Agreement (the “MSA”).
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”) for 2003-2015. In February
2017, the Supreme Court of Missouri denied Missouri’s motion to
order the Participating Manufacturers to arbitrate the question of
its diligent enforcement in a single-state arbitration for 2004, but
granted Missouri’s motion to modify, with respect to Missouri,
the pro rata judgment reduction related to the 2003 NPM
Adjustment. As a result of the judgment reduction decision, 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. In addition, PM USA will record a
corresponding reduction to its pre-tax earnings in the first quarter
of 2017.
Item 4. Mine Safety Disclosures.
Not applicable.
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, 2016, 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, 2016, the smokeless products segment used
four smokeless tobacco manufacturing and processing facilities
located in Franklin Park, Illinois; Nashville, Tennessee; and two
facilities in Hopkinsville, Kentucky, all of which are owned and
operated by USSTC.
As disclosed in Note 5. Asset Impairment, Exit and
Implementation Costs to the consolidated financial statements in
Item 8 (“Note 5”), in October 2016, Altria Group, Inc. announced
the consolidation of certain of its operating companies’
manufacturing facilities to streamline operations and achieve
greater efficiencies. Middleton will transfer its Limerick,
Pennsylvania operations to the Manufacturing Center site in
Richmond, Virginia (“Richmond Manufacturing Center”).
USSTC will transfer its Franklin Park, Illinois operations to its
Nashville, Tennessee facility and the Richmond Manufacturing
Center. The consolidation is expected to be completed by the first
quarter of 2018.
At December 31, 2016, the wine segment used 12 wine-
making facilities - seven in Washington, four 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 19 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, 2016 were
filed on Form 8-K on February 1, 2017 (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.
10
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last ive 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 investment of $100 in common stock and each of the indices as of the market close on December 31, 2011 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
$350
$300
$250
$200
$150
$100
$50
2011
2012
2013
2014
2015
2016
Date
December 2011
December 2012
December 2013
December 2014
December 2015
December 2016
Altria
Group, Inc.
$
$
$
$
$
$
100.00
111.77
143.69
193.28
237.92
286.61
Altria
Group, Inc.
Peer Group
$
$
$
$
$
$
100.00
108.78
135.61
151.74
177.04
192.56
S&P 500
$ 100.00
$ 115.99
$ 153.55
$ 174.55
$ 176.94
$ 198.09
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1) In 2016, 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-Palmolive Company, Conagra Brands, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation,
The Kraft Heinz Company, Mondelēz 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 Mondelēz 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).
On November 9, 2016, ConAgra Foods, Inc. (CAG) spun off Lamb Weston Holdings, Inc. (LW) to its shareholders and then changed its name from ConAgra
Foods, Inc. to Conagra Brands, Inc. (CAG).
11
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 13, 2017, there were approximately 68,000 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.
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Price Per Share
High
Low
Cash Dividends
Declared Per Share
$
$
$
$
$
$
$
$
68.03
70.15
69.26
63.15
61.74
56.39
52.99
56.70
$
$
$
$
$
$
$
$
60.82
62.46
59.48
56.15
53.68
47.41
47.31
48.52
$
$
$
$
$
$
$
$
0.61
0.61
0.565
0.565
0.565
0.565
0.52
0.52
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2016
In July 2015, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) authorized a $1.0 billion share repurchase program that
it expanded to $3.0 billion in October 2016 (as expanded, the “July 2015 share repurchase program”). Altria Group, Inc. expects to
complete the July 2015 share repurchase program by the end of the second quarter of 2018. 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, 2016, was as follows:
Period
October 1- October 31, 2016
November 1- November 30, 2016
December 1- December 31, 2016
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
2,393,027
3,395,434
2,343,025
$
$
$
62.61
63.19
65.46
2,392,200
3,394,623
2,340,000
$
$
$
2,302,733,059
2,088,226,586
1,935,041,770
For the Quarter Ended December 31, 2016
(1) The total number of shares purchased includes (a) shares purchased under the July 2015 share repurchase program (which totaled 2,392,200
8,126,823
8,131,486
63.67
$
shares in October, 3,394,623 shares in November and 2,340,000 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 units, and forfeitures of restricted stock for which
consideration was paid in connection with termination of employment of certain employees (which totaled 827 shares in October, 811 shares in
November and 3,025 shares in December).
12
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
Gain on AB InBev/SABMiller business combination
Earnings before income taxes (1)
Pre-tax profit margin (1)
Provision for income taxes (1)
Net earnings (1)
Net earnings attributable to Altria Group, Inc. (1)
Basic and Diluted EPS — net earnings attributable to Altria Group, Inc. (1)
Dividends declared per share
Weighted average shares (millions) — Basic and Diluted
Capital expenditures
Depreciation
Property, plant and equipment, net
Inventories
Total assets (1)(2)
Long-term debt (2)
Total debt (2)
Total stockholders’ equity (1)
Common dividends declared as a % of Basic and Diluted EPS (1)
Book value per common share outstanding (1)
Market price per common share — high/low
Closing price per common share at year end
Price/earnings ratio at year end — Basic and Diluted (1)
Number of common shares outstanding at year end (millions)
Approximate number of employees
2016
2015
2014
2013
2012
$
25,744
$
25,434
$
24,522
$
24,466
$
24,618
7,746
6,407
8,762
747
795
13,865
21,852
84.9%
7,608
14,244
14,239
7.28
2.35
1,952
189
183
1,958
2,051
45,932
13,881
13,881
12,773
7,740
6,580
8,361
817
757
5
8,078
31.8%
2,835
5,243
5,241
2.67
2.17
1,961
229
204
1,982
2,031
31,459
12,843
12,847
2,873
7,785
6,577
7,620
808
1,006
—
7,774
31.7%
2,704
5,070
5,070
2.56
2.00
1,978
163
188
1,983
2,040
33,440
13,610
14,610
3,010
7,206
6,803
8,084
1,049
991
—
6,942
28.4%
2,407
4,535
4,535
2.26
1.84
1,999
131
192
2,028
1,879
33,858
13,907
14,432
4,118
7,937
7,118
7,253
1,126
1,224
—
6,477
26.3%
2,294
4,183
4,180
2.06
1.70
2,024
124
205
2,102
1,746
34,252
12,346
13,805
3,170
32.3%
6.57
81.3%
1.47
78.1%
1.53
81.4%
2.07
82.5%
1.58
70.15-56.15
61.74-47.31
51.67-33.80
38.58-31.85
36.29-28.00
67.62
9
1,943
8,300
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
(1) Certain 2016 amounts include the impact of the Gain on AB InBev/SABMiller business combination. For further information, see Note 7 in Item 8.
(2) Certain prior-years’ amounts have been reclassified to conform with the current-year’s presentation due to the adoptions of certain accounting standards updates. For
further information, see Note 1 in Item 8.
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Altria Group, Inc. accounts for under the equity method of
accounting using a one-quarter lag. As a result of the one-
quarter lag and the timing of the completion of the Transaction,
no earnings from Altria Group, Inc.’s equity investment in AB
InBev were recorded for the year ended December 31, 2016.
Altria Group, Inc. receives cash dividends on its interest in AB
InBev if and when AB InBev pays such dividends. For further
discussion, see Note 7. Investment in AB InBev/SABMiller to
the consolidated financial statements in Item 8 (“Note 7”).
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.
In January 2017, Altria Group, Inc. acquired Nat Sherman,
which sells super-premium cigarettes and premium cigars and
joins PM USA and Middleton as part of Altria Group, Inc.’s
smokeable products segment.
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, 2016, Altria Group, Inc.’s wholly-owned
subsidiaries included PM USA, which is engaged 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, 2016, Altria Group, Inc.’s
principal wholly-owned subsidiaries were not limited by long-
term debt or other agreements in their ability to pay cash
dividends or make other distributions with respect to their
equity interests.
At September 30, 2016, Altria Group, Inc. had an
approximate 27% ownership of SABMiller, which Altria
Group, Inc. accounted for under the equity method of
accounting. On October 10, 2016, Legacy AB InBev
completed the Transaction, and AB InBev became the holding
company for the combined SABMiller and Legacy AB InBev
businesses. Upon completion of the Transaction, Altria Group,
Inc. had a 9.6% ownership of AB InBev based on AB InBev’s
shares outstanding at October 10, 2016. Following completion
of the Transaction, Altria Group, Inc. purchased 12,341,937
ordinary shares of AB InBev for a total cost of approximately
$1.6 billion, thereby increasing Altria Group, Inc.’s ownership
to approximately 10.2%. At December 31, 2016. Altria Group,
Inc. had an approximate 10.2% ownership of AB InBev, which
14
Executive Summary
lower interest and other debt expense, net; and
The following executive summary is intended to provide
significant highlights of the Discussion and Analysis that follows.
higher operating results from the financial services
business;
partially offset by:
lower earnings from Altria Group, Inc.’s equity
investment in SABMiller (excluding special items).
For further details, see the Consolidated Operating Results
and Operating Results by Business Segment sections of the
following Discussion and Analysis.
2017 Forecasted Results
In February 2017, Altria Group, Inc. forecasted that its 2017
full-year adjusted diluted EPS growth rate is expected to be in
the range of 7.5% to 9.5% over 2016 full-year adjusted diluted
EPS. This forecasted growth rate excludes the income and
expense items in the table below. Altria Group, Inc. expects
that its 2017 full-year effective tax rate on operations will be
approximately 36%.
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 that management believes are not part of underlying
operations. These items may include, for example, loss on
early extinguishment of debt, restructuring charges, gain on the
Transaction, AB InBev/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 Non-Participating Manufacturer (“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 19).
Altria Group, Inc.’s management cannot estimate on a
forward-looking basis the impact of certain income and
expense items, including those items noted in the preceding
paragraph, 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
United States generally accepted accounting principles (“U.S.
GAAP”) measure for, or reconciliation to, its adjusted diluted
EPS guidance or its effective tax rate on operations forecast.
In addition, the factors described in Item 1A represent
continuing risks to this forecast.
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, 2016, from the year ended
December 31, 2015, were due primarily to the following:
(in millions, except per share data)
For the year ended December 31, 2015
2015 NPM Adjustment Items
2015 Asset impairment, exit and integration
costs
2015 Tobacco and health litigation items
2015 SABMiller special items
2015 Loss on early extinguishment of debt
2015 Gain on AB InBev/SABMiller business
combination
2015 Tax items
Subtotal 2015 special items
2016 NPM Adjustment Items
2016 Asset impairment, exit, implementation
and acquisition-related costs
2016 Tobacco and health litigation items
2016 SABMiller special items
2016 Loss on early extinguishment of debt
2016 Patent litigation settlement
2016 Gain on AB InBev/SABMiller business
combination
2016 Tax items
Subtotal 2016 special items
Net
Earnings
5,241
(51)
$
Diluted
EPS
2.67
(0.03)
$
9
94
82
143
(3)
(11)
263
(11)
(135)
(71)
57
(541)
(13)
—
0.05
0.04
0.07
—
—
0.13
(0.01)
(0.07)
(0.04)
0.03
(0.28)
(0.01)
9,001
30
8,317
—
82
336
14,239
4.61
0.02
4.25
0.02
0.04
0.17
7.28
Fewer shares outstanding
Change in tax rate
Operations
$
For the year ended December 31, 2016
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.
$
Fewer Shares Outstanding: Fewer shares outstanding
during 2016 compared with 2015 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 driven
by tax benefits associated with the higher cumulative
dividends received from SABMiller and AB InBev in
2016.
Operations: The increase of $336 million in operations
shown in the table above was due primarily to the
following:
higher income from the smokeable products and
smokeless products segments;
lower investment spending in the innovative tobacco
products businesses;
15
Expense (Income), Net Excluded from Adjusted Diluted EPS
NPM Adjustment Items
Asset impairment, exit and
implementation costs
Tobacco and health litigation items
SABMiller special items
Loss on early extinguishment of debt
Patent litigation settlement
Gain on AB InBev/SABMiller
business combination
Tax items
2017
—
0.02
—
—
—
—
—
—
0.02
$
(1)
$
2016
0.01
0.07
0.04
(0.03)
0.28
0.01
(4.61)
(0.02)
(4.25)
$
$
(1) Represents restructuring charges in connection with the facilities
consolidation announced in October 2016. For further discussion, see
Note 5.
Altria Group, Inc. reports its financial results in
accordance with 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, including those items noted above. Altria Group, Inc.’s
management does not view any of these special items to be part
of Altria Group, Inc.’s underlying 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 the CODM 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.
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:
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.
16
Goodwill and indefinite-lived intangible assets recorded by
Altria Group, Inc. at December 31, 2016 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, 2016 were as follows:
(in millions)
Cigarettes
Smokeless products
Cigars
Wine
E-vapor
Total
$
$
Goodwill
— $
Indefinite-Lived
Intangible Assets
2
8,801
2,640
287
10
11,740
$
5,023
77
74
111
5,285
During 2016, 2015 and 2014, Altria Group, Inc. completed
its quantitative annual impairment test of goodwill and
indefinite-lived intangible assets, and no impairment charges
resulted. At December 31, 2016, the estimated fair values of all
reporting units and indefinite-lived intangible assets
substantially exceeded their carrying values.
In 2016, 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 discount rate used in performing substantially all of the
valuations was 8.5%.
In performing the 2016 discounted cash flow analysis,
Altria Group, Inc. made various judgments, estimates and
assumptions, the most significant of which were volume,
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
17
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; category growth rates; consumer
preferences; success of planned product expansions;
competitive activity; and income 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 19 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 the Fair and Equitable Tobacco Reform
Act of 2004 (“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. For the years ended December
31, 2016, 2015 and 2014, the aggregate amount recorded in cost
of sales with respect to the State Settlement Agreements,
FETRA (which expired after the third quarter of 2014) and FDA
user fees was approximately $4.9 billion, $4.8 billion and $4.9
billion, respectively.
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 19 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 in the consolidated statements of earnings.
Employee Benefit Plans: As discussed in Note 17. Benefit
Plans to the consolidated financial statements in Item 8 (“Note
17”), 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, 2016, Altria Group, Inc.’s discount rate
assumptions for its pension and postretirement plans obligations
decreased to 4.1% from 4.4% at December 31, 2015. Altria
Group, Inc. presently anticipates its 2017 pre-tax pension and
postretirement expense will be essentially unchanged versus
2016, excluding amounts in each year related to termination,
settlement and curtailment. Higher expected return on plan
assets due to the impact of voluntary pension contributions
totaling $500 million in September 2016 is expected to be offset
by the impact of higher amortization of unrecognized losses,
which includes the impact of the lower 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 $49 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
$45 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 $38
million. See Note 17 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. may be required to change the valuation allowance with
respect to foreign tax credit carryforwards, based upon
additional information to be received from AB InBev in 2017.
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 in its consolidated statements of earnings.
Altria Group, Inc. recognized income tax benefits and
charges in the consolidated statements of earnings during 2016,
2015 and 2014 as a result of various tax events.
For additional information on income taxes, see Note 15.
Income Taxes to the consolidated financial statements in Item 8
(“Note 15”).
Leasing: Substantially all of PMCC’s net revenues in
2016 related to income on leveraged leases and related gains on
asset sales. Income attributable to leveraged leases is initially
18
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 8.
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
For the Years Ended December 31,
2016
2015
2014
$ 22,851
2,051
746
96
$ 25,744
$ 22,792
1,879
692
71
$ 25,434
$ 21,939
1,809
643
131
$ 24,522
$
$
$
$
$
$
6,247
135
25
6,407
7,768
1,177
164
(99)
(21)
(222)
$
$
$
6,423
133
24
6,580
7,569
1,108
152
(169)
(21)
(237)
6,416
138
23
6,577
6,873
1,061
134
(185)
(20)
(241)
tax-related receivables
—
(41)
(2)
Corporate asset impairment and
exit costs
Operating income
(5)
8,762
$
—
8,361
$
—
7,620
$
As discussed further in Note 16, the CODM reviews
operating companies income to evaluate the performance of,
and allocate resources to, the segments. Operating companies
income for the segments is defined as operating income before
general corporate expenses and amortization of intangibles.
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 2016, 2015 and
2014 affected the comparability of statement of earnings
amounts.
Gain on AB InBev/SABMiller Business Combination:
As a result of the Transaction, during 2016, Altria Group, Inc.
recorded a pre-tax gain of approximately $13.9 billion. For
further discussion, see Note 7.
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. 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, 2016 and 2015. At December 31, 2016, PMCC’s
net finance receivables of approximately $1.1 billion, which are
included in finance assets, net, on Altria Group, Inc.’s
consolidated balance sheet, consisted of rents receivable ($1.6
billion) and the residual value of assets under lease ($0.5
billion), reduced by third-party nonrecourse debt ($0.8 billion)
and unearned income ($0.2 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.
Finance assets, net, of $1.0 billion at December 31, 2016 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 2016, 2015 and 2014,
PMCC’s review of estimated residual values resulted in a
decrease of $28 million, $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 $18 million, $41 million and $26
million in 2016, 2015 and 2014, respectively.
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, 2016.
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
19
NPM Adjustment Items: For the years ended December
Asset Impairment, Exit, Implementation, Integration and
31, 2016, 2015 and 2014, pre-tax expense (income) for NPM
Adjustment Items was recorded in Altria Group, Inc.’s
consolidated statements of earnings as follows:
(in millions)
2016
2015
2014
Smokeable products segment
$
12
$ (97)
$ (43)
Interest and other debt expense, net
6
13
(47)
Total
$
18
$ (84)
$ (90)
The amounts shown in the table above for the smokeable
products segment were recorded by PM USA as increases
(reductions) to costs of sales, which decreased (increased)
operating companies income in the smokeable products segment.
For further discussion, see Health Care Cost Recovery Litigation
- NPM Adjustment Disputes in Note 19.
Tobacco and Health Litigation Items: For the years
ended December 31, 2016, 2015 and 2014, pre-tax charges
related to certain tobacco and health litigations items were
recorded in Altria Group, Inc.’s consolidated statements of
earnings as follows:
(in millions)
2016
2015
2014
Smokeable products segment
$ 88
$ 127
$
General corporate
Interest and other debt expense, net
Total
—
17
—
23
$ 105
$ 150
$
27
15
2
44
During 2016, PM USA recorded pre-tax charges of $88
million in marketing, administration and research costs, primarily
related to settlements in the Miner and Aspinall cases totaling
approximately $67 million and $16 million related to a judgment
in the Merino case. In addition, during 2016, PM USA recorded
$17 million in interest costs primarily related to Aspinall. For
further discussion, see Note 19.
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 19.
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 19.
Acquisition-Related Costs: Pre-tax asset impairment, exit,
implementation, integration and acquisition-related costs for the
years ended December 31, 2016, 2015 and 2014 were $206
million, $11 million and $21 million, respectively.
In October 2016, Altria Group, Inc. announced the
consolidation of certain of its operating companies’
manufacturing facilities to streamline operations and achieve
greater efficiencies. The consolidation is expected to be
completed by the first quarter of 2018 and deliver approximately
$50 million in annualized cost savings by the end of 2018.
As a result of the consolidation, Altria Group, Inc. expects to
record total pre-tax charges of approximately $150 million, or
$0.05 per share. Altria Group, Inc. incurred $71 million of this
amount during 2016 and expects to record approximately $70
million in 2017 and the remainder in 2018.
In January 2016, Altria Group, Inc. announced a productivity
initiative designed to maintain its operating companies’ leadership
and cost competitiveness. The initiative, which reduces spending
on certain selling, general and administrative infrastructure and
implements a leaner organizational structure, is expected to
deliver approximately $300 million in annualized productivity
savings by the end of 2017. As a result of the initiative, during
2016, Altria Group, Inc. incurred total pre-tax restructuring
charges of $132 million. Total pre-tax charges related to the
initiative have been substantially completed.
For further discussion on 2016 asset impairment, exit and
implementation costs, including a breakdown of these costs by
segment, see Note 5.
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 2016
and 2015, Altria Group, Inc. completed debt tender offers to
purchase for cash certain of its senior unsecured notes in
aggregate principal amounts of $0.9 billion and $0.8 billion,
respectively.
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)
2016
2015
2014
Premiums and fees
$
809
$
226
$
Write-off of unamortized debt
discounts and debt issuance costs
Total
14
823
$
2
$
228
$
44
—
44
For further discussion, see Note 10. Long-Term Debt to
the consolidated financial statements in Item 8 (“Note 10”).
20
SABMiller Special Items: Altria Group, Inc.’s earnings
from its equity investment in SABMiller for 2016 included
net pre-tax income of $89 million, due primarily to a pre-tax
non-cash gain of $309 million, reflecting Altria Group, Inc.’s
share of SABMiller’s increase to shareholders’ equity,
resulting from the completion of the SABMiller, The Coca-
Cola Company and Gutsche Family Investments transaction,
combining bottling operations in Africa, partially offset by
Altria Group, Inc.’s share of SABMiller’s costs related to the
Transaction and asset impairment charges. 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 2016 primarily included the
reversal of tax accruals no longer required. 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. For further discussion, see
Note 15.
2016 Compared with 2015
The following discussion compares consolidated operating results
for the year ended December 31, 2016 with the year ended
December 31, 2015.
Net revenues, which include excise taxes billed to
customers, increased $310 million (1.2%), due primarily to
higher net revenues in the smokeless products, smokeable
products and wine segments.
Cost of sales was essentially unchanged as higher per unit
settlement charges and NPM Adjustment Items in 2015 were
offset by lower shipment volume and lower pension and benefit
costs in the smokeable products segment.
Excise taxes on products decreased $173 million (2.6%),
due primarily to lower smokeable products shipment volume.
Marketing, administration and research costs decreased
$58 million (2.1%), due primarily to lower costs in the
smokeable products segment (which included lower tobacco
and health litigation items), partially offset by higher costs in
the smokeless products segment.
Operating income increased $401 million (4.8%), due
primarily to higher operating results from the smokeable
products and smokeless products segments (which included
asset impairment, exit and implementation costs in connection
with the facilities consolidation and productivity initiative in
2016), lower investment spending in the innovative tobacco
products businesses, a reduction of a PMI tax-related
receivable in 2015 and higher operating results from the
financial services business.
Interest and other debt expense, net, decreased $70 million
(8.6%), due primarily to lower interest costs on debt as a result
of a debt maturity in 2015 and debt tender offers in 2016 and
2015.
Earnings from Altria Group, Inc.’s equity investment in
SABMiller, which increased $38 million (5.0%), were
positively impacted by SABMiller special items, mostly offset
by three fewer months of SABMiller’s earnings in 2016 versus
2015, as a result of the timing of the completion of the
Transaction.
Net earnings attributable to Altria Group, Inc. of $14,239
million increased $8,998 million (171.7%), due primarily to the
gain on the Transaction, higher operating income and lower
interest and other debt expense, partially offset by a higher loss
on early extinguishment of debt. Diluted and basic EPS
attributable to Altria Group, Inc. of $7.28, each increased by
172.7% due to higher net earnings attributable to Altria Group,
Inc. and fewer shares outstanding.
