Altria Group, Inc.
2017 Annual Report
2017 Results
Another
Strong Year
Grew
adjusted
diluted
earnings per
share 11.9%
Delivered
total shareholder
return of 9.4%
Paid
shareholders
$4.8 billion in
dividends
Acquired
Nat Sherman
Financial Highlights
Adjusted Diluted
EPS Growth2
Annualized
Dividend Growth3
Total Shareholder Return4
$3.39
$3.03
21.8%
+11.9%
●
$2.64
$2.44
+8.2%
●
12.4%
9.4%
2016
2017
2016
2017
Altria
S&P
500
S&P Food
Beverage &
Tobacco Index
Consolidated Results
(dollars in millions, except per share data)
Net revenues
Operating income
Net earnings attributable to Altria Group, Inc.1
Basic and diluted earnings per share (EPS)
attributable to Altria Group, Inc.1
Cash dividends declared per share
2017
$ 25,576
9,556
10,222
2016
$ 25,744
8,762
14,239
Change
(0.7)%
9.1%
(28.2)%
5.31
2.54
7.28
2.35
(27.1)%
8.1%
Results by Reportable Segment
2017
2016
Change
Smokeable Products
Net revenues
Operating companies income
Smokeless Products
Net revenues
Operating companies income
Wine
Net revenues
Operating companies income
$ 22,636
8,408
$ 22,851
7,768
(0.9)%
8.2%
$ 2,155
1,300
$ 2,051
1,177
5.1%
10.5%
$
698
147
$
746
164
(6.4)%
(10.4)%
The chief operating decision maker of Altria Group, Inc. (Altria) reviews operating companies income (OCI) to
evaluate the performance of, and allocate resources to, the segments. OCI for the segments is defined as operating
income before 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 15. Segment Reporting to the consolidated financial
statements in Item 8 of the enclosed Annual Report on Form 10-K.
1 Certain 2017 amounts include the impact of the enactment of the Tax Reform Act. Certain 2016 amounts include the
impact of the Gain on AB InBev/SABMiller business combination. For further discussion, see Notes 14 and 6 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 reports
4 Note: Assumes quarterly reinvestment of dividends as of the ex-dividend date. Source: Bloomberg Daily Return
(December 31, 2016 - December 31, 2017)
* Terms used but not defined herein are defined in the enclosed Annual Report on Form 10-K.
Dear Fellow Shareholders
Altria had another strong year in 2017,
during a time of dynamic industry
change. We delivered outstanding
financial performance, accomplished
several strategic initiatives important for
future success and continued to focus
on rewarding our shareholders.
In 2017 Altria:
n Grew adjusted diluted EPS by 11.9%;
n Delivered total shareholder return
(TSR) of 9.4%, following four consecu-
tive years of TSR exceeding 20%;
n Paid shareholders $4.8 billion in
dividends, and increased our dividend
by 8.2%, the 51st increase in the past
48 years;
n Repurchased more than $2.9 billion
in Altria shares under an expanded $4
billion share repurchase program; and
n Acquired Nat Sherman to address
the opportunity in the growing super-
premium cigarette segment.
Our Success Since 2012
Success is best measured over the
long term, so it’s important periodical-
ly to review our performance through
that lens. To do so, we briefly recount
what Altria and its companies set out to
accomplish over the last several years
and review how we have performed
against those goals. Next, we describe
the exciting new opportunity to provide
adult tobacco consumers with innovative,
reduced-harm products that are autho-
rized by the U.S. Food and Drug Admin-
istration (FDA), and how Altria has been
investing to win there in the long term.
Since 2012, we have described our
strategic purpose as Maximize the Core
and Innovate for our Future. It captures
the situation precisely, as we sought
to both maximize the value that our
industry-leading companies could create
for shareholders, while also preparing
to meet the longer term changes in
industry dynamics that we foresaw –
and to shape the opportunities they
could create.
At the core, our companies have
been immensely successful by building
on their premium brands, improving
our already high and industry-leading
margins, and delivering shareholder
returns that exceeded all relevant
benchmarks.
From 2012 through 2017:
n Our smokeable products segment
grew its adjusted OCI at a 6.4%
compounded annual growth rate to
Martin J. Barrington
Chairman of the Board, CEO and President
$8.6 billion and expanded adjusted OCI
margins by 10 percentage points to 51.2%.
n PM USA increased its retail share
by half a share point and strengthened
Marlboro’s brand equity. Middleton
grew cigar shipment volume at a 4.5%
compounded annual growth rate while
maintaining Black & Mild’s leadership in
the profitable tipped cigar segment.
n The smokeless products segment
grew its adjusted OCI at a 7.4%
compounded annual growth rate to
Performance since 2012
Adjusted Diluted
EPS Growth
Cash Returns to Shareholders
($ in billions)
Altria’s Total
Shareholder Return
$3.39
Share Repurchases
Dividends
5-Year
TSR
180.7%
9.4%
●
●
●
8.9%
5-Year
CAGR
$2.21
●
$27
$6
$21
20.5%
●
23.1%
●
34.5%
●
28.6%
●
2012
2017
2012-2017
2013
2014
2015
2016
2017
1
$1.4 billion and expanded adjusted
OCI margins by seven percentage
points to 67.8%.
n USSTC delivered combined retail
share growth on Copenhagen and
Skoal of 1.1 share points to 50.4%.
Copenhagen had a 2017 retail share
of 33.7% – the highest in the category.
n We generated approximately $400
million in cost savings that we used
to both reinvest and return to our
shareholders.
n We strengthened our beer invest-
ment by supporting Anheuser-Busch
InBev SA/NV’s (AB InBev) business
combination with SABMiller plc
(SABMiller). Altria’s 10.2% ownership
of AB InBev – now the largest global
brewer – provides us with substantial
income, cash flow and a strong asset
on our balance sheet.
As a result of these efforts, Altria:
n Grew adjusted diluted EPS to
$3.39 from $2.21 – a compounded
annual growth rate of 8.9%.
n Paid out $21 billion in dividends
and grew our dividend at an 8.4%
compounded annual rate.
n Returned over $6 billion to share-
holders through share repurchases.
n Delivered cumulative TSR of more
than 180% – significantly exceeding
our benchmarks.
At the same time, we believed that
industry change was accelerating. Those
changes included evolving adult tobacco
consumer preferences; emerging
technologies that allowed progress in
developing innovative new products to
meet them; and the need for regulatory
policy that supported harm reduction
and encouraged innovation. As the U.S.
industry leader, we embraced these
changes and invested to win in the
opportunities they might create as we
acted to shape our future.
We began more than 15 years ago
with the bold decision to pursue federal
legislation to grant the FDA jurisdiction
over tobacco, legislation that was
required to establish the possibility
of bringing innovative, reduced-risk
products to market. In 2009, the
Tobacco Control Act became law.
That same year, we provided the
FDA with a comprehensive science-
and evidence-based analysis advocating
that the FDA regulate tobacco based
on a continuum of risk, that promotes
innovative products and that permits
manufacturers to communicate truthful
information to consumers about those
products. It’s now well understood by
policy makers that nicotine itself is not
the problem, but rather its delivery by
combustion. Thus, we were gratified to
hear the FDA announce in July that it
is now official policy.
We’ve also been building a portfolio
of the leading platforms of non-combusti-
ble, nicotine-containing products for U.S.
adult tobacco consumers – concentrat-
ing on three platforms that presently hold
the most promise: smokeless tobacco
and oral nicotine-containing products,
e-vapor and heated tobacco.
championing diversity and inclusion
and encouraging innovation.
Winning in this environment will
require the financial strength and flex-
ibility to invest in products, capabilities
and market-building actions as may be
appropriate. We’ve maximized our core
businesses that provide us with signifi-
cant free cash flow – on average more
than $4.5 billion annually over the past
five years. We’ve improved our balance
sheet to be able to make the necessary
investments for this next chapter of our
success. And that investment capability
has been further bolstered by the Tax
Cuts and Jobs Act, which will materially
reduce Altria’s effective federal income
tax rate. Our teams have been investing
I believe strongly that Altria is well-positioned
for much future success.Our core businesses
operate in the largest industry profit pool in the
world outside of China.They continue to be
powerhouses, with premium brands that have
industry-leading equity, robust market shares
and high and growing margins.
In smokeless tobacco, we acquired
USSTC in 2009 and have built it into the
largest and most profitable non-combus-
tible tobacco business in the world. In
2013, we launched Nu Mark which has
built a leading e-vapor business in the
U.S., principally with its MarkTen brand.
Nu Mark is also actively pursuing other
e-vapor products based on consumer
insights and evolving technology. In
heated tobacco, we have the exclusive
right to commercialize the IQOS platform
and Heatsticks in the U.S. once autho-
rized by the FDA. And our dedicated
team is building its plan to bring this ex-
citing technology to adult smokers in the
U.S. We believe the breadth, quality and
focus of our non-combustible product
portfolio is second to none.
We acquired top talent to develop a
best-in-class regulatory and innovative
product development capability. And
we’ve been adapting our organization
to win in this environment by streamlin-
ing and simplifying our structure,
for years and are prepared to make
any further investments we need to
win, while delivering on our long-term
financial objectives.
Our Future Success
I believe strongly that Altria is well-
positioned for much future success. Our
core businesses operate in the largest
industry profit pool in the world outside
of China. They continue to be power-
houses, with premium brands that have
industry-leading equity, robust market
shares and high and growing margins.
At the same time, as industry
dynamics change, we have before us
the opportunity to bring new, innovative,
reduced-risk products to adult tobacco
consumers, a result good for consumers,
public health and our company. We
firmly believe we have the talent,
capability and resources to successfully
pursue our aspiration to be the U.S.
leader in FDA-authorized, non-combusti-
ble reduced-risk products.
22
It is against that background that
I close with a word on leadership
transition. In January, I informed the
Board of my decision to retire later this
year, as I will turn 65 years old and
have completed more than 25 years of
service. I will step down from my role
effective at the end of our May 17, 2018
Shareholder Meeting.
As should be apparent from this
letter, I am very proud of what our
teams have accomplished for you, our
shareholders, and am deeply confident
that much future success lies ahead.
My conviction is further strengthened
because the Board has elected two
of our most experienced and talented
leaders to important new roles. Howard
Willard, currently Altria’s Chief Operating
Officer, has been elected to succeed
me as Chairman and CEO. Howard is
immensely qualified to lead the compa-
ny, having served in numerous leader-
ship positions during his 25-year career
with us. These include Chief Operating
Officer, Chief Financial Officer and EVP
of Strategy and Business Development.
The Board has also elected Billy Gifford
to the role of Vice Chairman, supple-
menting his current role as CFO. Billy
also is fully ready for this important new
role, having served successfully during
his 23-year career in key leadership
positions including CFO, SVP of
Strategy and Business Development
and President and CEO of PM USA.
Howard and Billy, with the other talented
members of our leadership team, have
been key contributors to the strategies
that have delivered our winning results
for the last several years.
I am deeply grateful for the
opportunity to have served as your
Chairman, CEO and President, and
for the support you have shown me.
To you, and to my colleagues at our
great company, please accept my
sincere thanks and best wishes for
much continued success.
Martin J. Barrington
Chairman of the Board,
CEO and President
March 1, 2018
Our Mission
Our Mission is to own and develop financially disciplined businesses that
are leaders in responsibly providing adult tobacco and wine consumers with
superior branded products.
Our Mission Strategies
n Invest in People
Grow our leadership advantage through our people, our culture and our business
partners.
n Drive Positive Change
Help solve societal issues important to our business, stakeholders and communities.
n Deliver Superior Products and Brands
Offer our consumers enjoyable product choices, including reduced harm products.
n Create Substantial Value
Generate sustainable growth and long-term value for our shareholders.
Corporate Responsibility
Our Focus on Responsibility
We remain committed to helping solve
the issues important to our stakeholders
and key to our continued success. We
are focused on four priorities: reducing
the harm of tobacco products, marketing
responsibly, managing our supply
chain responsibly and developing our
employees and culture.
A few highlights from 2017 – We:
n Announced our innovation aspiration
to be the U.S. leader in providing adult
tobacco consumers with authorized,
non-combustible, reduced risk products.
n Conducted 29 engagements on
tobacco harm reduction and regulatory
compliance with FDA and other
stakeholders.
n Continued to support programs that
help reduce underage tobacco use,
including investing more than $21 million
in youth development programs.
n Launched “Our Leadership
Advantage” – a framework aligning
employees to shape the future, grow
people and teams and to deliver winning
results for our companies.
Supporting the Communities
Where We Live and Work
We invest in organizations that support
education and youth development,
protect the environment, provide arts
and cultural programming, and provide
humanitarian and military aid.
In 2017:
n Altria donated $54.7 million in cash
and in-kind contributions nationally.
n 55% of our employees volunteered,
contributing more than 45,000 hours of
community service.
n 98% of our executives served on
over 100 non-profit boards.
2017 Recognition
n We ranked fourth on Corporate
Responsibility Magazine’s 100 Best
Corporate Citizens List, our highest
ranking to date and named industry
leader for the consumer staples sector.
n Altria was among America’s most
community-minded companies in
The Civic 50.
n Altria was named to CDP’s Water
A-List for the first time, one of only
14 North American companies to
receive an A.
CR’s
100 Best Corporate
Citizens
2017
THE
CIVIC
Learn more about our Corporate Responsibility efforts on altria.com/Responsibility
3
Board of Directors
The 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.
Gerald L. Baliles 2,3,5,6
Retired Director and
Chief Executive Officer,
Miller Center of Public Affairs
at the University of Virginia
and former Governor of the
Commonwealth of Virginia
Director since 2008
Martin J. Barrington 3
Chairman of the Board,
Chief Executive Officer
and President,
Altria Group, Inc.
Director since 2012
John T. Casteen III 1,2,5
President Emeritus,
University of Virginia
Director since 2010
Dinyar S. Devitre 3,4,5,6
Former Chief Financial Officer,
Altria Group, Inc.
Director since 2008
Thomas F. Farrell II 2,3,6
Chairman, President and
Chief Executive Officer,
Dominion Energy, Inc.
Director since 2008
Debra J. Kelly-Ennis 1,5,6
Retired President and
Chief Executive Officer,
Diageo Canada, Inc.
Director since 2013
W. Leo Kiely III 2,3,4,5
Retired Chief Executive Officer,
MillerCoors LLC
Director since 2011
Kathryn B. McQuade 1,2,4
Retired Executive Vice President
and Chief Financial Officer,
Canadian Pacific Railway
Limited
Director since 2012
George Muñoz 1,3,4,6
Principal, Muñoz Investment
Banking Group, LLC
Partner, Tobin & Muñoz
Director since 2004
Mark E. Newman
Senior Vice President and
Chief Financial Officer,
The Chemours Company
Director since 2018
The Honorable Gerald L. Baliles will retire from Altria’s Board of Directors
following the completion of his current term. We thank him for his decade of
service and his significant contributions to Altria over the many years.
4
Nabil Y. Sakkab 3,4,5,6
Retired Senior Vice President,
Corporate Research and
Development, The Procter
& Gamble Company
Director since 2008
Virginia E. Shanks1,5
Executive Vice President
and Chief Administrative Officer,
Pinnacle Entertainment, Inc.
Director since 2017
Howard A. Willard III
Executive Vice President
and Chief Operating Officer
Altria Group, Inc.
Director since 2018
Committees
Presiding Director,
Thomas F. Farrell II
1 Member of Audit Committee,
George Muñoz, Chair
2 Member of Compensation Committee,
W. Leo Kiely III, Chair
3 Member of Executive Committee,
Martin J. Barrington, Chair
4 Member of Finance Committee,
Dinyar S. Devitre, Chair
5 Member of Innovation Committee,
Nabil Y. Sakkab, Chair
6 Member of Nominating,
Corporate Governance and
Social Responsibility Committee,
Gerald L. Baliles, Chair
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, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia
(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, a smaller reporting company,
or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if smaller reporting company) Smaller operating company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $143 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Common Stock, $0.33 1/3 par value
Class
Outstanding at February 13, 2018
1,900,449,362 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 17, 2018, to be filed with the Securities and Exchange Commission on or about April 5, 2018, are incorporated by reference
into Part III hereof.
10-K ALTRIA AR RELEASE Thursday, March 1, 2018 Noon Andra Design LLC
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Page
1
4
9
10
10
10
11
13
14
38
39
111
111
111
111
112
112
113
113
113
117
118
b
1
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC In January 2017, Altria Group, Inc. acquired Nat Sherman,
which joined 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, 2017,
Altria Group, Inc.’s principal wholly-owned subsidiaries were not
limited by long-term debt or other agreements in their ability to
pay cash dividends or make other distributions with respect to
their equity interests. 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 15. Segment Reporting to
the consolidated financial statements in Item 8 (“Note 15”).
Information about total assets by segment is not disclosed because
such information is not reported to or used by the CODM.
Segment goodwill and other intangible assets, net, are disclosed
in Note 3. Goodwill and Other Intangible Assets, net to the
consolidated financial statements in Item 8 (“Note 3”). 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, 2017, Altria Group, Inc.’s wholly-owned
subsidiaries included Philip Morris USA Inc. (“PM USA”), which
is engaged in the manufacture and sale of cigarettes in the United
States; John Middleton Co. (“Middleton”), which is engaged in
the manufacture and sale of machine-made large cigars and pipe
tobacco and is a wholly-owned subsidiary of PM USA; Sherman
Group Holdings, LLC and its subsidiaries (“Nat Sherman”),
which are engaged in the manufacture and sale of super premium
cigarettes and the sale of premium cigars; and UST LLC
(“UST”), which through its wholly-owned subsidiaries, including
U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste.
Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the
manufacture and sale of smokeless tobacco products and wine.
Altria Group, Inc.’s other operating companies included Nu Mark
LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in
the manufacture and sale of innovative tobacco products, and
Philip Morris Capital Corporation (“PMCC”), a wholly-owned
subsidiary that maintains a portfolio of finance assets,
substantially all of which are leveraged leases. Other Altria
Group, Inc. wholly-owned subsidiaries included Altria Group
Distribution Company, which provides sales and distribution
services to certain Altria Group, Inc. operating subsidiaries, and
Altria Client Services LLC, which provides various support
services in areas, such as legal, regulatory, consumer engagement,
finance, human resources and external affairs to Altria 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. In October 2016, Anheuser-Busch InBev SA/NV
(“Legacy AB InBev”) completed its business combination with
SABMiller, and Altria Group, Inc. received cash and shares
representing a 9.6% ownership in the combined company (the
“Transaction”). The newly formed Belgian company, which
retained the name Anheuser-Busch InBev SA/NV (“AB InBev”),
became the holding company for the combined businesses.
Subsequently, Altria Group, Inc. purchased approximately 12
million ordinary shares of AB InBev, increasing Altria Group,
Inc.’s ownership to approximately 10.2% at December 31, 2016.
At December 31, 2017, Altria Group, Inc. had an approximate
10.2% ownership of AB InBev, which Altria Group, Inc. accounts
for under the equity method of accounting using a one-quarter
lag. 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 6.
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
1
b
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
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
2017
2016
2015
85.8%
86.2%
87.4%
13.2
1.5
(0.5)
13.1
1.8
(1.1)
12.8
1.8
(2.0)
100.0% 100.0%
100.0%
For items affecting the comparability of the relative percentages
of operating companies income (loss) attributable to each
reportable segment, see Note 15.
Narrative Description of Business
Portions of the information called for by this Item are included in
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 and distribution 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. 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. Total smokeable
products segment’s cigarettes shipment volume in the United
States was 116.6 billion units in 2017, a decrease of 5.1% from
2016.
Cigars: Middleton is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco. Middleton
contracts with a third-party importer to supply a majority of its
cigars and sells substantially all of its cigars to customers in the
United States. Black & Mild is the principal cigar brand of
Middleton. Nat Sherman sources all of its cigars from third-party
suppliers and sells substantially all of its cigars to customers in
the United States. Total smokeable products segment’s cigars
shipment volume was approximately 1.5 billion units in 2017, an
increase of 9.9% from 2016.
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 segment’s shipment volume was 841.3
million units in 2017, a decrease of 1.4% from 2016.
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. In 2017,
Altria Group, Inc.’s subsidiaries purchased certain intellectual
property related to innovative tobacco products.
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 filed
its corresponding pre-market tobacco product application in the
first quarter of 2017. 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
permitted by law, allowances, the distribution of incentive items,
price promotions, product promotions, coupons and other
discounts.
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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, Middleton, Nat Sherman 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, Nat Sherman, 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 the majority of its burley and flue-cured leaf
tobaccos 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 dark fire-cured, dark air-cured and burley
leaf tobaccos from domestic tobacco growers under a contract
growing program as well as from leaf merchants.
Middleton purchases burley, dark air-cured and flue-cured
leaf tobaccos 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 2017 wine shipment volume
of approximately 8.5 million cases decreased 8.6% from 2016.
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 7. Finance
Assets, net to the consolidated financial statements in Item 8.
Other Matters
Customers: The largest customer of PM USA, USSTC,
Middleton and Nat Sherman, McLane Company, Inc., accounted
for approximately 26%, 25% and 26% of Altria Group, Inc.’s
consolidated net revenues for the years ended December 31,
2017, 2016 and 2015, respectively. In addition, Core-Mark
Holding Company, Inc. accounted for approximately 14%, 14%
and 10% of Altria Group, Inc.’s consolidated net revenues for the
years ended December 31, 2017, 2016 and 2015, respectively.
Substantially all of these net revenues were reported in the
smokeable products and smokeless products segments.
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Sales to three distributors accounted for approximately 67%,
69% and 66% of net revenues for the wine segment for the years
ended December 31, 2017, 2016 and 2015, respectively.
Employees: At December 31, 2017, Altria Group, Inc. and
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, 2018 of this Annual Report on Form
10-K.
Research and Development: Research and development
expense for the years ended December 31, 2017, 2016 and 2015
is set forth in Note 17. Additional Information to the consolidated
financial statements in Item 8.
Intellectual Property: Trademarks are of material
importance to Altria Group, Inc. and its operating companies, and
are protected by registration or otherwise. In addition, as of
December 31, 2017, the portfolio of approximately 800 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, 2017. Altria Group, Inc.’s
businesses also have proprietary trade secrets, technology, know-
how, processes and other intellectual property rights that are
protected by appropriate confidentiality measures. Certain trade
secrets are material to Altria Group, Inc. and its tobacco and wine
businesses.
Environmental Regulation: Altria Group, Inc. and its
subsidiaries (and former subsidiaries) are subject to various
federal, state and local laws and regulations concerning the
discharge of materials into the environment, or otherwise related
to environmental protection, including, in the United States: The
Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act (commonly known as
“Superfund”), which can impose joint and several liability on
each responsible party. Subsidiaries (and former subsidiaries) of
Altria Group, Inc. are involved in several matters subjecting them
to potential costs of remediation and natural resource damages
under Superfund or other laws and regulations. Altria Group,
Inc.’s subsidiaries expect to continue to make capital and other
expenditures in connection with environmental laws and
regulations. As discussed in Note 2, Altria Group, Inc. provides
for expenses associated with environmental remediation
obligations on an undiscounted basis when such amounts are
probable and can be reasonably estimated. Such accruals are
adjusted as new information develops or circumstances change.
Other than those amounts, it is not possible to reasonably estimate
the cost of any environmental remediation and compliance efforts
that subsidiaries of Altria Group, Inc. may undertake in the future.
In the opinion of management, however, compliance with
environmental laws and regulations, including the payment of any
remediation and compliance costs or damages and the making of
related expenditures, has not had, and is not expected to have, a
material adverse effect on Altria Group, Inc.’s consolidated results
of operations, capital expenditures, financial position or cash
flows.
Financial Information About Geographic Areas
Substantially all of Altria Group, Inc.’s net revenues are from
sales generated in the United States for each of the last three fiscal
years and substantially all of Altria Group, Inc.’s long-lived assets
are located in the United States.
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.
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
_____________________________________________________
(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.
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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, estimates 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 estimates or 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, or implied by, 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 below 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
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, have ranged in the
billions of dollars. The variability in pleadings in multiple
jurisdictions, together with the actual experience of management
in litigating claims, demonstrate that the monetary relief that may
be specified in a lawsuit bears little relevance to the ultimate
outcome. In certain cases, plaintiffs claim that defendants’
liability is joint and several. In such cases, Altria Group, Inc. or
its subsidiaries may face the risk that one or more co-defendants
decline or otherwise fail to participate in the bonding required for
an appeal or to pay their proportionate or jury-allocated share of a
judgment. As a result, Altria Group, Inc. or its subsidiaries under
certain circumstances may have to pay more than their
proportionate share of any bonding- or judgment-related amounts.
Furthermore, in those cases where plaintiffs are successful, Altria
Group, Inc. or its subsidiaries may also be required to pay interest
and attorneys’ fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
verdicts have been appealed, there remains a risk that such relief
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico now
limit the dollar amount of bonds or require no bond at all. As
discussed in Note 18. Contingencies to the consolidated financial
statements in Item 8 (“Note 18”), tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. Although we
cannot predict the outcome of such challenges, it is possible that
the consolidated results of operations, cash flows or financial
position of Altria Group, Inc., or the businesses of one or more of
its subsidiaries, could be materially adversely affected in a
particular fiscal quarter or fiscal year by an unfavorable outcome
of one or more such challenges.
In certain litigation, Altria Group, Inc. and its subsidiaries
may face potentially significant non-monetary remedies, which
may cause reputational harm. For example, in the lawsuit brought
by the United States Department of Justice, discussed in detail in
Note 18, the district court did not impose monetary penalties but
ordered significant non-monetary remedies, including the
issuance of “corrective statements” that Altria Group, Inc. and
PM USA began making in various media in the fourth quarter of
2017.
Altria Group, Inc. and its subsidiaries have achieved
substantial success in managing litigation. Nevertheless,
litigation is subject to uncertainty, and significant challenges
remain.
It is possible that the consolidated results of operations, cash
flows or financial position of Altria Group, Inc., or the businesses
of one or more of its subsidiaries, could be materially adversely
affected in a particular fiscal quarter or fiscal year by an
unfavorable outcome or settlement of certain pending litigation.
Altria Group, Inc. and each of its subsidiaries named as a
defendant believe, and each has been so advised by counsel
handling the respective cases, that it has valid defenses to the
litigation pending against it, as well as valid bases for appeal of
adverse verdicts. Each of the companies has defended, and will
continue to defend, vigorously against litigation challenges.