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
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.
21
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 19, 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 (and related
enforcement actions) 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;
the highly competitive nature of the tobacco categories
in which our tobacco subsidiaries operate, including
22
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 rapidly from 2012
through early 2015, the category has slowed since that time. Nu
Mark believes the category will continue to be dynamic as adult
tobacco consumers explore a variety of tobacco product options.
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 Cautionary
Factors That May Affect Future Results below 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 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 tobacco products; (2) require disclosures of related
information; and (3) enforce the FSPTCA and related regulations.
The FSPTCA went into effect in 2009 for cigarettes, cigarette
tobacco and smokeless tobacco products and in August 2016 for
Other Tobacco Products. See FDA Regulatory Actions - Deeming
Regulations below.
Among other measures, the FSPTCA or its implementing
regulations:
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,
establishes warning requirements for Other Tobacco
Products, and gives the FDA the authority to require new
warnings for any type of tobacco products;
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 for the FDA to follow, including:
subjecting cigarettes, cigarette tobacco and smokeless
tobacco products modified or first introduced into the
market after March 22, 2011, and Other Tobacco Products
modified or first introduced into the market after August
8, 2016, to new tobacco product application and pre-
market review and authorization requirements unless a
manufacturer can demonstrate they are “substantially
equivalent” to products commercially marketed as of
February 15, 2007, and possibly to deny any such new
tobacco product application, thereby preventing the
distribution and sale of any product affected by such
denial;
determining that cigarettes, cigarette tobacco and
smokeless tobacco products modified or introduced into
the market for the first time between February 15, 2007
and March 22, 2011 for which a manufacturer submitted a
substantial equivalence report 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 (see
FDA Regulatory Actions - Substantial Equivalence and
Other New Product Processes/Pathways below);
determining that Other Tobacco Products modified or
introduced into the market for the first time between
February 15, 2007 and August 8, 2016 for which a
manufacturer submits a substantial equivalence report by
February 8, 2018 are not “substantially equivalent” to
products commercially marketed as of February 15, 2007,
or to reject a new tobacco product application submitted
by a manufacturer by August 8, 2018, both of which could
require the removal of such products from the
marketplace (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.
Implementation Timing, Rulemaking and Guidance: The
implementation of the FSPTCA began in 2009 for cigarettes,
cigarette tobacco and smokeless tobacco products and in August
2016 for Other Tobacco Products 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 issues guidance that also generally involves 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
23
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 user fees on cigarette, cigarette
tobacco, smokeless tobacco, cigar and pipe tobacco
manufacturers and importers to pay for the cost of regulation and
other matters. The FSPTCA does not impose user fees on e-vapor
product manufacturers. 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
Agreements, FETRA 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 period but could become material, either individually or in
the aggregate, to one or more of our tobacco subsidiaries.
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 withdrawal and recall
orders, 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
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. In January 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. In February
2016, plaintiffs filed a petition for rehearing, which was
denied in May 2016.
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 May 2016 amendments to the Final Tobacco Marketing Rule
24
(instituted as part of the FDA’s deeming regulations) apply certain
provisions to certain “covered tobacco products,” which include
cigars, e-vapor products containing nicotine or other tobacco
derivatives, pipe tobacco and oral tobacco-derived nicotine
products, but do not include any component or part that is not
made or derived from tobacco. The Final Tobacco Marketing
Rule as so amended:
bans the use of color and graphics in cigarette and
smokeless tobacco product labeling and advertising;
prohibits the sale of cigarettes, smokeless tobacco and
covered tobacco products to persons under the age of 18;
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 covered tobacco
products 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 cigarette or smokeless tobacco brands
or logos; and
prohibits cigarettes and smokeless tobacco 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 for cigarettes and
smokeless tobacco products and in August 2016 for covered
tobacco products. 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 in 2009, several lawsuits have been filed
challenging various provisions of the FSPTCA, the Final Tobacco
Marketing Rule and the deeming regulations, including their
constitutionality and the scope of the FDA’s authority thereunder.
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. PM USA and USSTC submitted comments on the proposed
amended rule.
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
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 cigarette, cigarette tobacco and smokeless tobacco
products commercially available before March 22, 2011,
manufacturers of such products were required to send to the
FDA a report demonstrating substantial equivalence by
March 22, 2011. These products are referred to as
“provisional products.” All cigarette and smokeless tobacco
products currently marketed by PM USA and USSTC are
provisional products, as are some of the products currently
marketed by Nat Sherman. Our subsidiaries submitted timely
reports for these products and 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. While our
cigarette and smokeless tobacco subsidiaries 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
25
respective substantial equivalence reports or seek to enforce
the law and regulations consistent with its guidance.
The FDA began announcing its decisions on substantial
equivalence reports for provisional cigarette, cigarette
tobacco and smokeless tobacco products in 2013. There are a
significant number of substantial equivalence reports for such
products for which the FDA has not announced decisions,
including reports submitted by our cigarette and smokeless
tobacco subsidiaries. At the request of the FDA, our cigarette
and smokeless tobacco subsidiaries have provided additional
information with respect to certain substantial equivalence
reports. At this time, it is not possible to predict how long
reviews by the FDA of substantial equivalence reports or new
tobacco product applications for any tobacco product will
take. A “not substantially equivalent” determination or denial
of a new tobacco product application on one or more
products could 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.
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. Our cigarette and smokeless tobacco
subsidiaries 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 order to continue marketing Other Tobacco Products
In September 2015, the FDA issued a second edition of
modified or introduced into the market for the first time
between February 15, 2007 and August 8, 2016,
manufacturers are required to send to the FDA a report
demonstrating substantial equivalence by February 8, 2018 or
a new tobacco product application by August 8, 2018. If a
manufacturer does not obtain a “substantial equivalence
order” from the FDA by February 8, 2019 or a “new tobacco
product marketing order” from the FDA by August 8, 2019,
the FDA could require the manufacturer to remove such
product from the marketplace.
Because of the limited number of e-vapor products on
the market as of February 14, 2007, Nu Mark may not be
able to file substantial equivalence reports with the FDA on
its e-vapor products in the market as of August 8, 2016. In
such case, Nu Mark would have to file new tobacco product
applications which, among other things, demonstrate that the
marketing of the e-vapor products would be appropriate for
the protection of the public health. It is uncertain how the
FDA will interpret the requirements for obtaining a “new
tobacco product marketing order.”
Manufacturers intending to first introduce new and
certain modified cigarette, cigarette tobacco and smokeless
tobacco products into the market after March 22, 2011 or
intending to first introduce new and certain modified Other
Tobacco Products into the market after August 8, 2016, must
submit a substantial equivalence report to the FDA and obtain
a “substantial equivalence order” from the FDA or submit a
new tobacco product application to the FDA and obtain a
“new tobacco product marketing order” from the FDA before
introducing the products into the market.
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)
the Substantial Equivalence Guidance (the “Revised SE
Guidance”), which continued 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. In October 2015,
plaintiffs filed a motion for summary judgment. Defendants
opposed the motion for summary judgment and moved to
dismiss the complaint in December 2015. In August 2016,
the court held that a modification to an existing product’s
label does not result in a “new tobacco product” and
therefore such a label change does not give rise to the
substantial equivalence review process. Accordingly, the
court vacated the Revised SE Guidance insofar as it pertains
to label changes, but upheld the guidance in all other
respects, including its treatment of product quantity changes
as modifications that give rise to a new tobacco product
requiring substantial equivalence review. The parties did not
appeal this decision, concluding the litigation.
Deeming Regulations: As discussed above under FSPTCA
and FDA Regulation - The Regulatory Framework, in May
2016, the FDA issued final regulations for all Other Tobacco
Products, imposing the FSPTCA regulatory framework on
the tobacco products manufactured, marketed and sold by
Middleton and Nu Mark. At the same time the FDA issued
its final deeming regulations, it also amended the Final
Tobacco Marketing Rule as described above in FSPTCA and
FDA Regulation - Final Tobacco Marketing Rule. Under the
new regulations, for Other Tobacco Products modified or
introduced into the market for the first time between
February 15, 2007 and August 8, 2016, manufacturers must
26
demonstrate substantial equivalence to a product on the
market as of February 15, 2007 or obtain a “new tobacco
marketing order” by certain specified dates to continue
marketing those products. For further details, see FSPTCA
and FDA Regulation - FDA Regulatory Actions - Substantial
Equivalence and Other New Product Processes/Pathways
above.
Among the FSPTCA requirements that apply to Other
Tobacco Products is a ban on descriptors, including “mild,”
when used as descriptors of modified risk unless expressly
authorized by the FDA. In May 2016, Middleton filed a
lawsuit in the U.S. District Court for the District of Columbia
against the FDA challenging the application of the descriptor
ban on the use of the word “mild” as it relates to the “Black
& Mild” trademark. In July 2016, the Department of Justice,
on behalf of the FDA, informed Middleton that at present the
FDA does not intend to bring an enforcement action against
Middleton for the use of the term “mild” in the trademark
“Black & Mild.” Consequently, Middleton dismissed its
lawsuit without prejudice. If the FDA were to change its
mind at some later date, Middleton would have the
opportunity to make a submission to the FDA and ultimately,
if necessary, to bring another lawsuit.
Smokeless Tobacco Product Standard: In January 2017, the
FDA proposed a product standard for N-nitrosonornicotine
(NNN) levels in finished smokeless tobacco products.
USSTC believes that the FDA has not adequately considered
whether the proposed standard is technically achievable and
further believes it would have a significant negative impact
on farmers and manufacturers. USSTC is advocating for
withdrawal of the proposed rule. If the FDA does not
withdraw the rule, USSTC plans to submit comments. If the
proposed rule as presently formulated were to become final
and upheld in the courts, it could have a material adverse
effect on the business, consolidated results of operations,
cash flows or financial position of Altria Group, Inc. and
USSTC.
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.
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 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 23, 2017, the weighted-
average state and certain local cigarette excise taxes increased
from $0.36 to $1.61 per pack. During 2016, Pennsylvania,
Louisiana and West Virginia enacted legislation to increase their
cigarette excise taxes and California passed a ballot measure to
increase its cigarette excise tax by $2.00 per pack and impose
corresponding increases on other tobacco products and e-vapor
products. As of February 23, 2017, no state has increased its
cigarette excise tax in 2017.
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
23, 2017, the federal government, 23 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 23, 2017, 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
27
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
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 19, 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 Agreements, FETRA and FDA
Regulation below and Note 19. 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).
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.
State and Local Legislation to Increase the Legal Age to
Purchase Tobacco Products: An increasing number of states
and localities have proposed legislation to increase the minimum
age to purchase tobacco products above the current Federal
minimum age of 18. The following states have enacted such
legislation: California (21), Hawaii (21), Alabama (19), Alaska
(19), New Jersey (19) and Utah (19). Various localities (such as
New York City (21) and Chicago (21)) have taken similar actions.
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.
28
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.
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 could
have a material adverse impact on the business and volume of our
tobacco subsidiaries and the consolidated results of operations,
cash flows or financial position of Altria Group, Inc. and its
tobacco subsidiaries.
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 our tobacco subsidiaries’
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,
economic trade sanctions, geopolitical instability 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 companies’ 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. Certain types of tobacco are also only available in
limited geographies. 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.
Certain types of tobacco are available in limited geographies and
loss of their availability could impact adult tobacco consumer
product acceptability. Any significant change in the price, quality
or availability of tobacco leaf or other agricultural products used
to manufacture our products could impact adult consumer product
acceptability and 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
29
(in millions)
2016
2015
2014
2016
2015
2014
Black & Mild
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
Smokeable
products
Smokeless
products
Total
smokeable
and
smokeless
products
$ 22,851
$ 22,792
$ 21,939
$ 7,768
$ 7,569
$ 6,873
2,051
1,879
1,809
1,177
1,108
1,061
$ 24,902
$ 24,671
$ 23,748
$ 8,945
$ 8,677
$ 7,934
Smokeable Products Segment
The smokeable products segment’s operating companies
income and operating companies income margin increased
during 2016 due primarily to higher pricing. PM USA grew
total cigarettes retail share by 0.1 percentage point for 2016.
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,
2016
2015
2014
105,297
108,113
6,382
11,251
6,753
11,152
122,930
126,018
1,379
24
1,403
1,295
30
1,325
108,023
7,047
10,320
125,390
1,246
25
1,271
Total smokeable products
124,333
127,343
126,661
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.
30
The following table summarizes the smokeable products
segment retail share performance:
Retail Share
For the Years Ended December 31,
2016
2015
2014
44.0%
44.0%
43.8%
2.7
4.7
2.8
4.5
2.9
4.2
51.4%
51.3%
50.9%
26.3%
0.4
26.7%
27.3%
0.3
27.6%
28.3%
0.4
28.7%
Cigarettes:
Marlboro
Other premium
Discount
Total cigarettes
Cigars:
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 executed the following pricing and promotional
allowance actions during 2016, 2015 and 2014:
Effective November 13, 2016, PM USA reduced its
wholesale promotional allowance on Marlboro by $0.02
per pack and L&M by $0.08 per pack. In addition, PM
USA increased the list price on Marlboro by $0.06 per
pack and on all of its other cigarette brands by $0.08 per
pack, except for L&M, which had no list price change.
Effective May 15, 2016, PM USA increased the list price
on all of its cigarette brands by $0.07 per pack.
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.
The following discussion compares operating results for
the smokeable products segment for the year ended December
31, 2016 with the year ended December 31, 2015.
Net revenues, which include excise taxes billed to
customers, increased $59 million (0.3%), due primarily to
higher pricing, which includes higher promotional investments,
partially offset by lower shipment volume ($577 million).
Operating companies income increased $199 million
(2.6%), due primarily to higher pricing, which includes higher
promotional investments, lower costs (due primarily to lower
pension and benefit costs) and lower tobacco and health
litigation items ($39 million). These factors were partially
offset by lower shipment volume ($298 million), higher per
unit settlement charges, costs in connection with the
productivity initiative and facilities consolidation ($134
million) and NPM Adjustment Items in 2015 ($97 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 19
and Item 3. For the years ended December 31, 2016, 2015 and
2014, product liability defense costs for PM USA were $234
million, $228 million and $230 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.
Total smokeable products reported shipment volume
decreased 2.4%. PM USA’s reported and adjusted domestic
cigarettes shipment volume decreased approximately 2.5%
driven primarily by the industry’s rate of decline. PM USA
estimates that full-year total industry cigarette volumes also
declined by approximately 2.5%.
PM USA’s shipments of premium cigarettes accounted for
90.8% of its reported domestic cigarettes shipment volume for
2016, versus 91.2% for 2015.
Middleton’s reported cigars shipment volume increased
5.9%, driven primarily by Black & Mild in the tipped cigars
segment.
Marlboro’s retail share was unchanged in 2016. PM USA
grew its total retail share 0.1 share point.
In the machine-made large cigars category, Black & Mild’s
retail share declined 1.0 share point.
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
($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).
Total smokeable products reported shipment volume
increased 0.5%. PM USA’s 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 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 increased
4.2%, driven primarily by Black & Mild in the tipped cigars
segment.
Marlboro’s retail share increased 0.2 share points.
PM USA grew its total retail share by 0.4 share points, 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 declined 1.0 share point, Black & Mild
gained retail share in the more profitable tipped cigars segment.
Smokeless Products Segment
During 2016, the smokeless products segment grew net
revenues and operating companies income, primarily through
higher shipment volume and higher pricing. USSTC increased
Copenhagen and Skoal’s combined retail share versus 2015.
31
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,
2014
448.6
269.6
718.2
75.1
793.3
2015
474.7
267.9
742.6
70.9
813.5
2016
525.1
260.9
786.0
67.5
853.5
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. 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.
The following table summarizes smokeless products
segment retail share performance (excluding international
volume):
Copenhagen
Skoal
Copenhagen and Skoal
Other
Total smokeless products
Retail Share
For the Years Ended December 31,
2014
30.7%
20.3
51.0
4.0
55.0%
2016
33.8%
18.4
52.2
3.4
55.6%
2015
31.6%
19.7
51.3
3.6
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. 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. For example, one pack of snus,
irrespective of the number of pouches in the pack, is assumed to
be equivalent to one can of MST. 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
2016, 2015 and 2014:
$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 10, 2016, USSTC increased the list price
on all its brands by $0.07 per can.
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.
The following discussion compares operating results for
the smokeless products segment for the year ended December
31, 2016 with the year ended December 31, 2015.
Net revenues, which include excise taxes billed to customers,
increased $172 million (9.2%), due primarily to higher shipment
volume ($111 million) and higher pricing, which includes higher
promotional investments, partially offset by mix due to growth in
popular price products.
Operating companies income increased $69 million (6.2%),
due primarily to higher shipment volume ($98 million) and higher
pricing, which includes higher promotional investments, partially
offset by costs in connection with the productivity initiative and
facilities consolidation ($57 million), product mix, higher
marketing, administration and research costs and higher
manufacturing costs.
The smokeless products segment’s reported domestic
shipment volume increased 4.9%, driven by Copenhagen,
partially offset by declines in Skoal and Other portfolio brands.
Copenhagen and Skoal’s combined reported domestic shipment
volume increased 5.8%.
After adjusting for trade inventory movements and other
factors, USSTC estimates that its domestic smokeless products
shipment volume grew approximately 5% for 2016. USSTC
estimates that the smokeless products category volume grew
approximately 2.5% over the six months ended December 31,
2016.
Copenhagen and Skoal’s combined retail share increased 0.9
share points to 52.2%. Copenhagen’s retail share increased 2.2
share points and Skoal’s retail share declined 1.3 share points.
Total smokeless products retail share increased 0.7 share
points to 55.6%.
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,
Effective December 6, 2016, USSTC increased the list
price on Copenhagen and Skoal popular price products by
increased $70 million (3.9%), due primarily to higher pricing,
which includes higher promotional investments.
32
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 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%.
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%. 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%.
Wine Segment
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, Patz & Hall in Sonoma 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 2016, due primarily to higher shipment volume. The
following table summarizes operating results for the wine
segment:
(in millions)
Net revenues
Operating companies income
For the Years Ended December 31,
2016
746
164
$
$
2015
692
152
$
$
2014
643
134
$
$
The following discussion compares operating results for the
wine segment for the year ended December 31, 2016 with the
year ended December 31, 2015.
Net revenues, which include excise taxes billed to customers,
increased $54 million (7.8%), due primarily to higher shipment
volume. Operating companies income increased $12 million
(7.9%), due primarily to higher shipment volume and improved
premium mix, partially offset by higher costs.
For 2016, Ste. Michelle’s reported wine shipment volume of
9,333 thousand cases grew 5.3%, driven primarily by growth
among its core premium brands.
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 of
8,866 thousand cases increased 6.2%.
Financial Review
Net Cash Provided by Operating Activities
During 2016, net cash provided by operating activities was $3.8
billion compared with $5.8 billion during 2015. This decrease
was due primarily to the following:
income taxes paid on both the cash proceeds from the
Transaction and gains from exercising derivative
financial instruments associated with the Transaction in
2016; and
voluntary contributions totaling $500 million to Altria
Group, Inc.’s pension plans during 2016;
partially offset by:
higher cumulative dividends received from AB InBev
and SABMiller in 2016.
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
33
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.
Altria Group, Inc. had a working capital deficit at December
31, 2016 and 2015. 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 Provided by/Used in Investing Activities
During 2016, net cash provided by investing activities was $3.7
billion compared with net cash used in investing activities of $15
million during 2015. This change was due primarily to the
following:
proceeds of $4.8 billion from the Transaction during
2016; and
proceeds of $0.5 billion from exercising derivative
financial instruments associated with the Transaction
during 2016;
partially offset by:
payment of approximately $1.6 billion for the purchase
of ordinary shares of AB InBev during 2016.
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 was completed in 2016;
partially offset by:
Nu Mark’s acquisition of the e-vapor business of Green
Smoke during 2014.
Capital expenditures for 2016 decreased 17.5% to $189
million, due primarily to higher capital expenditures during 2015
for the new USSTC manufacturing facility noted above. Capital
expenditures for 2017 are expected to be in the range of $180
million to $220 million, and are expected to be funded from
operating cash flows. The increase in expected capital
expenditures in 2017 compared with 2016 is due primarily to
spending related to the facilities consolidation.
Net Cash Used in Financing Activities
During 2016, net cash used in financing activities was $5.3 billion
compared with $6.7 billion during 2015. This decrease was due
primarily to the following:
debt issuance of $2.0 billion of senior unsecured notes
used in part to repurchase senior unsecured notes in
connection with the 2016 debt tender offer, as more fully
described in Note 10; and
$1.0 billion repayment of Altria Group, Inc. senior
unsecured notes at scheduled maturity in 2015;
partially offset by:
higher premiums, fees and repayments of debt in
connection with debt tender offers during 2016;
higher share repurchases during 2016; and
higher dividends paid during 2016.
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
notes and a $226 million payment of premiums and fees,
as more fully described in Note 10;
$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.
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. As a result of credit rating upgrades by
both Moody’s Investors Service, Inc. (“Moody’s”) and Standard
& Poor’s Ratings Services (“Standard & Poor’s”) in the first
quarter of 2016, the provision in certain of Altria Group, Inc.’s
senior unsecured notes issued in 2008 and 2009 that required an
adjustment to the cost of borrowings upon a change in credit
rating terminated in accordance with its terms. The impact of
credit ratings on the cost of borrowings under Altria Group, Inc.’s
credit agreement is discussed below. See the discussion in Item
1A regarding the potential adverse impact of certain events on
Altria Group, Inc.’s credit ratings.
34
At December 31, 2016, 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 13.5 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 20. Condensed Consolidating
Financial Information to the consolidated financial statements in
Item 8 (“Note 20”).
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, 2016 and 2015, Altria Group, Inc.’s
total debt was $13.9 billion and $12.8 billion, respectively.
During 2016, Altria Group, Inc. issued $0.5 billion aggregate
principal amount of 2.625% senior unsecured notes due 2026 and
$1.5 billion aggregate principal amount of 3.875% senior
unsecured notes due 2046. In addition, during 2016, Altria
Group, Inc. completed a debt tender offer to purchase for cash
certain of its senior unsecured notes in the aggregate principal
amount of $933 million.
All of Altria Group, Inc.’s debt was fixed-rate debt at
December 31, 2016 and 2015. The weighted-average coupon
interest rate on total debt was approximately 4.9% and
5.5% at December 31, 2016 and 2015, respectively.
For further details on long-term debt, see Note 10.
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.
At December 31, 2016, the credit ratings and outlook for
Altria Group, Inc.’s indebtedness by major credit rating agencies
were:
Short-term
Debt
Long-term
Debt
Outlook
A-
A3
P-2
A-1
Stable
Moody’s 1
Standard & Poor’s 2
F2
Fitch Ratings Ltd.
1 On March 9, 2016, Moody’s raised the long-term debt credit rating
for Altria Group, Inc. to A3 from Baa1.