However, Altria Group, Inc. and its subsidiaries may enter into
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settlement discussions in particular cases if they believe it is in
the best interests of Altria Group, Inc. to do so. See Item 3. Legal
Proceedings of this Annual Report on Form 10-K (“Item 3”),
Note 18 and Exhibits 99.1 and 99.2 to this Annual Report on
Form 10-K for a discussion of pending tobacco-related litigation.
Significant federal, state and local governmental actions,
including actions by the FDA, and various private sector
actions may continue to have an adverse impact on our
tobacco subsidiaries’ businesses 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),
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, a determination by the FDA that one or more
tobacco products do not satisfy the statutory requirements for
substantial equivalence, or because the FDA requires that a
modification to a currently-marketed tobacco product proceed
through the pre-market review process), 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 within
their categories and their failure to compete effectively could
have an adverse effect on the consolidated results of
operations or cash flows of Altria Group, Inc., or the business
of Altria Group, Inc.’s tobacco subsidiaries.
Each of Altria Group, Inc.’s tobacco subsidiaries operates in
highly competitive tobacco categories. Significant methods of
competition include product quality, taste, price, product
innovation, marketing, packaging, distribution and promotional
activities. A highly competitive environment could negatively
impact the profitability, market share and shipment volume of our
tobacco subsidiaries, which could have an adverse effect on the
consolidated results of operations or cash flows of Altria Group,
Inc.
PM USA also faces competition from lowest priced brands
sold by certain United States and foreign manufacturers that have
cost advantages because they are not parties to settlements of
certain tobacco litigation in the United States. These settlements,
among other factors, have resulted in substantial cigarette price
increases. These manufacturers may fail to comply with related
state escrow legislation or may avoid escrow deposit obligations
on the majority of their sales by concentrating on certain states
where escrow deposits are not required or are required on fewer
than all such manufacturers’ cigarettes sold in such states.
Additional competition has resulted from diversion into the
United States market of cigarettes intended for sale outside the
United States, the sale of counterfeit cigarettes by third parties,
the sale of cigarettes by third parties over the Internet and by
other means designed to avoid collection of applicable taxes, and
imports of foreign lowest priced brands. USSTC faces significant
competition in the smokeless tobacco category and has
experienced consumer down-trading to lower-priced brands. In
the cigar category, additional competition has resulted from
increased imports of machine-made large cigars manufactured
offshore.
Altria Group, Inc. and its subsidiaries may be unsuccessful in
anticipating changes in adult consumer preferences,
responding to changes in consumer purchase behavior or
managing through difficult competitive and economic
conditions.
Each of our tobacco and wine subsidiaries is subject to intense
competition and changes in adult consumer preferences. To be
successful, they must continue to:
promote brand equity successfully;
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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. While our tobacco and wine
subsidiaries work to broaden their brand portfolios to compete
effectively with lower-priced products, the failure to do so could
negatively impact our companies’ ability to compete in these
circumstances.
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 and/or put them at a competitive
disadvantage.
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 their efforts to introduce such new products, 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 adult 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 reduced risk 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 key 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 key
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 key suppliers of any
of Altria Group, Inc.’s tobacco subsidiaries, including as a result
of a key supplier’s unwillingness to supply goods or services to a
tobacco company, 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
key 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, reputation, consolidated results of operations,
cash flows or financial position of Altria Group, Inc. and its
subsidiaries.
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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 recorded a charge during the
first quarter of 2017 related to this recall. While this charge was
not material to Altria Group, Inc.’s financial statements, future
recalls (if any) could have a material adverse effect on the
business, reputation, 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 of a
transaction.
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 negatively
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 cyber-attacks or security breaches, could have a
material adverse effect on the business, reputation,
consolidated results of operations, cash flows or financial
position of Altria Group, Inc. and its subsidiaries.
Altria Group, Inc. and its subsidiaries rely extensively on
information systems, many of which are managed by third-party
service providers (such as cloud providers), to support a variety of
business processes and activities, including: complying with
regulatory, legal, financial reporting and tax requirements;
engaging in marketing and e-commerce activities; managing and
improving the effectiveness of our operations; manufacturing and
distributing our products; collecting and storing sensitive data and
confidential information; and communicating internally and
externally with employees, investors, suppliers, trade customers,
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adult consumers and others. We continue to make investments in
administrative, technical and physical safeguards to protect our
information systems and data from cyber-threats, including
human error and malicious acts. Our safeguards include
employee training, testing and auditing protocols, backup systems
and business continuity plans, maintenance of security policies
and procedures, monitoring of networks and systems, and third-
party risk management.
To date, interruptions of our information systems have been
infrequent and have not had a material impact on our operations.
However, because technology is increasingly complex and cyber-
attacks are increasingly sophisticated and more frequent, there
can be no assurance that such incidents will not have a material
adverse effect on us in the future. Failure of our systems or
service providers’ systems to function as intended, or cyber-
attacks or security breaches, 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, operational disruptions, 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 any such investigation, and it is possible that our
business could be materially adversely affected by an unfavorable
outcome of a future investigation.
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. We cannot provide any assurance
that AB InBev will successfully execute its business plans and
strategies. Earnings from and carrying value of our equity
investment in AB InBev are also subject to fluctuations in AB
InBev’s stock price, for example through mark-to-market losses
on AB InBev’s derivative financial instruments used to hedge
certain share commitments.
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 decrease 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 decrease 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 our 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 may
not be as favorable as Altria Group, Inc. anticipates.
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. In addition, there is a risk
that the tax treatment of the dividends Altria Group, Inc. expects
to receive from AB InBev may not be as favorable as Altria
Group, Inc. anticipates.
Item 1B. Unresolved Staff Comments.
None.
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needs.
Item 3. Legal Proceedings.
The information required by this Item is included in Note 18 and
Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K.
Altria Group, Inc.’s consolidated financial statements and
accompanying notes for the year ended December 31, 2017 were
filed on Form 8-K on February 1, 2018 (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 the Form 8-K.
Recent Developments
Smoking and Health Litigation
Engle Progeny Trial Results:
In Gloger, in February 2018, a Miami-Dade County jury
returned a verdict in favor of plaintiff and against PM USA and
R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding
$7.5 million in compensatory damages. The jury also awarded
plaintiff $5 million in punitive damages against each defendant.
PM USA posted a bond in the amount of $2.5 million.
Defendants filed various post-trial motions, which remain
pending, and appealed to the Florida Third District Court of
Appeal.
In Wallace, in February 2018, PM USA filed an appeal to the
Florida Fifth District Court of Appeal and posted a bond in the
amount of approximately $3 million.
In Allen, in February 2018, the Florida Supreme Court denied
PM USA’s petition to invoke the court’s discretionary jurisdiction.
PM USA will record a pre-tax provision of approximately $10
million for the judgment plus interest in the first quarter of 2018.
In Gore, in February 2018, the Florida Fourth District Court
of Appeal affirmed the judgment in favor of plaintiff, withdrew
the comparative fault reduction for the compensatory damages
award and granted plaintiff leave to seek a new trial on punitive
damages. PM USA will record a pre-tax provision of
approximately $1 million for the judgment plus interest in the
first quarter of 2018.
In Bryant, in February 2018, the trial court denied all post-
trial motions and entered final judgment in favor of plaintiff.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 2. Properties.
In 2017, Altria Client Services LLC purchased the previously
leased property in Richmond, Virginia that serves as the
headquarters facility for Altria Group, Inc., PM USA, USSTC,
Middleton, Nu Mark and certain other subsidiaries.
At December 31, 2017, PM USA owned and operated a
manufacturing site located in Richmond, Virginia (“Richmond
Manufacturing Center”), that PM USA uses in the manufacturing
of cigarettes. Portions of this facility are leased by Middleton and
USSTC for use in the manufacturing of cigars and smokeless
tobacco products, respectively.
At December 31, 2017, the smokeable products segment
used five manufacturing and processing facilities, including the
Richmond Manufacturing Center. In addition to the Richmond
Manufacturing Center, PM USA owns and operates a cigarette
tobacco processing facility located in the Richmond, Virginia
area. Nat Sherman owns and operates a cigarette manufacturing
facility in Greensboro, North Carolina. Middleton, in addition to
the Richmond Manufacturing Center, operates two manufacturing
and processing facilities - one, which it owns, in King of Prussia,
Pennsylvania, and one, which it leases, 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, 2017, in addition to the Richmond
Manufacturing Center, the smokeless products segment used five
smokeless tobacco manufacturing and processing facilities
located in Clarksville, Tennessee; Franklin Park, Illinois;
Nashville, Tennessee; and two facilities in Hopkinsville,
Kentucky, all of which are owned and operated by USSTC, with
the exception of the facility leased by USSTC in Franklin Park,
Illinois.
As disclosed in Note 4. Asset Impairment, Exit and
Implementation Costs to the consolidated financial statements in
Item 8 (“Note 4”), 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 is in the process of transferring its
Limerick, Pennsylvania operations to the Richmond
Manufacturing Center. USSTC is in the process of transferring its
Franklin Park, Illinois operations to its Nashville, Tennessee
facility and the Richmond Manufacturing Center. The
consolidation is expected to be substantially completed by the end
of the first quarter of 2018.
At December 31, 2017, 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
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Part II
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Securities.
Performance Graph
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group (1). The graph assumes the
investment of $100 in common stock and each of the indices as of the market close on December 31, 2012 and the reinvestment of all
investment of $100 in common stock and each of the indices as of the market close on December 31, 2012 and the reinvestment of all
dividends on a quarterly basis.
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
2012
2013
2014
2015
2016
2017
Date
Date
December 2012
December 2012
December 2013
December 2013
December 2014
December 2014
December 2015
December 2015
December 2016
December 2016
December 2017
December 2017
Altria
Altria
Group, Inc.
Group, Inc.
100.00
$
100.00
$
128.56
$
128.56
$
172.93
$
172.93
$
212.87
$
212.87
$
256.43
$
256.43
$
280.65
$
280.65
$
Altria Group, Inc.
Altria Group, Inc.
Peer Group
Peer Group
$
$
$
$
$
$
$
$
$
$
$
$
100.00
100.00
124.66
124.66
139.49
139.49
162.74
162.74
177.01
177.01
193.86
193.86
S&P 500
S&P 500
$ 100.00
$ 100.00
$ 132.37
$ 132.37
$ 150.48
$ 150.48
$ 152.55
$ 152.55
$ 170.78
$ 170.78
$ 208.05
$ 208.05
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1)In 2017, the Altria Group, Inc. Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating
(1)In 2017, 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-
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,
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., Reynolds American Inc. and British American Tobacco p.l.c. headquartered in London, England.
Note - 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
Note - 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
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). On July 24, 2017, British American
Weston Holdings, Inc. (LW) to its shareholders and then changed its name from ConAgra Foods, Inc. to Conagra Brands, Inc. (CAG). On July 24, 2017, British American
Tobacco p.l.c. (BTI) acquired RAI. For 2017, Altria Group, Inc. Peer Group total shareholder return calculation includes RAI through July 24, 2017 and BTI American
Tobacco p.l.c. (BTI) acquired RAI. For 2017, Altria Group, Inc. Peer Group total shareholder return calculation includes RAI through July 24, 2017 and BTI American
Depository Receipts for the remainder of the year.
Depository Receipts for the remainder of the year.
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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, 2018, there were approximately 64,000 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.
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Price Per Share
High
Low
Cash Dividends
Declared Per Share
$
$
$
$
$
$
$
$
74.38
74.98
77.79
76.55
68.03
70.15
69.26
63.15
$
$
$
$
$
$
$
$
62.32
60.01
69.79
67.25
60.82
62.46
59.48
56.15
$
$
$
$
$
$
$
$
0.66
0.66
0.61
0.61
0.61
0.61
0.565
0.565
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2017
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 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”).
The July 2015 share repurchase program was completed in January 2018. In January 2018, the Board of Directors authorized a new $1.0
billion share repurchase program, which Altria Group, Inc. expects to complete by the end of 2018. 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.
Altria Group, Inc.’s share repurchase activity for each of the three months in the period ended December 31, 2017, was as follows:
Period
October 1- October 31, 2017
November 1- November 30, 2017
December 1- December 31, 2017
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
2,983,437
2,798,299
2,587,120
$
$
$
64.36
64.98
71.16
2,982,371
2,790,984
2,587,120
$
$
$
383,869,878
202,512,372
18,411,335
For the Quarter Ended December 31, 2017
(1) The total number of shares purchased includes (a) shares purchased under the July 2015 share repurchase program (which totaled 2,982,371
8,360,475
8,368,856
66.67
$
shares in October, 2,790,984 shares in November and 2,587,120 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 stock-based awards (which totaled 1,066 shares in October and 7,315 shares in
November).
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(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 AB InBev/SABMiller
Gain on AB InBev/SABMiller business combination
Earnings before income taxes (2)
Pre-tax profit margin (2)
(Benefit) provision for income taxes (1)(2)
Net earnings (1)(2)
Net earnings attributable to Altria Group, Inc. (1)(2)
Basic and Diluted EPS — net earnings attributable to Altria Group, Inc. (1)(2)
Dividends declared per share
Weighted average shares (millions) — Basic and Diluted
Capital expenditures
Depreciation
Property, plant and equipment, net
Inventories
Total assets (2)
Long-term debt
Total debt
Total stockholders’ equity (1)(2)
Common dividends declared as a % of Basic and Diluted EPS (1)(2)
Book value per common share outstanding (1)(2)
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)(2)
Number of common shares outstanding at year end (millions)
2017
2016
2015
2014
2013
$
25,576
$
25,744
$
25,434
$
24,522
$
24,466
7,543
6,082
9,556
705
532
445
9,828
38.4%
(399)
10,227
10,222
5.31
2.54
1,921
199
188
1,914
2,225
43,202
13,030
13,894
15,380
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
47.8%
8.09
32.3%
6.57
81.3%
1.47
78.1%
1.53
81.4%
2.07
77.79-60.01
70.15-56.15
61.74-47.31
51.67-33.80
38.58-31.85
71.41
13
1,901
67.62
9
1,943
58.21
22
1,960
49.27
19
1,971
38.39
17
1,993
9,000
Approximate number of employees
9,000
(1) Certain 2017 amounts include the impact of the enactment of the Tax Reform Act (as defined in Item 7). For further discussion, see Note 14 in Item 8.
(2) Certain 2016 amounts include the impact of the gain on AB InBev/SABMiller business combination. For further information, see Note 6 in Item 8.
8,800
8,300
8,300
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 6. Investment in AB InBev/SABMiller to
the consolidated financial statements in Item 8 (“Note 6”).
Altria Group, Inc.’s reportable segments are smokeable
products, smokeless products and wine. The financial services
and the innovative tobacco products businesses are included in an
all other category due to the continued reduction of the lease
portfolio of PMCC and the relative financial contribution of Altria
Group, Inc.’s innovative tobacco products businesses to Altria
Group, Inc.’s consolidated results.
In January 2017, Altria Group, Inc. acquired Nat Sherman,
which joined 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, 2017, 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; Nat Sherman, which is engaged
in the manufacture and sale of super premium cigarettes and the
sale of premium cigars; 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 and distribution services to certain Altria
Group, Inc. operating subsidiaries, and Altria Client Services
LLC, which provides various support services in areas, such as
legal, regulatory, consumer engagement, finance, human
resources and external affairs to Altria Group, Inc. and its
subsidiaries. In addition, Nu Mark, Middleton and Nat
Sherman use third-party 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, 2017, Altria Group, Inc.’s
principal wholly-owned subsidiaries were not limited by long-
term debt or other agreements in their ability to pay cash
dividends or make other distributions with respect to their
equity interests.
At September 30, 2016, Altria Group, Inc. had an
approximate 27% ownership of SABMiller, which Altria
Group, Inc. accounted for under the equity method of
accounting. In October 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. Subsequently, Altria Group, Inc. purchased
approximately 12 million ordinary shares of AB InBev,
increasing Altria Group, Inc.’s ownership to approximately
10.2% at December 31, 2016. At December 31, 2017, Altria
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Executive Summary
The following executive summary is intended to provide
significant highlights of the Discussion and Analysis that follows.
Consolidated Results of Operations
The changes in Altria Group, Inc.’s net earnings and diluted
earnings per share (“EPS”) attributable to Altria Group, Inc. for
the year ended December 31, 2017, from the year ended
December 31, 2016, were due primarily to the following:
(in millions, except per share data)
For the year ended December 31, 2016
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
2017 NPM Adjustment Items
2017 Asset impairment, exit, implementation
and acquisition-related costs
2017 Tobacco and health litigation items
2017 AB InBev special items
2017 Gain on AB InBev/SABMiller business
combination
2017 Settlement charge for lump sum pension
payments
2017 Tax items
Subtotal 2017 special items
Fewer shares outstanding
Change in tax rate
Operations
Net
Earnings
14,239
$
Diluted
EPS
7.28
$
11
135
71
(57)
541
13
(9,001)
(30)
(8,317)
(2)
(55)
(50)
(105)
0.01
0.07
0.04
(0.03)
0.28
0.01
(4.61)
(0.02)
(4.25)
—
(0.03)
(0.03)
(0.05)
289
0.15
(49)
(0.03)
3,674
3,702
—
124
474
1.91
1.92
0.05
0.06
0.25
5.31
For the year ended December 31, 2017
$
10,222
$
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 2017 compared with 2016 were due primarily to
shares repurchased by Altria Group, Inc. under its share
repurchase program.
Change in Tax Rate: The change in tax rate was driven
primarily by no tax being due on the dividends Altria
Group, Inc. received from AB InBev during 2017 as a
result of a deemed repatriation tax associated with the
Tax Reform Act (as defined below). For further
discussion, see Note 14. Income Taxes to the consolidated
financial statements in Item 8 (“Note 14”).
15
15
14
Operations: The increase of $474 million in operations
shown in the table above was due primarily to higher
income from the smokeable products and smokeless
products segments.
For further details, see the Consolidated Operating Results
and Operating Results by Business Segment sections of the
following Discussion and Analysis.
2018 Forecasted Results
In February 2018, Altria Group, Inc. forecasted that its 2018
full-year adjusted diluted EPS growth rate is expected to be in
the range of 15% to 19% over 2017 full-year adjusted diluted
EPS. This forecasted growth rate excludes the income and
expense items in the table below. Altria Group, Inc.’s 2018
guidance reflects investments in focus areas for long-term
growth, including innovative product development and
launches, regulatory science, brand equity, retail fixtures and
future retail concepts. Altria Group, Inc. expects its 2018 full-
year adjusted effective tax rate will be in a range of
approximately 23% to 24%.
Altria Group, Inc.’s full-year adjusted diluted EPS
guidance and full-year forecast for its adjusted effective tax rate
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 resolutions of certain non-participating manufacturer
(“NPM”) adjustment disputes under the 1998 Master
Settlement Agreement (such dispute resolutions are referred to
as “NPM Adjustment Items” and are more fully described in
Health Care Cost Recovery Litigation - NPM Adjustment
Disputes in Note 18).
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, may be infrequent, 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
adjusted effective tax rate forecast.
In addition, the factors described in Item 1A represent
continuing risks to this forecast.
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Expense (Income), Net Excluded from Adjusted Diluted EPS
Asset impairment, exit,
implementation and acquisition-
related costs
Tobacco and health litigation items
AB InBev special items
Gain on AB InBev/SABMiller
business combination
Settlement charge for lump sum
pension payments
Tax items
$
2018
—
—
—
—
—
0.09
0.09
(1)
$
2017
0.03
0.03
0.05
(0.15)
0.03
(1.91)
(1.92)
$
$
(1) Represents tax expense for a tax basis adjustment related to the
deemed repatriation tax associated with the Tax Reform Act (as
defined below). For further discussion, see Note 14.
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, may be infrequent, 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 adjusted effective tax rate may
exclude certain tax items from its reported effective tax rate.
Altria Group, Inc.’s management believes that adjusted
financial measures provide useful additional 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.
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Substantially all of the goodwill and indefinite-lived
intangible assets recorded by Altria Group, Inc. at December
31, 2017 relate to the acquisitions of Nat Sherman in 2017,
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, 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, the indefinite-lived intangible asset is considered
impaired and is reduced to fair value. For substantially all
goodwill and indefinite-lived intangible assets, the fair values
are determined using discounted cash flows.
Goodwill by reporting unit and indefinite-lived intangible
assets at December 31, 2017 were as follows:
(in millions)
Cigarettes
Smokeless products
Cigars
Wine
E-vapor
Other
Total
Goodwill
22
5,023
77
74
111
—
5,307
$
$
Indefinite-Lived
Intangible Assets
172
$
8,801
2,640
287
31
194
12,125
$
During 2017, 2016 and 2015, Altria Group, Inc. completed
its quantitative annual impairment test of goodwill and
indefinite-lived intangible assets, and no impairment charges
resulted. At December 31, 2017, the estimated fair values of all
reporting units and the indefinite-lived intangible assets within
those reporting units substantially exceeded their carrying
values, except for the Columbia Crest trademark within the
wine reporting unit. At December 31, 2017, the fair value of
the Columbia Crest trademark exceeded its book value of $54
million by approximately 9%. Results for Columbia Crest in
2017 were negatively impacted by increased competitive
activity and continued trade inventory reductions.
In 2017, 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 weighted-average discount rate used in performing the
valuations was approximately 9%.
In performing the 2017 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
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 3.
Marketing Costs: Altria Group, Inc.’s businesses promote
their products with consumer engagement programs, consumer
incentives and trade promotions. Such programs include
discounts, coupons, rebates, in-store display incentives, event
marketing and volume-based incentives. Consumer
engagement programs are expensed as incurred. Consumer
incentive and trade promotion activities are recorded as a
reduction of revenues, a portion of which is based on amounts
estimated as being due to wholesalers, retailers and consumers
at the end of a period, based principally on historical volume,
utilization and redemption rates. For interim reporting
purposes, consumer engagement programs and certain
consumer incentive expenses are charged to operations as a
percentage of sales, based on estimated sales and related
expenses for the full year.
Contingencies: As discussed in Note 18 and Item 3, legal
proceedings covering a wide range of matters are pending or
threatened in various United States and foreign jurisdictions
against Altria Group, Inc. and its subsidiaries, including PM
USA and UST and its subsidiaries, as well as their respective
indemnitees. In 1998, PM USA and certain other U.S. tobacco
product manufacturers entered into the 1998 Master Settlement
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Agreement (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. In addition,
PM USA, Middleton, Nat Sherman and USSTC are 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 and FDA user fees as a component of cost of sales.
Altria Group, Inc.’s subsidiaries recorded approximately $4.7
billion, $4.9 billion and $4.8 billion of charges to cost of sales
for the years ended December 31, 2017, 2016 and 2015,
respectively, in connection with the State Settlement
Agreements and FDA user fees.
Altria Group, Inc. and its subsidiaries record provisions in
the consolidated financial statements for pending litigation
when they determine that an unfavorable outcome is probable
and the amount of the loss can be reasonably estimated. At the
present time, while it is reasonably possible that an unfavorable
outcome in a case may occur, except to the extent discussed in
Note 18 and Item 3: (i) management has concluded that it is not
probable that a loss has been incurred in any of the pending
tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related
cases; and (iii) accordingly, management has not provided any
amounts in the consolidated financial statements for
unfavorable outcomes, if any. Litigation defense costs are
expensed as incurred and included in marketing, administration
and research costs in the consolidated statements of earnings.
Employee Benefit Plans: As discussed in Note 16. Benefit
Plans to the consolidated financial statements in Item 8 (“Note
16”), Altria Group, Inc. provides a range of benefits to its
employees and retired employees, including pension,
postretirement health care and postemployment benefits. Altria
Group, Inc. records annual amounts relating to these plans
based on calculations specified by U.S. GAAP, which include
various actuarial assumptions as to discount rates, assumed
rates of return on plan assets, mortality, compensation increases,
turnover rates and health care cost trend rates. Altria Group,
Inc. reviews its actuarial assumptions on an annual basis and
makes modifications to the assumptions based on current rates
and trends when it is deemed appropriate to do so. Any effect
of the modifications is generally amortized over future periods.
Altria Group, Inc. recognizes the funded status of its
defined benefit pension and other postretirement plans on the
consolidated balance sheet and records as a component of other
comprehensive earnings (losses), net of deferred income taxes,
the gains or losses and prior service costs or credits that have
not been recognized as components of net periodic benefit cost.
The gains or losses and prior service costs or credits recorded as
components of other comprehensive earnings (losses) are
subsequently amortized into net periodic benefit cost in future
years.
At December 31, 2017, Altria Group, Inc.’s discount rate
assumptions for its pension and postretirement plans obligations
decreased from 4.1% to 3.7% at December 31, 2017. Altria
Group, Inc. presently anticipates an increase of approximately
$30 million in its 2018 pre-tax pension and postretirement
expense versus 2017, excluding amounts in each year related to
termination, settlement and curtailment. This anticipated
increase is due primarily to higher amortization of unrecognized
losses, driven by the impact of lower discount rates, partially
offset by the expected return on postretirement assets resulting
from the December 2017 $270 million contribution to fund
certain postretirement benefits. 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 $53
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 $49 million.
Similarly, a 50 basis point decrease (increase) in the expected
return on plan assets would increase (decrease) Altria Group,
Inc.’s pension and postretirement expense by approximately
$38 million. See Note 16 for a sensitivity discussion of the
assumed health care cost trend rates.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions. Altria Group, Inc.’s deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Altria Group, Inc. records a valuation
allowance when it is more-likely-than-not that some portion or
all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax
positions when a tax position taken or expected to be taken in a
tax return is more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement. Altria
Group, Inc. recognizes accrued interest and penalties associated
with uncertain tax positions as part of the provision for income
taxes in its consolidated statements of earnings.
Altria Group, Inc. recognized income tax benefits and
charges in the consolidated statements of earnings during 2017,
2016 and 2015 as a result of various tax events, including the
impact of the Tax Reform Act (as defined below).
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On December 22, 2017, the U.S. Government enacted
comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Reform Act”). The main
provisions of the Tax Reform Act that impact Altria Group, Inc.
include: (i) a reduction in the U.S. federal statutory corporate
income tax rate from 35% to 21% effective January 1, 2018,
and (ii) changes in the treatment of foreign-source income,
commonly referred to as a modified territorial tax system.
As discussed further in Note 15, 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 transition to a modified territorial tax system required
The following events that occurred during 2017, 2016 and
Altria Group, Inc. to record a deemed repatriation tax and an
associated tax basis benefit in 2017. The tax impact related to the
tax basis benefit and the deemed repatriation tax was based on
provisional estimates as of January 18, 2018, substantially all of
which were related to Altria Group, Inc.’s share of AB InBev’s
accumulated earnings and associated taxes. Altria Group, Inc.
may be required to adjust these provisional estimates based on (i)
additional guidance related to, or interpretation of, the Tax
Reform Act and associated tax laws and (ii) additional
information to be received from AB InBev, including information
regarding AB InBev’s accumulated earnings and associated taxes
for the 2016 and 2017 tax years. This additional guidance and
information could result in increases or decreases to the
provisional estimates, which may be significant in relation to
these estimates. Altria Group, Inc. will record any such
adjustments in 2018.
For additional information on income taxes, see Note 14.
2015 affected the comparability of statement of earnings
amounts.
Gain on AB InBev/SABMiller Business Combination:
For the year ended December 31, 2017, Altria Group, Inc.
recorded pre-tax gains of $445 million related to the planned
completion of the remaining AB InBev divestitures of certain
SABMiller assets and businesses in connection with Legacy
AB InBev obtaining necessary regulatory clearances for the
Transaction. 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. For further discussion,
see Note 6.
NPM Adjustment Items: For the years ended December
31, 2017, 2016 and 2015, pre-tax expense (income) for NPM
Adjustment Items was recorded in Altria Group, Inc.’s
consolidated statements of earnings as follows:
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
Reductions of PMI tax-related
receivable
Corporate asset impairment and
exit costs
Operating income
For the Years Ended December 31,
2017
2016
2015
$ 22,636
2,155
698
87
$ 25,576
$ 22,851
2,051
746
96
$ 25,744
$ 22,792
1,879
692
71
$ 25,434
$
$
$
$
$
$
5,927
132
23
6,082
8,408
1,300
147
(51)
(21)
(227)
$
$
$
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)
—
—
(41)
—
9,556
$
(5)
8,762
$
—
8,361
$
(in millions)
Smokeable products segment
Interest and other debt expense, net
Total
2017
2016
2015
$
$
(5)
$ 12
$ (97)
9
4
6
13
$ 18
$ (84)
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 18.
Tobacco and Health Litigation Items: For the years
ended December 31, 2017, 2016 and 2015, 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)
2017
2016
2015
Smokeable products segment
$ 72
$
Interest and other debt expense, net
8
88
17
$ 127
23
Total
$ 80
$ 105
$ 150
During 2017, PM USA recorded pre-tax charges of $72
million in marketing, administration and research costs and $8
million in interest costs, substantially all of which related to 11
Engle progeny cases.
During 2016, PM USA recorded pre-tax charges of $88
million in marketing, administration and research costs, primarily
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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.
During 2015, PM USA recorded pre-tax charges in
marketing, administration and research costs in seven state Engle
progeny cases 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 Note 18.
Settlement for Lump Sum Pension Payments: In the third
quarter of 2017, Altria Group, Inc. made a voluntary, limited-time
offer to former employees with vested benefits in the Altria
Retirement Plan who had not commenced receiving benefit
payments and who met certain other conditions. Eligible
participants were offered the opportunity to make a one-time
election to receive their pension benefit as a single lump sum
payment or as a monthly annuity. As a result of the 2017 lump
sum distributions, a one-time pre-tax settlement charge of $81
million was recorded in 2017 in Altria Group, Inc.’s consolidated
statement of earnings as follows:
For the Year Ended December 31, 2017
Marketing,
Administration
and Research
Costs
Cost of
Sales
(in millions)
recorded pre-tax charges of $78 million and, in 2016, recorded
$71 million.
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, delivered Altria
Group, Inc.’s goal of approximately $300 million in annualized
productivity savings as of December 31, 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 completed.
For further discussion on asset impairment, exit and
implementation costs, including a breakdown of these costs by
segment, see Note 4.
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.
As a result of these debt tender offers, pre-tax losses on
early extinguishment of debt were recorded as follows:
(in millions)
Premiums and fees
Write-off of unamortized debt discounts and
debt issuance costs
Total
2016
2015
$
809
$
226
14
2
$
823
$
228
For further discussion, see Note 9. Long-Term Debt to the
Total
consolidated financial statements in Item 8 (“Note 9”).
Smokeable products
$
39
$
Smokeless products
General corporate
and other
Total
$
—
—
39
$
For further discussion, see Note 16.
18
16
8
42
$
$
57
16
8
81
Asset Impairment, Exit, Implementation, Integration and
Acquisition-Related Costs: Pre-tax asset impairment, exit,
implementation, integration and acquisition-related costs for the
years ended December 31, 2017, 2016 and 2015 were $89
million, $206 million and $11 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
substantially completed by the end of 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. Of this amount, during 2017, Altria Group, Inc.
AB InBev/SABMiller Special Items: Altria Group,
Inc.’s earnings from its equity investment in AB InBev for
2017 included net pre-tax charges of $160 million, consisting
primarily of Altria Group, Inc.’s share of AB InBev’s
Brazilian tax item and Altria Group, Inc.’s share of AB
InBev’s mark-to-market losses on AB InBev’s derivative
financial instruments used to hedge certain share
commitments. 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 2017 included net tax benefits of
$3,367 million related to the Tax Reform Act recorded in the
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fourth quarter of 2017 as follows: (i) a tax benefit of $3,017
million to re-measure Altria Group, Inc. and its consolidated
subsidiaries’ net deferred tax liabilities based on the new U.S.
federal statutory rate; and (ii) a net tax benefit of $763 million
for a tax basis adjustment associated with the deemed
repatriation tax, partially offset by tax expense of $413 million
for the deemed repatriation tax. Additional tax items for 2017
included tax benefits for the release of a valuation allowance
related to deferred income tax assets for foreign tax credit
carryforwards; and tax benefits related primarily to the effective
settlement in 2017 of the Internal Revenue Service (“IRS”)
audit of Altria Group, Inc. and its consolidated subsidiaries’
2010-2013 tax years (“IRS 2010-2013 Audit”), partially offset
by tax expense for tax reserves related to the calculation of
certain foreign tax credits. 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 IRS 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. For further discussion, see Note 14.
2017 Compared with 2016
The following discussion compares consolidated operating results
for the year ended December 31, 2017 with the year ended
December 31, 2016.
Net revenues, which include excise taxes billed to
customers, decreased $168 million (0.7%), due primarily to
lower net revenues in the smokeable products and wine
segments, partially offset by higher net revenues in the
smokeless products segment.
Cost of sales decreased $203 million (2.6%), due primarily
to lower smokeable products segment shipment volume,
partially offset by higher per unit settlement charges.
Excise taxes on products decreased $325 million (5.1%),
due primarily to lower smokeable products segment shipment
volume.
Marketing, administration and research costs decreased
$288 million (10.9%), due primarily to lower costs in the
smokeable products segment.
Operating income increased $794 million (9.1%), due
primarily to higher operating results from the smokeable and
smokeless products segments (which included lower asset
impairment and exit costs).
Interest and other debt expense, net, decreased $42 million
(5.6%), due primarily to lower interest costs on debt in 2017 as a
result of debt refinancing activities in 2016 and higher interest
income due to higher interest rates in 2017.
Earnings from Altria Group, Inc.’s equity investment in AB
InBev/SABMiller, which decreased $263 million (33.1%), were
negatively impacted by AB InBev/SABMiller special items.
Altria Group, Inc.’s effective income tax rate decreased 38.9
percentage points to an effective income tax benefit rate of 4.1%,
substantially all of which is due to the Tax Reform Act. For
further discussion, see Note 14.
Net earnings attributable to Altria Group, Inc. of $10,222
million decreased $4,017 million (28.2%), due primarily to a
lower gain on the Transaction in 2017 and lower earnings from
Altria Group, Inc.’s equity investment in AB InBev/SABMiller,
partially offset by a lower effective income tax rate, a loss on
early extinguishment of debt in 2016 and higher operating
income. Diluted and basic EPS attributable to Altria Group,
Inc. of $5.31, each decreased by 27.1% due to lower net
earnings attributable to Altria Group, Inc., partially offset by
fewer shares outstanding.
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
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172.7% due to higher net earnings attributable to Altria Group,
Inc. and fewer shares outstanding.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The United States tobacco industry faces a number of business
and legal challenges that have adversely affected and may
adversely affect the business and sales volume of our tobacco
subsidiaries and our consolidated results of operations, cash flows
or financial position. These challenges, some of which are
discussed in more detail below, in Note 18, Item 1A and Item 3,
include:
pending and threatened litigation and bonding
requirements;
the requirement to issue “corrective statements” in
various media in connection with the federal
government’s lawsuit;
restrictions and requirements imposed by the Family
Smoking Prevention and Tobacco Control Act
(“FSPTCA”), and restrictions and requirements (and
related enforcement actions) that have been, and in the
future will be, imposed by the U.S. Food and Drug
Administration (“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
(such as menthol) 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 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
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 and other raw
material prices, 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. The e-vapor category grew rapidly from 2012 through
early 2015 off a small base, but then slowed. The growth trend
resumed in 2017. 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). See the
discussions regarding new product technologies, adjacency
growth strategy and evolving consumer preferences in Item1A 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
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all other tobacco products, including cigars, e-vapor products,
pipe tobacco and oral tobacco-derived nicotine products (“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 (see FDA’s
Comprehensive Regulatory Plan for Tobacco and Nicotine
Regulation, and FDA Regulatory Actions - Product
Standards below);
establishes pre-market review pathways for new and
modified tobacco products for the FDA to follow (see Pre-
Market Review Pathways Including Substantial Equivalence
below); and
equips the FDA with a variety of investigatory and
enforcement tools, including the authority to inspect tobacco
product manufacturing and other facilities.
Pre-Market Review Pathways Including Substantial
Equivalence: The FSPTCA imposes restrictions on marketing
new and modified tobacco products, requiring FDA review to
begin marketing a new product or continue marketing a modified
product. Specifically, 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, are subjected 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. The FDA could deny any such
new tobacco product application, thereby preventing the
distribution and sale of any product affected by such denial.
For cigarettes, cigarette tobacco and smokeless tobacco
products modified or first introduced into the market between
February 15, 2007 and March 22, 2011 (“provisional products”)
for which a manufacturer submitted substantial equivalence
reports that the FDA determines are not “substantially equivalent”
to products commercially marketed as of February 15, 2007, 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).
Similarly, the FDA could determine that Other Tobacco
Products modified or first introduced into the market between
February 15, 2007 and August 8, 2016 for which a manufacturer
submits substantial equivalence reports that the FDA determines
are not “substantially equivalent” to products commercially
marketed as of February 15, 2007, or rejects a new tobacco
product application submitted by a manufacturer, both of which
could require the removal of such products from the marketplace
(see FDA’s Comprehensive Regulatory Plan for Tobacco and
Nicotine Regulation, and FDA Regulatory Actions - Substantial
Equivalence and Other New Product Processes/Pathways below).
Modifications to currently-marketed products, including
modifications that result from, for example, a supplier being
unable to maintain the consistency required in ingredients or a
manufacturer being unable to obtain the ingredients with the
required specifications, can trigger the FDA’s pre-market review
process described above. As noted, adverse determinations by the
FDA during that process could restrict a manufacturer’s ability to
continue marketing such products.
FDA’s Comprehensive Regulatory Plan for Tobacco and
Nicotine Regulation: In July 2017, the FDA announced a new
comprehensive plan for tobacco and nicotine regulation that will
serve as the FDA’s multi-year regulatory road map (the “July
2017 Comprehensive Plan”). The FDA has stated its belief that
this approach will strike an appropriate balance between
regulation and encouraging development of innovative tobacco
products that may be less risky than cigarettes. Major
components of the July 2017 Comprehensive Plan include the
following:
the FDA’s planned issuance of advance notices of
proposed rulemaking (“ANPRM”) seeking comments for
potential future regulations establishing product standards for
(i) nicotine in combustible cigarettes, (ii) flavors in tobacco
products and (iii) e-vapor products (see FDA Regulatory
Actions - Product Standards below);
the FDA’s planned extension of the timelines to submit
applications for Other Tobacco Products that were on the
market as of August 8, 2016, which the FDA extended in
August 2017 (see FDA Regulatory Actions - Substantial
Equivalence and Other New Product Processes/Pathways
below);
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the FDA’s reconsideration of whether its current plan,
which is to review all “provisional” products pending in the
substantial equivalence queue, is an effective use of its
resources and, if not, whether it should continue to pursue its
current approach to these reviews (see FDA Regulatory
Actions - Substantial Equivalence and Other New Product
Processes/Pathways below). As previously noted, a
“provisional” product refers to cigarettes, cigarette tobacco
and smokeless tobacco products modified or first
commercially available after February 15, 2007 and before
March 22, 2011; and
the FDA’s planned issuance of foundational regulations
identifying the information the FDA expects to be included in
substantial equivalence reports and applications for “new
tobacco products” and “modified risk tobacco products.”
The FDA also plans to finalize guidance on how it intends to
review new product applications for e-vapor products.
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. 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. TPSAC votes are
considered by the FDA, but are not binding. 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
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 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.
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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
(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 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 ANPRM
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 ANPRM.
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.
One lawsuit 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 and the FDA agreed
not to enforce the current or any amended trade name rule until at
least 180 days after rulemaking on the amended rule concludes.
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 general, in order to continue marketing
provisional products, manufacturers of such products were
required to send to the FDA a report demonstrating
substantial equivalence by March 22, 2011 for the FDA to
determine if such tobacco products are “substantially
equivalent” to products commercially available as of
February 15, 2007. 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
substantial equivalence reports for these provisional products
and can continue marketing these products unless the FDA
makes a determination that a specific provisional product is
not substantially equivalent. If the FDA ultimately makes
such a determination, it could require the removal of such
products from the marketplace. PM USA and USSTC also
submitted substantial equivalence reports on products
proposed to be marketed after March 22, 2011 (“non-
provisional” products). While our cigarette and smokeless
tobacco subsidiaries believe all of their current products meet
the statutory requirements of the FSPTCA, they cannot
predict whether, when or how the FDA ultimately will apply
its guidance to their various respective substantial
equivalence reports or seek to enforce the law and regulations
consistent with its guidance.
PM USA and USSTC have received decisions on certain
provisional and non-provisional products, some of which
were found to be substantially equivalent and others were
found to be not substantially equivalent. The provisional
products (all smokeless tobacco products) found to be not
substantially equivalent had been discontinued for business
reasons prior to the FDA’s determination; therefore, the
determinations did not impact business results. In February
2018, USSTC filed a lawsuit challenging the FDA’s
determination that certain of its non-provisional products are
not substantially equivalent. There remain a significant
number of substantial equivalence reports for products for
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which the FDA has not announced decisions. At the request
of the FDA, our cigarette and smokeless tobacco subsidiaries
have provided additional information with respect to certain
of these substantial equivalence reports. We cannot predict
whether this additional information will be satisfactory to the
FDA to result in substantial equivalence determinations for
the products covered by those reports. It is also 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.
In order to continue marketing Other Tobacco Products
modified or introduced into the market for the first time
between February 15, 2007 and August 8, 2016,
manufacturers originally were required to send to the FDA a
report demonstrating substantial equivalence by May 8, 2018
or a new tobacco product application by November 8, 2018.
In August 2017, the FDA extended the filing deadlines for
combustible Other Tobacco Products, such as cigars and pipe
tobacco, to August 8, 2021, and for non-combustible Other
Tobacco Products, such as e-vapor and oral nicotine
products, to August 8, 2022. The FDA also announced that it
will permit manufacturers to continue to market such Other
Tobacco Products until the FDA renders a decision on the
applicable substantial equivalence report or new tobacco
product application.
Because of the limited number of e-vapor products on
the market as of February 15, 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,” although as noted above
the FDA has indicated its intention to issue appropriate
regulations to clarify the requirements.
Manufacturers intending to first introduce new and
modified cigarette, cigarette tobacco and smokeless tobacco
products into the market after March 22, 2011 or intending to
first introduce new and modified Other Tobacco Products
into the market after August 8, 2016, must submit substantial
equivalence reports to the FDA and obtain “substantial
equivalence orders” from the FDA or submit new tobacco
product applications to the FDA and obtain “new tobacco
product marketing orders” 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)
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 September 2015, after industry objections to the
Substantial Equivalence Guidance, the FDA issued a second
edition of the 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 initiated litigation
challenging the Revised SE Guidance. 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. However, the court upheld the
Revised SE 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.
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
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
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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.
Nicotine and Flavors: As noted above, the FDA announced
in the July 2017 Comprehensive Plan its intent to seek
comments through an ANPRM on the following matters,
among others:
Potential Product Standards
Menthol in cigarettes: As required by the FSPTCA, the
TPSAC submitted a report on the impact of the use of
menthol in cigarettes on the public health and related
recommendations to the FDA in March 2011. It
recommended, among other things, that the “[r]emoval of
menthol cigarettes from the marketplace would benefit public
health in the United States” and also noted that any ban on
menthol cigarettes could lead to an increase in contraband
cigarettes and other potential unintended consequences.
Also in March 2011, PM USA submitted a report to the FDA
outlining its position that regulatory actions related to the use
of menthol cigarettes are not warranted based on available
science and evidence and that any significant restrictions on
the use of menthol in cigarettes would have unintended
consequences detrimental to public health and society.
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
ANPRM requesting comments on the FDA’s preliminary
scientific evaluation and information that may inform
potential regulatory actions regarding menthol in cigarettes.
PM USA submitted comments to the FDA raising a number
of concerns about the preliminary scientific evidence and
unintended consequences.
The July 2017 Comprehensive Plan contemplates the
issuance of an ANPRM seeking comments on the role that
flavors including menthol in tobacco products play in
attracting youth. 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 a
full rulemaking process.
NNN in Smokeless Tobacco: 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. In March 2017, the FDA
extended the comment period and acknowledged what it
described as a “typographical error” in a formula it used in
documentation supporting the proposed rule. USSTC
submitted comments to the FDA in July 2017. If the
proposed rule as presently proposed 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.
Nicotine in cigarettes: The potential public health
benefits and any possible adverse effects of lowering
nicotine in combustible cigarettes to non-addictive or
minimally addictive levels through achievable product
standards. Specifically, the FDA intends to seek
comments on the potential unintended consequences of
such product standard, including (i) smokers
compensating by smoking more cigarettes to obtain the
same level of nicotine as with their current product and
(ii) the illicit trade of cigarettes containing nicotine at
levels higher than a non-addictive threshold that may be
established by the FDA; and
Flavors in all tobacco products: The role that flavors
(including menthol) in tobacco products play in
attracting youth and may play in helping some smokers
switch to potentially less harmful forms of nicotine
delivery.
These ANPRM processes may ultimately lead to the
FDA’s development of product standards for nicotine and
flavors. The July 2017 Comprehensive Plan also includes the
FDA’s intent to develop e-vapor product standards to protect
against known public health risks such as battery issues and
concerns about children’s exposure to liquid nicotine.
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
(“FET”) on cigarettes increased from $0.39 per pack to
approximately $1.01 per pack, in 2010, the New York state excise
tax increased by $1.60 to $4.35 per pack, in October 2014,
Philadelphia, Pennsylvania enacted a $2.00 per pack local
cigarette excise tax and in November 2016, California passed a
ballot measure to increase its cigarette excise tax by $2.00 per
pack and its smokeless tobacco ad valorem excise tax from
27.30% to 65.08%, which went into effect on April 1, 2017 and
July 1, 2017, respectively. Between the end of 1998 and February
23, 2018, the weighted-average state and certain local cigarette
excise taxes increased from $0.36 to $1.75 per pack. During
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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 18, during 1997 and 1998, PM USA and
other major domestic tobacco product manufacturers entered into
the State Settlement Agreements. These settlements require
participating manufacturers to make substantial annual payments,
which are adjusted for several factors, including inflation,
operating income, market share and industry volume. For a
discussion of the impact of the State Settlement Agreements on
Altria Group, Inc., see Financial Review - Debt and Liquidity -
Payments Under State Settlement Agreements and FDA
Regulation below and Note 18. The State Settlement Agreements
also place numerous requirements and restrictions on
participating manufacturers’ business operations, including
prohibitions and restrictions on the advertising and marketing of
cigarettes and smokeless tobacco products. Among these are
prohibitions of outdoor and transit brand advertising, payments
for product placement and free sampling (except in adult-only
facilities). Restrictions are also placed on the use of brand name
sponsorships and brand name non-tobacco products. The State
Settlement Agreements also place prohibitions on targeting youth
and the use of cartoon characters. In addition, the State
Settlement Agreements require companies to affirm corporate
principles directed at reducing underage use of cigarettes; impose
requirements regarding lobbying activities; mandate public
disclosure of certain industry documents; limit the industry’s
ability to challenge certain tobacco control and underage use
laws; and provide for the dissolution of certain tobacco-related
organizations and place restrictions on the establishment of any
replacement organizations.
In November 1998, USSTC entered into the Smokeless
Tobacco Master Settlement Agreement (the “STMSA”) with the
attorneys general of various states and United States territories to
resolve the remaining health care cost reimbursement cases
initiated against USSTC. The STMSA required USSTC to adopt
various marketing and advertising restrictions. USSTC is the
only smokeless tobacco manufacturer to sign the STMSA.
2017, Rhode Island, Delaware, Connecticut and Puerto Rico
enacted legislation to increase their cigarette excise taxes. As of
February 23, 2018, no state has increased its cigarette excise tax
in 2018, but various increases are under consideration or have
been proposed.
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, 2018, 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, 2018, 180 countries, as well
as the European Community, have become parties to the FCTC.
While the United States is a signatory of the FCTC, it is not
currently a party to the agreement, as the agreement has not been
submitted to, or ratified by, the United States Senate. The FCTC
is the first international public health treaty and its objective is to
establish a global agenda for tobacco regulation with the purpose
of reducing initiation of tobacco use and encouraging cessation.
The treaty recommends (and in certain instances, requires)
signatory nations to enact legislation that would, among other
things: establish specific actions to prevent youth tobacco
product use; restrict or eliminate all tobacco product advertising,
marketing, promotion and sponsorship; initiate public education
campaigns to inform the public about the health consequences of
tobacco consumption and exposure to tobacco smoke and the
benefits of quitting; implement regulations imposing product
testing, disclosure and performance standards; impose health
warning requirements on packaging; adopt measures intended to
combat tobacco product smuggling and counterfeit tobacco
products, including tracking and tracing of tobacco products
through the distribution chain; and restrict smoking in public
places.
There are a number of proposals currently under
consideration by the governing body of the FCTC, some of which
call for substantial restrictions on the manufacture, marketing,
distribution and sale of tobacco products. In addition, the
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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, including menthol cigarettes, (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 (21), Utah (19), Oregon (21) and Maine (21).
Various localities (such as New York City (21) and Chicago (21))
have taken similar actions.
Health Effects of Tobacco Product Consumption and
Exposure to Environmental Tobacco Smoke (“ETS”): Reports
with respect to the health effects of smoking have been publicized
for many years, including various reports by the U.S. Surgeon
General. 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.
Most jurisdictions within the United States have restricted
smoking in public places. Some public health groups have called
for, and various jurisdictions have adopted or proposed, bans on
smoking in outdoor places, in private apartments and in cars
transporting minors. It is not possible to predict the results of
ongoing scientific research or the types of future scientific
research into the health risks of tobacco exposure and the impact
of such research on regulation.
Other Legislation or Governmental Initiatives: In
addition to the actions discussed above, other regulatory
initiatives affecting the tobacco industry have been adopted or are
being considered at the federal level and in a number of state and
local jurisdictions. For example, in recent years, legislation has
been introduced or enacted at the state or local level to subject
tobacco products to various reporting requirements and
performance standards (such as reduced cigarette ignition
propensity standards); establish educational campaigns relating to
tobacco consumption or tobacco control programs, or provide
additional funding for governmental tobacco control activities;
restrict the sale of tobacco products in certain retail
establishments and the sale of tobacco products in certain package
sizes; require tax stamping of moist smokeless tobacco (“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
untaxed 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
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revenues. Losses in tax revenues can cause such governments to
revenues. Losses in tax revenues can cause such governments to
take various actions, including increasing excise taxes; imposing
take various actions, including increasing excise taxes; imposing
legislative or regulatory requirements that may adversely impact
legislative or regulatory requirements that may adversely impact
Altria Group, Inc.’s consolidated results of operations and cash
Altria Group, Inc.’s consolidated results of operations and cash
flows and the businesses of its tobacco subsidiaries; or asserting
flows and the businesses of its tobacco subsidiaries; or asserting
claims against manufacturers of tobacco products or members of
claims against manufacturers of tobacco products or members of
the trade channels through which such tobacco products are
the trade channels through which such tobacco products are
distributed and sold.
distributed and sold.
Altria Group, Inc. and its tobacco subsidiaries devote
Altria Group, Inc. and its tobacco subsidiaries devote
significant resources to help prevent illicit trade in tobacco
significant resources to help prevent illicit trade in tobacco
products and to protect legitimate trade channels. For example,
products and to protect legitimate trade channels. For example,
Altria Group, Inc.’s tobacco subsidiaries are engaged in a number
Altria Group, Inc.’s tobacco subsidiaries are engaged in a number
of initiatives to help prevent illicit trade in tobacco products,
of initiatives to help prevent illicit trade in tobacco products,
including communication with wholesale and retail trade
including communication with wholesale and retail trade
members regarding illicit trade in tobacco products and how they
members regarding illicit trade in tobacco products and how they
can help prevent such activities; enforcement of wholesale and
can help prevent such activities; enforcement of wholesale and
retail trade programs and policies that address illicit trade in
retail trade programs and policies that address illicit trade in
tobacco products; engagement with and support of law
tobacco products; engagement with and support of law
enforcement and regulatory agencies; litigation to protect their
enforcement and regulatory agencies; litigation to protect their
trademarks; and support for a variety of federal and state
trademarks; and support for a variety of federal and state
legislative initiatives. Legislative initiatives to address illicit
legislative initiatives. Legislative initiatives to address illicit
trade in tobacco products are designed to protect the legitimate
trade in tobacco products are designed to protect the legitimate
channels of distribution, impose more stringent penalties for the
channels of distribution, impose more stringent penalties for the
violation of illegal trade laws and provide additional tools for law
violation of illegal trade laws and provide additional tools for law
enforcement. Regulatory measures and related governmental
enforcement. Regulatory measures and related governmental
actions to prevent the illicit manufacture and trade of tobacco
actions to prevent the illicit manufacture and trade of tobacco
products continue to evolve as the nature of illicit tobacco
products continue to evolve as the nature of illicit tobacco
products evolves.
products evolves.