2 On March 30, 2016, Standard & Poor’s raised the long-term debt
credit rating for Altria Group, Inc. to A- from BBB+ and the
short-term debt credit rating for Altria Group, Inc. to A-1 from
A-2.
Stable
Stable
BBB+
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, 2016, 2015 and 2014, Altria Group, Inc. had no
short-term borrowings.
At December 31, 2016, Altria Group, Inc. had in place a
senior unsecured 5-year revolving credit agreement (the “Credit
Agreement”). The Credit Agreement provides for borrowings up
to an aggregate principal amount of $3.0 billion and expires
August 19, 2020.
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 senior unsecured long-term 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, 2016 for borrowings under the Credit Agreement
was 1.125%. 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, 2016, 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.
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 19, 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, 2016. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated
entities. In addition, as discussed in Note 20, 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.
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,
2016:
(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
2017
2018 - 2019
2020 - 2021
$
14,017
$
— $
2,008
$
2,500
$
9,096
259
3,118
807
3,925
2,366
$
29,663
$
693
52
968
588
1,556
147
2,448
$
1,303
81
1,211
186
1,397
294
5,083
2022 and
Thereafter
9,509
6,167
72
440
—
440
933
54
499
33
532
286
4,305
$
1,639
17,827
$
(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, 2016, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts
and debt issuance costs, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net in 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 services, contract manufacturing, 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 2017 through 2021.
Contributions beyond 2021 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 19 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 19, 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 Agreements, FETRA and
FDA Regulation - As discussed previously and in Note 19 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 user
fees as a component of cost of sales. For the years ended
December 31, 2016, 2015 and 2014, the aggregate amount
recorded in cost of sales with respect to the State Settlement
Agreements, FETRA (which expired after the third quarter of
36
2014) and FDA user fees was approximately $4.9 billion, $4.8
billion and $4.9 billion, respectively. 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 19.
Based on current agreements, 2016 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 2017 and each year
thereafter. 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.
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, 2016, PM USA
had posted various forms of security totaling approximately $82
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 19, 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 12. Stock Plans to the consolidated financial
statements in Item 8, during 2016 Altria Group, Inc. granted an
aggregate of 0.9 million shares of restricted stock units to eligible
employees.
At December 31, 2016, the number of shares to be issued
upon vesting of restricted stock units was not significant.
Dividends paid in 2016 and 2015 were approximately $4.5
billion and $4.2 billion, respectively, an increase of 8.0%,
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 2016, the Board of Directors
approved an 8.0% increase in the quarterly dividend rate to $0.61
per share of Altria Group, Inc. common stock versus the previous
rate of $0.565 per 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
$2.44 per share. Future dividend payments remain subject to the
discretion of the Board of Directors.
During 2016, 2015 and 2014 the Board of Directors
authorized Altria Group, Inc. to repurchase shares of its
outstanding common stock under several share repurchase
programs.
At December 31, 2016, Altria Group, Inc. had approximately
$1,935 million remaining in the July 2015 share repurchase
program, which it expects to complete by the end of the second
quarter of 2018. For further discussion of Altria Group, Inc.’s
share repurchase programs, see Note 11. 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.
Recent Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of recent accounting guidance issued
but not yet adopted.
Contingencies
See Note 19 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
At December 31, 2016 and 2015, the fair value of Altria Group,
Inc.’s total debt was $15.1 billion and $14.5 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,
2016 and 2015 would decrease the fair value of Altria Group,
Inc.’s total debt by approximately $1.2 billion and $1.1 billion,
respectively. A 1% decrease in market interest rates at
December 31, 2016 and 2015 would increase the fair value of
Altria Group, Inc.’s total debt by approximately $1.4 billion
and $1.3 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, 2016 for
borrowings under the Credit Agreement was 1.125%. At
December 31, 2016, Altria Group, Inc. had no borrowings
under the Credit Agreement.
37
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
at December 31,
Assets
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Other current assets
Total current assets
Property, plant and equipment, at cost:
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress
Less accumulated depreciation
Goodwill
Other intangible assets, net
Investment in AB InBev/SABMiller
Finance assets, net
Other assets
Total Assets
See notes to consolidated financial statements.
2016
$
4,569
151
892
164
512
483
2,051
489
7,260
316
1,481
2,917
121
4,835
2,877
1,958
5,285
12,036
17,852
1,028
513
45,932
$
2015
2,369
124
957
181
444
449
2,031
387
4,911
295
1,406
2,969
207
4,877
2,895
1,982
5,285
12,028
5,483
1,239
531
31,459
$
$
38
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
____________________________________________
at December 31,
Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities:
Marketing
Employment costs
Settlement charges
Other
Dividends payable
Total current liabilities
Long-term debt
Deferred income taxes
Accrued pension costs
Accrued postretirement health care costs
Other liabilities
Total liabilities
Contingencies (Note 19)
Redeemable noncontrolling interest
Stockholders’ Equity
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
(862,689,093 shares at December 31, 2016 and
845,901,836 shares at December 31, 2015)
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
$
See notes to consolidated financial statements.
39
$
2016
— $
425
747
289
3,701
1,025
1,188
7,375
13,881
8,416
805
2,217
427
33,121
2015
4
400
695
198
3,590
1,073
1,110
7,070
12,843
4,667
1,277
2,245
447
28,549
38
37
935
5,893
36,906
(2,052)
(28,912)
12,770
3
12,773
45,932
$
935
5,813
27,257
(3,280)
(27,845)
2,880
(7)
2,873
31,459
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
Reductions of PMI and Mondelēz tax-related receivables
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
Gain on AB InBev/SABMiller business combination
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:
Basic and diluted earnings per share attributable to Altria Group, Inc.
See notes to consolidated financial statements.
2016
25,744
7,746
6,407
11,591
2,650
—
179
8,762
747
823
(795)
(13,865)
21,852
7,608
14,244
(5)
14,239
7.28
$
$
$
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
2.67
$
$
$
2014
24,522
7,785
6,577
10,160
2,539
2
(1)
7,620
808
44
(1,006)
—
7,774
2,704
5,070
—
5,070
2.56
$
$
$
40
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
_______________________
for the years ended December 31,
Net earnings
Other comprehensive earnings (losses), net of deferred income taxes:
2016
$
14,244
$
2015
5,243
$
2014
5,070
Currency translation adjustments
Benefit plans
SABMiller
Other comprehensive earnings (losses), net of deferred income taxes
1
(38)
1,265
1,228
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to Altria Group, Inc.
15,472
(5)
15,467
$
$
See notes to consolidated financial statements.
(3)
30
(625)
(598)
4,645
(2)
4,643
(2)
(767)
(535)
(1,304)
3,766
—
$
3,766
41
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:
2016
2015
2014
$
14,244
$
5,243
$
5,070
Depreciation and amortization
Deferred income tax provision (benefit)
Earnings from equity investment in SABMiller
Gain on AB InBev/SABMiller business combination
Dividends from AB InBev/SABMiller
Asset impairment and exit costs, net of cash paid
Loss on early extinguishment of debt
Cash effects of changes, net of the effects from acquisition of Green Smoke:
Receivables
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
Proceeds from AB InBev/SABMiller business combination
Purchase of AB InBev ordinary shares
Payment for derivative financial instruments
Proceeds from derivative financial instruments
Other
Net cash provided by (used in) 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:
Increase (decrease)
Balance at beginning of year
Balance at end of year
Cash paid: Interest
Income taxes
See notes to consolidated financial statements.
$
$
$
42
204
3,119
(795)
(13,865)
739
106
823
(27)
(34)
(6)
(231)
(113)
111
(531)
(73)
120
3,791
(189)
—
231
4,773
(1,578)
(3)
510
(36)
3,708
1,976
(933)
(1,030)
(4,512)
(809)
9
(5,299)
2,200
2,369
4,569
775
4,664
225
(132)
(757)
(5)
495
1
228
3
(33)
(7)
(12)
184
90
(28)
114
201
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
(9)
44
(8)
(184)
(5)
1
(107)
109
(15)
21
217
4,663
(163)
(102)
369
—
—
—
—
73
177
999
(825)
(939)
(3,892)
(44)
7
(4,694)
146
3,175
3,321
820
2,765
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
____________________________________
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
$
5,714
$
25,168
$
(1,378) $
(26,320) $
(1) $
—
—
—
—
—
935
—
—
—
—
—
935
—
—
—
—
—
—
—
—
21
—
—
5,735
—
—
78
—
—
5,813
—
—
90
—
—
(10)
5,070
—
—
(3,961)
—
26,277
5,241
—
—
(4,261)
—
27,257
14,239
—
—
(4,590)
—
—
—
(1,304)
—
—
—
(2,682)
—
(598)
—
—
—
—
—
8
—
(939)
(27,251)
—
—
(40)
—
(554)
(3,280)
(27,845)
—
1,228
—
—
—
—
—
—
(37)
—
(1,030)
—
4,118
5,067
(1,304)
29
(3,961)
(939)
3,010
5,238
(598)
38
(4,261)
(554)
2,873
14,239
1,228
53
(4,590)
(1,030)
—
(3)
—
—
—
—
(4)
(3)
—
—
—
—
(7)
—
—
—
—
—
10
3
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
Net earnings (1)
Other comprehensive earnings, net
of deferred income taxes
Stock award activity
Cash dividends declared ($2.35 per share)
Repurchases of common stock
Other
Balances, December 31, 2016
$
935
$
5,893
$
36,906
$
(2,052) $
(28,912) $
$
12,773
(1) Amounts attributable to noncontrolling interests for the years ended December 31, 2016, 2015 and 2014 exclude net earnings of $5 million, $5 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 on the consolidated
balance sheets at December 31, 2016, 2015 and 2014, respectively. See Note 19.
See notes to consolidated financial statements.
43
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 1. Background and Basis of Presentation
Background: At December 31, 2016, Altria Group, Inc.’s
wholly-owned subsidiaries included Philip Morris USA Inc. (“PM
USA”), which is engaged in the manufacture and sale of
cigarettes in the United States; John Middleton Co.
(“Middleton”), which is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco and is a wholly-
owned subsidiary of PM USA; 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, 2016,
Altria Group, Inc.’s principal wholly-owned subsidiaries were not
limited by long-term debt or other agreements in their ability to
pay cash dividends or make other distributions with respect to
their equity interests.
At September 30, 2016, Altria Group, Inc. had an
approximate 27% ownership of SABMiller plc (“SABMiller”),
which Altria Group, Inc. accounted for under the equity method
of accounting. On October 10, 2016, Anheuser-Busch InBev SA/
NV (“Legacy AB InBev”) completed a business combination with
SABMiller in a cash and stock transaction (the “Transaction”). A
newly formed Belgian company, which retained the name
Anheuser-Busch InBev SA/NV (“AB InBev”), became the
holding company for the combined SABMiller and Legacy AB
InBev businesses. Upon completion of the Transaction, Altria
Group, Inc. had a 9.6% ownership of AB InBev based on AB
InBev’s shares outstanding at October 10, 2016. Following
completion of the Transaction, Altria Group, Inc. purchased
12,341,937 ordinary shares of AB InBev for a total cost of
approximately $1.6 billion, thereby increasing Altria Group, Inc.’s
ownership to approximately 10.2%. At December 31, 2016,
Altria Group, Inc. had an approximate 10.2% ownership of AB
InBev, which Altria Group, Inc. accounts for under the equity
method of accounting using a one-quarter lag. As a result of the
one-quarter lag and the timing of the completion of the
Transaction, no earnings from Altria Group, Inc.’s equity
investment in AB InBev were recorded for the year ended
December 31, 2016. Altria Group, Inc. receives cash dividends
on its interest in AB InBev if and when AB InBev pays such
dividends. For further discussion, see Note 7. Investment in AB
InBev/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.
Certain prior year amounts have been reclassified to conform
with the current year’s presentation due primarily to Altria Group,
Inc.’s 2016 adoptions of Accounting Standards Update (“ASU”)
No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes (“ASU No. 2015-17”) and ASU
No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs (“ASU No.
2015-03”). For further discussion, see Note 15. Income Taxes and
Note 10. Long-Term Debt.
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
44
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
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 19.
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.
45
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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 19. 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 in
its consolidated statements of earnings.
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 in 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 is determined based on the number
of shares granted and the market value at date of grant.
New Accounting Standards: The following table provides a description of the recently issued accounting guidance that Altria
Group, Inc. has not yet adopted:
Standards
ASU Nos. 2014-09;
2015-14; 2016-08;
2016-10; 2016-12;
2016-20
Revenue from
Contracts with
Customers (Topic 606)
Description
The guidance establishes principles
for reporting information about the
nature, amount, timing, and
uncertainty of revenue and cash
flows arising from an entity’s
contracts with customers.
Effective Date for Public Entity
The guidance is effective 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 periods within that
reporting period.
Effect on Financial Statements
The adoption of this guidance is not expected to
have a material impact on the amount or timing of
revenue recognized on Altria Group, Inc.’s
financial statements based on current contracts
with customers. The guidance will result in
expanded footnote disclosures. Altria Group, Inc.
plans to retrospectively adopt this guidance by the
first quarter of 2018.
46
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Standards
ASU No. 2016-01
Recognition and
Measurement of
Financial Assets and
Financial Liabilities
(Subtopic 825-10)
Description
The guidance addresses certain
aspects of recognition,
measurement, presentation and
disclosure of financial instruments.
Effective Date for Public Entity
The guidance is 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.
ASU No. 2016-02
Leases (Topic 842)
The guidance increases
transparency and comparability
among organizations by requiring
entities to recognize lease assets
and lease liabilities on the balance
sheet and disclose key information
about leasing arrangements.
The guidance is effective for
annual reporting periods beginning
after December 15, 2018, including
interim periods within that
reporting period. Early adoption is
permitted.
ASU No. 2016-09
Improvements to
Employee Share-Based
Payment Accounting
(Topic 718)
ASU No. 2016-13
Measurement of Credit
Losses on Financial
Instruments (Topic
326)
ASU No. 2016-15
Classification of
Certain Cash Receipts
and Cash Payments
(Topic 230)
ASU No. 2016-18
Restricted Cash
(Topic 230)
The guidance simplifies several
aspects of the accounting for share-
based payment transactions,
including the income tax
consequences, classification of
awards as either equity or
liabilities, and classification on the
statement of cash flows.
The guidance replaces the current
incurred loss impairment
methodology for recognizing credit
losses for financial assets with a
methodology that reflects the
entity’s current estimate of all
expected credit losses and requires
consideration of a broader range of
reasonable and supportable
information for estimating credit
losses.
The guidance addresses how eight
specific cash flow issues are to be
presented and classified in the
statement of cash flows.
The guidance requires that a
statement of cash flows explain the
change during the period in the
total of cash, cash equivalents and
amounts generally described as
restricted cash and restricted cash
equivalents.
The guidance is effective for
annual reporting periods beginning
after December 15, 2016, and
interim periods within that
reporting period. Early adoption is
permitted in any interim or annual
period.
The guidance is effective for
annual reporting periods beginning
after December 15, 2019, including
interim periods within that
reporting period. Early adoption is
permitted only as of annual
reporting periods beginning after
December 15, 2018, including
interim periods within that
reporting period.
The guidance is effective for fiscal
years beginning after December 15,
2017 and interim periods within
those fiscal years. Early adoption
is permitted, including adoption in
an interim period.
The guidance is effective for fiscal
years beginning after December 15,
2017 and interim periods within
those fiscal years. Early adoption
is permitted, including adoption in
an interim period.
47
Effect on Financial Statements
The adoption of this guidance is not expected to
have a material impact on Altria Group, Inc.’s
consolidated financial statements.
Altria Group, Inc. is in the process of evaluating
the impact of this guidance on its consolidated
financial statements and related disclosures,
including identifying and analyzing all contracts
that contain a lease. As a lessor, PMCC maintains
a portfolio of finance assets, substantially all of
which are leveraged leases, the accounting of
which will be unchanged under the new guidance
and is not expected to change unless there is a
contract modification to an existing lease. As a
lessee, Altria Group, Inc.’s various leases under
existing guidance are classified as operating leases
that are not recorded on the balance sheet but are
recorded in the statement of earnings as expense is
incurred. Upon adoption of the new guidance,
Altria Group, Inc. will be required to record
substantially all leases on the balance sheet as a
right-of-use asset and a lease liability. The timing
of expense recognition and classification in the
statement of earnings could change based on the
classification of leases as either operating or
financing.
The adoption of this guidance is not expected to
have a material impact on Altria Group, Inc.’s
consolidated financial statements. Altria Group,
Inc. expects to adopt this guidance effective
January 1, 2017.
Altria Group, Inc. is in the process of evaluating
the impact of this guidance on its consolidated
financial statements and related disclosures. Altria
Group, Inc.’s financial assets that are within the
scope of the new guidance are approximately 3%
of Altria Group, Inc.’s total assets at December 31,
2016.
Altria Group, Inc. is in the process of evaluating
the impact of this guidance on its consolidated
financial statements and related disclosures.
Altria Group, Inc. is in the process of evaluating
the impact of this guidance on its consolidated
financial statements and related disclosures.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
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. The purchase price allocation was completed in 2015.
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.
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, 2016
77
$
5,023
74
111
5,285
$
December 31, 2015
77
$
5,023
74
111
5,285
$
December 31, 2016
2,901
$
8,829
295
11
12,036
$
December 31, 2015
2,919
$
8,831
267
11
12,028
$
Goodwill relates to the 2014 acquisition of Green Smoke, 2009 acquisition of UST and 2007 acquisition of Middleton.
Other intangible assets consisted of the following:
(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, 2016, 2015 and 2014, was $21 million, $21 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.
December 31, 2016
December 31, 2015
Gross Carrying
Amount
11,740
465
12,205
$
$
$
$
Accumulated
Amortization
— $
169
169
$
Gross Carrying
Amount
11,711
465
12,176
Accumulated
Amortization
—
148
148
$
$
During 2016, 2015 and 2014, 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, 2016, 2015 and 2014,
there have been no changes in goodwill and the gross carrying
amount of other intangible assets except for Ste. Michelle’s 2016
purchase of substantially all of the assets of Patz & Hall Wine
Company, Inc. and 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, 2016
and 2015.
48
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
$
125
$
9
$
134
Productivity Initiative: In January 2016, Altria Group, Inc.
Note 5. Asset Impairment, Exit and Implementation
Costs
Pre-tax asset impairment, exit and implementation costs for
the year ended December 31, 2016 consisted of the
following:
Asset
Impairment
and Exit Costs (1)
Implementation
Costs
Total
(in millions)
Smokeable
products
Smokeless
products
All other
General corporate
$
Total
(1) Includes termination, settlement and curtailment costs of
$27 million. See Note 17. Benefit Plans.
$
$
42
7
5
179
15
—
—
24
57
7
5
203
The movement in the restructuring liabilities (excluding
termination, settlement and curtailment costs), substantially
all of which are severance liabilities, was as follows:
(in millions)
Charges
Cash spent
Balances at December 31, 2016
For the Year Ended
December 31, 2016
152
(73)
79
$
$
The pre-tax asset impairment, exit and implementation
costs for 2016 shown above are related to the facilities
consolidation and productivity initiative discussed below.
Facilities Consolidation: In October 2016, Altria Group,
Inc. announced the consolidation of certain of its operating
companies’ manufacturing facilities to streamline operations and
achieve greater efficiencies. Middleton will transfer its Limerick,
Pennsylvania operations to the Manufacturing Center site in
Richmond, Virginia (“Richmond Manufacturing Center”).
USSTC will transfer its Franklin Park, Illinois operations to its
Nashville, Tennessee facility and the Richmond Manufacturing
Center. Separation benefits will be paid to non-relocating
employees. The consolidation is expected to be completed by the
first quarter of 2018.
As a result of the consolidation, Altria Group, Inc. expects to
record total pre-tax charges of approximately $150 million, or
$0.05 per share. Of this amount, during 2016, Altria Group, Inc.
incurred pre-tax charges of $71 million, or approximately $0.03
per share, and expects to record approximately $70 million in
2017 and the remainder in 2018. The total estimated charges
relate primarily to accelerated depreciation ($55 million),
employee separation costs ($45 million) and other exit and
implementation costs ($50 million). Approximately $90 million
of the total pre-tax charges are expected to result in cash
expenditures.
For the year ended December 31, 2016, total pre-tax asset
impairment and exit costs for the consolidation of $54 million
49
were recorded in the smokeable products segment ($25 million)
and smokeless products segment ($29 million). In addition, for
the year ended December 31, 2016, pre-tax implementation costs
of $17 million were recorded in the smokeable products segment
($3 million) and smokeless products segment ($14 million). The
pre-tax implementation costs were included in cost of sales in
Altria Group, Inc.’s consolidated statement of earnings.
Cash payments related to the consolidation of $4 million
were made during the year ended December 31, 2016.
announced a productivity initiative designed to maintain its
operating companies’ leadership and cost competitiveness. The
initiative reduces spending on certain selling, general and
administrative infrastructure and implements a leaner
organizational structure. As a result of the initiative, during 2016,
Altria Group, Inc. incurred total pre-tax restructuring charges of
$132 million, or $0.04 per share, substantially all of which result
in cash expenditures. The charges consist of employee separation
costs of $117 million and other associated costs of $15 million.
Total pre-tax charges related to the initiative have been
substantially completed.
For the year ended December 31, 2016, total pre-tax asset
impairment and exit costs for the initiative of $125 million were
recorded in the smokeable products segment ($100 million),
smokeless products segment ($13 million), all other ($7 million)
and general corporate ($5 million). In addition, for the year
ended December 31, 2016, pre-tax implementation costs of $7
million were recorded in the smokeable products segment ($6
million) and smokeless products segment ($1 million). The pre-
tax implementation costs were included in marketing,
administration and research costs in Altria Group, Inc.’s
consolidated statement of earnings.
Cash payments related to the initiative of $69 million were
made during the year ended December 31, 2016.
Other Programs: 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.
Note 6. Inventories
The cost of approximately 62% and 65% of inventories at
December 31, 2016 and 2015, 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, 2016 and 2015.
Note 7. Investment in AB InBev/SABMiller
Prior to the completion of the Transaction on October 10, 2016,
Altria Group, Inc. held an approximate 27% ownership of
SABMiller that was accounted for under the equity method of
accounting.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Pre-tax earnings from Altria Group, Inc.’s equity investment
in SABMiller were $795 million, $757 million and $1,006 million
for the years ended December 31, 2016, 2015 and 2014,
respectively. Altria Group, Inc.’s earnings from its equity
investment in SABMiller for the year ended December 31, 2016
included a pre-tax non-cash gain of $309 million, reflecting Altria
Group, Inc.’s share of SABMiller’s increase to shareholders’
equity, resulting from the completion of the SABMiller, The
Coca-Cola Company and Gutsche Family Investments
transaction, combining bottling operations in Africa. As a result
of the timing of the completion of the Transaction, Altria Group,
Inc.’s pre-tax earnings from its equity investment in SABMiller
for the year ended December 31, 2016 included its share of
approximately nine months of SABMiller’s earnings.