Price, Availability and Quality of Agricultural Products
Price, Availability and Quality of Agricultural Products
Shifts in crops (such as those driven by economic conditions and
Shifts in crops (such as those driven by economic conditions and
adverse weather patterns), government mandated prices,
adverse weather patterns), government mandated prices,
economic trade sanctions, geopolitical instability and production
economic trade sanctions, geopolitical instability and production
control programs may increase or decrease the cost or reduce the
control programs may increase or decrease the cost or reduce the
supply or quality of tobacco and other agricultural products used
supply or quality of tobacco and other agricultural products used
to manufacture our companies’ products. As with other
to manufacture our companies’ products. As with other
agriculture commodities, the price of tobacco leaf can be
agriculture commodities, the price of tobacco leaf can be
influenced by economic conditions and imbalances in supply and
influenced by economic conditions and imbalances in supply and
demand and crop quality and availability can be influenced by
demand and crop quality and availability can be influenced by
variations in weather patterns, including those caused by climate
variations in weather patterns, including those caused by climate
change. Tobacco production in certain countries is subject to a
change. Tobacco production in certain countries is subject to a
variety of controls, including government mandated prices and
variety of controls, including government mandated prices and
production control programs. Changes in the patterns of demand
production control programs. Changes in the patterns of demand
for agricultural products and the cost of tobacco production could
for agricultural products and the cost of tobacco production could
impact tobacco leaf prices and tobacco supply. Certain types of
impact tobacco leaf prices and tobacco supply. Certain types of
tobacco are only available in limited geographies, including
tobacco are only available in limited geographies, including
geographies experiencing political instability, and loss of their
geographies experiencing political instability, and loss of their
availability could impact adult tobacco consumer product
availability could impact adult tobacco consumer product
acceptability. Any significant change in the price, quality or
acceptability. Any significant change in the price, quality or
availability of tobacco leaf or other agricultural products used to
availability of tobacco leaf or other agricultural products used to
manufacture our products could restrict our subsidiaries’ ability to
manufacture our products could restrict our subsidiaries’ ability to
continue marketing existing products or impact adult consumer
continue marketing existing products or impact adult consumer
product acceptability, adversely affecting our subsidiaries’
product acceptability, adversely affecting our subsidiaries’
profitability and businesses.
profitability and businesses.
Timing of Sales
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are
In the ordinary course of business, our tobacco subsidiaries are
subject to many influences that can impact the timing of sales to
subject to many influences that can impact the timing of sales to
customers, including the timing of holidays and other annual or
customers, including the timing of holidays and other annual or
special events, the timing of promotions, customer incentive
special events, the timing of promotions, customer incentive
programs and customer inventory programs, as well as the actual
programs and customer inventory programs, as well as the actual
or speculated timing of pricing actions and tax-driven price
or speculated timing of pricing actions and tax-driven price
increases.
increases.
Operating Results
Operating Results
The following table summarizes operating results for the
smokeable and smokeless products segments:
The following table summarizes operating results for the
smokeable and smokeless products segments:
For the Years Ended December 31,
For the Years Ended December 31,
Net Revenues
Net Revenues
Operating Companies
Income
Operating Companies
Income
(in millions)
(in millions)
2017
2017
2016
2016
2015
2015
2017
2017
2016
2016
2015
2015
Smokeable
Smokeable
products
products
Smokeless
Smokeless
products
products
$ 22,636
$ 22,636
$ 22,851
$ 22,851
$ 22,792
$ 22,792
$ 8,408
$ 8,408
$ 7,768
$ 7,768
$ 7,569
$ 7,569
2,155
2,155
2,051
2,051
1,879
1,879
1,300
1,300
1,177
1,177
1,108
1,108
Total
Total
smokeable
smokeable
and
and
smokeless
smokeless
products
products
$ 24,791
$ 24,791
$ 24,902
$ 24,902
$ 24,671
$ 24,671
$ 9,708
$ 9,708
$ 8,945
$ 8,945
$ 8,677
$ 8,677
Smokeable Products Segment
Smokeable Products Segment
The smokeable products segment’s operating companies
The smokeable products segment’s operating companies
income increased during 2017 due primarily to higher pricing
income increased during 2017 due primarily to higher pricing
and lower costs, partially offset by lower shipment volume.
and lower costs, partially offset by lower shipment volume.
Shipment volume and retail share were negatively impacted in
Shipment volume and retail share were negatively impacted in
2017 by a large cigarette excise tax increase in California.
2017 by a large cigarette excise tax increase in California.
The following table summarizes the smokeable products
The following table summarizes the smokeable products
segment shipment volume performance:
segment shipment volume performance:
(sticks in millions)
Cigarettes:
(sticks in millions)
Cigarettes:
Marlboro
Marlboro
Other premium
Other premium
Discount
Discount
Total cigarettes
Total cigarettes
Cigars:
Cigars:
Black & Mild
Black & Mild
Other
Other
Total cigars
Total cigars
Shipment Volume
For the Years Ended December 31,
Shipment Volume
For the Years Ended December 31,
2015
2016
2017
2016
2017
2015
99,974
99,974
105,297
105,297
108,113
108,113
5,967
5,967
6,382
6,382
10,665
10,665
11,251
11,251
6,753
6,753
11,152
11,152
116,606
116,606
122,930
122,930
126,018
126,018
1,527
1,527
1,379
1,379
15
15
24
24
1,542
1,542
1,403
1,403
1,295
1,295
30
30
1,325
1,325
Total smokeable products
Total smokeable products
118,148
118,148
124,333
124,333
127,343
127,343
Cigarettes shipment volume includes Marlboro; Other
Cigarettes shipment volume includes Marlboro; Other
premium brands, such as Virginia Slims, Parliament and
premium brands, such as Virginia Slims, Parliament and
Benson & Hedges; and Discount brands, which include L&M
Benson & Hedges; and Discount brands, which include L&M
and Basic. Cigarettes volume includes units sold as well as
and Basic. Cigarettes volume includes units sold as well as
promotional units, but excludes units sold for distribution to
promotional units, but excludes units sold for distribution to
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Puerto Rico, and units sold in U.S. Territories, to overseas
military and by Philip Morris Duty Free Inc., none of which,
individually or in the aggregate, is material to the smokeable
products segment.
The following table summarizes cigarettes retail share
performance:
Retail Share
For the Years Ended December 31,
2017
2016
2015
43.3%
43.7%
43.8%
2.7
4.7
2.8
4.6
2.8
4.5
50.7%
51.1%
51.1%
Cigarettes:
Marlboro
Other premium
Discount
Total cigarettes
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. This service
tracks sales in the food, drug, mass merchandisers,
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”). This
service is not designed to capture sales through other channels,
including the internet, direct mail and some illicitly tax-
advantaged outlets. It is IRI’s standard practice to periodically
refresh its services, which could restate retail share results that
were previously released in this service.
PM USA and Middleton executed the following pricing
and promotional allowance actions during 2017, 2016 and
2015:
Effective September 24, 2017, PM USA increased the
list price on all of its cigarette brands by $0.10 per pack.
Effective May 21, 2017, Middleton increased various list
prices across substantially all of its cigar brands resulting
in a weighted-average increase of approximately $0.10 per
five-pack.
Effective March 19, 2017, PM USA increased the list
price on Parliament by $0.12 per pack. In addition, PM
USA increased the list price on all of its other cigarette
brands by $0.08 per pack.
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.
The following discussion compares operating results for
the smokeable products segment for the year ended December
31, 2017 with the year ended December 31, 2016.
Net revenues, which include excise taxes billed to
customers, decreased $215 million (0.9%), due primarily to
lower shipment volume ($1,273 million), partially offset by
higher pricing, which includes higher promotional investments.
Operating companies income increased $640 million
(8.2%), due primarily to higher pricing ($1,023 million), which
includes higher promotional investments, lower marketing,
administration and research costs ($251 million), which
includes 2016 state excise tax ballot initiative spending and
lower product liability defense costs, and lower asset
impairment and exit costs ($120 million). These factors were
partially offset by lower shipment volume ($691 million) and
higher per unit settlement charges.
Marketing, administration and research costs for the
smokeable products segment include PM USA’s cost of
administering and litigating product liability claims. Litigation
defense costs are influenced by a number of factors, including
the number and types of cases filed, the number of cases tried
annually, the results of trials and appeals, the development of
the law controlling relevant legal issues, and litigation strategy
and tactics. For further discussion on these matters, see Note 18
and Item 3. For the years ended December 31, 2017, 2016 and
2015, product liability defense costs for PM USA were $179
million, $234 million and $228 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 segment’s reported shipment
volume decreased 5.0%. The smokeable products segment’s
reported domestic cigarettes shipment volume decreased 5.1%,
driven primarily by the industry’s rate of decline, retail share
declines and one fewer shipping day. When adjusted for
calendar differences, the smokeable products segment’s
domestic cigarettes shipment volume decreased an estimated
5%. Total cigarette industry volumes declined by an estimated
4%.
Shipments of premium cigarettes accounted for 90.9% of
smokeable products’ reported domestic cigarettes shipment
volume for 2017, versus 90.8% for 2016.
The smokeable products segment’s reported cigars
shipment volume increased 9.9%.
Marlboro’s retail share declined 0.4 share points, driven
primarily by competitive activity and the effect of the cigarette
excise tax increase in California. PM USA’s total retail share
decreased 0.4 share points.
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.
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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).
Total smokeable products segment’s reported shipment
volume decreased 2.4%. The smokeable products segment’s
reported and adjusted domestic cigarettes shipment volume
decreased approximately 2.5% driven primarily by the
industry’s rate of decline. Total cigarette industry volumes
declined by an estimated 2.5%.
Shipments of premium cigarettes accounted for 90.8% of
smokeable products’ 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 declined 0.1 share point in 2016.
PM USA’s total retail share was unchanged in 2016.
Smokeless Products Segment
During 2017, the smokeless products segment grew net
revenues and operating companies income, primarily through
higher pricing, partially offset by unfavorable mix and lower
shipment volume.
During 2017, USSTC voluntarily recalled certain
smokeless tobacco products manufactured at its Franklin Park,
Illinois facility due to a product tampering incident (the
“Recall”). USSTC has concluded the Recall and trade
inventories have been replenished. USSTC estimates that the
Recall reduced smokeless products segment operating
companies income by approximately $60 million in 2017.
The following table summarizes smokeless products segment
shipment volume performance:
(cans and packs in millions)
Copenhagen
Skoal
Copenhagen and Skoal
Other
Total smokeless products
Shipment Volume
For the Years Ended December 31,
2015
474.7
267.9
742.6
70.9
813.5
2016
525.1
260.9
786.0
67.5
853.5
2017
531.6
241.9
773.5
67.8
841.3
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,
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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,
2015
31.0%
19.4
50.4
3.7
54.1%
2017
33.7%
16.7
50.4
3.3
53.7%
2016
33.2%
18.1
51.3
3.4
54.7%
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. This
service tracks sales in the food, drug, mass merchandisers,
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
2017, 2016 and 2015:
Effective September 26, 2017, 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 April 25, 2017, USSTC increased the list price
on all its brands by $0.07 per can.
Effective December 6, 2016, 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 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
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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.
The following discussion compares operating results for the
smokeless products segment for the year ended December 31,
2017 with the year ended December 31, 2016.
Net revenues, which include excise taxes billed to customers,
increased $104 million (5.1%), due primarily to higher pricing
($168 million), which includes lower promotional investments,
partially offset by unfavorable mix and lower shipment volume
($24 million).
Operating companies income increased $123 million
(10.5%), due primarily to higher pricing ($168 million), which
includes lower promotional investments, and lower
manufacturing costs, partially offset by unfavorable mix, lower
shipment volume ($18 million) and a settlement charge for lump
sum pension payments ($16 million).
USSTC’s reported domestic shipment volume decreased
1.4%, driven primarily by declines in Skoal. After adjusting for
trade inventory movements and other factors, USSTC estimates
that its domestic smokeless products shipment volume declined
approximately 2%. USSTC estimates that the smokeless products
category volume was essentially unchanged over the six months
ended December 31, 2017.
Copenhagen’s 0.5 retail share point growth was offset by
Skoal’s 1.4 retail share point loss, contributing to a combined
retail share decline of 0.9 share points.
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 51.3%. 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 0.6 share
points to 54.7%.
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 results for 2017 were negatively impacted by
competitive activity, continued trade inventory reductions and
slower premium wine category growth.
The following table summarizes operating results for the
wine segment:
(in millions)
Net revenues
Operating companies income
For the Years Ended December 31,
2017
698
147
$
$
2016
746
164
$
$
2015
692
152
$
$
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The following discussion compares operating results for the
Altria Group, Inc. had a working capital deficit at December
31, 2017 and 2016. 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 2017, net cash used in investing activities was $0.5 billion
compared with net cash provided by investing activities of $3.7
billion during 2016. This change was due primarily to the
following:
proceeds of $4.8 billion from the Transaction during
2016;
proceeds of $0.5 billion from exercising derivative
financial instruments associated with the Transaction
during 2016; and
higher acquisitions of businesses and assets in 2017;
partially offset by:
payment of approximately $1.6 billion for the purchase
of ordinary shares of AB InBev during 2016.
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.
Capital expenditures for 2017 increased 5.3% to $199
million, due primarily to the acquisition of the previously leased
headquarters in Richmond, Virginia in 2017, partially offset by
lower spending related to manufacturing. Capital expenditures
for 2018 are expected to be in the range of $200 million to $250
million, and are expected to be funded from operating cash flows.
The increase in expected capital expenditures in 2018 compared
with 2017 is due primarily to spending related to manufacturing.
wine segment for the year ended December 31, 2017 with the
year ended December 31, 2016.
Net revenues, which include excise taxes billed to customers,
decreased $48 million (6.4%), due primarily to lower shipment
volume, partially offset by improved premium mix.
Operating companies income decreased $17 million (10.4%),
due primarily to lower shipment volume.
For 2017, Ste. Michelle’s reported wine shipment volume of
8,530 thousand cases decreased 8.6%.
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.
Financial Review
Net Cash Provided by Operating Activities
During 2017, net cash provided by operating activities was $4.9
billion compared with $3.8 billion during 2016. This increase
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;
higher operating companies income in the smokeable
and smokeless products segments;
lower contributions to Altria Group, Inc.’s pension and
postretirement plans in 2017; and
lower payments for tobacco and health litigation items in
2017;
partially offset by:
higher payments of settlement charges in 2017.
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.
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Net Cash Used in Financing Activities
During 2017, net cash used in financing activities was $7.8 billion
compared with $5.3 billion during 2016. This increase was due to
the following:
debt issuance of $2.0 billion of senior unsecured notes
during 2016 used in part to repurchase senior unsecured
notes in connection with the 2016 debt tender offer;
higher repurchases of common stock during 2017; and
higher dividends paid during 2017;
partially offset by:
debt repayments of $0.9 billion and premiums and fees
of $0.8 billion in connection with the debt tender offer
during 2016.
During 2016, net cash used in financing activities was $5.3
billion compared with $6.8 billion during 2015. This decrease
was due primarily to the following:
debt issuance of $2.0 billion of senior unsecured notes
during 2016 used in part to repurchase senior unsecured
notes in connection with the 2016 debt tender offer; 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 repurchases of common stock during 2016; and
higher dividends paid during 2016.
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. 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.
At December 31, 2017, the credit ratings and outlook for
Altria Group, Inc.’s indebtedness by major credit rating agencies
were:
Moody’s Investor Service, Inc.
(“Moody’s”)
Standard & Poor’s Ratings
Services (“Standard & Poor’s”)
Fitch Ratings Ltd. (“Fitch”) 1
Short-term
Debt
Long-term
Debt Outlook
P-2
A-1
A3
A-
Stable
Stable
Stable
1 On April 3, 2017, Fitch raised the long-term debt credit rating for Altria
Group, Inc. to A- from BBB+.
F2
A-
34
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.
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35
At December 31, 2017, 2016 and 2015, Altria Group, Inc. had no
short-term borrowings.
At December 31, 2017, 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 long-term senior unsecured debt. Interest rates on
borrowings under the Credit Agreement are expected to be based
on the London Interbank Offered Rate (“LIBOR”) plus a
percentage based on the higher of the ratings of Altria Group,
Inc.’s long-term senior unsecured debt from Moody’s and
Standard & Poor’s. The applicable percentage based on Altria
Group, Inc.’s long-term senior unsecured debt ratings at
December 31, 2017 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, 2017, credit
available to Altria Group, Inc. under the Credit Agreement was
$3.0 billion.
The Credit Agreement is used for general corporate purposes
and to support Altria Group, Inc.’s commercial paper issuances.
The Credit Agreement requires that Altria Group, Inc. maintain
(i) a ratio of debt to consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) of not more than 3.0
to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated
interest expense of not less than 4.0 to 1.0, each calculated as of
the end of the applicable quarter on a rolling four quarters basis.
At December 31, 2017, the ratios of debt to consolidated EBITDA
and consolidated EBITDA to consolidated interest expense,
calculated in accordance with the Credit Agreement, were 1.3 to
1.0 and 14.8 to 1.0, respectively. Altria Group, Inc. expects to
continue to meet its covenants associated with the Credit
Agreement. The terms “consolidated EBITDA,” “debt” and
“consolidated interest expense,” as defined in the Credit
Agreement, include certain adjustments. Exhibit 99.3 to Altria
Group, Inc.’s Quarterly Report on Form 10-Q for the period
ended September 30, 2013 sets forth the definitions of these terms
as they appear in the Credit Agreement and is incorporated herein
by reference.
Any commercial paper issued by Altria Group, Inc. and
borrowings under the Credit Agreement are guaranteed by PM
USA as further discussed in Note 19. Condensed Consolidating
Financial Information to the consolidated financial statements in
Item 8 (“Note 19”).
Financial Market Environment - Altria Group, Inc. believes it
has adequate liquidity and access to financial resources to meet its
anticipated obligations and ongoing business needs in the
foreseeable future. Altria Group, Inc. continues to monitor the
credit quality of its bank group and is not aware of any potential
non-performing credit provider in that group. Altria Group, Inc.
believes the lenders in its bank group will be willing and able to
advance funds in accordance with their legal obligations. See Item
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
1A for certain risk factors associated with the foregoing
discussion.
Tax Reform Act - As a result of the Tax Reform Act’s
reduction in the U.S. federal statutory corporate income tax rate
from 35% to 21% effective January 1, 2018, Altria Group, Inc.
expects increased liquidity. Altria Group, Inc. plans to make
strategic long-term investments with the increased liquidity,
reinvesting approximately one-third of the total tax reform benefit
in 2018, with a moderating level of investment in subsequent
years.
Debt - At December 31, 2017 and 2016, Altria Group, Inc.’s
total debt was $13.9 billion for each period.
All of Altria Group, Inc.’s debt was fixed-rate debt at
December 31, 2017 and 2016. The weighted-average coupon
interest rate on total debt was approximately 4.9% at December
31, 2017 and 2016. For further details on long-term debt, see
Note 9.
In October 2017, 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.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual
obligations that are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 18, Altria Group, Inc. and certain of its subsidiaries had unused letters
of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling
interest outstanding at December 31, 2017. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated
entities. In addition, as discussed in Note 19, PM USA has issued guarantees relating to Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under 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,
2017:
(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
2018
2019 - 2020
2021 - 2022
$
14,017
$
8,403
192
3,452
634
4,086
2,084
864
693
38
1,023
456
1,479
78
$
2,144
$
3,400
$
1,100
61
1,250
159
1,409
166
849
49
600
19
619
194
$
28,782
$
3,152
$
4,880
$
5,111
$
2023 and
Thereafter
7,609
5,761
44
579
—
579
1,646
15,639
(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, 2017, 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 2018 through 2022.
Contributions beyond 2022 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.
36
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
The State Settlement Agreements and related legal fee
payments, and payments for FDA user fees, as discussed below
and in Note 18, are excluded from the table above, as the
payments are subject to adjustment for several factors, including
inflation, operating income, market share and industry volume.
Litigation escrow deposits, as discussed below and in Note 18, are
also excluded from the table above since these deposits will be
returned to PM USA should it prevail on appeal.
Payments Under State Settlement Agreements and FDA
Regulation - As discussed previously and in Note 18, PM USA
and Nat Sherman have entered into State Settlement Agreements
with the states and territories of the United States that call for
certain payments. In addition, PM USA, Middleton, Nat Sherman
and USSTC are 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 and FDA user fees as a component of cost of sales.
Altria Group, Inc.’s subsidiaries recorded approximately $4.7
billion, $4.9 billion and $4.8 billion of charges to cost of sales for
the years ended December 31, 2017, 2016 and 2015, respectively,
in connection with the State Settlement Agreements and FDA user
fees. For further discussion of the resolutions of certain disputes
with states and territories related to the NPM Adjustment
provision under the MSA, see Health Care Cost Recovery
Litigation - NPM Adjustment Disputes in Note 18.
Based on current agreements, 2017 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 $4.8 billion in 2018 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
resolutions of the NPM Adjustment disputes.
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, 2017, PM USA
had posted various forms of security totaling approximately $61
million, the majority of which have been collateralized with cash
deposits. These cash deposits are included in assets on the
consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse
outcome or settlement of litigation could have a material adverse
effect on the financial position, cash flows or results of operations
of PM USA, UST or Altria Group, Inc. in a particular fiscal
quarter or fiscal year, as more fully disclosed in Note 18, Item 3
and Item 1A, management expects cash flow from operations,
together with Altria Group, Inc.’s access to capital markets, to
provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 11. Stock Plans to the consolidated financial
statements in Item 8, during 2017 Altria Group, Inc. granted an
aggregate of 0.6 million restricted stock units and 0.2 million
performance stock units to eligible employees.
At December 31, 2017, the number of shares to be issued
upon vesting of restricted stock units and performance stock units
was not significant.
Dividends paid in 2017 and 2016 were approximately $4.8
billion and $4.5 billion, respectively, an increase of 6.5%,
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 program.
During the third quarter of 2017, the Board of Directors
approved an 8.2% increase in the quarterly dividend rate to $0.66
per share of Altria Group, Inc. common stock versus the previous
rate of $0.61 per share. 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
$2.64 per share. Future dividend payments remain subject to the
discretion of the Board of Directors.
At December 31, 2017, Altria Group, Inc. had approximately
$18 million remaining in the July 2015 share repurchase program,
which it subsequently completed in January 2018. In January
2018, the Board of Directors authorized a new $1.0 billion share
repurchase program, which Altria Group, Inc. expects to complete
by the end of 2018. For further discussion of Altria Group, Inc.’s
share repurchase programs, see Note 10. Capital Stock to the
consolidated financial statements in Item 8 and Part II, Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities of this Annual
Report on Form 10-K.
Recent Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of recently issued accounting
guidance applicable to, but not yet adopted by, Altria Group, Inc.
In addition, in February 2018, the Financial Accounting
Standards Board issued Accounting Standards Update No.
2018-02, Income Statement - Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income (“ASU No.
2018-02”). Under ASU No. 2018-02, an entity may elect to
reclassify the income tax effects of the Tax Reform Act on items
within accumulated other comprehensive income to retained
earnings. ASU No. 2018-02 is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal
years. Early adoption is permitted in any interim period for which
36
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
financial statements have not yet been issued. The guidance in
ASU No. 2018-02 should be applied either in the period of
adoption or retrospectively to each period (or periods) in which
the effect of the change in the U.S. federal corporate tax rate in
the Tax Reform Act is recognized. Altria Group, Inc. is in the
process of evaluating the impact of this guidance on its
consolidated financial statements and related disclosures.
Contingencies
See Note 18 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
At December 31, 2017 and 2016, the fair value of Altria Group,
Inc.’s total debt was $15.3 billion and $15.1 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,
2017 and 2016 would decrease the fair value of Altria Group,
Inc.’s total debt by approximately $1.2 billion for each period.
A 1% decrease in market interest rates at December 31, 2017
and 2016 would increase the fair value of Altria Group, Inc.’s
total debt by approximately $1.3 billion and $1.4 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, 2017 for
borrowings under the Credit Agreement was 1.125%. At
December 31, 2017, Altria Group, Inc. had no borrowings
under the Credit Agreement.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Item 8. Financial Statements and Supplementary Data.
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
Consolidated Balance Sheets
(in millions of dollars)
(in millions of dollars)
________________________
________________________
at December 31,
at December 31,
Assets
Assets
Cash and cash equivalents
Cash and cash equivalents
Receivables
Receivables
Inventories:
Inventories:
Leaf tobacco
Leaf tobacco
Other raw materials
Other raw materials
Work in process
Work in process
Finished product
Finished product
Income taxes
Income taxes
Other current assets
Other current assets
Total current assets
Total current assets
Property, plant and equipment, at cost:
Property, plant and equipment, at cost:
Land and land improvements
Land and land improvements
Buildings and building equipment
Buildings and building equipment
Machinery and equipment
Machinery and equipment
Construction in progress
Construction in progress
Less accumulated depreciation
Less accumulated depreciation
Goodwill
Goodwill
Other intangible assets, net
Other intangible assets, net
Investment in AB InBev
Investment in AB InBev
Finance assets, net
Finance assets, net
Other assets
Other assets
Total Assets
Total Assets
See notes to consolidated financial statements.
See notes to consolidated financial statements.
38
39
39
39
$
$
2017
2017
1,253
1,253
142
142
941
941
170
170
560
560
554
554
2,225
2,225
461
461
263
263
4,344
4,344
302
302
1,437
1,437
2,975
2,975
165
165
4,879
4,879
2,965
2,965
1,914
1,914
5,307
5,307
12,400
12,400
17,952
17,952
899
899
386
386
43,202
43,202
$
$
2016
2016
4,569
4,569
151
151
892
892
164
164
512
512
483
483
2,051
2,051
269
269
220
220
7,260
7,260
316
316
1,481
1,481
2,917
2,917
121
121
4,835
4,835
2,877
2,877
1,958
1,958
5,285
5,285
12,036
12,036
17,852
17,852
1,028
1,028
513
513
45,932
45,932
$
$
$
$
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
Altria Group, Inc. and Subsidiaries
____________________________________________
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
____________________________________________
at December 31,
Liabilities
at December 31,
Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities:
Current portion of long-term debt
Marketing
Accounts payable
Employment costs
Accrued liabilities:
Settlement charges
Marketing
Other
Employment costs
Settlement charges
Other
Total current liabilities
Dividends payable
Total current liabilities
Dividends payable
Long-term debt
Deferred income taxes
Accrued pension costs
Long-term debt
Accrued postretirement health care costs
Deferred income taxes
Other liabilities
Accrued pension costs
Accrued postretirement health care costs
Other liabilities
Contingencies (Note 18)
Redeemable noncontrolling interest
Stockholders’ Equity
Contingencies (Note 18)
Redeemable noncontrolling interest
Stockholders’ Equity
(2,805,961,317 shares issued)
Total liabilities
Total liabilities
Common stock, par value $0.33 1/3 per share
Additional paid-in capital
Common stock, par value $0.33 1/3 per share
Earnings reinvested in the business
(2,805,961,317 shares issued)
Accumulated other comprehensive losses
Additional paid-in capital
Cost of repurchased stock
Earnings reinvested in the business
Accumulated other comprehensive losses
Cost of repurchased stock
(904,702,125 shares at December 31, 2017 and
862,689,093 shares at December 31, 2016)
(904,702,125 shares at December 31, 2017 and
862,689,093 shares at December 31, 2016)
Noncontrolling interests
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
2017
864
2017
374
864
695
374
188
2,442
695
971
188
1,258
2,442
6,792
971
1,258
13,030
6,792
5,247
445
13,030
1,987
5,247
283
445
27,784
1,987
283
27,784
38
38
935
5,952
42,251
935
(1,897)
5,952
42,251
(1,897)
(31,864)
15,377
3
(31,864)
15,380
15,377
43,202
3
15,380
43,202
$
$
$
$
2016
—
2016
425
—
747
425
289
3,701
747
1,025
289
1,188
3,701
7,375
1,025
1,188
13,881
7,375
8,416
805
13,881
2,217
8,416
427
805
33,121
2,217
427
33,121
38
38
935
5,893
36,906
935
(2,052)
5,893
36,906
(2,052)
(28,912)
12,770
3
(28,912)
12,773
12,770
45,932
3
12,773
45,932
$
$
$
$
See notes to consolidated financial statements.
40
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC 2017
25,576
7,543
2017
6,082
25,576
11,951
7,543
2,362
6,082
—
11,951
33
2,362
9,556
—
705
33
—
9,556
(532)
705
(445)
—
9,828
(532)
(399)
(445)
10,227
9,828
(5)
(399)
10,222
10,227
(5)
10,222
5.31
5.31
$
$
$
$
$
$
2016
25,744
7,746
2016
6,407
25,744
11,591
7,746
2,650
6,407
—
11,591
179
2,650
8,762
—
747
179
823
8,762
(795)
747
(13,865)
823
21,852
(795)
7,608
(13,865)
14,244
21,852
(5)
7,608
14,239
14,244
(5)
14,239
7.28
7.28
$
$
$
$
$
$
2015
25,434
7,740
2015
6,580
25,434
11,114
7,740
2,708
6,580
41
11,114
4
2,708
8,361
41
817
4
228
8,361
(757)
817
(5)
228
8,078
(757)
2,835
(5)
5,243
8,078
(2)
2,835
5,241
5,243
(2)
5,241
2.67
2.67
$
$
$
$
$
$
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
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
for the years ended December 31,
Excise taxes on products
Net revenues
Gross profit
Cost of sales
Marketing, administration and research costs
Excise taxes on products
Reduction of PMI tax-related receivable
Gross profit
Asset impairment and exit costs
Marketing, administration and research costs
Operating income
Operating income
Reduction of PMI tax-related receivable
Interest and other debt expense, net
Asset impairment and exit costs
Loss on early extinguishment of debt
Earnings from equity investment in AB InBev/SABMiller
Interest and other debt expense, net
Gain on AB InBev/SABMiller business combination
Loss on early extinguishment of debt
Earnings before income taxes
Earnings from equity investment in AB InBev/SABMiller
(Benefit) provision for income taxes
Gain on AB InBev/SABMiller business combination
Net earnings
Earnings before income taxes
Net earnings attributable to noncontrolling interests
(Benefit) provision for income taxes
Net earnings attributable to Altria Group, Inc.
Net earnings
Per share data:
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Basic and diluted earnings per share attributable to Altria Group, Inc.
Per share data:
See notes to consolidated financial statements.
Basic and diluted earnings per share attributable to Altria Group, Inc.
See notes to consolidated financial statements.
40
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
Altria Group, Inc. and Subsidiaries
_______________________
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
_______________________
2017
for the years ended December 31,
Net earnings
for the years ended December 31,
Other comprehensive earnings (losses), net of deferred income taxes:
Net earnings
Currency translation adjustments
Other comprehensive earnings (losses), net of deferred income taxes:
Benefit plans
Currency translation adjustments
AB InBev/SABMiller
Benefit plans
Other comprehensive earnings (losses), net of deferred income taxes
AB InBev/SABMiller
Other comprehensive earnings (losses), net of deferred income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings
Comprehensive earnings attributable to Altria Group, Inc.
Comprehensive earnings attributable to noncontrolling interests
See notes to consolidated financial statements.
Comprehensive earnings attributable to Altria Group, Inc.
See notes to consolidated financial statements.
$
$
$
$
10,227
2017
10,227
—
209
—
(54)
209
155
(54)
155
10,382
(5)
10,382
10,377
(5)
10,377
$
$
$
$
2016
14,244
2016
14,244
1
(38)
1
1,265
(38)
1,228
1,265
1,228
15,472
(5)
15,472
15,467
(5)
15,467
$
$
$
$
2015
5,243
2015
5,243
(3)
30
(3)
(625)
30
(598)
(625)
(598)
4,645
(2)
4,645
4,643
(2)
4,643
42
42
42
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
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:
for the years ended December 31,
Cash Provided by (Used in) Operating Activities
Depreciation and amortization
Net earnings
Deferred income tax (benefit) provision
Adjustments to reconcile net earnings to operating cash flows:
Earnings from equity investment in AB InBev/SABMiller
Depreciation and amortization
Gain on AB InBev/SABMiller business combination
Deferred income tax (benefit) provision
Dividends from AB InBev/SABMiller
Earnings from equity investment in AB InBev/SABMiller
Asset impairment and exit costs, net of cash paid
Gain on AB InBev/SABMiller business combination
Loss on early extinguishment of debt
Dividends from AB InBev/SABMiller
Cash effects of changes:
Asset impairment and exit costs, net of cash paid
Receivables
Loss on early extinguishment of debt
Inventories
Cash effects of changes:
Accounts payable
Receivables
Income taxes
Inventories
Accrued liabilities and other current assets
Accounts payable
Accrued settlement charges
Income taxes
Pension and postretirement plans contributions
Accrued liabilities and other current assets
Pension provisions and postretirement, net
Accrued settlement charges
Other
Pension and postretirement plans contributions
Net cash provided by operating activities
Pension provisions and postretirement, net
Other
Cash Provided by (Used in) Investing Activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by investing activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Acquisitions of businesses and assets
Proceeds from finance assets
Capital expenditures
Proceeds from AB InBev/SABMiller business combination
Acquisitions of businesses and assets
Purchase of AB InBev ordinary shares
Proceeds from finance assets
Payment for derivative financial instruments
Proceeds from AB InBev/SABMiller business combination
Proceeds from derivative financial instruments
Purchase of AB InBev ordinary shares
Other
Payment for derivative financial instruments
Proceeds from derivative financial instruments
Cash Provided by (Used in) Financing Activities
Other
Long-term debt issued
Long-term debt repaid
Repurchases of common stock
Long-term debt issued
Dividends paid on common stock
Long-term debt repaid
Premiums and fees related to early extinguishment of debt
Repurchases of common stock
Other
Dividends paid on common stock
Net cash used in financing activities
Premiums and fees related to early extinguishment of debt
Other
(Decrease) increase
Balance at beginning of year
Cash and cash equivalents:
Balance at end of year
(Decrease) increase
Balance at beginning of year
Income taxes
Balance at end of year
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities
Cash and cash equivalents:
Cash paid: Interest
42
See notes to consolidated financial statements.
Cash paid: Interest
Income taxes
See notes to consolidated financial statements.
43
4343
$
$
$
$
$
$
$
$
2017
2016
10,227
2017
209
10,227
(3,126)
(532)
209
(445)
(3,126)
806
(532)
(38)
(445)
—
806
(38)
10
—
(171)
(55)
10
(294)
(171)
(85)
(55)
(1,259)
(294)
(294)
(85)
(11)
(1,259)
(20)
(294)
4,922
(11)
(20)
(199)
4,922
(415)
133
(199)
—
(415)
—
133
(5)
—
—
—
19
(5)
(467)
—
19
—
(467)
—
(2,917)
—
(4,807)
—
—
(2,917)
(47)
(4,807)
(7,771)
—
(47)
(3,316)
(7,771)
4,569
1,253
(3,316)
696
4,569
3,036
1,253
696
3,036
$
$
$
$
$
$
$
$
14,244
2016
204
14,244
3,119
(795)
204
(13,865)
3,119
739
(795)
106
(13,865)
823
739
106
(27)
823
(34)
24
(27)
(231)
(34)
(113)
24
111
(231)
(531)
(113)
(73)
111
120
(531)
3,821
(73)
120
(189)
3,821
(45)
231
(189)
4,773
(45)
(1,578)
231
(3)
4,773
510
(1,578)
9
(3)
3,708
510
9
1,976
3,708
(933)
(1,030)
1,976
(4,512)
(933)
(809)
(1,030)
(21)
(4,512)
(5,329)
(809)
(21)
2,200
(5,329)
2,369
4,569
2,200
775
2,369
4,664
4,569
775
4,664
$
$
$
$
$
$
$
$
2015
5,243
2015
225
5,243
(132)
(757)
225
(5)
(132)
495
(757)
1
(5)
228
495
1
3
228
(33)
26
3
(12)
(33)
184
26
90
(12)
(28)
184
114
90
201
(28)
5,843
114
201
(229)
5,843
—
354
(229)
—
—
—
354
(132)
—
—
—
(8)
(132)
(15)
—
(8)
—
(15)
(1,793)
(554)
—
(4,179)
(1,793)
(226)
(554)
(28)
(4,179)
(6,780)
(226)
(28)
(952)
(6,780)
3,321
2,369
(952)
776
3,321
3,029
2,369
776
3,029
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
____________________________________
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
Net earnings (1)
Other comprehensive earnings, net
of deferred income taxes
Stock award activity
Cash dividends declared ($2.54 per share)
Repurchases of common stock
Balances, December 31, 2017
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
$
5,735
$
26,277
$
(2,682) $
(27,251) $
(4) $
—
—
—
—
—
935
—
—
—
—
—
—
935
—
—
—
—
—
—
—
78
—
—
5,813
—
—
90
—
—
(10)
5,893
—
—
59
—
—
5,241
—
—
(4,261)
—
27,257
14,239
—
—
(4,590)
—
—
36,906
10,222
—
—
(4,877)
—
—
(598)
—
—
—
—
—
(40)
—
(554)
(3,280)
(27,845)
—
1,228
—
—
—
—
—
—
(37)
—
(1,030)
—
(2,052)
(28,912)
—
155
—
—
—
—
—
(35)
—
(2,917)
$
935
$
5,952
$
42,251
$
(1,897) $
(31,864) $
(3)
—
—
—
—
(7)
—
—
—
—
—
10
3
—
—
—
—
—
3
$
3,010
5,238
(598)
38
(4,261)
(554)
2,873
14,239
1,228
53
(4,590)
(1,030)
—
12,773
10,222
155
24
(4,877)
(2,917)
15,380
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2017, 2016 and 2015 exclude net earnings of $5 million 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, 2017, 2016 and 2015. See Note 18.
See notes to consolidated financial statements.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Note 1. Background and Basis of Presentation
Background: At December 31, 2017, Altria Group, Inc.’s
wholly-owned subsidiaries included Philip Morris USA Inc. (“PM
USA”), which is engaged in the manufacture and sale of
cigarettes in the United States; John Middleton Co.
(“Middleton”), which is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco and is a wholly-
owned subsidiary of PM USA; Sherman Group Holdings, LLC
and its subsidiaries (“Nat Sherman”), which are engaged in the
manufacture and sale of super premium cigarettes and the sale of
premium cigars; and UST LLC (“UST”), which through its
wholly-owned subsidiaries, including U.S. Smokeless Tobacco
Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd.
(“Ste. Michelle”), is engaged in the manufacture and sale of
smokeless tobacco products and wine. Altria Group, Inc.’s other
operating companies included Nu Mark LLC (“Nu Mark”), a
wholly-owned subsidiary that is engaged in the manufacture and
sale of innovative tobacco products, and Philip Morris Capital
Corporation (“PMCC”), a wholly-owned subsidiary that
maintains a portfolio of finance assets, substantially all of which
are leveraged leases. Other Altria Group, Inc. wholly-owned
subsidiaries included Altria Group Distribution Company, which
provides sales and distribution services to certain Altria Group,
Inc. operating subsidiaries, and Altria Client Services LLC, which
provides various support services in areas such as legal,
regulatory, consumer engagement, finance, human resources and
external affairs to Altria 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, 2017,
Altria Group, Inc.’s principal wholly-owned subsidiaries were not
limited by long-term debt or other agreements in their ability to
pay cash dividends or make other distributions with respect to
their equity interests.
At September 30, 2016, Altria Group, Inc. had an
approximate 27% ownership of SABMiller plc (“SABMiller”),
which Altria Group, Inc. accounted for under the equity method
of accounting. In October 2016, Anheuser-Busch InBev SA/NV
(“Legacy AB InBev”) completed its business combination with
SABMiller, and Altria Group, Inc. received cash and shares
representing a 9.6% ownership in the combined company (the
“Transaction”). The newly formed Belgian company, which
retained the name Anheuser-Busch InBev SA/NV (“AB InBev”),
became the holding company for the combined businesses.
Subsequently, Altria Group, Inc. purchased approximately 12
million ordinary shares of AB InBev, increasing Altria Group,
Inc.’s ownership to approximately 10.2% at December 31, 2016.
At December 31, 2017, Altria Group, Inc. had an approximate
10.2% ownership of AB InBev, which Altria Group, Inc. accounts
for under the equity method of accounting using a one-quarter
lag. 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 6. Investment in
AB InBev/SABMiller.
In January 2017, Altria Group, Inc. acquired Nat Sherman,
which joined PM USA and Middleton as part of Altria Group,
Inc.’s smokeable products segment.
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 2017 adoption of Accounting Standards Update (“ASU”)
No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
(“ASU No. 2016-09”). For further discussion, see Note 11. Stock
Plans.
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
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
Group, Inc. groups assets and liabilities at the lowest level for
which cash flows are separately identifiable. If an impairment is
determined to exist, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed
of, if any, are based on the estimated proceeds to be received, less
costs of disposal. Altria Group, Inc. also reviews the estimated
remaining useful lives of long-lived assets whenever events or
changes in business circumstances indicate the lives may have
changed.
Altria Group, Inc. conducts a required annual review of
goodwill and indefinite-lived intangible assets for potential
impairment, and more frequently if an event occurs or
circumstances change that would require Altria Group, Inc. to
perform an interim review. If the carrying value of goodwill
exceeds its fair value, which is determined using discounted cash
flows, goodwill is considered impaired. The amount of
impairment loss is measured as the difference between the
carrying value and the implied fair value. If the carrying value of
an indefinite-lived intangible asset exceeds its fair value, which is
determined using discounted cash flows, the intangible asset is
considered impaired and is reduced to fair value.
Derivative Financial Instruments: In November 2017,
Altria Group, Inc. adopted ASU No. 2017-12, Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities, which expands hedge accounting for both
financial and nonfinancial risk components to better portray the
economic results of an entity’s risk management activities in its
financial statements. In addition, the guidance includes certain
targeted improvements to simplify the application of hedge
accounting. At adoption, Altria Group, Inc. had no derivative or
nonderivative financial instruments designated in hedging
relationships. Adoption of the guidance had no impact on prior
years.
Altria Group, Inc. enters into derivatives to mitigate the
potential impact of certain market risks, including foreign
currency exchange rate risk. Altria Group, Inc. uses various types
of derivative financial instruments, including forward contracts,
options and swaps.
Derivative financial instruments are recorded at fair value on
the consolidated balance sheets as either assets or liabilities.
Derivative financial instruments that qualify for hedge accounting
are designated as either fair value hedges, cash flow hedges or net
investment hedges at the inception of the contracts. For fair value
hedges, changes in the fair value of the derivative, as well as the
offsetting changes in the fair value of the hedged item, are
recorded in the consolidated statements of earnings each period.
For cash flow hedges, changes in the fair value of the derivative
are recorded each period in accumulated other comprehensive
earnings (losses) and are reclassified to the consolidated
statements of earnings in the same periods in which operating
results are affected by the respective hedged item. For net
investment hedges, changes in the fair value of the derivative or
foreign currency transaction gains or losses on a nonderivative
hedging instrument are recorded in accumulated other
comprehensive earnings (losses) to offset the change in the value
of the net investment being hedged. Such amounts remain in
accumulated other comprehensive earnings (losses) until the
complete or substantially complete liquidation of the underlying
foreign operations occurs or, for investments in foreign entities
accounted for under the equity method of accounting, Altria
Group, Inc.’s economic interest in the underlying foreign entity
decreases. Cash flows from hedging instruments are classified in
the same manner as the respective hedged item in the
consolidated statements of cash flows.
To qualify for hedge accounting, the hedging relationship,
both at inception of the hedge and on an ongoing basis, is
expected to be highly effective at achieving the offsetting changes
in the fair value of the hedged risk during the period that the
hedge is designated. Altria Group, Inc. formally designates and
documents, at inception, the financial instrument as a hedge of a
specific underlying exposure, the risk management objective, the
strategy for undertaking the hedge transaction and method for
assessing hedge effectiveness. Additionally, for qualified hedges
of forecasted transactions, if it becomes probable that a forecasted
transaction will not occur, the hedge will no longer be effective
and all of the derivative gains and losses would be recorded in the
consolidated statement of earnings in the current period.
For financial instruments that are not designated as hedging
instruments or do not qualify for hedge accounting, changes in
fair value are recorded in the consolidated statements of earnings
each period. 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,
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
and is not expected to have, a material adverse effect on Altria
Group, Inc.’s consolidated results of operations, capital
expenditures, financial position or cash flows (see Note 18.
Contingencies - Environmental Regulation).
Fair Value Measurements: Altria Group, Inc. measures
certain assets and liabilities at fair value. Fair value is defined as
the exchange price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Altria Group, Inc. uses a fair value hierarchy, which gives the
highest priority to unadjusted quoted prices in active markets for
identical assets and liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).
The three levels of inputs used to measure fair value are:
Level 1 Unadjusted quoted prices in active markets for
identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs
that are observable or can be corroborated by
observable market data for substantially the full term
of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value
of the assets or liabilities.
Finance Leases: Income attributable to leveraged leases is
initially recorded as unearned income and subsequently
recognized as revenue over the terms of the respective leases at
constant after-tax rates of return on the positive net investment
balances. Investments in leveraged leases are stated net of related
nonrecourse debt obligations.
Finance leases include unguaranteed residual values that
represent PMCC’s estimates at lease inception as to the fair values
of assets under lease at the end of the non-cancelable lease terms.
The estimated residual values are reviewed at least annually by
PMCC’s management. This review includes analysis of a number
of factors, including activity in the relevant industry. If necessary,
revisions are recorded to reduce the residual values.
PMCC considers rents receivable past due when they are
beyond the grace period of their contractual due date. PMCC
stops recording income (“non-accrual status”) on rents receivable
when contractual payments become 90 days past due or earlier if
management believes there is significant uncertainty of
collectability of rent payments, and resumes recording income
when collectability of rent payments is reasonably certain.
Payments received on rents receivable that are on non-accrual
status are used to reduce the rents receivable balance. Write-offs
to the allowance for losses are recorded when amounts are
deemed to be uncollectible.
Guarantees: Altria Group, Inc. recognizes a liability for the
fair value of the obligation of qualifying guarantee activities. See
Note 18. Contingencies for a further discussion of guarantees.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Altria Group, Inc.
records a valuation allowance when it is more-likely-than-not that
some portion or all of a deferred tax asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax
positions when a tax position taken or expected to be taken in a
tax return is more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. Altria Group,
Inc. recognizes accrued interest and penalties associated with
uncertain tax positions as part of the provision for income taxes in
its consolidated statements of earnings.
Inventories: 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 (“FIFO”) and average cost methods. Inventories that are
measured using the LIFO method are stated at the lower of cost or
market. Inventories that are measured using the FIFO and
average cost methods are stated at the lower of cost and net
realizable value. 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
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
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, net of estimated forfeitures, and recognizes
compensation expense over the service periods for awards
expected to vest.
New Accounting Standards: The following table provides a description of the recently issued accounting guidance applicable to,
but not yet adopted by, Altria Group, Inc.:
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.
Effect on Financial Statements
The adoption of this guidance will not have a
material impact on the amount or timing of
revenue recognized on Altria Group, Inc.’s
consolidated financial statements based on current
contracts with customers. The guidance will
result in expanded footnote disclosures. Altria
Group, Inc. will adopt this guidance in the first
quarter of 2018, using the modified retrospective
transition method.
The guidance addresses certain
aspects of recognition,
measurement, presentation and
disclosure of financial instruments.
The guidance is effective for
annual reporting periods beginning
after December 15, 2017, including
interim periods within that
reporting period.
The adoption of this guidance will not have a
material impact on Altria Group, Inc.’s
consolidated financial statements. Altria Group,
Inc. will adopt this guidance in the first quarter of
2018.
ASU No. 2016-01
Recognition and
Measurement of
Financial Assets and
Financial Liabilities
(Subtopic 825-10)
ASU Nos. 2016-02;
2018-01
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.
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 its consolidated balance
sheets but are recorded in its consolidated
statements of earnings as expense is incurred.
Upon adoption of the new guidance, Altria Group,
Inc. will record substantially all leases on its
balance sheets as a right-of-use asset and a lease
liability. The adoption of this guidance is not
expected to have a material impact on Altria
Group, Inc.’s consolidated financial statements.
The guidance will result in expanded footnote
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.’s financial assets that are within the
scope of the new guidance were approximately
2% of Altria Group, Inc.’s total assets at
December 31, 2017.
ASU No. 2016-13
Measurement of Credit
Losses on Financial
Instruments (Topic
326)
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 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.
ASU No. 2016-15
Classification of
Certain Cash Receipts
and Cash Payments
(Topic 230)
The guidance addresses how eight
specific cash flow issues are to be
presented and classified in the
statement of cash flows.
The guidance is effective for fiscal
years beginning after December 15,
2017 and interim periods within
those fiscal years.
The adoption of this guidance will not have a
material impact on Altria Group, Inc.’s
consolidated statements of cash flows. Altria
Group, Inc. will adopt this guidance in the first
quarter of 2018.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
Standards
Description
ASU No. 2016-18
Restricted Cash (Topic
230)
ASU No. 2017-07
Improving the
Presentation of Net
Periodic Pension Cost
and Net Periodic
Postretirement Benefit
Cost (Topic 715)
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 requires an employer
to report the service cost
component of net periodic pension
cost and net periodic postretirement
benefit cost in the same line item or
items as other compensation costs
arising from services rendered by
employees during the period. The
other components of net periodic
pension cost and net periodic
postretirement benefit cost are
required to be presented in the
statement of earnings separately
from the service cost component
and outside the subtotal of
operating income. Additionally,
only the service cost component is
eligible for capitalization.
Effective Date for Public Entity
The guidance is effective for fiscal
years beginning after December 15,
2017 and interim periods within
those fiscal years.
Effect on Financial Statements
At December 31, 2017 and December 31, 2016,
Altria Group, Inc. had restricted cash of $61
million and $82 million, respectively. Altria
Group, Inc. will retrospectively adopt this
guidance in the first quarter of 2018 and will
comply with the required presentation of restricted
cash in its consolidated statements of cash flows
upon adoption.
The guidance is effective for
annual periods beginning after
December 15, 2017 and interim
periods within that reporting
period. The guidance is required to
be applied retrospectively for the
presentation of the service cost
component and the other
components of net periodic pension
cost and net periodic postretirement
benefit cost in the statement of
earnings, and prospectively for the
capitalization of the service cost
component.
Under the new guidance, the amount of non-
service cost components of net periodic benefit
cost (income) presented within operating income
that would have been presented separately from
operating income was $37 million, $(1) million
and $151 million for the years ended December
31, 2017, 2016 and 2015, respectively. The
prospective adoption of this guidance related to
the capitalization of the service cost component
will not have a material impact on Altria Group,
Inc.’s consolidated financial statements. Altria
Group, Inc. will adopt this guidance in the first
quarter of 2018.
Note 3. 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, 2017
99
$
5,023
74
111
5,307
$
December 31, 2016
77
$
5,023
74
111
5,285
$
December 31, 2017
3,054
$
8,827
294
225
12,400
$
December 31, 2016
2,901
$
8,829
295
11
12,036
$
Goodwill relates to the 2017 acquisition of Nat Sherman, 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 each of the
years ended December 31, 2017, 2016 and 2015, was $21 million.
Annual amortization expense for each of the next five years is
estimated to be approximately $20 million, assuming no
December 31, 2017
December 31, 2016
Gross Carrying
Amount
12,125
465
12,590
$
$
$
$
Accumulated
Amortization
— $
190
190
$
Gross Carrying
Amount
11,740
465
12,205
Accumulated
Amortization
—
169
169
$
$
additional transactions occur that require the amortization of
intangible assets.
During 2017, 2016 and 2015, 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, 2017, 2016 and 2015,
there have been no changes in goodwill and the gross carrying
amount of other intangible assets except for the purchase of
certain intellectual property in 2017 primarily related to
innovative tobacco products, the 2017 acquisition of Nat Sherman
and Ste. Michelle’s 2016 purchase of substantially all of the assets
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The movement in the restructuring liabilities (excluding
termination, settlement and curtailment costs), substantially
all of which are severance liabilities, for the years ended
December 31, 2017 and 2016 was as follows:
(in millions)
Balances at December 31, 2015
Charges
Cash spent
Balances at December 31, 2016
Balances at December 31, 2017
$
$
—
152
(73)
79
25
(71)
33
Asset Impairment
and Exit Costs
Implementation
Costs (1)
Total
Charges
Cash spent
of Patz & Hall Wine Company, Inc. In addition, there were no
accumulated impairment losses related to goodwill and other
intangible assets, net at December 31, 2017 and 2016.
Note 4. Asset Impairment, Exit and Implementation
Costs
Pre-tax asset impairment, exit and implementation costs
consisted of the following:
For the Year Ended December 31, 2017
(in millions)
Smokeable
products
Smokeless
products
Total
$
$
5
$
28
33
$
17
$
22
28
45
$
56
78
(1) The pre-tax implementation costs were included in cost of
sales in Altria Group, Inc.’s consolidated statement of
earnings.