Summary financial data of SABMiller is as follows:
(in millions)
Net revenues
Operating profit
Net earnings
(in millions)
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Noncontrolling interests
For the Years Ended December 31,
2014
$ 22,380
4,478
$
3,532
$
2016 (1)
$ 14,543
2,099
$
1,803
$
2015
$ 20,188
3,690
$
2,838
$
At December 31, 2015
4,266
38,425
6,282
13,960
1,235
$
$
$
$
$
(1) As a result of the timing of the completion of the Transaction,
summary financial data of SABMiller for the year ended December 31,
2016 included approximately nine months of SABMiller’s results.
The fair value of Altria Group, Inc.’s equity investment in
SABMiller at December 31, 2015 was based on unadjusted
quoted prices in active markets and was 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 was $25.8
billion as compared with its carrying value of $5.5 billion.
AB InBev and SABMiller Business Combination: On
October 10, 2016, Legacy AB InBev completed the Transaction,
and AB InBev became the holding company for the combined
SABMiller and Legacy AB InBev businesses. Under the terms of
the Transaction, SABMiller shareholders received 45 British
pounds (“GBP”) in cash for each SABMiller share held, with a
partial share alternative (“PSA”), which was subject to proration,
available for approximately 41% of the SABMiller shares.
Pursuant to the terms and conditions of an Irrevocable
Undertaking, previously delivered by Altria Group, Inc. in
November 2015, Altria Group, Inc. elected the PSA.
Upon completion of the Transaction and taking into account
proration, Altria Group, Inc. received, in respect of its
430,000,000 SABMiller shares, (i) an interest that was converted
into 185,115,417 restricted shares of AB InBev (the “Restricted
Shares”), representing a 9.6% ownership of AB InBev based on
AB InBev’s shares outstanding at October 10, 2016, and (ii)
approximately $4.8 billion in pre-tax cash as the cash component
50
of the PSA. Additionally, Altria Group, Inc. received pre-tax cash
proceeds of approximately $0.5 billion from exercising the
derivative financial instruments discussed below, which, together
with the pre-tax cash from the Transaction, totaled approximately
$5.3 billion in pre-tax cash. Following completion of the
Transaction, Altria Group, Inc. purchased 12,341,937 ordinary
shares of AB InBev for a total cost of approximately $1.6 billion,
thereby increasing Altria Group, Inc.’s ownership of AB InBev to
approximately 10.2%. At December 31, 2016, Altria Group, Inc.
had an approximate 10.2% ownership of AB InBev.
The Restricted Shares:
are unlisted and not admitted to trading on any stock
exchange;
are subject to a five-year lock-up (subject to limited
exceptions) ending October 10, 2021;
are convertible into ordinary shares of AB InBev on a
one-for-one basis after the end of this five-year lock-up
period;
rank equally with ordinary shares of AB InBev with
regards to dividends and voting rights; and
have director nomination rights with respect to AB
InBev.
As a result of the Transaction, for the year ended December
31, 2016, Altria Group, Inc. recorded a pre-tax gain of
approximately $13.9 billion, or $9.0 billion after-tax, which was
based on the following:
the Legacy AB InBev share price as of October 10,
2016;
the book value of Altria Group, Inc.’s investment in
SABMiller, including Altria Group, Inc.’s accumulated
other comprehensive losses directly attributable to
SABMiller, at October 10, 2016;
the gains on the derivative financial instruments
discussed below; and
the impact of AB InBev’s divestitures of certain
SABMiller assets and businesses in connection with
Legacy AB InBev obtaining necessary regulatory
clearances for the Transaction (“AB InBev divestitures”)
that occurred by December 31, 2016.
Altria Group, Inc. expects to record additional pre-tax gains of
approximately $445 million related to the remaining AB InBev
divestitures when those divestitures occur.
Altria Group, Inc.’s gain on the Transaction is deferred for
United States corporate income tax purposes, except to the extent
of the cash consideration received.
Altria Group, Inc. accounts for its investment in AB InBev
under the equity method of accounting because Altria Group, Inc.
has the ability to exercise significant influence over the operating
and financial policies of AB InBev, including having active
representation on AB InBev’s Board of Directors (“AB InBev
Board”) and certain AB InBev Board Committees. Through this
representation, Altria Group, Inc. participates in AB InBev policy
making processes. Altria Group, Inc. reports its share of AB
InBev’s results using a one-quarter lag because AB InBev’s
results are not available in time for Altria Group, Inc. to record
them in the concurrent period. As a result of the one-quarter lag
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
and the timing of the completion of the Transaction, no earnings
from Altria Group, Inc.’s equity investment in AB InBev were
recorded for the year ended December 31, 2016.
Summary financial data of AB InBev at October 10, 2016
representing preliminary purchase price accounting for the
Transaction is as follows:
(in millions)
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Noncontrolling interests
At October 10, 2016
40,086
$
223,701
$
44,272
$
139,112
$
9,177
$
At December 31, 2016, Altria Group, Inc.’s carrying amount
of its equity investment in AB InBev exceeded its share of AB
InBev’s net assets attributable to equity holders of AB InBev by
approximately $10.7 billion. Substantially all of this difference is
comprised of goodwill and other indefinite-lived intangible assets
(consisting primarily of trademarks).
The fair value of Altria Group, Inc.’s equity investment in
AB InBev is based on: (i) unadjusted quoted prices in active
markets for AB InBev’s ordinary shares and was classified in
Level 1 of the fair value hierarchy and (ii) observable inputs other
than Level 1 prices, such as quoted prices for similar assets for
the Restricted Shares, and was classified in Level 2 of the fair
value hierarchy. Altria Group, Inc. may, in certain instances,
pledge or otherwise grant a security interest in all or part of its
Restricted Shares. In the event the pledgee or security interest
holder forecloses on the Restricted Shares, the relevant Restricted
Shares will be automatically converted, one-for-one, into ordinary
shares. Therefore, the fair value of each Restricted Share is based
on the value of an ordinary share. The fair value of Altria Group,
Inc.’s equity investment in AB InBev at December 31, 2016 was
$20.9 billion, compared with its carrying value of $17.9 billion.
Derivative Financial Instruments: In November 2015
and August 2016, Altria Group, Inc. entered into a derivative
financial instrument, each in the form of a put option
(together the “options”) to hedge Altria Group, Inc.’s
exposure to foreign currency exchange rate movements in the
GBP to the United States dollar, in relation to the pre-tax
cash consideration that Altria Group, Inc. expected to receive
under the PSA pursuant to the revised and final offer
announced by Legacy AB InBev on July 26, 2016. The
notional amounts of the November 2015 and August 2016
options were $2,467 million (1,625 million GBP) and $480
million (378 million GBP), respectively. The options did not
qualify for hedge accounting; therefore, changes in the fair
values of the options were recorded as gains or losses in
Altria Group, Inc.’s consolidated statements of earnings in
the periods in which the changes occurred. For the year
ended December 31, 2016, Altria Group, Inc. recorded pre-
tax gains associated with the November 2015 and August
2016 options of $330 million and $19 million, respectively,
for the changes in the fair values of the options in Gain on
AB InBev/SABMiller business combination in Altria Group,
Inc.’s consolidated statement of earnings. 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
November 2015 option. Exercising the options in October
2016 resulted in approximately $0.5 billion in pre-tax cash
proceeds.
The fair values of the options were determined using
binomial option pricing models, which reflect the contractual
terms of the options and other observable market-based inputs,
and were classified in Level 2 of the fair value hierarchy. At
December 31, 2015, the fair value of the November 2015 option
of $152 million was recorded in other current assets on Altria
Group, Inc.’s consolidated balance sheet.
Note 8. Finance Assets, net
In 2003, PMCC ceased making new investments and began
focusing exclusively on managing its portfolio of finance assets in
order to maximize its operating results and cash flows from its
existing lease portfolio activities and asset sales. Accordingly,
PMCC’s operating companies income will fluctuate over time as
investments mature or are sold.
At December 31, 2016, finance assets, net, of $1,028 million
were comprised of investments in finance leases of $1,060
million, reduced by the allowance for losses of $32 million. At
December 31, 2015, finance assets, net, of $1,239 million were
comprised of investments in finance leases of $1,281 million,
reduced by the allowance for losses of $42 million.
A summary of the net investments in finance leases,
substantially all of which were leveraged leases, at December
31, 2016 and 2015, before allowance for losses was as
follows:
(in millions)
Rents receivable, net
Unguaranteed residual values
Unearned income
Investments in finance leases
Deferred income taxes
$
$
2016
805
495
(240)
1,060
(717)
Net investments in finance leases
$
343
$
2015
923
674
(316)
1,281
(928)
353
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 $0.8
billion and $1.2 billion at December 31, 2016 and 2015,
respectively, has been offset against the related rents receivable.
There were no leases with contingent rentals in 2016 and 2015.
In 2016, 2015 and 2014, PMCC’s review of estimated
residual values resulted in a decrease of $28 million, $65 million
and $63 million, respectively, to unguaranteed residual values.
These decreases in unguaranteed residual values resulted in a
51
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
reduction to PMCC’s net revenues of $18 million, $41 million
and $26 million in 2016, 2015 and 2014, respectively.
At December 31, 2016, PMCC’s investments in finance
leases were principally comprised of the following investment
categories: aircraft (43%), electric power (28%), railcar (12%),
real estate (9%) and manufacturing (8%). There were no
investments located outside the United States at December 31,
2016 and 2015.
Rents receivable in excess of debt service requirements on
third-party nonrecourse debt at December 31, 2016 were as
follows:
(in millions)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
33
129
186
128
100
229
805
Included in net revenues for the years ended December 31,
2016, 2015 and 2014 were leveraged lease revenues of $48
million, $46 million and $80 million, respectively. Income tax
expense on leveraged lease revenues for the years ended
December 31, 2016, 2015 and 2014 was $16 million, $17 million
and $30 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
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 2016 and 2014, PMCC determined that its
52
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 for each of the years ended
December 31, 2016 and 2014, respectively. There was no such
adjustment for the year ended December 31, 2015. These
decreases to the allowance for losses were recorded as a reduction
to marketing, administration and research costs in Altria Group,
Inc.’s consolidated statements of earnings. PMCC believes that,
as of December 31, 2016, the allowance for losses of $32 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, 2016, 2015 and 2014 was as
follows:
(in millions)
Balance at beginning of year
Decrease to allowance
Balance at end of year
2016
42
(10)
32
$
$
2015
42
—
42
$
$
2014
52
(10)
42
$
$
All PMCC lessees were current on their lease payment
obligations as of December 31, 2016.
The credit quality of PMCC’s investments in finance leases
as assigned by Standard & Poor’s Ratings Services (“Standard &
Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at
December 31, 2016 and 2015 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
2016
2015
$
218
559
283
$ 1,060
$
212
702
367
$ 1,281
Note 9. Short-Term Borrowings and Borrowing
Arrangements
At December 31, 2016 and December 31, 2015, Altria Group, Inc.
had no short-term borrowings. The credit line available to Altria
Group, Inc. at December 31, 2016 under the Credit Agreement (as
defined below) was $3.0 billion.
At December 31, 2016, Altria Group, Inc. had in place a
senior unsecured 5-year revolving credit agreement (the “Credit
Agreement”). The Credit Agreement provides for borrowings up
to an aggregate principal amount of $3.0 billion and expires on
August 19, 2020. 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
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
December 31, 2016 for borrowings under the Credit Agreement
was 1.125%. 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, 2016, 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 13.5 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 20. Condensed
Consolidating Financial Information.
Note 10. Long-Term Debt
At December 31, 2016 and 2015, 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 2046 (1)
Debenture, 7.75%, interest payable semi-
annually, due 2027
2016
2015
$
13,839
$
12,789
42
42
Other
Less current portion of long-term debt
16
12,847
4
12,843
(1) Weighted-average coupon interest rate of 4.9% and 5.5% at December
31, 2016 and 2015, respectively.
—
13,881
—
13,881
$
$
At December 31, 2016, aggregate maturities of Altria Group,
Inc.’s long-term debt were as follows:
(in millions)
2018
2019
2020
2021
2022
Thereafter
Less: debt issuance costs
debt discounts
$
$
864
1,144
1,000
1,500
1,900
7,609
14,017
77
59
13,881
On January 1, 2016, Altria Group, Inc. adopted ASU No.
53
2015-03, which requires that debt issuance costs related to a
recognized debt liability be presented on the balance sheet as a
direct deduction from the carrying amount of that debt liability,
consistent with debt discounts, rather than as a deferred charge
(an asset). As a result of the adoption, $77 million of debt
issuance costs have been presented on Altria Group, Inc.’s
consolidated balance sheet at December 31, 2016 as a deduction
from the carrying amount of long-term debt. In addition, $72
million of debt issuance costs were reclassified from other assets
to long-term debt on Altria Group, Inc.’s consolidated balance
sheet at December 31, 2015.
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, 2016 and 2015, was $15.1 billion
and $14.5 billion, respectively, as compared with its carrying
value of $13.9 billion and $12.8 billion, respectively.
Altria Group, Inc. Senior Notes: In September 2016, Altria
Group, Inc. issued $0.5 billion aggregate principal amount of
2.625% senior unsecured long-term notes due 2026 and $1.5
billion aggregate principal amount of 3.875% senior unsecured
long-term notes due 2046. Interest on these notes is payable
semi-annually. The net proceeds from the issuance of these senior
unsecured notes were added to Altria Group, Inc.’s general funds
and were used to repurchase certain of its senior unsecured notes
in connection with the 2016 debt tender offer described below and
for other general corporate purposes, including voluntary
contributions to Altria Group, Inc.’s pension plans.
The notes 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 $2.5 billion aggregate principal amount of
Altria Group, Inc.’s senior unsecured long-term notes issued in
2008 and 2009, the interest rate payable on each series of notes
was subject to adjustment from time to time if the rating assigned
to the notes of such series by Moody’s or Standard & Poor’s was
downgraded (or subsequently upgraded) as and to the extent set
forth in the terms of the notes. As a result of credit rating
upgrades by both Moody’s and Standard & Poor’s in the first
quarter of 2016, this interest rate adjustment provision terminated
in accordance with its terms.
The obligations of Altria Group, Inc. under the notes are
guaranteed by PM USA as further discussed in Note 20.
Condensed Consolidating Financial Information.
Debt Tender Offers and Redemption: During 2016 and
2015, Altria Group, Inc. completed debt tender offers to purchase
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
for cash certain of its senior unsecured notes in aggregate
principal amounts of $0.9 billion and $0.8 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
Total
2016
2015
$
$
441
492
—
933
$
$
—
—
793
793
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)
2016
2015
2014
Premiums and fees
$
809
$
226
$
Write-off of unamortized debt
discounts and debt issuance costs
Total
14
823
$
2
$
228
$
44
—
44
Note 11. Capital Stock
At December 31, 2016, 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,
2013
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2014
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2015
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2016
Shares Issued
Shares
Repurchased
Shares
Outstanding
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
—
—
(566,256)
(566,256)
(16,221,001)
(16,221,001)
2,805,961,317
(862,689,093)
1,943,272,224
At December 31, 2016, 41,952,545 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 2016, Altria Group,
Inc.’s Board of Directors (the “Board of Directors”) approved an
8.0% increase in the quarterly dividend rate to $0.61 per share of
Altria Group, Inc. common stock versus the previous rate of
$0.565 per share. The current annualized dividend rate is $2.44
per share. Future dividend payments remain subject to the
discretion of the Board of Directors.
Share Repurchases: 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 that it expanded to $3.0
billion in October 2016 (as expanded, the “July 2015 share
repurchase program”). During 2016 and 2015, Altria Group,
Inc. repurchased 16.2 million shares and 0.6 million shares,
respectively, of its common stock (at an aggregate cost of
approximately $1,030 million and $35 million, respectively,
and at an average price of $63.48 per share and $57.66 per
share, respectively) under the July 2015 share repurchase
program. At December 31, 2016, Altria Group, Inc. had
approximately $1,935 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, 2016, 2015 and 2014,
Altria Group, Inc.’s total share repurchase activity was as follows:
2016
2015
2014
(in millions, except per share data)
16.2
10.7
1,030 $
554 $
22.5
939
63.48 $
51.83 $
41.79
Total number of shares
repurchased
Aggregate cost of shares
repurchased
Average price per share of
shares repurchased
$
$
Note 12. Stock Plans
Under the Altria Group, Inc. 2015 Performance Incentive Plan
(the “2015 Plan”), Altria Group, Inc. may grant stock options,
stock appreciation rights, restricted stock, restricted and deferred
54
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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, under the 2015 Stock Compensation Plan for
Non-Employee Directors (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, 2016, were 39,046,757 and
954,574, respectively.
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, 2016, 2015 and 2014 of $44
million, $51 million and $46 million, respectively. The deferred
tax benefit recorded related to this compensation expense was $17
million, $20 million and $18 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The
unamortized compensation expense related to Altria Group, Inc.
restricted stock and restricted stock units was $64 million at
December 31, 2016 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, 2016:
Number of
Shares
Weighted-Average
Grant Date Fair
Value Per Share
Balance at December 31, 2015
3,937,685
$
Granted
Vested
Forfeited
947,725
(1,305,351)
(334,525)
Balance at December 31, 2016
3,245,534
40.86
59.38
33.90
46.83
48.45
The weighted-average grant date fair value of Altria Group,
Inc. restricted stock and restricted stock units granted during the
years ended December 31, 2016, 2015 and 2014 was $56 million,
$65 million and $53 million, respectively, or $59.38, $54.54 and
$36.75 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, 2016, 2015 and 2014 was $78 million, $85 million and $86
million, respectively.
Note 13. 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,
2016
2015
2014
$
14,239
$
5,241
$
5,070
(24)
(10)
(12)
$
14,215
$
5,231
$
5,058
1,952
1,961
1,978
55
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 14. 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.:
Currency
Translation
Adjustments
Benefit Plans
SABMiller
Accumulated
Other
Comprehensive
Losses
$
— $
(1,273) $
(in millions)
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
Balances, December 31, 2015
Other comprehensive earnings (losses) before reclassifications
Deferred income taxes
Other comprehensive earnings (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 earnings (losses), net of deferred
income taxes
(1,411)
550
(861)
154
(60)
94
(767)
(2,040)
(223)
86
(137)
272
(105)
167
$
(1)
(105)
(881)
308
(573)
59
(21)
38
(535)
(640)
(983)
344
(639)
21
(7)
14
30
(1)
(625)
(2,010)
(1,265)
(247)
96
(151)
178
(65)
113
787
(276)
(2)
511
1,160
(406)
(3)
754
(1,378)
(2,294)
858
(1,436)
213
(81)
132
(1,304)
(2,682)
(1,210)
431
(779)
293
(112)
181
(598)
(3,280)
541
(180)
361
1,338
(471)
867
(2)
—
(2)
—
—
—
(2)
(2)
(4)
1
(3)
—
—
—
(3)
(5)
1
—
1
—
—
—
1
Balances, December 31, 2016
(1) For the years ended December 31, 2015 and 2014, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses
consisted primarily of currency translation adjustments.
(2) As a result of the Transaction, Altria Group, Inc. reversed to Investment in AB InBev/SABMiller $414 million of its accumulated other
comprehensive losses directly attributable to SABMiller; the remaining $97 million consisted primarily of currency translation adjustments.
(3) As a result of the Transaction, Altria Group, Inc. recognized $737 million of its accumulated other comprehensive losses directly attributable to
SABMiller.
(2,048) $
(4) $
—
$
$
(2,052)
56
(38)
1,265
1,228
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,
2016
2015
2014
$
$
223
(45)
178
1,160
$
304
(32)
272
21
187
(33)
154
59
213
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
1,338
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 17. Benefit Plans.
(2) Substantially all of the amount for the year ended December 31, 2016 is included in Gain on AB InBev/SABMiller business
combination. For the years ended December 31, 2015 and 2014, amounts are included in earnings from equity investment in
SABMiller. For further information, see Note 7. Investment in AB InBev/SABMiller.
293
$
$
$
Note 15. Income Taxes
Earnings before income taxes and provision for income taxes
consisted of the following for the years ended December 31,
2016, 2015 and 2014:
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31, 2016,
2015 and 2014 was as follows:
(in millions)
Earnings before income taxes:
2016
2015
2014
(in millions)
2016
2015
2014
Balance at beginning of year
$
158
$
258
$
227
United States
$ 21,867
$
8,078
$
7,763
Outside United States
(15)
—
11
Additions based on tax positions
related to the current year
Total
$ 21,852
$
8,078
$
7,774
Additions for tax positions of
Provision for income taxes:
Current:
Federal
$
4,093
$
2,516
$
2,350
prior years
Reductions for tax positions due to
lapse of statutes of limitations
Reductions for tax positions of
State and local
Outside United States
390
6
451
—
480
3
prior years
Settlements
15
29
(4)
(28)
(1)
15
57
(4)
(86)
(82)
15
29
(2)
—
(11)
Deferred:
Federal
State and local
Outside United States
4,489
2,967
2,833
Balance at end of year
$
169
$
158
$
258
3,102
(140)
(124)
20
(3)
8
—
(5)
—
Unrecognized tax benefits and Altria Group, Inc.’s
consolidated liability for tax contingencies at December 31, 2016
and 2015 were as follows:
3,119
(132)
(129)
(in millions)
Total provision for income taxes
$
7,608
$
2,835
$
2,704
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 2010 and forward,
with years 2010 to 2013 currently under examination by the
Internal Revenue Service (“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 2012 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
Accrued interest and penalties
Tax credits and other indirect benefits
2016
2015
$
169
$
158
23
(6)
14
(3)
Liability for tax contingencies
$
186
$
169
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate at December 31, 2016 was $67
million, along with $102 million affecting deferred taxes. The
amount of unrecognized tax benefits that, if recognized, would
impact the effective tax rate at December 31, 2015 was $76
million, along with $82 million affecting deferred taxes.
Altria Group, Inc. recognizes accrued interest and penalties
associated with uncertain tax positions as part of the tax
provision.
57
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
For the years ended December 31, 2016, 2015 and 2014,
Altria Group, Inc. recognized in its consolidated statements of
earnings $9 million, $(36) million and $14 million, respectively,
of gross interest expense (income) 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
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 $116 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, 2016, 2015 and 2014:
U.S. federal statutory rate
35.0%
35.0%
35.0%
2016
2015
2014
Increase (decrease) resulting from:
State and local income taxes, net
of federal tax benefit
Uncertain tax positions
AB InBev/SABMiller dividend
benefit
Domestic manufacturing deduction
Other
Effective tax rate
1.2
—
(0.6)
(0.8)
—
3.7
(0.8)
(0.5)
(2.0)
(0.3)
4.0
0.5
(2.3)
(2.4)
—
The tax provision in 2016 included increased tax benefits
associated with the cumulative SABMiller and AB InBev
dividends and tax expense of $4.9 billion (approximately 35%)
for the gain on the Transaction.