For the Year Ended December 31, 2016
(in millions)
Smokeable
products
Smokeless
products
All other
General
corporate
Total
Asset Impairment
and Exit Costs (1)
Implementation
Costs
Total
$
$
125
$
9
$ 134
42
7
5
179
$
15
—
—
24
57
7
5
$ 203
(1) Includes termination, settlement and curtailment costs of
$27 million. See Note 16. Benefit Plans.
The pre-tax asset impairment, exit and implementation
costs for 2017 are related to the facilities consolidation
discussed below, and the pre-tax asset impairment, exit and
implementation costs for 2016 are related to both the
facilities consolidation and the 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 is in the process of
transferring its Limerick, Pennsylvania operations to the
Manufacturing Center site in Richmond, Virginia (“Richmond
Manufacturing Center”). USSTC is in the process of transferring
its Franklin Park, Illinois operations to its Nashville, Tennessee
facility and the Richmond Manufacturing Center. Separation
benefits are being paid to non-relocating employees. The
consolidation is expected to be substantially completed by the end
of 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 2017, Altria Group, Inc.
incurred pre-tax charges of $78 million and recorded $71 million
in 2016. The total estimated charges relate primarily to
accelerated depreciation and asset impairment ($50 million),
employee separation costs ($45 million) and other exit and
implementation costs ($55 million). Approximately $95 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
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 $58 million
were made during the year ended December 31, 2017, for total
cash payments of $63 million since inception.
Productivity Initiative: In January 2016, Altria Group, Inc.
announced a productivity initiative designed to maintain its
operating companies’ leadership and cost competitiveness through
reduced spending on certain selling, general and administrative
infrastructure and a leaner organizational structure. As a result of
the initiative, during 2016, Altria Group, Inc. incurred total pre-
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substantially all of which result in cash expenditures. The charges
consisted of employee separation costs of $117 million and other
associated costs of $15 million. Total pre-tax charges related to
the initiative have been 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 $32 million were
made during the year ended December 31, 2017, for total cash
payments of $106 million since inception.
Note 5. Inventories
On January 1, 2017, Altria Group, Inc. adopted ASU No.
2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory, which requires inventory that is measured using the
FIFO or average cost methods to be measured at the lower of cost
and net realizable value. Previous guidance required inventory
that was measured using the FIFO or average cost methods to be
measured at the lower of cost or market. The adoption of this
guidance did not have a material impact on Altria Group, Inc.’s
consolidated financial statements.
The cost of approximately 59% and 62% of inventories at
December 31, 2017 and 2016, 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, 2017 and 2016.
Note 6. Investment in AB InBev/SABMiller
At December 31, 2017, Altria Group, Inc. had an approximate
10.2% ownership of AB InBev, consisting of approximately 185
million restricted shares of AB InBev (the “Restricted Shares”)
and approximately 12 million ordinary shares of AB InBev.
Altria 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.
Pre-tax earnings from Altria Group, Inc.’s equity investment
in AB InBev were $532 million for the year ended December 31,
2017. 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.
On December 22, 2017, the U.S. Government enacted
comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Reform Act”). Consistent with the
one-quarter lag for recording AB InBev’s results, in the first
quarter of 2018 Altria Group, Inc. will record its share of AB
InBev’s recorded fourth quarter 2017 estimated effect of the Tax
Reform Act.
Summary financial data of AB InBev is as follows:
(in millions)
Net revenues
Gross profit
Earnings from continuing operations
Net earnings
Net earnings attributable to AB InBev
For Altria Group, Inc.’s
Year Ended
December 31, 2017 (1)
$
$
$
$
$
56,004
34,376
6,769
6,845
5,473
(in millions)
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Noncontrolling
interests
At September 30,
2017 (1)
At October 10,
2016 (1)
$
$
$
$
$
30,920
213,696
37,765
134,236
10,639
$
$
$
$
$
40,086
223,701
44,272
139,112
9,177
(1) Reflecting the one-quarter lag: (i) summary financial data of AB
InBev’s results for Altria Group, Inc.’s year ended December 31, 2017
include AB InBev’s results for the last three months of 2016 and the first
nine months of 2017, and (ii) summary financial data of AB InBev’s
financial position is disclosed at September 30, 2017 and October 10,
2016.
At December 31, 2017, 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 $11.7 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, 2017 and
2016 was $22.1 billion and $20.9 billion, respectively, compared
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respectively.
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.
Pre-tax earnings from Altria Group, Inc.’s equity investment
in SABMiller were $795 million and $757 million for the years
ended December 31, 2016 and 2015, 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 attributable
For the Years Ended December 31,
2015
20,188
3,690
2016 (1)
14,543
2,099
$
$
$
$
$
to SABMiller
2,838
(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.
1,803
$
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. 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 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 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. Subsequently,
Altria Group, Inc. purchased approximately 12 million 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.
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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.
For the year ended December 31, 2017, Altria Group, Inc.
recorded pre-tax gains of $445 million related to the planned
completion of the remaining AB InBev divestitures in gain on AB
InBev/SABMiller business combination in Altria Group, Inc.’s
consolidated statement of earnings.
Altria Group, Inc.’s gain on the Transaction was deferred for
United States corporate income tax purposes, except to the extent
of the cash consideration received.
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
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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.
Note 7. Finance Assets, net
In 2003, PMCC ceased making new investments and began
focusing exclusively on managing its portfolio of finance assets in
order to maximize its operating results and cash flows from its
existing lease portfolio activities and asset sales. Accordingly,
PMCC’s operating companies income will fluctuate over time as
investments mature or are sold.
At December 31, 2017, finance assets, net, of $899 million
were comprised of investments in finance leases of $922 million,
reduced by the allowance for losses of $23 million. 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.
A summary of the net investments in finance leases,
substantially all of which were leveraged leases, at December
31, 2017 and 2016, before allowance for losses was as
follows:
(in millions)
Rents receivable, net
Unguaranteed residual values
Unearned income
Investments in finance leases
Deferred income taxes
$
$
2017
696
427
(201)
922
(407)
Net investments in finance leases
$
515
$
2016
805
495
(240)
1,060
(717)
343
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 $0.6
billion and $0.8 billion at December 31, 2017 and 2016,
respectively, has been offset against the related rents receivable.
There were no leases with contingent rentals in 2017 and 2016.
In 2017, 2016 and 2015 PMCC’s review of estimated
residual values resulted in a decrease of $8 million, $28 million
and $65 million, respectively, to unguaranteed residual values.
These decreases in unguaranteed residual values resulted in a
reduction to PMCC’s net revenues of $5 million, $18 million and
$41 million in 2017, 2016 and 2015, respectively.
At December 31, 2017, PMCC’s investments in finance
leases were principally comprised of the following investment
categories: aircraft (40%), electric power (27%), railcar (13%),
real estate (10%) and manufacturing (10%). There were no
investments located outside the United States at December 31,
2017 and 2016.
Rents receivable in excess of debt service requirements on
third-party nonrecourse debt at December 31, 2017 were as
follows:
(in millions)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
96
173
116
96
142
73
696
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 2017 and 2016, PMCC determined that its
allowance for losses exceeded the amount required based on
management’s assessment of the credit quality and size of
PMCC’s leasing portfolio. As a result, PMCC reduced its
allowance for losses by $9 million and $10 million for the years
ended December 31, 2017 and 2016, respectively. There was no
such adjustment for the year ended December 31, 2015. These
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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, 2017, the allowance for losses of $23 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, 2017, 2016 and 2015 was as
follows:
(in millions)
Balance at beginning of year
Decrease to allowance
Balance at end of year
2017
32
(9)
23
$
$
2016
42
(10)
32
$
$
2015
42
—
42
$
$
All PMCC lessees were current on their lease payment
obligations as of December 31, 2017.
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, 2017 and 2016 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
2017
2016
$
$
220
550
152
922
$
218
559
283
$ 1,060
Note 8. Short-Term Borrowings and Borrowing
Arrangements
At December 31, 2017 and December 31, 2016, Altria Group, Inc.
had no short-term borrowings. The credit line available to Altria
Group, Inc. at December 31, 2017 under the Credit Agreement (as
defined below) was $3.0 billion.
At December 31, 2017, 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
December 31, 2017 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, 2017, the ratios of debt to consolidated EBITDA
and consolidated EBITDA to consolidated interest expense,
calculated in accordance with the Credit Agreement, were 1.3 to
1.0 and 14.8 to 1.0, respectively. Altria Group, Inc. expects to
continue to meet its covenants associated with the Credit
Agreement. The terms “consolidated EBITDA,” “debt” and
“consolidated interest expense,” as defined in the Credit
Agreement, include certain adjustments.
Any commercial paper issued by Altria Group, Inc. and
borrowings under the Credit Agreement are guaranteed by
PM USA as further discussed in Note 19. Condensed
Consolidating Financial Information.
Note 9. Long-Term Debt
At December 31, 2017 and 2016, 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-
2017
2016
$
13,852
$
13,839
annually, due 2027
Less current portion of long-term debt
42
13,881
—
13,881
(1) Weighted-average coupon interest rate of 4.9% at December 31, 2017
and 2016.
42
13,894
864
13,030
$
$
At December 31, 2017, 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
68
55
13,894
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, 2017 and 2016, was $15.3 billion
and $15.1 billion, respectively, as compared with its carrying
value of $13.9 billion for each period.
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Altria Group, Inc. Senior Notes: The notes of Altria Group,
Inc. are senior unsecured obligations and rank equally in right of
payment with all of Altria Group, Inc.’s existing and future senior
unsecured indebtedness. Upon the occurrence of both (i) a
change of control of Altria Group, Inc. and (ii) the notes ceasing
to be rated investment grade by each of Moody’s, Standard &
Poor’s and Fitch Ratings Ltd. within a specified time period,
Altria Group, Inc. will be required to make an offer to purchase
the notes at a price equal to 101% of the aggregate principal
amount of such notes, plus accrued and unpaid interest to the date
of repurchase as and to the extent set forth in the terms of the
notes.
The obligations of Altria Group, Inc. under the notes are
guaranteed by PM USA as further discussed in Note 19.
Condensed Consolidating Financial Information.
Debt Tender Offers: 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.
Details of these debt tender offers and the associated pre-tax
losses on early extinguishment of debt recorded by Altria Group,
Inc. were as follows:
(in millions)
Notes Purchased
9.95% Notes due 2038
10.20% Notes due 2039
9.70% Notes due 2018
Total
$
$
Pre-tax Loss on Early Extinguishment of Debt
Premiums and fees
Write-off of unamortized debt discounts
and debt issuance costs
Total
$
$
2016
2015
$
441
492
—
933
$
809
$
14
823
$
—
—
793
793
226
2
228
Note 10. Capital Stock
At December 31, 2017, 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,
2014
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2015
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2016
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2017
Shares Issued
Shares
Repurchased
Shares
Outstanding
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
—
—
(408,891)
(408,891)
(41,604,141)
(41,604,141)
2,805,961,317
(904,702,125)
1,901,259,192
At December 31, 2017, 41,688,666 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 2017, Altria Group,
Inc.’s Board of Directors (the “Board of Directors”) approved an
8.2% increase in the quarterly dividend rate to $0.66 per share of
Altria Group, Inc. common stock versus the previous rate of
$0.61 per share. The current annualized dividend rate is $2.64 per
share. Future dividend payments remain subject to the discretion
of the Board of Directors.
Share Repurchases: 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 and to $4.0 billion in July 2017 (as
expanded, the “July 2015 share repurchase program”).
During 2017, 2016 and 2015, Altria Group, Inc. repurchased
41.6 million shares, 16.2 million shares, and 0.6 million
shares, respectively, of its common stock (at an aggregate cost
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of approximately $2,917 million, $1,030 million and $35
million, respectively, and at an average price of $70.10 per
share, $63.48 per share and $57.66 per share, respectively)
under the July 2015 share repurchase program. At December
31, 2017, Altria Group, Inc. had approximately $18 million
remaining in the July 2015 share repurchase program. In
January 2018, Altria Group, Inc. completed the July 2015
share repurchase program, under which it purchased a total of
58.7 million shares of its common stock at an average price of
$68.15 per share.
In January 2018, the Board of Directors authorized a
new $1.0 billion 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, 2017, 2016 and 2015,
Altria Group, Inc.’s total share repurchase activity was as follows:
2017
2016
2015
(in millions, except per share data)
41.6
16.2
2,917 $
1,030 $
10.7
554
70.10 $
63.48 $
51.83
Total number of shares
repurchased
Aggregate cost of shares
repurchased
Average price per share of
shares repurchased
$
$
Note 11. 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
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. Any awards
granted pursuant to the 2015 Plan may be in the form of
performance-based awards subject to the achievement or
satisfaction of performance goals and performance cycles. 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, 2017, were 38,161,242 and
920,942, respectively.
On January 1, 2017, Altria Group, Inc. adopted ASU No.
2016-09, which simplifies several aspects of the accounting for
share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
adoption of ASU No. 2016-09 did not have a material impact on
Altria Group, Inc.’s consolidated financial statements. The
portions of the guidance that have an impact on Altria Group,
Inc.’s consolidated financial statements have been adopted
prospectively, with the exception of the classification of employee
taxes paid by Altria Group, Inc. on the consolidated statements of
cash flows related to shares withheld by Altria Group, Inc. for tax
withholding purposes, which has been applied retrospectively.
Altria Group, Inc. has made an accounting policy election to
continue to estimate the number of share-based awards that are
expected to vest, which includes estimating forfeitures.
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. Altria Group, Inc. estimates the number
of awards expected to be forfeited and adjusts this estimate when
subsequent information indicates that the actual number of
forfeitures is likely to differ from previous estimates. 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, net of estimated forfeitures, 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, 2017, 2016 and 2015 of $49 million, $44 million and $51
million, respectively. The deferred tax benefit recorded related to
this compensation expense was $18 million, $17 million and $20
million for the years ended December 31, 2017, 2016 and 2015,
respectively. The unamortized compensation expense related to
Altria Group, Inc. restricted stock and restricted stock units was
$54 million at December 31, 2017 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, 2017:
Number of
Shares
Weighted-Average
Grant Date Fair
Value Per Share
Balance at December 31, 2016
3,245,534
Granted
Vested
Forfeited
Balance at December 31, 2017
2,384,501
$
$
$
641,263
(1,321,620) $
(180,676) $
48.45
71.05
36.40
59.11
60.40
The weighted-average grant date fair value of Altria Group,
Inc. restricted stock and restricted stock units granted during the
years ended December 31, 2017, 2016 and 2015 was $46 million,
$56 million and $65 million, respectively, or $71.05, $59.38 and
$54.54 per restricted stock 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, 2017, 2016 and 2015 was $95 million, $78 million and $85
million, respectively.
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Performance Stock Units: In January 2017, Altria Group,
Inc. granted an aggregate of 187,886 performance stock units to
eligible employees. The payout of the performance stock units
requires the achievement of certain performance measures, which
were predetermined at the time of grant, over a three-year
performance cycle. These performance measures consist of Altria
Group, Inc.’s adjusted diluted earnings per share (“EPS”)
compounded annual growth rate and Altria Group, Inc.’s total
shareholder return relative to a predetermined peer group. The
performance stock units are also subject to forfeiture if certain
employment conditions are not met. At December 31, 2017,
Altria Group, Inc. had 170,755 performance stock units
remaining, with a weighted-average grant date fair value of
$70.39 per performance stock unit. The fair value of the
performance stock units at the date of grant, net of estimated
forfeitures, is amortized to expense over the performance period.
Altria Group, Inc. recorded pre-tax compensation expense related
to performance stock units for the year ended December 31, 2017
of $6 million. The unamortized compensation expense related to
Altria Group, Inc.’s performance stock units was $7 million at
December 31, 2017. Altria Group, Inc. did not grant any
performance stock units during 2016 and 2015.
Note 12. Earnings per Share
Basic and diluted EPS were calculated using the following:
(in millions)
Net earnings attributable to
Altria Group, Inc.
Less: Distributed and
undistributed earnings
attributable to share-based
awards
Earnings for basic and diluted
EPS
Weighted-average shares for
basic and diluted EPS
For the Years Ended December 31,
2017
2016
2015
$
10,222
$ 14,239
$
5,241
(14)
(24)
(10)
$
10,208
$ 14,215
$
5,231
1,921
1,952
1,961
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Note 13. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes,
attributable to Altria Group, Inc.:
(in millions)
Balances, December 31, 2014
Benefit Plans
$
(2,040) $
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 earnings (losses), net of deferred
income taxes
Balances, December 31, 2015
Other comprehensive (losses) earnings before reclassifications
Deferred income taxes
Other comprehensive (losses) earnings before reclassifications,
net of deferred income taxes
Amounts reclassified to net earnings
Deferred income taxes
Amounts reclassified to net earnings, net of
deferred income taxes
Other comprehensive (losses) earnings, net of deferred
income taxes
Balances, December 31, 2016
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
(223)
86
(137)
272
(105)
167
30
(2,010)
(247)
96
(151)
178
(65)
113
(38)
(2,048)
52
(21)
31
291
(113)
178
209
AB InBev/
SABMiller
Currency
Translation
Adjustments
and Other
Accumulated
Other
Comprehensive
Losses
(640)
(983)
344
(639)
21
(7)
14
(1)
(625)
(1,265)
787
(276)
(2)
511
1,160
(406)
(3)
754
1,265
—
(91)
32
(59)
8
(3)
5
(1)
(54)
$
(2) $
(4)
1
(3)
—
—
—
(3)
(5)
1
—
1
—
—
—
1
(4)
—
—
—
—
—
—
—
(2,682)
(1,210)
431
(779)
293
(112)
181
(598)
(3,280)
541
(180)
361
1,338
(471)
867
1,228
(2,052)
(39)
11
(28)
299
(116)
183
155
Balances, December 31, 2017
(1) Altria Group, Inc.’s proportionate share of AB InBev’s and SABMiller’s other comprehensive earnings/losses consisted primarily of currency
translation adjustments for the years ended December 31, 2017 and 2015, respectively.
(2) As a result of the Transaction, Altria Group, Inc. reversed to investment in 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.
(1,839) $
(4) $
(54)
$
$
(1,897)
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC 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
AB InBev/SABMiller (2)
For the Years Ended December 31,
2017
2016
2015
$
$
$
325
(34)
291
8
223
(45)
178
1,160
304
(32)
272
21
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
(1) Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.
(2) For the years ended December 31, 2017 and 2015, amounts are included in earnings from equity investment in AB InBev/SABMiller. Substantially
all of the amount for the year ended December 31, 2016 is included in gain on AB InBev/SABMiller business combination. For further information,
see Note 6. Investment in AB InBev/SABMiller.
1,338
299
293
$
$
$
Note 14. Income Taxes
As a result of the Tax Reform Act, Altria Group, Inc. recorded net
tax benefits of approximately $3.4 billion in the fourth quarter of
2017 as discussed below. The main provisions of the Tax Reform
Act that impact Altria Group, Inc. include: (i) a reduction in the
U.S. federal statutory corporate income tax rate from 35% to 21%
effective January 1, 2018, and (ii) changes in the treatment of
foreign-source income, commonly referred to as a modified
territorial tax system.
The transition to a modified territorial tax system requires
Altria Group, Inc. to record a deemed repatriation tax and an
associated tax basis benefit in 2017. Substantially all of the
deemed repatriation tax is related to Altria Group, Inc.’s share of
AB InBev’s accumulated earnings. As a result of the deemed
repatriation tax, no tax was due on the dividends Altria Group,
Inc. received from AB InBev in 2017.
Earnings before income taxes and (benefit) provision for
income taxes consisted of the following for the years ended
December 31, 2017, 2016 and 2015:
(in millions)
2017
2016
2015
Earnings before income taxes:
United States
$
9,809
$ 21,867
$
8,078
Outside United States
19
(15)
—
Total
Provision (benefit) for
income taxes:
Current:
Federal
State and local
Outside United States
Deferred:
Federal
State and local
Outside United States
$
9,828
$ 21,852
$
8,078
$
2,346
$
4,093
$
2,516
366
15
390
6
451
—
2,727
4,489
2,967
(3,213)
3,102
(140)
86
1
20
(3)
8
—
(3,126)
3,119
(132)
Total (benefit) provision for
income taxes
$
(399) $
7,608
$
2,835
Altria Group, Inc.’s U.S. subsidiaries join in the filing of a
U.S. federal consolidated income tax return. The U.S. federal
income tax statute of limitations remains open for the year 2010
and forward, with years 2014 and 2015 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 2013
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.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31, 2017,
2016 and 2015 was as follows:
(in millions)
2017
2016
2015
Balance at beginning of year
$
169
$
158
$
258
Additions based on tax positions
related to the current year
Additions for tax positions of
prior years
Reductions for tax positions due to
lapse of statutes of limitations
Reductions for tax positions of
prior years
Settlements
—
129
(4)
(208)
(20)
15
29
(4)
(28)
(1)
15
57
(4)
(86)
(82)
Balance at end of year
$
66
$
169
$
158
Unrecognized tax benefits and Altria Group, Inc.’s
consolidated liability for tax contingencies at December 31, 2017
and 2016 were as follows:
(in millions)
Unrecognized tax benefits
Accrued interest and penalties
Tax credits and other indirect benefits
2017
2016
$
66
$
169
9
(1)
23
(6)
Liability for tax contingencies
$
74
$
186
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate at December 31, 2017 was $43
million, along with $23 million affecting deferred taxes. 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.
Altria Group, Inc. recognizes accrued interest and penalties
associated with uncertain tax positions as part of the tax
provision.
For the years ended December 31, 2017, 2016 and 2015,
Altria Group, Inc. recognized in its consolidated statements of
earnings $(13) million, $9 million and $(36) million, respectively,
of gross interest (income) expense associated with uncertain tax
positions.
Altria Group, Inc. is subject to income taxation in many
jurisdictions. Uncertain tax positions reflect the difference
between tax positions taken or expected to be taken on income tax
returns and the amounts recognized in the financial statements.
Resolution of the related tax positions with the relevant tax
authorities may take many years to complete, and such timing is
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 $5 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, 2017, 2016 and 2015:
U.S. federal statutory rate
35.0 %
35.0%
35.0%
2017
2016
2015
Increase (decrease) resulting from:
State and local income taxes, net
of federal tax benefit
Re-measurement of net deferred
tax liabilities
Tax basis in foreign investments
Deemed repatriation tax
Uncertain tax positions
AB InBev/SABMiller dividend
benefit
Domestic manufacturing deduction
Other
Effective tax rate
3.5
(31.2)
(7.8)
4.2
(0.9)
(5.9)
(1.8)
0.8
1.2
—
—
—
—
(0.6)
(0.8)
—
3.7
—
—
—
(0.8)
(0.5)
(2.0)
(0.3)
(4.1)%
34.8%
35.1%
The tax benefit in 2017 included net tax benefits of $3,367
million related to the Tax Reform Act recorded in the fourth
quarter of 2017 as follows: (i) a tax benefit of $3,017 million to
re-measure Altria Group, Inc. and its consolidated subsidiaries’
net deferred tax liabilities based on the new U.S. federal statutory
rate; and (ii) a net tax benefit of $763 million for a tax basis
adjustment associated with the deemed repatriation tax, partially
offset by tax expense of $413 million for the deemed repatriation
tax.
The amounts above related to the tax basis adjustment and
the deemed repatriation tax were based on provisional estimates
as of January 18, 2018, substantially all of which are related to
Altria Group, Inc.’s share of AB InBev’s accumulated earnings
and associated taxes. Altria Group, Inc. may be required to adjust
these provisional estimates based on (i) additional guidance
related to, or interpretation of, the Tax Reform Act and associated
tax laws and (ii) additional information to be received from AB
InBev, including information regarding AB InBev’s accumulated
earnings and associated taxes for the 2016 and 2017 tax years.
This additional guidance and information could result in increases
or decreases to the provisional estimates, which may be
significant in relation to these estimates. Altria Group, Inc. will
record any such adjustments in 2018.
The tax benefit in 2017 also included tax benefits of $232
million for the release of a valuation allowance in the third
quarter of 2017 related to deferred income tax assets for foreign
tax credit carryforwards, which is included in AB InBev/
SABMiller dividend benefit in the table above; and tax benefits of
$152 million related primarily to the effective settlement in the
second quarter of 2017 of the IRS audit of Altria Group, Inc. and
its consolidated subsidiaries’ 2010-2013 tax years, partially offset
by tax expense of $114 million in the third quarter of 2017 for tax
reserves related to the calculation of certain foreign tax credits.
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.
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At December 31, 2017, Altria Group, Inc. had estimated
gross state tax net operating losses of $569 million that, if unused,
will expire in 2018 through 2037.
Note 15. Segment Reporting
The products of Altria Group, Inc.’s subsidiaries include
smokeable tobacco products, consisting of cigarettes
manufactured and sold by PM USA and Nat Sherman, machine-
made large cigars and pipe tobacco manufactured and sold by
Middleton and premium cigars sold by Nat Sherman; smokeless
tobacco products manufactured and sold by USSTC; and wine
produced and/or distributed by Ste. Michelle. The products and
services of these subsidiaries constitute Altria Group, Inc.’s
reportable segments of smokeable products, smokeless products
and wine. The financial services and the innovative tobacco
products businesses are included in all other.
Altria Group, Inc.’s chief operating decision maker (the
“CODM”) reviews operating companies income to evaluate the
performance of, and allocate resources to, the segments.
Operating companies income for the segments is defined as
operating income before general corporate expenses and
amortization of intangibles. Interest and other debt expense, net,
and provision for income taxes are centrally managed at the
corporate level and, accordingly, such items are not presented by
segment since they are excluded from the measure of segment
profitability reviewed by the CODM. 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 3. 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.
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.
Under tax sharing agreements between Altria Group, Inc. and
its former subsidiary PMI, entered into in connection with the
2008 spin-off, PMI is responsible for its 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 PMI in its liability for uncertain tax positions. As of
December 31, 2015, there were no remaining pre-spin-off tax
reserves for PMI.
During 2015, Altria Group, Inc. recorded tax benefits of $41
million for PMI tax matters, primarily relating to the IRS
2007-2009 Audit. These net tax benefits were offset by a
reduction of a PMI tax-related receivable, which was recorded as
a decrease to operating income in Altria Group, Inc.’s
consolidated statement of earnings. Due to the offset, the PMI tax
matters had no impact on Altria Group, Inc.’s net earnings for the
year ended December 31, 2015.