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
audit of Altria Group, Inc. and its consolidated subsidiaries’
2007-2009 tax years (“IRS 2007-2009 Audit”); and (ii) $41
million for Philip Morris International Inc. (“PMI”) tax matters
discussed below, 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 the
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
International, Inc.
tax matters discussed
below.
Under tax sharing agreements between Altria Group, Inc. and
its former subsidiaries Kraft Foods Inc. (now known as
and PMI, entered into in connection with the 2007 and
and PMI are responsible
2008 spin-offs, respectively,
for their respective pre-spin-off tax obligations. Altria Group,
Inc., however, remained severally liable for
PMI’s pre-spin-off federal tax obligations pursuant to regulations
governing federal consolidated income tax returns, and continued
to include the pre-spin-off federal income tax reserves of
s and
and PMI in its liability for uncertain tax positions. As
of December 31, 2015, there were no remaining pre-spin-off tax
reserves for
and PMI.
During 2015 and 2014, Altria Group, Inc. recorded net tax
benefits of $41 million and $2 million, respectively, for PMI and
tax matters, primarily relating to the IRS 2007-2009
Audit. These net tax benefits were offset by reductions of PMI
and
tax-related receivables, which were recorded as
decreases to operating income in Altria Group, Inc.’s consolidated
statements of earnings. Due to the respective offsets, the PMI and
tax matters had no impact on Altria Group, Inc.’s net
earnings for the years ended December 31, 2015 and 2014.
The tax effects of temporary differences that gave rise to
deferred income tax assets and liabilities consisted of the
following at December 31, 2016 and 2015:
(in millions)
Deferred income tax assets:
Accrued postretirement and
postemployment benefits
Settlement charges
Net operating losses and tax credit
carryforwards
Total deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Intangible assets
Investment in AB InBev/SABMiller
Finance assets, net
Other
Total deferred income tax liabilities
Valuation allowances
2016
2015
$
952
$
1,446
330
288
3,016
(429)
(4,032)
(5,546)
(708)
(125)
(10,840)
(240)
953
1,393
512
335
3,193
(441)
(3,968)
(1,794)
(909)
(116)
(7,228)
(260)
Net deferred income tax liabilities
$
(8,064) $
(4,295)
At December 31, 2016, Altria Group, Inc. had estimated
gross state tax net operating losses of $532 million that, if unused,
will expire in 2017 through 2036, state tax credit carryforwards of
$14 million that, if unused, will expire in 2017, and foreign tax
credit carryforwards of $296 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 AB InBev. A valuation allowance
of $240 million has been established for those benefits that more-
likely-than-not will not be realized. Altria Group, Inc. may be
58
34.8%
35.1%
34.8%
Accrued pension costs
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
required to change the valuation allowance with respect to foreign
tax credit carryforwards, based upon additional information to be
received from AB InBev in 2017.
In the fourth quarter of 2016, Altria Group, Inc. retroactively
adopted ASU No. 2015-17, which requires that deferred tax assets
and liabilities be classified as noncurrent on a classified statement
of financial position. As a result of the adoption, at December 31,
2015, current deferred income tax assets of approximately $1.2
billion were reclassified to noncurrent deferred income tax
liabilities ($1.0 billion) and noncurrent deferred income tax assets
($0.2 billion) on Altria Group, Inc.’s consolidated balance sheet.
Note 16. Segment Reporting
At December 31, 2016, the products of Altria Group, Inc.’s
subsidiaries include smokeable tobacco products, consisting of
cigarettes manufactured and sold by PM USA and machine-made
large cigars and pipe tobacco manufactured and sold by
Middleton; smokeless tobacco products, 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 (the
“CODM”) reviews operating companies income to evaluate the
performance of, and allocate resources to, the segments.
Operating companies income for the segments is defined as
operating income before general corporate expenses and
amortization of intangibles. Interest and other debt expense, net,
and provision for income taxes are centrally managed at the
corporate level and, accordingly, such items are not presented by
segment since they are excluded from the measure of segment
profitability reviewed by the CODM. Information about total
assets by segment is not disclosed because such information is not
reported to or used by the CODM. 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
Earnings before income taxes:
Operating companies
income (loss):
Smokeable products
Smokeless products
Wine
All other
Amortization of intangibles
General corporate expenses
Reductions of PMI and
receivables
Corporate 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
Gain on AB InBev/SABMiller
business combination
Earnings before income taxes
For the Years Ended December 31,
2014
2016
2015
$
$
$
$
$
$
22,851
2,051
746
96
25,744
7,768
1,177
164
(99)
(21)
(222)
—
(5)
8,762
$
$
$
22,792
1,879
692
71
25,434
7,569
1,108
152
(169)
(21)
(237)
21,939
1,809
643
131
24,522
6,873
1,061
134
(185)
(20)
(241)
(41)
(2)
—
8,361
—
7,620
(747)
(817)
(808)
(823)
(228)
(44)
795
757
1,006
13,865
21,852
$
$
5
8,078
$
—
7,774
The smokeable products segment included net revenues of
$22,199 million, $22,193 million and $21,363 million for the
years ended December 31, 2016, 2015 and 2014, respectively,
related to cigarettes and net revenues of $652 million, $599
million and $576 million for the years ended December 31, 2016,
2015 and 2014, respectively, related to cigars.
PM USA, USSTC and Middleton’s largest customer, McLane
Company, Inc., accounted for approximately 25%, 26% and 27%
of Altria Group, Inc.’s consolidated net revenues for the years
ended December 31, 2016, 2015 and 2014, respectively. In
addition, Core-Mark Holding Company, Inc. accounted for
approximately 14% and 10% of Altria Group, Inc.’s consolidated
net revenues for the years ended December 31, 2016 and 2015,
respectively. Substantially all of these net revenues were reported
in the smokeable products and smokeless products segments.
Sales to three distributors accounted for approximately 69%, 66%
and 67% of net revenues for the wine segment for the years ended
December 31, 2016, 2015 and 2014, respectively.
59
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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,
2014
2015
2016
$
$
$
93
26
36
28
183
55
52
59
23
$
117
$
$
$
27
32
28
204
56
113
42
18
$
$
112
22
30
24
188
49
40
46
28
Total capital expenditures
$
189
$
229
$
163
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, 2016, 2015 and 2014,
pre-tax expense (income) for NPM adjustment items was
recorded in Altria Group, Inc.’s consolidated statements of
earnings as follows:
(in millions)
Smokeable products segment
Interest and other debt expense, net
Total
2016
2015
2014
$
$
12
$
(97) $
6
13
18
$
(84) $
(43)
(47)
(90)
NPM adjustment items result from the settlement of, and
determinations made in connection with, disputes with certain
states and territories related to the NPM adjustment provision
under the 1998 Master Settlement Agreement (such settlements
and determinations are referred to collectively as “NPM
Adjustment Items” and are more fully described in Health Care
Cost Recovery Litigation - NPM Adjustment Disputes in Note 19.
Contingencies). The amounts shown in the table above for the
smokeable products segment were recorded by PM USA as
increases (reductions) to cost of sales, which decreased
(increased) operating companies income in the smokeable
products segment.
Tobacco and Health Litigation Items: For the years ended
December 31, 2016, 2015 and 2014, pre-tax charges related to
certain tobacco and health litigation items were recorded in Altria
Group, Inc.’s consolidated statements of earnings as follows:
(in millions)
2016
2015
2014
Smokeable products segment
$
General corporate
Interest and other debt expense, net
88
—
17
$
127
$
—
23
Total
$
105
$
150
$
27
15
2
44
During 2016, PM USA recorded pre-tax charges of $88
million in marketing, administration and research costs, primarily
related to settlements in the Miner and Aspinall cases totaling
approximately $67 million, and $16 million related to a judgment
in the Merino case. In addition, during 2016, PM USA recorded
$17 million in interest costs primarily related to Aspinall. For
further discussion, see Note 19. Contingencies.
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 19. 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 19. Contingencies.
Asset Impairment and Exit Costs: See Note 5. Asset
Impairment, Exit and Implementation Costs for a breakdown of
these costs by segment.
Note 17. Benefit Plans
Subsidiaries of Altria Group, Inc. sponsor noncontributory
defined benefit pension plans covering the majority of all
employees of Altria Group, Inc. and its subsidiaries. However,
employees hired on or after a date specific to their employee
group are not eligible to participate in these noncontributory
defined benefit pension plans but are instead eligible to
participate in a defined contribution plan with enhanced benefits.
This transition for new hires occurred from October 1, 2006 to
January 1, 2008. In addition, effective January 1, 2010, certain
employees of UST’s subsidiaries and Middleton who were
participants in noncontributory defined benefit pension plans
ceased to earn additional benefit service under those plans and
60
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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.
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.
Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and
postretirement plans at December 31, 2016 and 2015 were as follows:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial losses (gains)
Termination and curtailment
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 on Altria Group, Inc.’s consolidated
balance sheets were as follows:
Other accrued liabilities
Accrued pension costs
Accrued postretirement health care costs
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 $8.0 billion and $7.7 billion at December 31,
2016 and 2015, respectively.
At December 31, 2016 and 2015, 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, 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
Pension
Postretirement
2016
2015
2016
2015
$
8,011
76
281
(440)
367
13
4
8,312
6,706
678
531
(440)
7,475
(837) $
(32) $
(805)
—
(837) $
8,330
86
337
(431)
(317)
—
6
8,011
7,297
(188)
28
(431)
6,706
(1,305)
(28)
(1,277)
—
(1,305)
$
$
$
$
$
2,392
17
77
(135)
24
5
(16)
2,364
—
—
—
—
—
(2,364) $
(147) $
—
(2,217)
(2,364) $
2,613
18
100
(141)
(192)
—
(6)
2,392
—
—
—
—
—
(2,392)
(147)
—
(2,245)
(2,392)
$
$
$
$
included in Altria Group, Inc.’s accumulated postretirement
benefit obligation at December 31, 2016 and 2015. 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
2016
4.1%
4.0
2015
4.4%
4.0
61
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
2016
4.1%
7.0
5.0
2022
2015
4.4%
6.5
5.0
2019
Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31,
2016, 2015 and 2014:
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization:
Net loss
Prior service cost (credit)
Termination, settlement and curtailment
Net periodic benefit cost
Pension
Postretirement
2016
76
281
(553)
171
5
34
14
$
$
2015
86
337
(539)
234
7
8
133
$
$
2014
68
345
(518)
147
10
—
52
$
$
2016
17
77
—
25
(39)
(2)
78
$
$
2015
18
100
—
43
(39)
—
122
$
$
2014
15
107
—
22
(43)
—
101
$
$
Termination, settlement and curtailment shown in the table
above primarily relate to the productivity initiative and facilities
consolidation discussed in Note 5. Asset Impairment, Exit and
Implementation Costs.
The amounts included in termination, settlement and
curtailment in the table above were comprised of the following
changes:
Pension
(in millions)
Benefit obligation
Other comprehensive
earnings/losses:
Net loss (earnings)
Prior service cost
(credit)
2016
23
$
9
2
34
$
2015
$ —
8
—
8
$
Postretirement
2016
11
$
—
(13)
(2)
$
Beginning in 2016, Altria Group, Inc. began using a spot rate
approach to estimate the service and interest cost 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 is a more precise estimate
of service and interest cost. This change resulted in a decrease of
approximately $70 million and $20 million to its 2016 pre-tax
pension and postretirement net periodic benefit cost, respectively.
Prior to 2016, Altria Group, Inc. estimated the service and interest
cost components of net periodic benefit cost using a single
weighted-average discount rate derived from the yield curve used
to measure the pension and postretirement plans benefit
obligations.
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 2017 is as follows:
(in millions)
Net loss
Prior service cost (credit)
$
Pension
200
4
Postretirement
32
$
(38)
62
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following assumptions were used to determine Altria Group, Inc.’s net periodic benefit cost for the years ended December 31:
Discount rates:
Service cost
Interest cost
Expected rate of return on plan assets
Rate of compensation increase
Health care cost trend rate
Pension
Postretirement
2016
2015
2014
2016
2015
2014
4.7%
3.6
8.0
4.0
—
4.1%
4.1
8.0
4.0
—
4.9%
4.9
8.0
4.0
—
4.5%
3.4
—
—
6.5
4.0%
4.0
—
—
7.0
4.8%
4.8
—
—
7.0
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,
2016:
Effect on total of postretirement
service and interest cost
Effect on postretirement benefit
obligation
One-
Percentage-
Point Increase
One-
Percentage-
Point Decrease
8.0%
6.4%
(6.7)%
(5.4)%
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 $93 million, $85 million and $82 million in 2016, 2015
and 2014, 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
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, 2016 was broadly characterized as an allocation
between equity securities (57%), corporate bonds (32%), U.S.
Treasury and foreign government securities (8%) and all other
types of investments (3%). 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, 2016. The allocation to emerging markets
represented 3% of the equity holdings or 2% of total plan assets at
December 31, 2016.
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.
On January 1, 2016, Altria Group, Inc. retrospectively
adopted ASU No. 2015-07, Fair Value Measurement (Topic 820):
Disclosures for Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent), which removes the
requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset
value (“NAV”) per share as a practical expedient. As a result of
the adoption, certain investments have not been classified by level
in the fair value table but are disclosed to permit reconciliation to
the fair value of plan assets. Certain investments in the fair value
table at December 31, 2015 have been reclassified to conform
with the current year’s presentation.
63
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2016 and 2015 were as follows:
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2016
2015
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
Investments measured at NAV as a practical
expedient for fair value:
Common/collective trusts:
U.S. large cap
U.S. small cap
International developed markets
Fair value of plan assets, net
—
—
—
—
1,076
760
51
91
444
102
185
1,735
602
—
—
—
33
$ 1,978
$ 3,101
$
—
—
—
—
—
—
—
13
13
444
102
185
1,735
602
1,076
760
51
137
$
— $
—
—
—
—
907
605
58
16
331
102
252
1,660
502
—
—
—
58
$ 5,092
$ 1,586
$ 2,905
$
1,940
363
80
$ 7,475
—
—
—
—
2
—
—
13
15
331
102
252
1,660
502
909
605
58
87
$ 4,506
1,762
360
78
$ 6,706
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2016 and 2015.
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.
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 registered
investment companies are valued at the closing NAV publicly
reported on the last business day of the year.
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.
The underlying assets are valued based on the NAV, which is
provided by the investment account manager as a practical
expedient to estimate fair value. In accordance with ASU No.
2015-07, these investments have not been classified by level
but are disclosed to permit reconciliation to the fair value of
plan assets.
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. In
September 2016, Altria Group, Inc. made voluntary contributions
totaling $500 million to its pension plans. Currently, Altria
Group, Inc. anticipates making employer contributions to its
pension plans of approximately $30 million to $50 million in
2017 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.
64
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Estimated future benefit payments at December 31, 2016 were as follows:
(in millions)
2017
2018
2019
2020
2021
2022-2026
$
Pension
456
461
449
456
459
2,395
$
Postretirement
147
149
145
143
141
655
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2016 consisted of the following:
(in millions)
Net loss
Prior service (cost) credit
Deferred income taxes
Amounts recorded in accumulated other comprehensive losses
Pension
(2,857) $
(19)
1,124
Post-
retirement
Post-
employment
(581) $
195
153
(99) $
—
36
Total
(3,537)
176
1,313
(1,752) $
(233) $
(63) $
(2,048)
$
$
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
Amounts recorded in accumulated other comprehensive losses
Pension
Post-
retirement
Post-
employment
Total
(2,805) $
(588) $
(108) $
(3,501)
(22)
1,101
231
141
—
40
209
1,282
(1,726) $
(216) $
(68) $
(2,010)
$
$
The movements in other comprehensive earnings/losses during the year ended December 31, 2016 were as follows:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Pension
Post-
retirement
Post-
employment
Total
Amortization:
Net loss
Prior service cost/credit
Other expense (income):
Net loss
Prior service cost/credit
Deferred income taxes
Other movements during the year:
Net loss
Prior service cost/credit
Deferred income taxes
Total movements in other comprehensive earnings/losses
$
$
$
171
5
$
25
(39)
$
18
—
9
2
(69)
118
(232)
(4)
92
(144)
(26) $
—
(13)
11
(16)
(18)
16
1
(1)
(17) $
—
—
(7)
11
(9)
—
3
(6)
5
$
214
(34)
9
(11)
(65)
113
(259)
12
96
(151)
(38)
65
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Pension
Post-
retirement
Post-
employment
Total
Amortization:
Net loss
Prior service cost/credit
Other expense:
Net loss
Deferred income taxes
Other movements during the year:
Net loss
Prior service cost/credit
Deferred income taxes
Total movements in other comprehensive earnings/losses
$
$
$
234
7
$
43
(39)
8
(96)
153
(410)
(6)
160
(256)
(103) $
—
(2)
2
192
6
(75)
123
125
$
19
—
—
(7)
12
(5)
—
1
(4)
8
The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:
(in millions)
Amounts reclassified to net earnings as components of net periodic benefit cost:
Pension
Post-
retirement
Post-
employment
Amortization:
Net loss
Prior service cost/credit
Deferred income taxes
Other movements during the year:
Net loss
Deferred income taxes
Total movements in other comprehensive earnings/losses
$
$
$
147
10
(61)
96
(1,093)
425
(668)
(572) $
$
22
(43)
8
(13)
(306)
120
(186)
(199) $
18
—
(7)
11
(12)
5
(7)
4
$
$
$
$
296
(32)
8
(105)
167
(223)
—
86
(137)
30
Total
187
(33)
(60)
94
(1,411)
550
(861)
(767)
66
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 18. 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,
2016
203
27
754
(13)
6
747
53
$
$
$
$
$
2015
186
25
808
(4)
13
817
48
$
$
$
$
$
2014
167
30
857
(2)
(47)
808
52
$
$
$
$
$
Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2016 were as
follows:
(in millions)
2017
2018
2019
2020
2021
Thereafter
Rental Commitments
52
$
46
35
30
24
72
259
$
$
$
Sublease Income
5
5
5
6
6
15
42
The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2016, 2015 and
2014 was as follows:
(in millions)
Balance at beginning of year
Charged to costs and expenses
Deductions (1)
2016
2015
2014
Discounts
$
— $
628
(628)
Returned
Goods
Discounts
Returned
Goods
68
133
(152)
$
— $
618
(618)
46
217
(195)
Discounts
$
— $
599
(599)
Balance at end of year
(1) Represents the recording of discounts and returns for which allowances were created.
— $
49
$
$
— $
68
$
— $
Returned
Goods
41
179
(174)
46
Note 19. 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
67
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. States, including
Florida, may also seek to repeal or alter bond cap statutes through
legislation. Although Altria Group, Inc. cannot predict the
outcome of such challenges, it is possible that the consolidated
results of operations, cash flows or financial position of Altria
Group, Inc., or one or more of its subsidiaries, could be materially
affected in a particular fiscal quarter or fiscal year by an
unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the
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 19. 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(1) and, in
some instances, Altria Group, Inc. as of December 31, 2016,
2015 and 2014:
2016
2015
2014
8
1
1
5
1
5
5
12
11
67
65
70
Individual Smoking and Health Cases (2)
Smoking and Health Class Actions and
Aggregated Claims Litigation (3)
Health Care Cost Recovery Actions (4)
“Lights/Ultra Lights” Class Actions
(1) Does not include 25 cases filed on the asbestos docket in the Circuit Court for
Baltimore City, Maryland, which seek to join PM USA and other cigarette-
manufacturing defendants in complaints previously filed against asbestos
companies.
(2) Does not include 2,485 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).
(3)
Includes as one case the 600 civil actions (of which 344 were actions against
PM USA) that were to be tried in a single proceeding in West Virginia (In re:
Tobacco Litigation). The West Virginia Supreme Court of Appeals ruled that the
United States Constitution did not preclude a trial in two phases in this case.
Issues related to defendants’ conduct and whether punitive damages are
permissible were tried in the first phase. Trial in the first phase of this case began
in April 2013. In May 2013, the jury returned a verdict in favor of defendants on
the claims for design defect, negligence, failure to warn, breach of warranty, and
concealment and declined to find that the defendants’ conduct warranted punitive
damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should
have included use instructions for the period 1964 - 1969. The second phase will
consist of trials to determine liability and compensatory damages. In November
2014, the West Virginia Supreme Court of Appeals affirmed the final judgment. In
July 2015, the trial court entered an order that will result in the entry of final
judgment in favor of defendants and against all but 30 plaintiffs who potentially
have a claim against one or more defendants that may be pursued in a second
phase of trial. The court intends to try the claims of these 30 plaintiffs in six
consolidated trials, each with a group of five plaintiffs. The first trial is currently
scheduled to begin May 1, 2018. Dates for the five remaining consolidated trials
have not been scheduled.
(4) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit
below.
68
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
International Tobacco-Related Cases: As of January 27,
2017, PM USA is a named defendant in 10 health care cost
recovery actions in Canada, eight of which also name Altria
Group, Inc. as a defendant. PM USA and Altria Group, Inc. are
also named defendants in seven smoking and health class actions
filed in various Canadian provinces. See Guarantees and Other
Similar Matters below for a discussion of the Distribution
Agreement between Altria Group, Inc. and PMI that provides for
indemnities for certain liabilities concerning tobacco products.
Tobacco-Related Cases Set for Trial: As of January 27,
2017, nine Engle progeny cases are set for trial through March 31,
2017. There are no individual smoking and health cases and no
“Lights/Ultra Lights” class actions or medical monitoring cases
against PM USA set for trial during this period. Cases against
other companies in the tobacco industry are 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 61 smoking and health, “Lights/Ultra Lights” and
health care cost recovery cases in which PM USA was a
defendant. Verdicts in favor of PM USA and other defendants
were returned in 41 of the 61 cases. These 41 cases were tried in
Alaska (1), California (7), Florida (10), Louisiana (1),
Massachusetts (2), Mississippi (1), Missouri (4), New Hampshire
(1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1),
Rhode Island (1), Tennessee (2) and West Virginia (2). A motion
for a new trial was granted in one of the cases in Florida and in
the case in Alaska. In the Alaska case (Hunter), the trial court
withdrew its order for a new trial upon PM USA’s motion for
reconsideration. In December 2015, the Alaska Supreme Court
reversed the trial court decision and remanded the case with
directions for the trial court to reassess whether to grant a new
trial. In March 2016, the trial court granted a new trial and PM
USA filed a petition for review of that order with the Alaska
Supreme Court, which the court denied in July 2016. The retrial
began in October 2016. In November 2016, the court declared a
mistrial after the jury failed to reach a verdict. The plaintiff
subsequently moved for a new trial, which is scheduled to begin
October 16, 2017. 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 20 non-Engle progeny cases in which verdicts were
returned in favor of plaintiffs, 18 have reached final resolution. A
verdict against PM USA in a purported “Lights” class action in
Illinois (Price) was reversed and ultimately resolved in PM USA’s
favor. See “Lights/Ultra Lights” Cases - State Trial Court Class
Certifications Concluded in 2016 below for further discussion.
As of January 27, 2017, 105 state and federal Engle progeny
cases involving PM USA have resulted in verdicts since the
Florida Supreme Court’s Engle decision as follows: 58 verdicts
were returned in favor of plaintiffs; 44 verdicts were returned in
favor of PM USA. Three verdicts in favor of plaintiffs were
partially or entirely reversed on appeal. See Smoking and Health
Litigation - Engle Progeny Trial Court Results below for a
discussion of these verdicts.
69
Judgments Paid and Provisions for Tobacco and Health
Litigation Items (Including Engle Progeny Litigation): After
exhausting all appeals in those cases resulting in adverse verdicts
associated with tobacco-related litigation, since October 2004,
PM USA has paid in the aggregate judgments and settlements
(including related costs and fees) totaling approximately $473
million and interest totaling approximately $183 million as of
December 31, 2016. These amounts include payments for Engle
progeny judgments (and related costs and fees) totaling
approximately $82 million, interest totaling approximately $21
million and payment of approximately $43 million in connection
with the Federal Engle Agreement, discussed below.
The changes in Altria Group, Inc.’s accrued liability for
tobacco and health litigation items, including related interest
costs, for the periods specified below are as follows:
(in millions)
2016
2015
2014
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
Agreement to resolve Aspinall
including related interest
costs
Agreement to resolve Miner
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
$
132
$
39
$
3
21
7
—
32
45
84
23
43
—
—
—
(190)
—
(57)
11
2
—
—
—
31
(8)
$
47
$
132
$
39
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, the agreement to resolve the
Aspinall case (excluding related interest costs of approximately
$10 million), the agreement to resolve the Miner case and the
implementation of the corrective communications remedy
pursuant to the federal government’s lawsuit 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, 2016, PM USA has
posted various forms of security totaling approximately $82
million, the majority of which has been collateralized with cash
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
deposits that are included in other assets on the consolidated
balance sheet.
of the verdict and post-trial developments in the United States of
America health care cost recovery case.
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
2016 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: In December 2015, a jury in the U.S. District Court for
the Central District of California returned a verdict in favor of
plaintiff, awarding $900,000 in compensatory damages. In
January 2016, the plaintiff moved for a new trial, which the
district court denied in February 2016. In March 2016, PM USA
filed a notice of appeal to the U.S. Court of Appeals for the Ninth
Circuit and plaintiff cross-appealed.
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. Upon retrial, in February 2012, the jury
awarded plaintiff $25 million in punitive damages, which was
ultimately upheld on appeal. 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. In June 2016, PM USA paid the final judgment
plus interest and associated costs of approximately $34 million,
concluding this litigation.
Federal Government’s Lawsuit: See Health Care Cost Recovery
Litigation - Federal Government’s Lawsuit below for a discussion
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
70
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
ruled upon in the Florida Third District Court of Appeal or in the
Florida Supreme Court now be addressed. Plaintiffs also filed a
motion for rehearing in August 2006 seeking clarification of the
applicability of the statute of limitations to non-members of the
decertified class. In December 2006, the Florida Supreme Court
refused to revise its July 2006 ruling, except that it revised the set
of Phase I findings entitled to res judicata effect by excluding
finding (v) listed above (relating to agreement to misrepresent
information), and added the finding that defendants sold or
supplied cigarettes that, at the time of sale or supply, did not
conform to the representations of fact made by defendants. In
January 2007, the Florida Supreme Court issued the mandate
from its revised opinion. Defendants then filed a motion with the
Florida Third District Court of Appeal requesting that the court
address legal errors that were previously raised by defendants but
have not yet been addressed either by the Florida Third District
Court of Appeal or by the Florida Supreme Court. In February
2007, the Florida Third District Court of Appeal denied
defendants’ motion. In May 2007, defendants’ motion for a
partial stay of the mandate pending the completion 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 27, 2017,
approximately 2,600 state court cases were pending against PM
USA or Altria Group, Inc. asserting individual claims by or on
behalf of approximately 3,500 state court plaintiffs. Because of a
number of factors, including, but not limited to, docketing delays,
duplicated filings and overlapping dismissal orders, these
numbers are estimates. While the Federal Engle Agreement
(discussed below) resolved nearly all Engle progeny cases
pending in federal court, as of January 27, 2017, approximately
14 cases were pending against PM USA in federal court
representing the cases excluded from that agreement.
Agreement to Resolve Federal Engle Progeny Cases: In
2015, PM USA, R.J. Reynolds Tobacco Company (“R.J.
Reynolds”) and Lorillard Tobacco Company (“Lorillard”)
resolved approximately 415 pending federal Engle progeny cases
(the “Federal Engle Agreement”). Under the terms of the Federal
Engle Agreement, PM USA paid approximately $43 million.
Federal cases that were in trial and those that previously reached
final verdict were not included in the Federal Engle Agreement.
Engle Progeny Trial Results: As of January 27, 2017, 105
federal and state Engle progeny cases involving PM USA have
resulted in verdicts since the Florida Supreme Court Engle
decision. Fifty-eight verdicts were returned in favor of plaintiffs
and three verdicts (Graham, Skolnick and Calloway) that were
initially returned in favor of plaintiffs were reversed on appeal
and remain pending. Graham is now subject to en banc appellate
review; Skolnick was remanded for a new trial; Calloway was
reversed on an appellate finding that improper arguments by
plaintiff’s counsel deprived defendants of a fair trial.
Forty-four verdicts were returned in favor of PM USA, of
which 35 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, Shulman, Ewing, E. Smith, Mooney, Chacon and
Dubinsky) 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 27, 2017. The
judgment in D. Cohen was subsequently reversed for a new trial.
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.
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 27, 2017; the second
chart lists such cases that were pending within the previous 12
months, but that are now concluded.
71
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Currently-Pending Engle Cases
________________________________________________________________________________________________________________________________
Plaintiff: Pardue
Date: December 2016
Verdict:
An Alachua County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of approximately $5.9 million and allocating 25% of the fault to PM USA. The jury also awarded plaintiff $6.75 million in punitive
damages against PM USA.
Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff without a deduction for plaintiff’s comparative fault. In
January 2017, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial
or, in the alternative, for remittitur of the jury’s damages awards.
________________________________________________________________________________________________________________________________
Plaintiff: Martin
Date: November 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of approximately $5.4 million and allocating 46% of the fault to PM USA (an amount of approximately $2.48 million). The jury also
awarded plaintiff $450,000 in punitive damages against PM USA.
Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault and PM
USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial. In January 2017,
the trial court denied all post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: Howles
Date: November 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of $4 million and allocating 50% of the fault to PM USA (an amount of $2 million). The jury also awarded plaintiff $3 million in
punitive damages against PM USA.
Post-Trial Developments:
In November 2016, 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 in December 2016. Also in December 2016, defendants filed a notice of appeal to the Florida Fourth
District Court of Appeal.
________________________________________________________________________________________________________________________________
Plaintiff: Oshinsky-Blacker
Date: September 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of $6.155 million and allocating 60% of the fault to PM USA (an amount of $3.7 million). The jury also awarded plaintiff $1 million in
punitive damages against PM USA.
Post-Trial Developments:
In October 2016, PM USA and R.J. Reynolds filed motions to set aside the verdict and for a directed verdict.
________________________________________________________________________________________________________________________________
Plaintiff: Varner
Date: July 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1.5 million and
72
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
allocating 25% of the fault to PM USA (an amount of $375,000).
Post-Trial Developments:
In July 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In August
2016, PM USA filed motions to set aside the verdict and for a directed verdict, and plaintiff filed a motion for a new trial. In January
2017, the trial court denied all post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: Sermons
Date: July 2016
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of
$65,000 and allocating 15% of the fault to PM USA (an amount of $9,750). The jury also awarded plaintiff $51,225 in punitive damages
against PM USA.
Post-Trial Developments:
In July 2016, plaintiff filed a motion for a new trial or, in the alternative, for an additur.
________________________________________________________________________________________________________________________________
Plaintiff: Purdo
Date: April 2016
Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory
damages of $21 million and allocating 12% of the fault to PM USA (an amount of $2.52 million). The jury also awarded plaintiff $6.25
million in punitive damages against each defendant.
Post-Trial Developments:
In May 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial,
all of which the court denied and entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In June
2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of
approximately $1.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: McCall
Date: March 2016
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $350,000 and
allocating 25% of the fault to PM USA (an amount of $87,500).
Post-Trial Developments:
In March 2016, PM USA filed a motion to set aside the verdict and to enter judgment in its favor, which the court denied in May 2016.
Also in March 2016, plaintiff filed a motion for a new trial on punitive damages, citing the Soffer decision (allowing Engle progeny
plaintiffs to seek punitive damages on their negligence and strict liability claims) discussed below under Engle Progeny Appellate Issues,
which the court granted in May 2016. In June 2016, PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal and
plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Ahrens
Date: February 2016
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $9 million in
compensatory damages and allocating 24% of the fault to PM USA. The jury also awarded plaintiff $2.5 million in punitive damages
against each defendant.
Post-Trial Developments:
In February 2016, the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s
73
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
comparative fault and defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In March
2016, the trial court denied defendants’ post-trial motions. In April 2016, defendants filed a notice of appeal to the Florida Second
District Court of Appeal and PM USA posted a bond in the amount of $2.5 million.
________________________________________________________________________________________________________________________________
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:
In January 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new
trial, and the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s comparative
fault. In February 2016, the trial court denied defendants’ post-trial motions. In March 2016, defendants filed a notice of appeal to the
Florida Third District Court of Appeal and PM USA posted a bond in the amount of $2.5 million.
________________________________________________________________________________________________________________________________
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:
In November 2015, the court entered final judgment in favor of plaintiff without any deduction for plaintiff’s comparative fault and in
December 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 in January 2016. In February 2016, PM USA posted a bond in the amount of $2.5 million and filed a notice
of appeal to the Florida Second District Court of Appeal.
________________________________________________________________________________________________________________________________
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:
In December 2015, PM USA filed a motion to set aside the verdict and for judgment in accordance with its motion for directed verdict.
In January 2016, the trial court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault and plaintiff
filed an appeal to the Florida Fourth District Court of Appeal. Additionally, the trial court denied PM USA’s post-trial motions and 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:
In November 2015, plaintiff filed a motion to enforce the parties’ pretrial stipulation of $2.3 million in economic damages, which the
trial court granted. The plaintiff also filed a motion for an additur or, in the alternative, for a new trial and PM USA filed post-trial
motions, including a motion concerning the proper form of judgment and for a new trial. In December 2015, the trial court granted
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plaintiff’s motion for a new trial on damages and denied PM USA’s post-trial motions. In January 2016, PM USA filed a notice of
appeal to the Florida First District Court of Appeal.
________________________________________________________________________________________________________________________________
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 (an amount of $225,000). 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. In November
2015, the court entered final judgment in favor of plaintiff. In May 2016, the court denied defendants’ post-trial motions and amended
the final judgment to apply the comparative fault deduction. In June 2016, defendants filed a notice of appeal to the Florida Fourth
District Court of Appeal and plaintiff cross-appealed. Also in June 2016, PM USA posted a bond in the amount of approximately
$475,000.
________________________________________________________________________________________________________________________________
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. In
November 2015, PM USA and R.J. Reynolds filed a notice of appeal to the Florida Second District Court of Appeal and 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. In
January 2016, the trial court denied PM USA’s post-trial motions. In February 2016, the trial court entered final judgment in favor of
plaintiff, reducing the compensatory damages award against PM USA to approximately $300,000. In March 2016, PM USA and R.J.
Reynolds filed a notice of appeal in the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in March 2016, PM
USA posted a bond in the amount of approximately $300,000.
________________________________________________________________________________________________________________________________
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
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verdict and for a new trial, which the court denied in December 2015. PM USA subsequently filed a notice of appeal to the Florida First
District Court of Appeal and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
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.
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. In November 2016, the Florida Third District
Court of Appeal issued a per curiam decision affirming the trial court’s judgment against PM USA. PM USA subsequently filed a
motion seeking a written opinion, which the court denied in December 2016. In the fourth quarter of 2016, PM USA recorded a
provision on its consolidated balance sheet of $16.9 million for the judgment plus interest and associated costs and increased the bond to
$14.5 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. In January 2016, the trial court denied
defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. Subsequently, defendants filed
a notice of appeal to the Florida Fourth District Court of Appeal, PM USA posted a bond in the amount of approximately $1.65 million
and plaintiff filed a notice of cross-appeal.
________________________________________________________________________________________________________________________________
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).
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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. 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.
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. In January 2016, the trial court denied defendants’ post-
trial motions and amended the final judgment to apply the comparative fault deduction. Also in January 2016, defendants filed a notice
of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In February 2016,
plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
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 under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
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.
In January 2017, the defendants agreed to voluntarily dismiss their appeal in exchange for a full retrial and the court dismissed the case.
________________________________________________________________________________________________________________________________
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.
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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. In January 2017, the Florida Fourth District Court of Appeal issued a decision
largely affirming the trial court’s judgment against PM USA, but remanded the case to the trial court to amend the final judgment to
apply the comparative fault deduction to the compensatory damages award.
________________________________________________________________________________________________________________________________
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
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 final
disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
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 May 2016, the court granted plaintiff’s motion for a new trial on punitive damages, citing the Soffer decision,
discussed below under Engle Progeny Appellate Issues. In September 2016, the court denied defendants’ post-trial motions.
________________________________________________________________________________________________________________________________
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
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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.
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 under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
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. In August 2016, the Florida Second District Court of Appeal affirmed the judgment entered in favor of the plaintiff. In
September 2016, defendants filed a petition to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida
Supreme Court stayed the proceedings pending final disposition in the Marotta case, discussed below under Engle Progeny Appellate
Issues.
________________________________________________________________________________________________________________________________
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. In November 2015, the court entered final judgment with a deduction for plaintiff’s comparative fault. In April
2016, plaintiff filed a motion to reinstate the jury’s punitive damages award or, alternatively, for a new trial on punitive damages, citing
the Soffer decision, discussed below under Engle Progeny Appellate Issues. Also in April 2016, PM USA filed a motion to stay post-trial
proceedings pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
In May 2016, (i) the trial court denied PM USA’s remaining post-trial motions and (ii) PM USA filed a notice of appeal to the U.S. Court
of Appeals for the Eleventh Circuit and a motion to stay the appeal pending Graham, which the court granted in June 2016. In August
2016, the trial court denied plaintiff’s motion to reinstate the jury’s punitive damages or to order a new trial and, in September 2016,
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plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
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 under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
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 under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
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: Skolnick
June 2013
Date:
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 plaintiff 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
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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 under Engle Progeny Appellate
Issues. In April 2016, the Florida Supreme Court ordered defendants to show cause as to why the case should not be remanded in light
of the Soffer decision. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of
approximately $55,000 for the judgment plus interest and associated costs. In May 2016, the Florida Supreme Court accepted
jurisdiction of plaintiff’s petition for review and remanded the case for reconsideration in light of the Soffer decision. In September
2016, the Florida First District Court of Appeal further remanded the case in light of Soffer.
________________________________________________________________________________________________________________________________
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. In January
2016, the Eleventh Circuit granted a rehearing en banc on both the preemption and due process issues.
________________________________________________________________________________________________________________________________
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. Plaintiff 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
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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: 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. In January 2016, a panel of 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. In February 2016, defendants and plaintiff filed
respective motions for rehearing and rehearing en banc. In March 2016, plaintiff filed a notice of supplemental authority citing the
Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the Florida Fourth District Court of Appeal,
ruling en banc, reversed the judgment against PM USA and R.J. Reynolds in its entirety on the grounds that improper arguments by
plaintiff’s counsel deprived defendants of a fair trial, and ordered a new trial. In October 2016, plaintiff filed a notice to invoke the
discretionary jurisdiction of the Florida Supreme Court.
________________________________________________________________________________________________________________________________
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. In February 2016, the Florida Supreme
Court upheld the trial court’s decision in favor of plaintiff and, in March 2016, clarified that its February 2016 order reinstated the trial
court’s decision on the statute of repose only. In August 2016, the Florida Fourth District Court of Appeal reinstated the jury’s punitive
damages verdict and reaffirmed that the compensatory damages award was excessive, remanding the case to the trial court to reduce the
compensatory damages.
________________________________________________________________________________________________________________________________
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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
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 June 2012, the Fourth District Court of Appeal affirmed the final judgment (as amended to
correct a clerical error) in the amount of approximately $12.3 million in compensatory damages and approximately $24.5 million in
punitive damages. 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, in October 2013, the
new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. 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. In January 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. In April 2016, PM USA moved for a new trial following
the juror interview, which the court denied. In May 2016, PM USA filed a notice of appeal to the Fourth District Court of Appeal.
_______________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
Plaintiff: Hancock
Date: August 2012
Engle Cases Concluded Within Past 12 Months
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. In December
2016, plaintiff agreed not to pursue the judgment in exchange for PM USA not pursuing its fee award, thereby resolving the case.
________________________________________________________________________________________________________________________________
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
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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. In January 2016, the Florida Supreme Court upheld the trial court’s decision in favor of
plaintiff. In February 2016, PM USA posted a rider increasing the amount of its bond to $7.5 million. In April 2016, PM USA filed a
motion in the trial court with regard to Florida’s bond cap statute, seeking to confirm that the stay on executing the judgment remains in
effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has
expired, which the court granted. See additional discussion below under Florida Bond Statute. In June 2016, PM USA paid the
judgment plus interest and associated costs in the amount of approximately $19.1 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. In February 2016, the Florida Supreme Court declined to accept jurisdiction of PM
USA’s petition for review and PM USA posted a rider increasing the amount of its bond to $5.5 million. In June 2016, PM USA paid the
judgment plus interest and associated costs in the amount of approximately $4.4 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, discussed below under Engle Progeny Appellate Issues. 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. In January 2016, the Florida Supreme Court denied defendants’ petition for discretionary review, and PM USA
amended its bond to post an additional amount of approximately $500,000. In the first quarter of 2016, PM USA recorded a provision
on its condensed consolidated balance sheet of approximately $2.2 million for the judgment plus interest and associated costs. In June
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2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.3 million.
________________________________________________________________________________________________________________________________
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
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. In February
2016, the Florida Supreme Court upheld the trial court’s decision in favor of plaintiff, and PM USA posted a rider increasing the amount
of its bond to $15 million. In April 2016, PM USA filed a motion in the trial court with regard to Florida’s bond cap statute, seeking to
confirm that the stay on executing the judgment remains in effect through the completion of United States Supreme Court writ of
certiorari review or until the time for moving for such review has expired, which the court granted. See additional discussion below
under Florida Bond Statute. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately
$30.1 million.
________________________________________________________________________________________________________________________________
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. In February 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 recorded a provision on its condensed consolidated balance sheet of approximately $1.6
million for the judgment plus interest. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of
approximately $2.7 million.
________________________________________________________________________________________________________________________________
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
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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. In February 2016,
PM USA paid the judgment plus interest and associated costs in the amount of approximately $10.6 million. In June 2016, PM USA
paid an additional $843,261 in interest on the judgment, an amount that had been disputed between the parties.
________________________________________________________________________________________________________________________________
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. In July
2015, the Florida Fifth District Court of Appeal found that the trial court should have applied the comparative fault 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. In February 2016, PM USA paid the judgment plus
interest in the amount of approximately $6.8 million. In April 2016, PM USA paid fees of approximately $1.45 million.
________________________________________________________________________________________________________________________________
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
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
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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, in April 2015 the court, found in favor of defendants on
the basis of federal preemption, reversing the trial court’s denial
of judgment as a matter of law. Thereafter, plaintiff filed a
petition for rehearing en banc, which the Eleventh Circuit granted
in January 2016. The Eleventh Circuit directed the parties to file
briefs and argue both the federal preemption and due process
issues. Also in January 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 March
2016, the Florida Supreme Court accepted review of Marotta.
Argument was held in November 2016.
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. The Florida Supreme Court accepted jurisdiction
over plaintiff’s appeal from the Florida First District Court of
Appeal’s decision and, in March 2016, held that Engle progeny
plaintiffs can recover punitive damages in connection with all of
their claims. Plaintiffs have increasingly relied on this Florida
Supreme Court decision at the trial and appellate court levels in
seeking punitive damages in connection with all of their claims.
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 and, in March 2016, ruled in
favor of plaintiff, approving the Fourth District Court of Appeal’s
definition.
In Schoeff, an Engle progeny case against R.J. Reynolds, the
Florida Fourth District Court of Appeal held that comparative
fault findings should apply to reduce all compensatory damage
awards, including awards based on intentional fraud claims. The
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Florida Supreme Court accepted jurisdiction over plaintiff’s
appeal of the Florida Fourth District Court of Appeal’s decision.
Oral argument is scheduled for March 8, 2017.
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.
In February 2016, in the Sikes case against R.J. Reynolds, the
trial court held that Florida’s bond cap statute does not stay the
execution of judgment after a case is final in the Florida judicial
system and before the defendant files a petition for writ of
certiorari in the United States Supreme Court. The District Court
of Appeal for the First District of Florida issued an order staying
execution of the judgment and requesting that plaintiff show
cause why the stay should not remain in effect through the
completion of United States Supreme Court writ of certiorari
review or until the time for moving for such review has expired.
In April 2016, the District Court of Appeal held that the bond cap
applies to the period between a Florida Supreme Court ruling and
completion of United States Supreme Court writ of certiorari
review. In April 2016, PM USA filed motions in the trial court in
the R. Cohen and Kayton cases seeking confirmation that the stay
on executing the judgment remains in effect through the
completion of United States Supreme Court writ of certiorari
review or until the time for moving for such review has expired,
which the court granted.
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.
The Florida Legislature is considering legislation that would
repeal the 2009 appeal bond cap statute.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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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
(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 27, 2017, 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 have sought 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 have
sought 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 scanning in order
to identify and diagnose lung cancer. Plaintiffs in these cases
have not sought punitive damages, although plaintiffs in Donovan
sought permission from the court to seek to treble any damages
awarded, which the court denied. The defense of any future
medical monitoring cases may be negatively impacted by
evolving medical standards and practice.
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 certain residents who had neither
been diagnosed with lung cancer nor were 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 that under certain circumstances state law
recognizes a claim by individual smokers for medical monitoring
despite the absence of an actual injury. The case was remanded to
federal court for further proceedings. The district court granted in
part 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. As a
remedy, plaintiffs proposed a 28-year medical monitoring
program with a cost in excess of $190 million.
Both parties filed various motions, including motions for
partial summary judgment and to exclude certain evidence. 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. In 2016, PM USA
ultimately prevailed at trial on the warranty claim and the
Massachusetts Consumer Protection Act claim with final
judgment entered in favor of PM USA in September 2016.
Plaintiff did not appeal the judgment, concluding this litigation.
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
should be subject to all defenses available against the injured
party.