The tax effects of temporary differences that gave rise to
deferred income tax assets and liabilities consisted of the
following at December 31, 2017 and 2016:
(in millions)
Deferred income tax assets:
Accrued postretirement and
postemployment benefits
Settlement charges
Accrued pension costs
Net operating losses and tax credit
carryforwards
Total deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Intangible assets
Investment in AB InBev
Finance assets, net
Other
2017
2016
$
$
539
614
136
18
1,307
(261)
(2,674)
(2,859)
(404)
(121)
952
1,446
330
288
3,016
(429)
(4,032)
(5,546)
(708)
(125)
Total deferred income tax liabilities
Valuation allowances
(6,319)
(10,840)
—
(240)
Net deferred income tax liabilities
$
(5,012) $
(8,064)
60
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Segment data were as follows:
Details of Altria Group, Inc.’s depreciation expense and
capital expenditures were as follows:
For the Years Ended December 31,
2015
2017
2016
(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
$
$
$
$
$
$
93
29
40
26
188
39
61
53
46
$
$
$
93
26
36
28
183
55
52
59
23
Total capital expenditures
$
199
$
189
$
117
27
32
28
204
56
113
42
18
229
—
—
(41)
The comparability of operating companies income for the
(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
Reduction of PMI tax-related
receivable
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 AB InBev/
SABMiller
For the Years Ended December 31,
2015
2016
2017
$
$
$
$
$
$
22,636
2,155
698
87
25,576
8,408
1,300
147
(51)
(21)
(227)
$
$
$
22,851
2,051
746
96
25,744
7,768
1,177
164
(99)
(21)
(222)
22,792
1,879
692
71
25,434
7,569
1,108
152
(169)
(21)
(237)
—
9,556
(705)
—
532
(5)
8,762
(747)
(823)
—
8,361
(817)
(228)
795
757
Gain on AB InBev/SABMiller
business combination
Earnings before income taxes
$
445
9,828
13,865
21,852
$
$
5
8,078
The smokeable products segment included net revenues of
$21,900 million, $22,199 million and $22,193 million for the
years ended December 31, 2017, 2016 and 2015, respectively,
related to cigarettes and net revenues of $736 million, $652
million and $599 million for the years ended December 31, 2017,
2016 and 2015, respectively, related to cigars.
PM USA, USSTC, Middleton and Nat Sherman’s largest
customer, McLane Company, Inc., accounted for approximately
26%, 25% and 26% of Altria Group, Inc.’s consolidated net
revenues for the years ended December 31, 2017, 2016 and 2015,
respectively. In addition, Core-Mark Holding Company, Inc.
accounted for approximately 14%, 14% and 10% of Altria Group,
Inc.’s consolidated net revenues for the years ended December 31,
2017, 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 67%, 69% and 66% of net revenues for the wine
segment for the years ended December 31, 2017, 2016 and 2015,
respectively.
reportable segments was affected by the following:
Non-Participating Manufacturer (“NPM”) Adjustment
Items: For the years ended December 31, 2017, 2016 and 2015,
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
2017
2016
2015
(5) $
12
$
(97)
9
4
6
13
$
18
$
(84)
$
$
NPM adjustment items result from the resolutions of certain
disputes with states and territories related to the NPM adjustment
provision under the 1998 Master Settlement Agreement (such
dispute resolutions are referred to collectively as “NPM
Adjustment Items”). For the year ended December 31, 2015, the
NPM Adjustment Items primarily relate to the resolution of the
dispute with New York. For further discussion, see Health Care
Cost Recovery Litigation - NPM Adjustment Disputes in Note 18.
Contingencies. The amounts shown in the table above for the
smokeable products segment were recorded by PM USA as
increases (reductions) to cost of sales, which decreased
(increased) operating companies income in the smokeable
products segment.
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Tobacco and Health Litigation Items: For the years ended
December 31, 2017, 2016 and 2015, 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)
Smokeable products segment
Interest and other debt expense, net
Total
2017
72
8
$
2016
88
17
$
80
$
105
$
2015
127
23
150
$
$
During 2017, PM USA recorded pre-tax charges of $72
million in marketing, administration and research costs and $8
million in interest costs, substantially all of which related to 11
Engle progeny cases. For further discussion, see Note 18.
Contingencies.
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 18. Contingencies.
During 2015, PM USA recorded pre-tax charges in
marketing, administration and research costs in seven state Engle
progeny cases 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
Note 18. Contingencies.
Settlement for Lump Sum Pension Payments: In the third
quarter of 2017, Altria Group, Inc. made a voluntary, limited-time
offer to former employees with vested benefits in the Altria
Retirement Plan who had not commenced receiving benefit
payments and who met certain other conditions. Eligible
participants were offered the opportunity to make a one-time
election to receive their pension benefit as a single lump sum
payment or as a monthly annuity. As a result of the 2017 lump
sum distributions, a one-time pre-tax settlement charge of $81
million was recorded in 2017 in Altria Group, Inc.’s consolidated
statement of earnings as follows:
For the Year Ended December 31, 2017
Marketing,
Administration
and Research
Costs
Cost of
Sales
(in millions)
Smokeable products
$
39
$
Smokeless products
General corporate and
other
Total
$
—
—
39
$
18
16
8
42
$
$
Total
57
16
8
81
For further discussion, see Note 16. Benefit Plans.
Smokeless Products Recall: During 2017, USSTC
voluntarily recalled certain smokeless tobacco products
manufactured at its Franklin Park, Illinois facility due to a product
tampering incident (the “Recall”). USSTC estimates that the
Recall reduced smokeless products segment operating companies
income by approximately $60 million in 2017.
Asset Impairment, Exit and Implementation Costs: See
Note 4. Asset Impairment, Exit and Implementation Costs for a
breakdown of these costs by segment.
Note 16. Benefit Plans
Subsidiaries of Altria Group, Inc. sponsor noncontributory
defined benefit pension plans covering the majority of all
employees of Altria Group, Inc. and its subsidiaries. However,
employees hired on or after a date specific to their employee
group are not eligible to participate in these noncontributory
defined benefit pension plans but are instead eligible to
participate in a defined contribution plan with enhanced benefits.
This transition for new hires occurred from October 1, 2006 to
January 1, 2008. In addition, effective January 1, 2010, certain
employees of UST’s subsidiaries and Middleton who were
participants in noncontributory defined benefit pension plans
ceased to earn additional benefit service under those plans and
became eligible to participate in a defined contribution plan with
enhanced benefits. Altria Group, Inc. and its subsidiaries also
provide postretirement health care and other benefits to the
majority of retired employees.
The plan assets and benefit obligations of Altria Group, Inc.’s
pension plans and postretirement plans are measured at
December 31 of each year. In December 2017, Altria Group, Inc.
made a contribution of $270 million to a trust to fund certain
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postretirement benefits. Prior to this contribution, Altria Group,
Inc.’s postretirement plans were not funded.
corporate bonds with durations that match the expected future
cash flows of the pension and postretirement benefit obligations.
The discount rates for Altria Group, Inc.’s plans were based
on a yield curve developed from a model portfolio of high-quality
Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and
postretirement plans at December 31, 2017 and 2016 were as follows:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial losses
Termination, settlement 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
Other assets
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 $8.2 billion and $8.0 billion at December 31,
2017 and 2016, respectively.
For plans with accumulated benefit obligations in excess of
plan assets at December 31, 2017, the projected benefit
obligation, accumulated benefit obligation and fair value of plan
assets were $413 million, $364 million and $124 million,
respectively. At December 31, 2016, 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 2022, including the imposition of an excise
tax on high cost health care plans effective in 2022. The
Pension
Postretirement
2017
2016
2017
2016
$
8,312
75
288
(703)
589
(51)
—
8,510
7,475
1,219
24
(703)
8,015
(495) $
(51) $
(445)
1
—
(495) $
8,011
76
281
(440)
367
13
4
8,312
6,706
678
531
(440)
7,475
(837)
(32)
(805)
—
—
(837)
$
$
$
$
$
2,364
16
76
(139)
56
—
(38)
2,335
—
—
270
—
270
(2,065) $
(78) $
—
—
(1,987)
(2,065) $
2,392
17
77
(135)
24
5
(16)
2,364
—
—
—
—
—
(2,364)
(147)
—
—
(2,217)
(2,364)
$
$
$
$
additional accumulated postretirement liability resulting from the
PPACA, which is not material to Altria Group, Inc., has been
included in Altria Group, Inc.’s accumulated postretirement
benefit obligation at December 31, 2017 and 2016. 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
2017
3.7%
4.0
2016
4.1%
4.0
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
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
2017
3.7%
7.0
5.0
2022
2016
4.1%
7.0
5.0
2022
Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31,
2017, 2016 and 2015:
(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
2017
75
288
(601)
197
4
86
49
$
$
2016
76
281
(553)
171
5
34
14
$
$
2015
86
337
(539)
234
7
8
133
$
$
2017
16
76
—
25
(38)
—
79
$
$
2016
17
77
—
25
(39)
(2)
78
$
$
2015
18
100
—
43
(39)
—
122
$
$
Termination, settlement and curtailment shown in the table
above primarily relate to the settlement charge discussed below,
and the productivity initiative and facilities consolidation
discussed in Note 4. Asset Impairment, Exit and Implementation
Costs.
In the third quarter of 2017, Altria Group, Inc. made a
voluntary, limited-time offer to former employees with vested
benefits in the Altria Retirement Plan who had not commenced
receiving benefit payments and who met certain other conditions.
Eligible participants were offered the opportunity to make a one-
time election to receive their pension benefit as a single lump sum
payment or as a monthly annuity. Distributions to former
employees who elected to receive lump sum payments totaled
approximately $277 million, substantially all of which were made
in December 2017 from the Altria Retirement Plan’s assets.
Payments began on January 1, 2018 to former employees who
elected a monthly annuity. As a result of the lump sum
distributions, Altria Group, Inc. recorded a one-time settlement
charge of $81 million in 2017.
The amounts included in termination, settlement and
curtailment in the table above were comprised of the following
changes:
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.
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 2018 is as follows:
(in millions)
Net loss
Prior service cost (credit)
$
Pension
228
4
Postretirement
35
$
(42)
(in millions)
Benefit obligation
Other comprehensive
earnings/losses:
Net loss
Prior service cost
(credit)
64
Pension
2017
$ — $
2016
2015
23 $ — $
Post-
retirement
2016
11
86
9
—
86 $
2
34 $
$
8
—
8
$
—
(13)
(2)
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC 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
2017
2016
2015
2017
2016
2015
4.3%
3.5
8.0
4.0
—
4.7%
3.6
8.0
4.0
—
4.1%
4.1
8.0
4.0
—
4.3%
3.5
—
—
7.0
4.5%
3.4
—
—
6.5
4.0%
4.0
—
—
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,
2017:
Effect on total of postretirement
service and interest cost
Effect on postretirement benefit
obligation
One-
Percentage-
Point Increase
One-
Percentage-
Point Decrease
7.8%
6.6%
(6.9)%
(5.5)%
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 $83 million, $93 million and $85 million in 2017, 2016
and 2015, respectively.
Pension Plan Assets: Altria Group, Inc.’s investment
strategy for its pension plan assets 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, 2017 was broadly characterized as an allocation
between equity securities (59%), corporate bonds (30%) and U.S.
Treasury and foreign government securities (11%). Virtually all
pension assets can be used to make monthly benefit payments.
Altria Group, Inc.’s investment objective for its pension plan
assets 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
16% of the fixed income holdings or 7% of total plan assets at
December 31, 2017. The allocation to emerging markets
represented 4% of the equity holdings or 3% of total plan assets at
December 31, 2017.
Altria Group, Inc.’s risk management practices for its pension
plans 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. Altria
Group, Inc. has reduced this assumption from 8.0% to 7.8% for
determining its pension net periodic benefit cost for 2018.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2017 and 2016 were as follows:
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2017
2016
U.S. and foreign government securities or
their agencies:
U.S. government and agencies
$
— $
588
$
— $
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
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
$
— $
—
—
—
—
1,396
831
120
81
150
1,789
511
—
—
74
—
—
—
—
—
—
—
588
81
150
1,789
511
1,396
831
194
$
— $
—
—
—
—
1,076
760
142
444
102
185
1,735
602
—
—
33
$ 2,347
$ 3,193
$
— $ 5,540
$ 1,978
$ 3,101
$
2,014
361
100
$ 8,015
—
—
—
—
—
—
13
13
444
102
185
1,735
602
1,076
760
188
$ 5,092
1,940
363
80
$ 7,475
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2017 and 2016.
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.
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 net asset value
(“NAV”), which is provided by the investment account
manager as a practical expedient to estimate fair value. These
investments are not classified by level but are disclosed to
permit reconciliation to the fair value of plan assets.
Postretirement Plan Assets: Altria Group, Inc. has
established a long-term investment strategy for its postretirement
plan assets using a target asset allocation between equity
securities and fixed income investments of 55%/45%. The
expected rate of return on plan assets is 7.8% for determining
Altria Group, Inc.’s postretirement net periodic benefit cost for
2018. At December 31, 2017, postretirement plan assets totaled
$270 million. Approximately $150 million was invested in
domestic and international common/collective trusts. The
underlying assets of each of the respective common/collective
trusts are valued based on the NAV, which is provided by the
investment account manager as a practical expedient to estimate
fair value. Additionally, approximately $120 million was held in
an interest bearing cash account, which is classified in Level 1 of
the fair value hierarchy, pending full implementation of the
investment strategy in early January 2018.
Cash Flows: Altria Group, Inc. makes contributions to the
pension plans to the extent that the contributions are tax
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC deductible and pays benefits that relate to plans for salaried
employees that cannot be funded under IRS regulations.
Currently, Altria Group, Inc. anticipates making employer
contributions to its pension plans of up to approximately $60
million in 2018 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 plan assets, or
changes in interest rates. In December 2017, Altria Group, Inc.
made a contribution of $270 million to its postretirement plans.
Currently, Altria Group, Inc. anticipates making employer
contributions to its postretirement plans of up to approximately
$70 million in 2018. 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 postretirement plan assets.
Estimated future benefit payments at December 31, 2017 were as follows:
(in millions)
2018
2019
2020
2021
2022
2023-2027
$
Pension
480
451
456
459
463
2,372
$
Postretirement
142
140
138
136
133
620
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2017 consisted of the following:
(in millions)
Net loss
Prior service (cost) credit
Deferred income taxes
Amounts recorded in accumulated other comprehensive losses
Pension
(2,493) $
(15)
979
Post-
retirement
Post-
employment
(612) $
195
166
(93) $
—
34
Total
(3,198)
180
1,179
(1,529) $
(251) $
(59) $
(1,839)
$
$
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
Post-
retirement
Post-
employment
Total
(2,857) $
(581) $
(99) $
(3,537)
(19)
1,124
195
153
—
36
176
1,313
(1,752) $
(233) $
(63) $
(2,048)
$
$
The movements in other comprehensive earnings/losses during the year ended December 31, 2017 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
$
$
$
197
4
$
25
(38)
86
(113)
174
81
—
(32)
49
223
$
—
6
(7)
(56)
38
7
(11)
(18) $
17
—
—
(6)
11
(11)
—
4
(7)
4
$
$
239
(34)
86
(113)
178
14
38
(21)
31
209
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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)
9
2
(69)
118
(232)
(4)
92
(144)
(26) $
—
(13)
11
(16)
(18)
16
1
(1)
(17) $
18
—
—
—
(7)
11
(9)
—
3
(6)
5
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
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
$
$
$
$
214
(34)
9
(11)
(65)
113
(259)
12
96
(151)
(38)
Total
296
(32)
8
(105)
167
(223)
—
86
(137)
30
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Note 17. Additional Information
(in millions)
Research and development expense
Advertising expense
Interest and other debt expense, net:
Interest expense
Interest income
Interest related to NPM Adjustment Items
Rent expense
For the Years Ended December 31,
2017
241
29
727
(31)
9
705
43
$
$
$
$
$
2016
203
27
754
(13)
6
747
53
$
$
$
$
$
2015
186
25
808
(4)
13
817
48
$
$
$
$
$
Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2017 were as
follows:
(in millions)
2018
2019
2020
2021
2022
Thereafter
Rental Commitments
38
$
33
28
26
23
44
192
$
$
$
Sublease Income
5
5
5
5
5
5
30
The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2017, 2016 and
2015 was as follows:
(in millions)
Balance at beginning of year
Charged to costs and expenses
Deductions (1)
2017
2016
2015
Discounts
$
— $
626
(626)
Returned
Goods
Discounts
Returned
Goods
49
130
(139)
$
— $
628
(628)
68
133
(152)
Discounts
$
— $
618
(618)
Balance at end of year
(1) Represents the recording of discounts and returns for which allowances were created.
— $
40
$
$
— $
49
$
— $
Returned
Goods
46
217
(195)
68
Note 18. Contingencies
Legal proceedings covering a wide range of matters are pending
or threatened in various United States and foreign jurisdictions
against Altria Group, Inc. and its subsidiaries, including PM USA
and UST and its subsidiaries, as well as their respective
indemnitees. Various types of claims may be raised in these
proceedings, including product liability, consumer protection,
antitrust, tax, contraband shipments, patent infringement,
employment matters, claims for contribution and claims of
competitors or distributors.
Litigation is subject to uncertainty and it is possible that there
could be adverse developments in pending or future cases. An
unfavorable outcome or settlement of pending tobacco-related or
other litigation could encourage the commencement of additional
litigation. Damages claimed in some tobacco-related and other
litigation are or can be significant and, in certain cases, have
ranged in the billions of dollars. The variability in pleadings in
multiple jurisdictions, together with the actual experience of
management in litigating claims, demonstrate that the monetary
relief that may be specified in a lawsuit bears little relevance to
the ultimate outcome. In certain cases, plaintiffs claim that
defendants’ liability is joint and several. In such cases, Altria
Group, Inc. or its subsidiaries may face the risk that one or more
co-defendants decline or otherwise fail to participate in the
bonding required for an appeal or to pay their proportionate or
jury-allocated share of a judgment. As a result, Altria Group, Inc.
or its subsidiaries under certain circumstances may have to pay
more than their proportionate share of any bonding- or judgment-
related amounts. Furthermore, in those cases where plaintiffs are
successful, Altria Group, Inc. or its subsidiaries may also be
required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
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programs for ongoing medical monitoring and purporting to be
brought on behalf of a class of individual plaintiffs, including
cases in which the aggregated claims of a number of individual
plaintiffs are to be tried in a single proceeding; (iii) health care
cost recovery cases brought by governmental (both domestic and
foreign) plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits; (iv) class action suits alleging that the
uses of the terms “Lights” and “Ultra Lights” constitute deceptive
and unfair trade practices, common law or statutory fraud, unjust
enrichment, breach of warranty or violations of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”); and
(v) other tobacco-related litigation described below. Plaintiffs’
theories of recovery and the defenses raised in pending smoking
and health, health care cost recovery and “Lights/Ultra Lights”
cases are discussed below.
The table below lists the number of certain tobacco-related
cases pending in the United States against PM USA and, in some
instances, Altria Group, Inc. as of December 31, 2017, 2016 and
2015:
Individual Smoking and Health Cases (1)
Smoking and Health Class Actions and
Aggregated Claims Litigation (2)
Health Care Cost Recovery Actions (3)
“Lights/Ultra Lights” Class Actions
2017
92
2016
70
4
1
3
5
1
8
2015
65
5
1
11
(1) Does not include 2,414 cases brought by flight attendants seeking
compensatory damages for personal injuries allegedly caused by exposure to
environmental tobacco smoke (“ETS”). The flight attendants allege that they are
members of an ETS smoking and health class action in Florida, which was settled
in 1997 (Broin). The terms of the court-approved settlement in that case allowed
class members to file individual lawsuits seeking compensatory damages, but
prohibited them from seeking punitive damages. Also, does not include individual
smoking and health cases brought by or on behalf of plaintiffs in Florida state and
federal courts following the decertification of the Engle case (discussed below in
Smoking and Health Litigation - Engle Class Action).
(2)
Includes as one case the 30 civil actions that were to be tried in six consolidated
trials in West Virginia (In re: Tobacco Litigation). PM USA is a defendant in nine
of the 30 cases. The parties have agreed to resolve the cases for an immaterial
amount and have so notified the court.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit
below.
International Tobacco-Related Cases: As of January 29,
2018, 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.
verdicts have been appealed, there remains a risk that such relief
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico limit
the dollar amount of bonds or require no bond at all. As
discussed below, however, tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. States, including
Florida, may also seek to repeal or alter bond cap statutes through
legislation. Although Altria Group, Inc. cannot predict the
outcome of such challenges, it is possible that the consolidated
results of operations, cash flows or financial position of Altria
Group, Inc., or one or more of its subsidiaries, could be materially
affected in a particular fiscal quarter or fiscal year by an
unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the
consolidated financial statements for pending litigation when they
determine that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. At the present
time, while it is reasonably possible that an unfavorable outcome
in a case may occur, except to the extent discussed elsewhere in
this Note 18. Contingencies: (i) management has concluded that it
is not probable that a loss has been incurred in any of the pending
tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related cases;
and (iii) accordingly, management has not provided any amounts
in the consolidated financial statements for unfavorable outcomes,
if any. Litigation defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved
substantial success in managing litigation. Nevertheless,
litigation is subject to uncertainty and significant challenges
remain. It is possible that the consolidated results of operations,
cash flows or financial position of Altria Group, Inc., or one or
more of its subsidiaries, could be materially affected in a
particular fiscal quarter or fiscal year by an unfavorable outcome
or settlement of certain pending litigation. Altria Group, Inc. and
each of its subsidiaries named as a defendant believe, and each
has been so advised by counsel handling the respective cases, that
it has valid defenses to the litigation pending against it, as well as
valid bases for appeal of adverse verdicts. Each of the companies
has defended, and will continue to defend, vigorously against
litigation challenges. However, Altria Group, Inc. and its
subsidiaries may enter into settlement discussions in particular
cases if they believe it is in the best interests of Altria Group, Inc.
to do so.
Overview of Altria Group, Inc. and/or PM USA Tobacco-
Related Litigation
Types and Number of Cases: Claims related to tobacco
products generally fall within the following categories:
(i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs; (ii) smoking and health cases
primarily alleging personal injury or seeking court-supervised
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Tobacco-Related Cases Set for Trial: As of January 29,
2018, three Engle progeny cases are set for trial through March
31, 2018. There are no other individual smoking and health cases
against PM USA set for trial during this period. Cases against
other companies in the tobacco industry may be scheduled for
trial during this period. Trial dates are subject to change.
Trial Results: Since January 1999, excluding the Engle
progeny cases (separately discussed below), verdicts have been
returned in 63 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 42 of the 63 cases. These 42 cases were tried in
Alaska (1), California (7), Connecticut (1), 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 April 9, 2018. See Types and Number of
Cases above for a discussion of the trial results in In re: Tobacco
Litigation (West Virginia consolidated cases).
Of the 21 non-Engle progeny cases in which verdicts were
returned in favor of plaintiffs, 18 have reached final resolution.
As of January 29, 2018, 116 state and federal Engle progeny
cases involving PM USA have resulted in verdicts since the
Florida Supreme Court’s Engle decision as follows: 61 verdicts
were returned in favor of plaintiffs; 45 verdicts were returned in
favor of PM USA. Eight verdicts that were initially returned in
favor of plaintiff were reversed post-trial or on appeal and remain
pending and two verdicts in favor of PM USA were reversed for a
new trial. See Smoking and Health Litigation - Engle Progeny
Trial Court Results below for a discussion of these verdicts.
Judgments Paid and Provisions for Tobacco and Health
Litigation Items (Including Engle Progeny Litigation): After
exhausting all appeals in those cases resulting in adverse verdicts
associated with tobacco-related litigation, since October 2004,
PM USA has paid in the aggregate judgments and settlements
(including related costs and fees) totaling approximately $490
million and interest totaling approximately $184 million as of
December 31, 2017. These amounts include payments for Engle
progeny judgments (and related costs and fees) totaling
approximately $99 million, interest totaling approximately $22
million and payment of approximately $43 million in connection
with the Federal Engle Agreement, discussed below.
The changes in Altria Group, Inc.’s accrued liability for
tobacco and health litigation items, including related interest
costs, for the periods specified below are as follows:
(in millions)
2017
2016
2015
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
$
47
$
132
$
39
72
8
—
—
—
21
7
—
32
45
84
23
43
—
—
(57)
Payments
(21)
(190)
Accrued liability for tobacco and
health litigation items at
end of year
$
106
$
47
$
132
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 and the agreements to resolve the
Aspinall and Miner “lights” class action cases (excluding related
interest costs of approximately $10 million in Aspinall) 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, 2017, PM USA has
posted various forms of security totaling approximately $61
million, the majority of which has been collateralized with cash
deposits that are included in assets on the consolidated balance
sheet.
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Smoking and Health Litigation
Overview: Plaintiffs’ allegations of liability in smoking and
health cases are based on various theories of recovery, including
negligence, gross negligence, strict liability, fraud,
misrepresentation, design defect, failure to warn, nuisance, breach
of express and implied warranties, breach of special duty,
conspiracy, concert of action, violations of deceptive trade
practice laws and consumer protection statutes, and claims under
the federal and state anti-racketeering statutes. Plaintiffs in the
smoking and health cases seek various forms of relief, including
compensatory and punitive damages, treble/multiple damages and
other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of profits,
and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, statutes of
limitations and preemption by the Federal Cigarette Labeling and
Advertising Act.
Non-Engle Progeny Litigation: Summarized below are the
non-Engle progeny smoking and health cases pending during
2017 in which a verdict was returned in favor of plaintiff and
against PM USA. Charts listing certain verdicts for plaintiffs in
the Engle progeny cases can be found in Smoking and Health
Litigation - Engle Progeny Trial Results below.
Gentile: In October 2017, a jury in a Florida state court returned
a verdict in favor of plaintiff, awarding approximately $7.1
million in compensatory damages and allocating 75% of the fault
to PM USA (an amount of approximately $5.3 million).
Subsequently, in October 2017, PM USA filed various post-trial
motions.
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. In December 2017, the U.S.
Court of Appeals for the Ninth Circuit affirmed the judgment. In
the fourth quarter of 2017, PM USA recorded a provision on its
consolidated balance sheet of approximately $1 million for the
judgment plus interest and associated costs.
Federal Government’s Lawsuit: See Health Care Cost Recovery
Litigation - Federal Government’s Lawsuit below for a discussion
of the verdict and post-trial developments in the United States of
America health care cost recovery case.