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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
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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” (now PM USA and R.J. Reynolds and,
with respect to the brands it acquired from R.J. Reynolds and
Lorillard, ITG Brands, LLC (“ITG”), subject to a dispute
discussed below with respect to some of the State Settlement
Agreements) make annual payments of approximately $9.4
billion, subject to adjustments for several factors, including
inflation, market share and industry volume. In addition, the
OPMs are required to pay settling plaintiffs’ attorneys’ fees,
subject to an annual cap of $500 million. For the years ended
December 31, 2016, 2015 and 2014, 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, which expired after the third quarter of 2014, was
approximately $4.6 billion, $4.5 billion and $4.6 billion,
respectively.
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 2003-2015. 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.
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 were “transition years,” for which
the PMs received specified payments in settlement of the NPM
Adjustments for those years. PM USA received $38 million for
the 2013 transition year and $41 million for the 2014 transition
year pursuant to this revised provision in the form of reductions to
its MSA payments in 2014 and 2015, respectively.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The revised NPM Adjustment provision in the settlement
provides that, for 2015 and subsequent years, there is a potential
downward adjustment to the PMs’ MSA payment relating to NPM
sales on which state excise tax (“SET”) is paid. Pursuant to such
adjustment, each signatory state will pay an amount to the OPMs
tied to the number of NPM cigarettes sold during the year at issue
on which that state collected its SET (or, potentially, on which a
comparable tax was collected) but on which that state did not
collect escrow (“non-compliant NPM sales”). These payments
will be made in the form of future reductions to MSA payments
by the OPMs. This adjustment for SET-paid NPM sales is subject
to certain exceptions and to a “safe harbor” under which a state
does not owe any payment if the number or percentage of non-
compliant NPM sales is below certain stated benchmarks. In
addition, the settlement further provides that the NPM Adjustment
for 2015 and subsequent years will continue to apply to the
signatory states, subject to certain defenses, but that those states
will receive a partial liability reduction tied to the percentage of
NPM sales nationwide during the year at issue on which either an
MSA state has collected SET (or potentially a comparable tax is
collected) or, potentially, Mississippi, Florida, Texas or Minnesota
collected an equity fee (as defined in the settlement) on cigarettes
sold by NPMs in those respective states. The amount (if any) of
the potential adjustments relating to SET-paid NPM sales for
2015 and 2016 and the amount of the partial liability reductions
for 2015 and 2016 have not yet been determined. In addition,
proceedings to determine the availability of and defenses to the
2015 and 2016 NPM Adjustments as to the signatory states will
likely not take place for a considerable period of time. In the
meantime, pursuant to the settlement, the OPMs and the signatory
states have agreed to split the NPM Adjustment amount for 2015
and each subsequent year thereafter pending the ultimate outcome
of the applicable proceedings. As a result, in the second quarter
of 2016, approximately $43 million was returned to PM USA
related to the 2015 NPM Adjustment. This amount was included
in other liabilities on the condensed consolidated balance sheet at
June 30, 2016 and, once the proceedings to determine the amount
of the 2015 NPM Adjustment are concluded, it will either be paid
to the signatory states or retained by PM USA (in each case,
without interest) as part of the ultimately determined amount
payable. The OPMs have agreed that the amounts they receive
under the settlement for the 2013-2014 transition years and for
subsequent years from the signatory states will be allocated
among them pursuant to a formula that modifies the MSA
allocation formula in a manner favorable to PM USA. The extent
to which it remains favorable to PM USA will depend upon future
developments, as well as upon the resolution of certain disputes
among the OPMs discussed below.
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
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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,
Maryland and New Mexico 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. 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 PMs, 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 received
approximately $126 million for 2004-2014 in the form of a
reduction to its MSA payment in 2016. PM USA previously
recorded $126 million as a reduction to cost of sales in the third
quarter of 2015 to reflect the New York settlement 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
SET is paid is largely similar to the revised provision in the
settlement with the 24 signatory states with respect to an
adjustment relating to SET-paid NPM sales. Based on the
information provided by New York, no such adjustment is due for
2015.
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 to the PMs tied
to the number of NPM cigarettes on which New York did not
collect SET 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 (“Tribal NPM Packs”). These annual payments will
be made in the form of reductions to future MSA payments by the
PMs, 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, as well as upon the resolution of certain disputes
among the OPMs discussed below. Under the New York
settlement, in return for the payments described above and other
consideration described in the New York settlement, the PMs
have released New York from the NPM Adjustment provision for
all years except as provided in the New York settlement.
The number of Tribal NPM Packs sold in a given year will be
determined by an investigative firm based on information
provided by the PMs and New York and by the investigative
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
firm’s own research and activities (the “investigative
proceeding”). The investigative firm’s determination of the
number of Tribal NPM Packs sold in a given year will apply for
that year as well as for the following year, with the result that an
investigative proceeding is expected to be held every two years.
Accordingly, the number of Tribal NPM Packs determined by the
investigative firm to have been sold during 2015 (which is
expected to result in a reduction of the PMs’ MSA payments due
in April 2017) will also apply to 2016 (which is expected to result
in a reduction of the PMs’ MSA payments due in April 2018).
While an investigative proceeding to determine the number of
Tribal NPM Packs sold during 2015 has been commenced, PM
USA does not expect a determination by the investigative firm
until later in the first quarter of 2017.
In connection with the investigative proceeding, PM USA
recorded for the years 2015 and 2016 a $58 million reduction to
cost of sales in the fourth quarter of 2016. This amount
represents PM USA’s estimate, based on information submitted
by the PMs and New York to the investigative firm, of the
minimum number of Tribal NPM Packs that the investigative firm
is likely to find were sold during 2015 and the related reductions
to PM USA’s MSA payments in April 2017 and April 2018.
Depending upon whether the investigative firm’s determination of
the number of Tribal NPM Packs sold during 2015 is greater or
lower than PM USA’s estimate, PM USA will respectively record
later in 2017 either an additional reduction in cost of sales or an
increase in cost of sales.
2003 and Subsequent 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 other
than New York. 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 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 2014 will become effective
in February 2017). Whether the “significant factor” condition for
2015 has been met has not yet been resolved.
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
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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 record the
remaining $25 million based on its assessment of certain disputes
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 believed 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 filed a motion
in its state court to (i) vacate the panel’s ruling as to its diligence
and (ii) modify the pro rata judgment reduction and to substitute a
reduction method more favorable to the state. These four states
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. In December 2015, the Supreme Court of
Pennsylvania denied PM USA’s petition for further judicial
review of the Pennsylvania intermediate appellate court decision.
Because the Pennsylvania state trial court ruling preceded PM
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
USA’s 2014 MSA payment date, 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. In April
2016, PM USA filed a petition for writ of certiorari with the
United States Supreme Court, which was denied in October 2016.
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. 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 sought further discretionary
review of this decision in the Maryland Court of Appeals but, in
February 2016, the Court of Appeals denied PM USA’s petition.
As a result, PM USA returned 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 recorded a
corresponding reduction to its pre-tax earnings in the first quarter
of 2016. In June 2016, PM USA filed a petition for writ of
certiorari with the United States Supreme Court, which was
denied in October 2016.
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. If Missouri is successful on
further judicial review of 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.
In September 2016, a New Mexico state trial court denied
New Mexico’s motion to vacate the arbitration panel’s ruling that
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New Mexico had not diligently enforced, but granted New
Mexico’s motion to modify, with respect to New Mexico, the pro
rata judgment reduction. PM USA is appealing the New Mexico
trial court’s decision regarding the pro rata judgment reduction. If
PM USA is not successful on further judicial review of the trial
court’s ruling on the judgment reduction issue, PM USA will have
to return $3 million of the 2003 NPM Adjustment and $2 million
of the interest it received (plus interest on those amounts) and
would need to make corresponding revisions to amounts
previously recorded. This and 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 litigation and disputes discussed above will be resolved in
a manner favorable to PM USA.
2004 and Subsequent NPM Adjustments. PM USA believes that
the MSA requires the states’ diligent enforcement claims for 2004
and thereafter to be determined in multi-state arbitrations,
although a number of non-signatory states 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. In December 2015, a Wisconsin trial court ruled that
Wisconsin must arbitrate its claim of diligent enforcement for
2004, and Wisconsin has since agreed to join the 2004 diligent
enforcement arbitration.
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.
In December 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 (the “inter-
company disputes”). Several of the 17 states and PM USA 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. PM
USA, the 17 states and the other PMs resolved these disputes, and
the 2004 diligent enforcement arbitration is underway before two
separate arbitration panels, with certain states’ claims of diligent
enforcement to be decided by one panel and certain other states’
claims of diligent enforcement decided by the other panel. These
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
two arbitration panels have two arbitrators in common. As part of
the resolution of these disputes, the OPMs have agreed that the
inter-company disputes will be heard by a separate arbitration
panel. In addition, Wisconsin, Pennsylvania and Maryland have
agreed to join in the 2004 diligent enforcement arbitration. In
November 2016, New Mexico was ordered by its trial court to
join the arbitration. New Mexico has appealed the decision.
Proceedings regarding diligent enforcement claims for 2005
and subsequent years have not yet been scheduled. No assurance
can be given as to when proceedings for 2005 and subsequent
years will be scheduled or the precise form those proceedings will
take.
The independent auditor has calculated that PM USA’s share
of the maximum potential NPM Adjustments for 2004-2015 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, $210 million for 2012, $218 million
for 2013, $241 million for 2014 and $289 million for 2015.
These maximum amounts will be reduced by a judgment
reduction to reflect the settlement with the signatory states (for
2004-2014) and the New York settlement. The judgment
reduction for the 2004 and subsequent 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. In addition, as discussed below, PM USA
believes that the amount shown above as PM USA’s share of the
maximum potential NPM Adjustment for 2015 was incorrectly
calculated by the independent auditor, and that PM USA’s correct
share is higher. Finally, PM USA’s recovery of these amounts,
even as reduced, is dependent upon subsequent determinations of
state diligent enforcement claims, and is subject (in the case of
signatory states found non-diligent) to the partial liability
reduction under the settlement. The availability and amount of
any NPM Adjustment for 2004 and subsequent years will not be
finally determined in the near term. There is no assurance that
PM USA will ultimately receive any adjustment 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
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
allocations of any NPM Adjustments received by them pursuant
to the MSA or the settlements of NPM Adjustment disputes with
certain states described above, as calculated by the independent
93
auditor, have been and may continue to be affected by R.J.
Reynolds’s acquisition of Lorillard and the related assignment of
certain cigarette brands by R.J. Reynolds to ITG (the “RJR-
Lorillard-ITG transaction”). For example, R.J. Reynolds and ITG
have taken the position that they do not have to make payments
on those brands under the Florida, Minnesota and Texas State
Settlement Agreements or include those brands in their reported
volumes or profits for purposes of certain calculations under the
State Settlement Agreements. PM USA believes that the position
taken by R.J. Reynolds and ITG violates the State Settlement
Agreements and applicable law. In that regard, PM USA disputes
several calculations made by the independent auditor since the
RJR-Lorillard-ITG transaction. In particular, PM USA believes
that the independent auditor’s calculations incorrectly increased
PM USA’s payments for 2015 due to Mississippi, Florida, Texas
and Minnesota under their State Settlement Agreements by at
least $42 million and for 2016 by an amount that cannot yet be
determined because the final 2016 payment amounts have not
been calculated by the independent auditor (see below for a
discussion of the portion of these improperly increased payments
attributable to the Florida Settlement Agreement). PM USA
further believes that such payments due to those states for
subsequent years may also be incorrectly increased by amounts
that will depend on the independent auditor’s future calculations.
In January 2017, PM USA and the State of Florida each filed
in Florida state court a motion against R.J. Reynolds and ITG to
enforce the Florida State Settlement Agreement with respect to
their failure to make payments to Florida on the assigned brands
and failure to include those brands in their reported volumes and
profits for purposes of certain calculations under the Florida State
Settlement Agreement. PM USA believes that, as a result of these
failures by R.J. Reynolds and ITG, its settlement payments to
Florida have been improperly increased by over $13 million.
In addition to the disputes noted above, PM USA believes
that the calculations by the independent auditor have resulted in
an improper decrease of PM USA’s share of the 2015 NPM
Adjustment pursuant to the MSA and the settlements of the NPM
Adjustment disputes and may result in improper decreases of its
share for subsequent years, although the amounts of such
decreases depend on a number of factors that cannot be
determined at this time. PM USA cannot provide any assurance
that it will be successful in any such disputes that it has raised or
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.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
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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 ETS; (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 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
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
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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.
Court of Appeals and any implementation changes the parties
propose. In February 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, which the parties jointly submitted and the court approved
in April 2016. Also in April 2016, defendants filed a notice of
appeal to the U.S. Court of Appeals for the District of Columbia
Circuit on the content of the corrective communications. In May
2016, defendants filed a notice of appeal of the consent order for
the purpose of perfecting the appeal of the district court’s
February 2016 order on the content of the corrective
communications. Oral argument is scheduled for February 14,
2017 on defendants’ appeal.
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
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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 other 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 27, 2017, a total of 8 such cases are
pending in various U.S. state courts.
The Good Case and Federal Multidistrict Proceeding: In
Good, a purported “Lights” class action, the United States
Supreme Court ruled in December 2008 that plaintiffs’ claims are
not preempted by the Federal Cigarette Labeling and Advertising
Act (“FCLAA”). The case was returned to federal court in Maine
and consolidated with other federal cases in a multidistrict
litigation (“MDL”) proceeding. In June 2011, the plaintiffs
voluntarily dismissed the Good case without prejudice. The other
multidistrict cases were either voluntarily dismissed or resolved in
a manner favorable to PM USA.
“Lights” Cases Dismissed, Not Certified or Ordered De-
Certified: As of January 27, 2017, in addition to the federal
MDL proceeding discussed above, 20 courts in 21 “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.
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. One certified class action
remains pending on appeal.
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
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
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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.
Upon retrial, in April 2016, the jury returned a verdict in favor of
PM USA. In May 2016, plaintiffs filed a motion for a new trial,
which PM USA opposed in June 2016. In August 2016, the trial
court denied plaintiffs’ motion for a new trial, plaintiffs filed a
notice of appeal and PM USA cross-appealed. In November
2016, the court of appeals dismissed PM USA’s cross-appeal
without prejudice upon joint motion of the parties.
State Trial Court Class Certifications Concluded in 2016:
Aspinall: In August 2004, the Massachusetts Supreme Judicial
Court affirmed the class certification order. 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. Trial began in October 2015 and concluded in
November 2015. In February 2016, the trial court issued its
“Findings of Fact and Conclusions of Law,” and awarded
statutory damages of $25 per class member, for a total of $4.9
million, plus interest, attorneys’ fees and costs. In April 2016,
subject to the court’s approval, the parties agreed to settle all
claims for approximately $32 million. In the first quarter of 2016,
PM USA recorded a provision on its condensed consolidated
balance sheet of approximately $32 million for the judgment plus
interest and associated costs. In May 2016, PM USA paid
approximately $32 million to plaintiffs’ escrow agent. In
September 2016, the court approved the settlement in which PM
USA agreed to pay approximately $15.3 million to the class and
$16.5 million in attorneys’ fees and costs, and dismissed the case
with prejudice, concluding this litigation.
Miner: 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
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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. In June 2016, the trial court granted PM
USA’s motion for partial summary judgment to limit any damages
claimed by the plaintiffs’ class to purchases made prior to May
2003. In July 2016, the parties agreed to settle all claims for $45
million. In the third quarter of 2016, PM USA recorded a
provision on its condensed consolidated balance sheet of $45
million. In November 2016, the trial court granted final approval
of the settlement, concluding this litigation. In December 2016,
PM USA paid $45 million to plaintiff’s escrow agent.
Price: 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 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 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. In
February 2012, plaintiffs filed an amended petition asking the
trial court to reinstate the original judgment, which the court
denied in December 2012. On appeal, in April 2014, the Fifth
Judicial District reversed and ordered reinstatement of the original
$10.1 billion trial court judgment against PM USA. In September
2014, the Illinois Supreme Court granted PM USA’s motion for
leave to appeal. In November 2015, the Illinois Supreme Court
vacated the Fifth Judicial District’s decision and dismissed the
cause of action without prejudice to plaintiffs to file a motion to
recall the mandate in the Illinois Supreme Court. In November
2015, the plaintiffs filed a motion in the Illinois Supreme Court
seeking to recall the 2005 mandate issued in PM USA’s favor,
which the court denied. The litigation concluded in June 2016
after the United States Supreme Court denied plaintiffs’ petition
for writ of certiorari.
Other Developments: In Oregon (Pearson), a state court in
October 2006 denied plaintiffs’ motion for interlocutory review of
the trial court’s refusal to certify a class. The denial was
ultimately affirmed on appeal and the case was remanded to the
trial court to adjudicate the claims of the individual plaintiffs. In
April 2016, the parties agreed to settle plaintiffs’ individual
claims for an aggregate amount of $30,000 and, pursuant to that
settlement, the parties filed a stipulation of voluntary dismissal
with prejudice with the Circuit Court of Multnomah County. This
litigation has concluded.
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
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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.
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. In
November 2016, defendants filed renewed motions to dismiss the
case.
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 U.S. 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 U.S. 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
U.S. Court of Appeals for the District of Columbia Circuit in May
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
2015. In June 2016, the U.S. Court of Appeals for the District of
Columbia Circuit affirmed the dismissal of the case on
jurisdictional grounds. In July 2016, the relator filed a petition
for rehearing or rehearing en banc. In September 2016, the U.S.
Court of Appeals for the District of Columbia Circuit denied the
petition for rehearing. Plaintiffs did not file a certiorari petition
in the United States Supreme Court within the required time, and
the case is thus concluded.
Argentine Grower Cases: PM USA and Altria Group, Inc.
were sued 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 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 Monsanto
Company’s (“Monsanto”) Roundup herbicide during the
production and cultivation of tobacco. Plaintiffs seek
compensatory and punitive damages against all defendants. Altria
Group, Inc. and certain other defendants were dismissed from the
Hupan, Chalanuk, Rodriguez Da Silva, Aranda, Taborda and
Biglia cases. The three remaining defendants in the six cases
were PM USA, Philip Morris Global Brands Inc. (a subsidiary of
PMI) and Monsanto. Following discussions regarding
indemnification for these cases pursuant to the Distribution
Agreement between PMI and Altria Group, Inc., PMI and PM
USA 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. In November 2015, the trial
court granted PM USA’s motion to dismiss on forum non
conveniens grounds. Plaintiffs filed a motion for clarification or
re-argument in December 2015, which the court denied in August
2016. Later in August 2016, PM USA and Philip Morris Global
Brands moved for entry of final judgment in the Hupan case and
also moved to lift the stays in the other five cases for the limited
purpose of entering final judgment of dismissal in those cases as
well based on the forum non conveniens decision in Hupan. The
court granted those motions in September 2016, and entered final
judgment of dismissal in all six cases. In October 2016, plaintiffs
filed their notice of appeal to the Delaware Supreme Court.
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
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usage, including smokeless tobacco products. Included among
the plaintiffs are three 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 have 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. In July 2016, USSTC and
Altria Group, Inc. were named as defendants, along with other
named defendants, in one such case in California (Gwynn). In
August 2016, defendants removed the case to federal court. In
September 2016, plaintiffs filed a motion to remand the case back
to state court, which the court granted in January 2017.
Nu Mark Patent Litigation
In April 2016, Fontem Ventures B.V. and Fontem Holdings 1
B.V., both subsidiaries of ITG, sued Nu Mark for alleged patent
infringement in the U.S. District Court for the Central District of
California. The suit alleged that Nu Mark’s MarkTen, MarkTen
XL and Green Smoke products infringe one or more claims under
eight separate Fontem patents for e-vapor products. The suit
sought recovery of an unspecified amount of money damages for
alleged past infringement and an injunction against future
infringement, which injunction may have resulted in Nu Mark
being enjoined from marketing one or more of the products at
issue in the suit. In June and July 2016, Nu Mark filed multiple
inter partes review petitions with the U.S. Patent Trial and Appeal
Board challenging the validity of all patents and claims asserted
against it in the lawsuit on multiple grounds.
In June 2016, the same Fontem entities filed a second lawsuit
against Nu Mark in the U.S. District Court for the Central District
of California asserting infringement of eight additional e-vapor
patents that have issued since the filing of the first case in April
2016. The second case involved the same Nu Mark products as
the first case, and likewise sought recovery of an unspecified
amount of money damages for alleged past infringement and an
injunction against future infringement. In June 2016, Nu Mark
filed a motion to transfer venue of both lawsuits from California
to the Middle District of North Carolina, which the court granted
in August 2016. Between August and November 2016, Nu Mark
filed multiple inter partes review petitions with the U.S. Patent
Trial and Appeal Board challenging the validity of all patents and
claims asserted against it in the second lawsuit. In December
2016, the parties entered into a settlement and license agreement,
resulting in the dismissal of the litigation and termination of all
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
pending inter partes review proceedings. Under the terms of the
agreement, in January 2017, Nu Mark made an upfront payment
of $21 million and will make future royalty payments in amounts
that Altria Group, Inc. does not expect to be material. In the
fourth quarter of 2016, Nu Mark recorded a provision on its
consolidated balance sheet of $21 million.
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, 2016,
Altria Group, Inc. and certain of its subsidiaries (i) had $59
million of unused letters of credit obtained in the ordinary course
of business; (ii) were contingently liable for $25 million of
guarantees, consisting primarily of surety bonds, related to their
own performance; and (iii) had a redeemable noncontrolling
interest of $38 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
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, 2016 as the fair value
of this indemnification is insignificant.
As more fully discussed in Note 20. 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, 2016, 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, 2016 and
2015.
Note 20. 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
99
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
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
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, 2016, 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, 2016 and 2015, condensed
consolidating statements of earnings and comprehensive earnings
for the years ended December 31, 2016, 2015 and 2014, and
condensed consolidating statements of cash flows for the years
ended December 31, 2016, 2015 and 2014 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.
100
at December 31, 2016
Assets
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Due from Altria Group, Inc. and subsidiaries
Other current assets
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation
Goodwill
Other intangible assets, net
Investment in AB InBev
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
$
$
4,521
—
$
1
8
$
47
143
— $
—
4,569
151
892
164
512
483
2,051
—
489
7,260
4,835
2,877
1,958
5,285
12,036
17,852
—
1,028
—
513
45,932
—
—
—
—
—
—
170
4,691
—
—
—
—
—
17,852
11,636
—
4,790
18
38,987
$
541
111
3
112
767
3,797
118
4,691
2,971
2,073
898
—
2
—
2,632
—
—
1,748
9,971
$
351
53
509
371
1,284
1,511
201
3,186
1,864
804
1,060
5,285
12,034
—
—
1,028
—
131
22,724
—
—
—
—
—
(5,308)
—
(5,308)
—
—
—
—
—
—
(14,268)
—
(4,790)
(1,384)
(25,750) $
$
101
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
at December 31, 2016
Liabilities
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
$
1
$
92
$
332
$
— $
425
—
104
—
261
1,188
5,030
6,584
13,881
5,424
207
—
—
121
26,217
619
14
3,696
438
—
237
5,096
—
—
—
1,453
—
146
6,695
128
171
5
326
—
41
1,003
—
4,376
598
764
4,790
160
11,691
—
—
—
—
—
(5,308)
(5,308)
—
(1,384)
—
—
(4,790)
—
(11,482)
747
289
3,701
1,025
1,188
—
7,375
13,881
8,416
805
2,217
—
427
33,121
—
—
38
—
38
935
5,893
36,906
(2,052)
(28,912)
12,770
—
12,770
—
3,310
237
(271)
—
3,276
—
3,276
9
11,585
1,118
(1,720)
—
10,992
3
10,995
(9)
(14,895)
(1,355)
1,991
—
(14,268)
—
(14,268)
935
5,893
36,906
(2,052)
(28,912)
12,770
3
12,773
45,932
Total Liabilities and Stockholders’ Equity
$
38,987
$
9,971
$
22,724
$
(25,750) $
102
at December 31, 2015
Assets
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Due from Altria Group, Inc. and subsidiaries
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
$
$
2,313
—
— $
7
$
56
117
— $
—
2,369
124
957
181
444
449
2,031
—
387
4,911
4,877
2,895
1,982
5,285
12,028
5,483
—
1,239
—
531
31,459
—
—
—
—
—
—
284
2,597
—
—
—
—
—
5,483
11,648
—
4,790
20
24,538
$
562
123
5
121
811
3,821
65
4,704
3,102
2,157
945
—
2
—
2,715
—
—
1,804
10,170
$
395
58
439
328
1,220
1,807
112
3,312
1,775
738
1,037
5,285
12,026
—
—
1,239
—
138
23,037
$
—
—
—
—
—
(5,628)
(74)
(5,702)
—
—
—
—
—
—
(14,363)
—
(4,790)
(1,431)
(26,286) $
103
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
—
255
1,110
5,427
6,813
12,831
1,646
215
—
—
153
21,658
586
11
3,585
616
—
191
5,093
—
—
—
1,460
—
126
6,679
109
169
5
276
—
10
866
12
4,452
1,062
785
4,790
168
12,135
—
—
—
(74)
—
(5,628)
(5,702)
—
(1,431)
—
—
(4,790)
—
(11,923)
4
400
695
198
3,590
1,073
1,110
—
7,070
12,843
4,667
1,277
2,245
—
447
28,549
—
—
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
$
24,538
$
10,170
$
23,037
$
(26,286) $
31,459
104
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2016
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Marketing, administration and research costs
Asset impairment and exit costs
Operating (expense) income
Interest and other debt expense, net
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Gain on AB InBev/SABMiller business combination
Earnings before income taxes and equity earnings of
subsidiaries
Provision for income taxes
Equity earnings of subsidiaries
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive earnings (losses), net of deferred
income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
Altria
Group, Inc.
— $
—
—
—
165
5
(170)
519
823
(795)
(13,865)
13,148
4,453
5,544
14,239
—
14,239
$
PM USA
22,146
6,628
6,187
9,331
1,996
97
7,238
10
—
—
—
7,228
2,631
268
4,865
—
4,865
$
$
Non-
Guarantor
Subsidiaries
3,633
1,153
220
2,260
489
77
1,694
218
—
—
—
Total
Consolidating
Adjustments
$
Consolidated
25,744
7,746
6,407
11,591
2,650
179
8,762
747
823
(795)
(13,865)
(35) $
(35)
—
—
—
—
—
—
—
—
—
1,476
524
—
952
(5)
947
$
—
—
(5,812)
(5,812)
—
(5,812) $
21,852
7,608
—
14,244
(5)
14,239
14,239
$
4,865
$
952
$
(5,812) $
14,244
1,228
15,467
—
(16)
4,849
—
(28)
924
(5)
44
(5,768)
1,228
15,472
—
(5)
$
15,467
$
4,849
$
919
$
(5,768) $
15,467
105
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2015
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Marketing, administration and research costs
Reduction of PMI tax-related receivable
Asset impairment and exit costs
Operating (expense) income
Interest and other debt expense, net
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Gain on AB InBev/SABMiller business combination
(Loss) earnings before income taxes and equity earnings of
subsidiaries
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive (losses) earnings, net of deferred
income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
Altria
Group, Inc.
— $
—
—
—
189
41
—
(230)
560
228
(757)
(5)
(256)
(184)
5,313
5,241
—
5,241
$
$
Non-
Guarantor
Subsidiaries
3,342
1,117
211
2,014
425
PM USA
22,133
6,664
6,369
9,100
2,094
—
—
7,006
33
—
—
—
6,973
2,536
268
4,705
—
4,705
$
—
4
1,585
224
—
—
—
1,361
483
—
878
(2)
876
$
$
Total
Consolidating
Adjustments
Consolidated
25,434
7,740
6,580
11,114
2,708
(41) $
(41)
—
—
—
—
—
—
—
—
—
—
—
—
(5,581)
(5,581)
—
(5,581) $
41
4
8,361
817
228
(757)
(5)
8,078
2,835
—
5,243
(2)
5,241
5,241
$
4,705
$
878
$
(5,581) $
5,243
(598)
4,643
—
86
4,791
—
(69)
809
(2)
(17)
(5,598)
—
(598)
4,645
(2)
$
4,643
$
4,791
$
807
$
(5,598) $
4,643
106
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2014
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Marketing, administration and research costs
Asset impairment and exit costs
Operating (expense) income
Interest and other debt expense (income), net
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Earnings before income taxes and equity earnings of
subsidiaries
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive losses, net of deferred
income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
Altria
Group, Inc.
— $
—
—
—
231
2
—
(233)
614
—
(1,006)
159
(119)
4,792
5,070
—
5,070
$
$
Non-
Guarantor
Subsidiaries
3,267
1,106
219
1,942
419
PM USA
21,298
6,722
6,358
8,218
1,889
—
(6)
6,335
(46)
—
—
6,381
2,381
244
4,244
—
4,244
$
—
5
1,518
240
44
—
1,234
442
—
792
—
792
$
$
Total
Consolidating
Adjustments
Consolidated
24,522
7,785
6,577
10,160
2,539
(43) $
(43)
—
—
—
—
—
—
—
—
—
—
—
(5,036)
(5,036)
—
(5,036) $
2
(1)
7,620
808
44
(1,006)
7,774
2,704
—
5,070
—
5,070
5,070
$
4,244
$
792
$
(5,036) $
5,070
(1,304)
3,766
—
(110)
4,134
—
(642)
150
—
752
(4,284)
(1,304)
3,766
—
—
$
3,766
$
4,134
$
150
$
(4,284) $
3,766
107
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
for the year ended December 31, 2016
Cash Provided by Operating Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Proceeds from finance assets
Proceeds from AB InBev/SABMiller business combination
Purchase of AB InBev ordinary shares
Payment for derivative financial instrument
Proceeds from derivative financial instruments
Other
Net cash provided by (used in) 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
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash and cash equivalents:
Increase (decrease)
Balance at beginning of year
Balance at end of year
Altria
Group, Inc.
PM USA
Non-
Guarantor
Subsidiaries
Total
Consolidating
Adjustments
Consolidated
$
4,326
$
5,138
$
319
$
(5,992) $
3,791
—
—
4,773
(1,578)
(3)
510
—
3,702
1,976
(933)
(1,030)
(4,512)
(530)
(809)
—
18
(5,820)
(45)
—
—
—
—
—
—
(45)
—
—
—
—
(28)
—
(5,064)
—
(5,092)
(144)
231
—
—
—
—
(36)
51
—
—
—
—
558
—
(928)
(9)
(379)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,992
—
5,992
2,208
2,313
4,521
$
1
—
1
$
$
(9)
56
47
$
—
—
— $
(189)
231
4,773
(1,578)
(3)
510
(36)
3,708
1,976
(933)
(1,030)
(4,512)
—
(809)
—
9
(5,299)
2,200
2,369
4,569
108
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
for the year ended December 31, 2015
Cash Provided by Operating Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
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 repaid
Repurchases of common stock
Dividends paid on common stock
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash and cash equivalents:
(Decrease) increase
Balance at beginning of year
Balance at end of year
Altria
Group, Inc.
PM USA
Non-
Guarantor
Subsidiaries
Total
Consolidating
Adjustments
Consolidated
$
5,085
$
5,204
$
961
$
(5,440) $
5,810
—
—
(132)
—
(132)
(1,793)
(554)
(4,179)
814
(226)
—
17
(5,921)
(968)
3,281
2,313
$
(51)
—
—
10
(41)
—
—
—
(495)
—
(4,671)
—
(5,166)
(3)
3
$
— $
(178)
354
—
(18)
158
—
—
—
(319)
—
(769)
(12)
(1,100)
—
—
—
—
—
—
—
—
—
—
5,440
—
5,440
19
37
56
$
—
—
— $
(229)
354
(132)
(8)
(15)
(1,793)
(554)
(4,179)
—
(226)
—
5
(6,747)
(952)
3,321
2,369
109
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
for the year ended December 31, 2014
Cash Provided by Operating Activities
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
Other
Net cash 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
Changes in amounts due to/from Altria Group, Inc. and
subsidiaries
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash and cash equivalents:
Increase (decrease)
Balance at beginning of year
Balance at end of year
Altria
Group, Inc.
PM USA
Non-
Guarantor
Subsidiaries
Total
Consolidating
Adjustments
Consolidated
$
4,924
$
4,451
$
707
$
(5,419) $
4,663
—
—
—
—
—
999
(525)
(939)
(3,892)
(411)
—
—
11
(4,757)
(44)
—
—
70
26
—
—
—
—
(351)
—
(4,124)
—
(4,475)
(119)
(102)
369
3
151
—
(300)
—
—
762
(44)
(1,295)
(4)
(881)
—
—
—
—
—
—
—
—
—
—
—
5,419
—
5,419
167
3,114
3,281
$
$
2
1
3
$
(23)
60
37
$
—
—
— $
(163)
(102)
369
73
177
999
(825)
(939)
(3,892)
—
(44)
—
7
(4,694)
146
3,175
3,321
110
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 21. 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
6,066
2,656
1,218
1,217
0.62
1st
5,804
2,475
1,018
1,018
0.52
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016 Quarters
2nd
6,521
2,957
1,654
1,653
0.84
$
$
$
$
$
2015 Quarters
2nd
6,613
2,871
1,449
1,448
0.74
$
$
$
$
$
3rd
6,905
3,150
1,094
1,093
0.56
3rd
6,699
3,046
1,528
1,528
0.78
$
$
$
$
$
$
$
$
$
$
4th (1)
6,252
2,828
10,278
10,276
5.27
4th
6,318
2,722
1,248
1,247
0.64
During 2016 and 2015, 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
Patent litigation settlement
Asset impairment, exit, implementation and acquisition-related costs
Loss on early extinguishment of debt
Gain on AB InBev/SABMiller business combination
SABMiller special items (1)
(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
Gain on AB InBev/SABMiller business combination
SABMiller special items
1st
18
38
—
122
—
(40)
166
304
$
$
1st
— $
43
—
228
—
86
357
$
2016 Quarters
2nd
— $
5
—
5
—
(117)
21
(86) $
3rd
— $
45
—
6
823
(48)
(40)
786
4th
—
17
21
73
—
(13,660)
(236)
$ (13,785)
2015 Quarters
2nd
— $
5
7
—
—
2
14
$
3rd
(126) $
67
1
—
—
8
(50) $
4th
42
35
3
—
(5)
30
105
$
$
$
$
(1) During the fourth quarter of 2016, Altria Group, Inc. recorded a non-cash gain, reflecting its share of SABMiller’s increase to
shareholders’ equity, resulting from the third quarter of 2016 completion of the SABMiller, The Coca-Cola Company and Gutsche
Family Investments transaction, combining bottling operations in Africa. The gain was included in earnings from equity investment in
SABMiller, and increased Altria Group, Inc.’s earnings before income taxes ($309 million), net earnings ($201 million), net earnings
attributable to Altria Group, Inc. ($201 million) and diluted EPS attributable to Altria Group, Inc. ($0.10) in the fourth quarter of 2016.
The impact of recording the gain in the fourth quarter of 2016 rather than the third quarter of 2016 was not material to Altria Group,
Inc.’s financial statements in either quarter.
As discussed in Note 15. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated
statements of earnings during 2016 and 2015 as a result of various tax events.
111
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
February 1, 2017
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, 2016 and 2015, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2016 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, 2016, 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
112
Based on this assessment, management determined that, as of
December 31, 2016, 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, 2016,
as stated in their report herein.
February 1, 2017
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,
2016. 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.
113
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 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 18, 2017 that will be filed with the SEC on or about April 6, 2017 (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 Altria - 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 13, 2017:
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 Procurement
President and Chief Executive Officer, U.S. Smokeless Tobacco Company LLC
Senior Vice President, Human Resources, Compliance and Information Services and Chief
Howard A. Willard III
Executive Vice President and Chief Operating Officer
Compliance Officer
Age
63
47
53
50
46
46
64
64
51
43
51
50
53
All of the above-mentioned officers have been employed
by Altria Group, Inc. or its subsidiaries in various capacities
during the past five years.
Altria Group, Inc., was appointed Senior Vice President, Strategy,
Planning and Procurement of Altria Group, Inc.
Mr. Whitaker’s wife and Mr. Surgner’s wife are first
Effective February 15, 2016, Mr. Mancuso, previously
cousins.
Senior Vice President, Strategy, Planning and Accounting of
114
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, 2016” 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, 2016, 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)
1,951,214 (2)
$—
40,001,331 (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 1,951,214 shares of restricted stock units (also referred to as deferred stock).
(3)
Includes 39,046,757 shares available under the 2015 Performance Incentive Plan and 954,574 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 Altria - Directors and Executive Officers” and “Ownership of Equity Securities of
Altria - 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.
115
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Earnings for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting
Page
38
40
41
42
43
44
112
113
Schedules have been omitted either because such schedules are not required or are not applicable.
In accordance with Regulation S-X Rule 3-09, the audited financial statements of AB InBev for the year ended December 31, 2016
will be filed by amendment within six months after AB InBev’s year ended December 31, 2016.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
2.1
2.2
2.3
2.4
3.1
3.2
4.1
Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as
Mondelēz International, Inc.), dated as of January 31, 2007. Incorporated by reference to Altria
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).
116116
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
10.9
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).
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).
117
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
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).
Employee Matters Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known
as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria
Group, Inc.’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940).
Tax Sharing Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as
Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria
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).*
Amendment to Benefit Equalization Plan, effective March 31, 2016. Incorporated by reference to
Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 (File No.
1-08940).*
Amendment to Benefit Equalization Plan, effective January 1, 2016 and October 1, 2016.*
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).*
118118
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
12
21
23
24
31.1
31.2
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).*
Deferred Fee Plan for Non-Employee Directors, as amended and restated effective October 28,
2015. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2015 (File No. 1-08940).*
2015 Stock Compensation Plan for Non-Employee Directors, as amended and restated effective
October 28, 2015. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2015 (File No. 1-08940).*
2010 Performance Incentive Plan, effective on May 20, 2010. Incorporated by reference to Altria
Group, Inc.’s definitive proxy statement on Schedule 14A 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).*
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 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 Restricted Stock Unit Agreement, dated as of January 26, 2016. Incorporated by reference
to Altria Group, Inc.’s Current Report on Form 8-K filed on January 28, 2016 (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. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K
for the year ended December 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.
119
32.1
32.2
99.1
99.2
99.3
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.
Item 16. Form 10-K Summary.
None.
120
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 27, 2017
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 27, 2017
/s/ WILLIAM F. GIFFORD, JR.
(William F. Gifford, Jr.)
Executive Vice President and
Chief Financial Officer
February 27, 2017
/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 27, 2017
Directors
February 27, 2017
121
[THIS PAGE LEFT INTENTIONALLY BLANK]
Disclosure of Non-GAAP Financial Measures
Altria reports its inancial results in accordance with U.S.
generally accepted accounting principles (GAAP). Altria’s
management reviews certain inancial results, including OCI
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, Gain
on AB InBev/SABMiller business combination, AB InBev/
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 disputes under the Master
Settlement Agreement (such settlements and determinations
are referred to collectively as NPM Adjustment Items). Altria’s
management does not view any of these special items to be part
of Altria’s underlying results as they may be highly variable, are
dificult to predict and can distort underlying business trends
and results. Altria’s management believes that adjusted inancial
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 inancial
measures for planning, forecasting and evaluating business
and inancial performance, including allocating resources and
evaluating results relative to employee compensation targets.
These adjusted inancial measures are not consistent with GAAP
and may not be calculated the same as similarly titled measures
used by other companies. These adjusted inancial measures
should thus be considered as supplemental in nature and not
considered in isolation or as a substitute for the related inancial
information prepared in accordance with GAAP. Reconciliations
of historical adjusted inancial measures to corresponding GAAP
measures are provided below.
Reconciliations of Adjusted OCI
(dollars in millions)
For the years ended December 31,
Net revenues
Excise taxes
Revenues net of excise taxes
Reported OCI
NPM Adjustment Items
Asset impairment, exit
and implementation costs
Tobacco and health litigation items
Acquisition-related costs
Smokeable Products
2016
2015 Change
Smokeless Products
2016
2015 Change
$22,851 $22,792
)
)
(6,423
(6,247
$16,604 $16,369
$ 7,768 $ 7,569
)
(97
12
134
88
—
—
127
—
$2,051 $ 1,879
)
)
(133
(135
$1,916 $ 1,746
$1,177 $ 1,108
—
—
57
—
—
4
—
—
Wine
2015 Change
$692
)
(24
$668
$152
—
—
—
—
2016
$746
)
(25
$721
$164
—
—
—
3
Adjusted OCI
$ 8,002 $ 7,599
5.3%
$1,234 $ 1,112
11.0%
$167
$152
9.9%
Disclosure of Non-GAAP Financial Measures (continued)
Reconciliations of Adjusted Diluted EPS
(dollars in millions, except per share data)
For the year ended December 31, 2016
2016 Reported
NPM Adjustment Items
Tobacco and health litigation items
SABMiller special items
Loss on early extinguishment of debt
Asset impairment, exit, implementation and
acquisition-related costs
Patent litigation settlement
Gain on AB InBev/SABMiller business combination
Tax items
2016 Adjusted for Special Items
Annual Growth Rate (2016 vs 2015)
Reconciliations of Adjusted Diluted EPS
(dollars in millions, except per share data)
For the year ended December 31, 2015
2015 Reported
NPM Adjustment Items
Tobacco and health litigation items
SABMiller special items
Loss on early extinguishment of debt
Asset impairment, exit and integration costs
Gain on AB InBev/SABMiller business combination
Tax items
2015 Adjusted for Special Items
Earnings
before
Income
Taxes
$ 21,852
18
105
)
(89
823
206
21
)
(13,865
—
$ 9,071
Provision
for
Income
Taxes
$ 7,608
7
34
)
(32
282
71
8
)
(4,864
30
$ 3,144
Net
Earnings
$ 14,244
11
71
)
(57
541
135
13
)
(9,001
)
(30
$ 5,927
Net Earnings
Attributable to
Altria
Group, Inc.
$ 14,239
11
71
)
(57
541
135
13
)
(9,001
)
(30
$ 5,922
Earnings
before
Income
Taxes
$ 8,078
)
(84
150
126
228
11
)
(5
41
$ 8,545
Provision
for
Income
Taxes
$ 2,835
)
(33
56
44
85
2
)
(2
52
$ 3,039
Net
Earnings
$ 5,243
)
(51
94
82
143
9
)
(3
)
(11
$ 5,506
Net Earnings
Attributable to
Altria
Group, Inc.
$ 5,241
)
(51
94
82
143
9
)
(3
)
(11
$ 5,504
Diluted
EPS
$ 7.28
0.01
0.04
)
(0.03
0.28
0.07
0.01
)
(4.61
)
(0.02
$ 3.03
8.2%
Diluted
EPS
$ 2.67
)
(0.03
0.05
0.04
0.07
—
—
—
$ 2.80
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Altria Group, Inc.6601 W. Broad StreetRichmond, VA 23230-1723altria.comPhilip Morris USA Inc.P.O. Box 26603Richmond, VA 23261-6603philipmorrisusa.comU.S. Smokeless Tobacco Company LLCP.O. Box 85107Richmond, VA 23285-5107ussmokeless.comJohn Middleton Co.6601 W. Broad StreetRichmond, VA 23230-1723johnmiddletonco.comSte. Michelle Wine Estates Ltd.P.O. Box 1976Woodinville, WA 98072-1976smwe.comPhilip Morris Capital Corporation225 High Ridge Road Suite 300 WestStamford, CT 06905-3000philipmorriscapitalcorp.comNu Mark LLC6603 West Broad StreetRichmond, VA 23230-1723nu-mark.comIndependent Auditors:PricewaterhouseCoopers LLP1021 E. Cary St., Suite 1250 Richmond, VA 23219Transfer Agent and Registrar:Computershare Trust Company, N.A.P.O. Box 43078Providence, RI 02940-3078The 2016 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.Design: Andra Design andradesignllc.comPhotography: Casey Templeton, Ed WheelerPrinter: Stephenson Printing Inc.© Copyright 2017 Altria Group, Inc.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: 1-800-442-0077From 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 02940-3078To eliminate duplicate mailings, please contact Computershare (if you are a registered shareholder) or your broker (if you hold your shares 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, 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/investorsAltria Group, Inc. makes available free of charge its filings with the U.S. Securities and Exchange Commission (such as proxy statements and Reports on Form 10-K, 10-Q and 8-K). For copies, please visit our website at: www.altria.com/SECfilingsIf you do not have Internet access, you may call: 1-804-484-8222Internet Access Helps Reduce Costs:As a convenience to share-holders 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 more information, please visit our website at: www.altria.com/investors2017 Annual Meeting:The Altria Group, Inc. Annual Meeting of Shareholders will be held at 9:00 a.m. (Eastern Time)on Thursday, May 18, 2017 at The Greater Richmond Convention Center, 403 North Third Street, Richmond, VA 23219. For further information, call: 1-804-484-8838Download the Altria IR App:Stay up-to-date with the latest investor information on our app. Download at the AppleStore 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 symbol: MO). As of January 31, 2017, there were approximately 68,000 hold-ers of record of Altria Group, Inc.’s common stock.Additional Information: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 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 AddressesShareholder Information altria.comAltria’s Operating CompaniesPhilip Morris USA Inc. (PM USA) PM USA is the largest tobacco company in the U.S. and has over 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, a growing segment 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 inance lease investments.an Altria Companyan Altria Companyan Altria Companyan Altria CompanyAn Altria Innovation Companyan Altria CompanyAltria Group, Inc.6601 W. Broad StreetRichmond, VA 23230-1723