Engle Class Action: In July 2000, in the second phase of the
Engle smoking and health class action in Florida, a jury returned a
verdict assessing punitive damages totaling approximately $145
billion against various defendants, including $74 billion against
PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing
that execution of the punitive damages component of the Engle
judgment will remain stayed against PM USA and the other
participating defendants through the completion of all judicial
review. As a result of the stipulation, PM USA placed $500
million into an interest-bearing escrow account that, regardless of
the outcome of the judicial review, was to be paid to the court and
the court was to determine how to allocate or distribute it
consistent with Florida Rules of Civil Procedure. In May 2003,
the Florida Third District Court of Appeal reversed the judgment
entered by the trial court and instructed the trial court to order the
decertification of the class. Plaintiffs petitioned the Florida
Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the
punitive damages award be vacated, that the class approved by
the trial court be decertified and that members of the decertified
class could file individual actions against defendants within one
year of issuance of the mandate. The court further declared the
following Phase I findings are entitled to res judicata effect in
such individual actions brought within one year of the issuance of
the mandate: (i) that smoking causes various diseases; (ii) that
nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes
were defective and unreasonably dangerous; (iv) that defendants
concealed or omitted material information not otherwise known
or available knowing that the material was false or misleading or
failed to disclose a material fact concerning the health effects or
addictive nature of smoking; (v) that defendants agreed to
misrepresent information regarding the health effects or addictive
nature of cigarettes with the intention of causing the public to rely
on this information to their detriment; (vi) that defendants agreed
to conceal or omit information regarding the health effects of
cigarettes or their addictive nature with the intention that smokers
would rely on the information to their detriment; (vii) that all
defendants sold or supplied cigarettes that were defective; and
(viii) that defendants were negligent. The court also reinstated
compensatory damages awards totaling approximately $6.9
million to two individual plaintiffs and found that a third
plaintiff’s claim was barred by the statute of limitations. In
February 2008, PM USA paid approximately $3 million,
representing its share of compensatory damages and interest, to
the two individual plaintiffs identified in the Florida Supreme
Court’s order.
In August 2006, PM USA sought rehearing from the Florida
Supreme Court on parts of its July 2006 opinion, including the
ruling (described above) that certain jury findings have res
judicata effect in subsequent individual trials timely brought by
Engle class members. The rehearing motion also asked, among
other things, that legal errors that were raised but not expressly
ruled upon in the Florida Third District Court of Appeal or in the
Florida Supreme Court now be addressed. Plaintiffs also filed a
motion for rehearing in August 2006 seeking clarification of the
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
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Engle Progeny Trial Results: As of January 29, 2018, 116
federal and state Engle progeny cases involving PM USA have
resulted in verdicts since the Florida Supreme Court Engle
decision. Sixty-one verdicts were returned in favor of plaintiffs
and eight verdicts (Skolnick, Calloway, Pollari, McCoy, Duignan,
McCall, Caprio and Oshinsky-Blacker) that were initially
returned in favor of plaintiffs were reversed post-trial or on appeal
and remain pending. Skolnick was remanded for a new trial;
Calloway was reversed and remanded for a new trial on an
appellate finding that improper arguments by plaintiff’s counsel
deprived defendants of a fair trial; Pollari and McCoy were
reversed and remanded for a new trial on an appellate finding that
the trial court erred in admitting certain materials into evidence
that deprived defendants of a fair trial; Duignan was reversed and
remanded for a new trial on an appellate finding that the trial
judge erred in responding to a question from the jury during
deliberations; Caprio was reversed post-trial after defendants
agreed to voluntarily dismiss their appeal in exchange for a full
retrial; Oshinsky-Blacker was reversed post-trial based on
plaintiff’s counsel’s improper arguments at trial; and McCall was
reversed based on an appellate finding that the trial judge erred in
instructing the jury on the warning labels on cigarette packs.
Forty-five verdicts were returned in favor of PM USA, of
which 36 were state cases. In addition, there have been a number
of mistrials, only some of which have resulted in new trials as of
January 29, 2018. Two verdicts (D. Cohen and Collar) that were
returned in favor of PM USA were subsequently reversed for new
trials. 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 29, 2018; the second
chart lists such cases that were pending within the previous 12
months, but that are now concluded.
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 29, 2018,
approximately 2,400 state court cases were pending against PM
USA or Altria Group, Inc. asserting individual claims by or on
behalf of approximately 3,100 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 29, 2018, approximately
12 cases were pending against PM USA in federal court
representing the cases excluded from that agreement.
Agreement to Resolve Federal Engle Progeny Cases: In
2015, PM USA, R.J. Reynolds Tobacco Company (“R.J.
Reynolds”) and Lorillard Tobacco Company (“Lorillard”)
resolved approximately 415 pending federal Engle progeny cases
(the “Federal Engle Agreement”). Under the terms of the Federal
Engle Agreement, PM USA paid approximately $43 million.
Federal cases that were in trial and those that previously reached
final verdict were not included in the Federal Engle Agreement.
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_______________________________________________________________________________________________________________________________
Plaintiff: Bryant
Date: December 2017
Currently-Pending Engle Cases
Verdict:
An Escambia County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $581,000 and
allocating 25% of the fault to PM USA. The jury also awarded $225,000 in punitive damages against PM USA.
Post-Trial Developments:
In December 2017, PM USA filed various post-trial motions, including motions to enter judgment in its favor and for a new trial.
Plaintiff also filed a motion for a new trial on the amount of punitive damages.
_______________________________________________________________________________________________________________________________
Plaintiff: R. Douglas
Date: November 2017
Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $131,371 and
allocating 4% of the fault to PM USA (an amount of $5,255).
Post-Trial Developments:
In November 2017, PM USA filed a motion to set aside the verdict, and plaintiff filed a motion for a new trial or, in the alternative, for
an additur of the damages award.
________________________________________________________________________________________________________________________________
Plaintiff: Wallace
Date: October 2017
Verdict:
A Brevard County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of $12 million and allocating 66% of the fault to PM USA (an amount of approximately $7.9 million). The jury also awarded plaintiff
$16 million in punitive damages against PM USA.
Post-Trial Developments:
In November 2017, defendants filed post-trial motions, including for a new trial or remittitur of the damages awards. In December
2017, the court denied certain post-trial motions. In January 2018, the court amended the final judgment to withdraw the comparative
fault reduction for the compensatory damages award and denied the remaining post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: L. Martin
Date: May 2017
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1.1 million
and allocating 55% of the fault to PM USA (an amount of $605,000). The jury also awarded plaintiff $1.3 million in punitive damages
against PM USA.
Post-Trial Developments:
In May 2017, PM USA filed various post-trial motions, including motions to set aside the verdict and for a new trial. In June 2017, the
trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In August 2017, the court denied
PM USA’s post-trial motions and PM USA filed a notice of appeal to the Florida Third District Court of Appeal and posted a bond in the
amount of approximately $1.9 million. In September 2017, plaintiff cross-appealed.
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Date: April 2017
Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1 million
and allocating 40% of the fault to PM USA. The court dismissed the punitive damages claim prior to trial.
Post-Trial Developments:
In April 2017, PM USA filed motions for a new trial and for a directed verdict, and plaintiff filed a motion for a new trial on punitive
damages. In January 2018, the trial court granted plaintiff’s motion for a new trial on punitive damages and denied PM USA’s post-trial
motions.
________________________________________________________________________________________________________________________________
Plaintiff: Santoro
Date: March 2017
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group LLC (“Liggett
Group”) awarding compensatory damages of $1.6 million and allocating 28% of the fault to PM USA (an amount of approximately
$450,000). The jury also awarded plaintiff $100,000 in punitive damages against PM USA.
Post-Trial Developments:
In April 2017, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault and defendants
filed various post-trial motions, including motions to set aside the verdict and for a new trial. In December 2017, the trial court granted
defendants’ motion to set aside the verdict as to all claims except plaintiff’s conspiracy claim. In January 2018, plaintiff filed a motion to
amend the final judgment to award the full compensatory damages without reduction for plaintiff’s comparative fault.
________________________________________________________________________________________________________________________________
Plaintiff: J. Brown
Date: February 2017
Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages
of $5.4 million and allocating 35% of the fault to PM USA. The jury also awarded plaintiff $200,000 in punitive damages against PM
USA.
Post-Trial Developments:
In March 2017, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. The court ruled
that it will not apply the comparative fault reduction to the compensatory damages. In August 2017, the trial court denied defendants’
post-trial motions and entered final judgment in favor of plaintiff. In September 2017, defendants filed a notice of appeal to the Florida
Second District Court of Appeal and posted a bond in the amount of $2.5 million.
________________________________________________________________________________________________________________________________
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. In February 2017, the court granted defendants’ alternative motion for
remittitur, reducing the compensatory damages award against PM USA and R.J. Reynolds to approximately $5.2 million. Also in
February 2017, defendants filed a renewed motion to alter or amend the judgment, which the court denied in April 2017. In March
2017, defendants filed a notice of appeal to the Florida First District Court of Appeal and plaintiff cross-appealed. In April 2017, PM
USA posted a bond in the amount of $2.5 million.
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Plaintiff: S. 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. In February 2017, defendants filed a notice of appeal to the Florida Fourth District Court of
Appeal and plaintiff cross-appealed. Also in February 2017, PM USA posted a bond in the amount of $2.9 million.
________________________________________________________________________________________________________________________________
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. In March 2017, the trial
court vacated the verdict, ordered a new trial based on plaintiff’s counsel’s improper arguments at trial and denied defendants’ remaining
post-trial motions. Also in March 2017, plaintiff filed a notice of appeal with the Florida Fourth District Court of Appeal and defendants
cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Sermons
July 2016
Date:
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 of the damages awards.
________________________________________________________________________________________________________________________________
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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. In August 2017, the Florida Fourth District Court of Appeal affirmed the final judgment in favor of
plaintiff. In September 2017, defendants petitioned the Florida Fourth District Court of Appeal for panel rehearing or for rehearing en
banc, which the court denied in October 2017. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of
the Florida Supreme Court.
______________________________________________________________________________________________________________________________
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. In December 2017, the Florida Fourth District Court of Appeal reversed the judgment and remanded the case
for a new trial on an appellate finding that the trial judge erred in instructing the jury on the warning labels on cigarette packs.
________________________________________________________________________________________________________________________________
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
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. In May 2017, the Florida Second District Court of
Appeal issued a per curiam affirmance of the final judgment against defendants and defendants filed a motion for rehearing. In July
2017, the Second District Court of Appeal withdrew its prior decision and replaced it with a written opinion affirming the trial court’s
judgment, but certifying to the Florida Supreme Court a conflict with Schoeff, discussed below under Engle Progeny Appellate Issues.
In August 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme
Court stayed the case pending Schoeff. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not
reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on
its consolidated balance sheet of approximately $7 million for the judgment plus interest and associated costs.
______________________________________________________________________________________________________________________________
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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. In October 2017, the Florida Third
District Court of Appeal affirmed the final judgment in favor of plaintiff. In November 2017, defendants filed a notice to invoke the
discretionary jurisdiction of the Florida Supreme Court, contending that the final judgment conflicts with Schoeff, discussed below under
Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce
compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM USA recorded a provision on its
consolidated balance sheet of approximately $20 million for the judgment plus interest and associated costs.
_______________________________________________________________________________________________________________________________
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. In August 2017, the Florida Second District Court of Appeal issued a per
curiam affirmance of the final judgment against defendants and defendants filed a motion seeking a written opinion with a citation to
Schoeff, discussed below under Engle Progeny Appellate Issues. In October 2017, the Florida Second District Court of Appeal issued a
written opinion with a citation to Schoeff and granted defendants’ March 2017 motion for rehearing en banc or certification to the
Florida Supreme Court. In November 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme
Court, contending that the final judgment conflicts with Schoeff. In December 2017, the Florida Supreme Court held in Schoeff that
comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM
USA recorded a provision on its consolidated balance sheet of approximately $12 million for the judgment plus interest and associated
costs.
________________________________________________________________________________________________________________________________
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. In June 2017, the Florida Fourth District Court of Appeal issued a per curiam affirmance of the final judgment
against PM USA. In July 2017, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court and, in
August 2017, the Florida Supreme Court stayed the case pending Schoeff, discussed below under Engle Progeny Appellate Issues. In
December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for
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approximately $1 million for the judgment plus interest.
________________________________________________________________________________________________________________________________
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
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. In July 2017, the Florida First District Court of Appeal affirmed the trial court’s
order granting a new trial on non-economic compensatory damages, but reinstated the jury’s punitive damages award.
______________________________________________________________________________________________________________________________
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. In November 2017, the Florida Second District Court of Appeal reversed the
judgment against PM USA and R.J. Reynolds and ordered a new trial on an appellate finding that the trial judge erred in responding to a
question from the jury during deliberations. Also in November 2017, plaintiff filed a motion for rehearing with the Florida Second
District Court of Appeal, which the court denied in January 2018.
________________________________________________________________________________________________________________________________
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. In January 2018, the Florida Fourth District Court of Appeal affirmed the
judgment in favor of plaintiff and granted plaintiff a new trial on punitive damages.
________________________________________________________________________________________________________________________________
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.
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In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, but reduced the
compensatory damages to approximately $6.4 million. PM USA filed various post-trial motions, including motions to set aside the
verdict and for a new trial, which the court denied in December 2015. PM USA subsequently filed a notice of appeal to the Florida First
District Court of Appeal and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
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. In November 2017, the Florida Fourth District Court of Appeal reversed the judgment
against PM USA and R.J. Reynolds and ordered a new trial on an appellate finding that the trial court erred in admitting certain materials
into evidence that deprived defendants of a fair trial. In December 2017, plaintiff filed a notice to invoke the discretionary jurisdiction
of the Florida Supreme Court.
______________________________________________________________________________________________________________________________
Plaintiff: M. Brown
Date: May 2015
Verdict:
In May 2015, a Duval County jury returned a verdict in favor of plaintiff and against PM USA in a partial retrial. In 2013, a jury
returned a partial verdict against PM USA, but was deadlocked as to (i) the amount of compensatory damages, (ii) whether punitive
damages should be awarded and, if so, (iii) the amount of punitive damages. In the partial retrial, the jury was asked to address these
issues. In May 2015, the jury awarded $6.375 million in compensatory damages, but did not award any punitive damages.
Post-Trial Developments:
In May 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA posted a bond
in the amount of $5 million. Additionally, PM USA filed post-trial motions, including motions to set aside the verdict and for a new
trial, as well as filed a notice of appeal to the Florida First District Court of Appeal. In August 2015, the trial court denied the last of PM
USA’s post-trial motions and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Gore
Date: March 2015
Verdict:
An Indian River County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $2 million in
compensatory damages and allocating 23% of the fault to PM USA (an amount of $460,000).
Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In September 2015, the
trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2015, defendants filed a notice of appeal
to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. PM USA subsequently posted a bond in the amount of
$460,000.
______________________________________________________________________________________________________________________________
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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. In August 2017, the Florida Fourth District Court of Appeal reversed the original judgment against PM USA
and ordered a new trial on an appellate finding that the trial court erred in admitting certain materials into evidence that deprived
defendants of a fair trial. In September 2017, plaintiff moved for rehearing, rehearing en banc, or certification of a question to the
Florida Supreme Court, which the Florida Fourth District Court of Appeal denied in November 2017. In December 2017, plaintiff filed
a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
________________________________________________________________________________________________________________________________
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, discussed below under Engle Progeny Appellate Issues. In June 2015, the trial court stayed the case pending the
Eleventh Circuit’s final disposition in the Graham case. In January 2018, the United States Supreme Court denied PM USA’s petition
for writ of certiorari in Graham.
________________________________________________________________________________________________________________________________
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.
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
appeal.
________________________________________________________________________________________________________________________________
Plaintiff: McKeever
Date: February 2015
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $5.8 million in
compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded plaintiff approximately $11.63 million in
punitive damages. However, the jury found in favor of PM USA on the statute of repose defense to plaintiff’s intentional tort and
punitive damages claims.
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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. In February 2017, PM USA filed a notice to invoke the
discretionary jurisdiction of the Florida Supreme Court. In March 2017, the Florida Supreme Court stayed the appeal pending its
decisions in Marotta and Schoeff, discussed below under Engle Progeny Appellate Issues. In April 2017, the Florida Supreme Court
rejected R.J. Reynolds’s federal preemption defense in Marotta. In December 2017, the Florida Supreme Court held in Schoeff that
comparative fault does not reduce compensatory damages awards for intentional torts. As a result, in the fourth quarter of 2017, PM
USA recorded a provision on its consolidated balance sheet of approximately $20 million for the judgment plus interest.
________________________________________________________________________________________________________________________________
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. In January 2018, the United States Supreme
Court denied PM USA’s petition for writ of certiorari in Graham.
______________________________________________________________________________________________________________________________
Plaintiff: Allen
Date: November 2014
Verdict:
A Duval County jury returned a verdict against PM USA and R.J. Reynolds awarding plaintiff approximately $3.1 million in
compensatory damages and allocating 6% of the fault to PM USA. The jury also awarded approximately $7.76 million in punitive
damages against each defendant. This was a retrial of a 2011 trial that awarded plaintiff $6 million in compensatory damages and $17
million in punitive damages against each defendant.
Post-Trial Developments:
In December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial,
which the court denied in July 2015. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s
comparative fault. Defendants filed a notice of appeal to the Florida First District Court of Appeal in September 2015 and PM USA
posted a bond in the amount of approximately $2.5 million. In February 2017, the Florida First District Court of Appeal affirmed the
trial court’s judgment. In March 2017, defendants filed a motion for rehearing en banc with the Florida First District Court of Appeal or
for certification to the Florida Supreme Court. In June 2017, the Florida First District Court of Appeal granted defendants’ motion for
rehearing en banc. In October 2017, the Florida First District Court of Appeal dissolved the en banc proceeding. In November 2017,
defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.
________________________________________________________________________________________________________________________________
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).
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In December 2014, 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
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 plaintiff cross-appealed. PM USA posted a bond in the amount of
$3.98 million. In April 2017, the Florida Second District Court of Appeal rejected PM USA’s grounds for appeal and affirmed the
judgment, but ruled that the trial court should not have applied the comparative fault deduction. The court remanded the case to the trial
court to amend the judgment to award plaintiff the full amount of the jury’s compensatory damages award and also separately ruled that
plaintiff is entitled to attorneys’ fees. In May 2017, defendants filed notices to invoke the discretionary jurisdiction of the Florida
Supreme Court on the merits and on the attorneys’ fees issue. The Florida Supreme Court stayed consideration of its jurisdiction on the
merits appeal pending its ruling in Schoeff, discussed below under Engle Progeny Appellate Issues. In December 2017, the Florida
Supreme Court held in Schoeff that comparative fault does not reduce compensatory damages awards for intentional torts. PM USA
intends to request that the Florida Supreme Court remand the case to the Second District Court of Appeal for further consideration.
______________________________________________________________________________________________________________________________
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. In June 2017, the trial court lifted the stay on the
post-trial motions.
______________________________________________________________________________________________________________________________
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.
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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,
plaintiff cross-appealed. In June 2017, the U.S. Court of Appeals for the Eleventh Circuit lifted the stay on the post-trial motions.
______________________________________________________________________________________________________________________________
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. In January 2018, the United
States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
________________________________________________________________________________________________________________________________
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. In the second quarter of 2017, PM USA recorded a provision on its
condensed consolidated balance sheet of approximately $1.1 million for the judgment plus interest and associated costs. In January
2018, the United States Supreme Court denied PM USA’s petition for writ of certiorari in Graham.
________________________________________________________________________________________________________________________________
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.
In April 2017, the Eleventh Circuit stayed the appeal pending final disposition in the Graham case, discussed below under Engle
Progeny Appellate Issues. In November 2017, the Eleventh Circuit further stayed the appeal pending Schoeff, discussed below under
Engle Progeny Appellate Issues. In December 2017, the Florida Supreme Court held in Schoeff that comparative fault does not reduce
compensatory damages awards for intentional torts. In January 2018, the United States Supreme Court denied PM USA’s petition for
writ of certiorari in Graham.
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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
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: 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 arguing that application of the Engle findings to
the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. In December 2013, defendants
filed an amended notice of appeal after the district court corrected a clerical error in the final judgment, and PM USA posted a bond in
the amount of approximately $2.2 million. In January 2018, the U.S. Court of Appeals for the Eleventh Circuit ordered supplemental
briefing on the due process issue.
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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, which the court denied in March 2017. In June 2017, plaintiff filed a petition
for writ of certiorari with the United States Supreme Court seeking review of the 2016 en banc ruling by the Florida Fourth District
Court of Appeal, which the court denied in October 2017.
________________________________________________________________________________________________________________________________
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. In May 2017, the trial court ruled that the 2010 jury award of $15.1 million in compensatory damages was
excessive and reduced the award to $225,000. In June 2017, plaintiff requested a new trial on compensatory damages.
_______________________________________________________________________________________________________________________________
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Plaintiff: Graham
Date: May 2013
Engle Cases Concluded Within Past 12 Months
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. In May 2017, the U.S. Court of
Appeals for the Eleventh Circuit affirmed the final judgment entered in plaintiff’s favor, rejecting defendants’ preemption and due
process arguments. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of
approximately $500,000 for the judgment plus interest and associated costs. In September 2017, defendants filed a petition for writ of
certiorari with the United States Supreme Court on due process and federal preemption grounds, which the court denied in January
2018. PM USA paid the judgment plus interest and associated costs in the amount of approximately $1 million in January 2018.
________________________________________________________________________________________________________________________________
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. In
April 2017, the Fourth District Court of Appeal issued a per curiam decision affirming the trial court’s judgment against PM USA. In
the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $13.2 million
for the judgment plus interest and associated costs, and increased its bond by $6.2 million. In September 2017, PM USA filed a petition
for writ of certiorari with the United States Supreme Court on due process and federal preemption grounds, which PM USA dismissed
after the court denied PM USA’s petition in Graham. PM USA paid the judgment plus interest and associated costs in the amount of
approximately $13.5 million in January 2018.
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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. In June 2017, the Florida Supreme Court denied PM USA’s petition to invoke the court’s discretionary jurisdiction. In the
second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.3 million for the
judgment plus interest and associated costs. In September 2017, defendants filed a petition for writ of certiorari with the United States
Supreme Court on due process and federal preemption grounds, which PM USA dismissed after the court denied PM USA’s petition in
Graham. PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.5 million in January 2018.
________________________________________________________________________________________________________________________________
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. In November 2017, the Florida Fourth District Court of Appeal rejected defendants’ appeal, granted plaintiff’s cross-appeal
finding that the trial court erred in applying the comparative fault deduction and remanded the case to the trial court with directions to
enter an amended final judgment. In the fourth quarter of 2017, PM USA recorded a provision of approximately $1 million on its
consolidated balance sheet for the judgment plus interest and paid this amount in January 2018.
________________________________________________________________________________________________________________________________
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. In April 2017, PM USA paid the judgment plus interest and associated costs in the amount of approximately $17.4
million.
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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
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. In February 2017, PM USA paid the judgment plus interest and associated costs in the
amount of approximately $600,000.
________________________________________________________________________________________________________________________________
Engle Progeny Appellate Issues: In Douglas, an Engle
progeny case against PM USA and R.J. Reynolds, 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’s subsequent petition for writ of certiorari with
the United States Supreme Court was unsuccessful.
In Graham, an Engle progeny case against PM USA and R.J.
Reynolds, in April 2015, the U.S. Court of Appeals for the
Eleventh Circuit found in favor of defendants on the basis of
federal preemption, reversing the trial court’s denial of judgment
as a matter of law. Thereafter, plaintiff filed a petition for
rehearing en banc, which the Eleventh Circuit granted in January
2016. In May 2017, the U.S. Court of Appeals for the Eleventh
Circuit rejected defendants’ preemption and due process
arguments and affirmed the final judgment entered in plaintiff’s
favor. In September 2017, defendants filed a petition for writ of
certiorari with the United States Supreme Court on due process
and federal preemption grounds, which the court denied in
January 2018. 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 and
in April 2017, affirmed the Fourth District Court of Appeal’s
ruling on preemption.
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 January
2018, the Eleventh Circuit ordered supplemental briefing on the
due process issues.
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 now generally seek punitive damages in
connection with all of their claims in Engle progeny cases.
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
Florida Supreme Court accepted jurisdiction over plaintiff’s
appeal of the Florida Fourth District Court of Appeal’s decision.
In December 2017, the Florida Supreme Court reversed the Court
of Appeal’s decision, finding that comparative fault does not
reduce compensatory damages awards for intentional torts.
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’
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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 with 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.
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
61 smoking and health class actions involving PM USA in
Arkansas (1), California (1), Delaware (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 29, 2018, 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.
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.
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.
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 cases), 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
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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 tobacco product
manufacturers entered into the 1998 Master Settlement
Agreement (the “MSA”) with 46 states, the District of Columbia
and certain U.S. territories to settle asserted and unasserted health
care cost recovery and other claims. PM USA and certain other
tobacco product manufacturers had previously entered into
agreements to settle similar claims brought by Mississippi,
Florida, Texas and Minnesota (together with the MSA, the “State
Settlement Agreements”). The State Settlement Agreements
require that the original participating manufacturers or
“OPMs” (now PM USA and R.J. Reynolds and, with respect to
certain brands, ITG Brands, LLC (“ITG”)) 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, 2017, 2016 and 2015, the aggregate
amount recorded in cost of sales with respect to the State
Settlement Agreements was approximately $4.5 billion, $4.6
billion and $4.5 billion, respectively. These amounts include PM
USA’s estimate of amounts related to NPM Adjustments
discussed below.
The State Settlement Agreements also include advertising
and marketing restrictions, require public disclosure of certain
industry documents, limit challenges to certain tobacco control
and underage use laws, and restrict lobbying activities.
NPM Adjustment Disputes: The MSA provides for
potential downward adjustments to MSA payments (the “NPM
Adjustment”) made by the OPMs and those manufacturers that
are subsequent signatories to the MSA (collectively, the
“participating manufacturers” or “PMs”). PM USA is
participating in proceedings regarding the NPM Adjustment for
2003-2016. 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
since 1997, subject to certain conditions and defenses. The
independent auditor (the “IA”) appointed under the MSA
calculates the maximum amount of the NPM Adjustment, if any,
for each year.
2003-2015 NPM Adjustment Disputes - Settlement with 26 States
and Territories and Settlement with New York. PM USA has
entered into two settlements of NPM Adjustment disputes with a
total of 27 states and territories. The first settlement was
originally entered into in 2012 with 19 states and territories and
has been subsequently expanded to include a total of 26 of the 52
MSA states and territories (the “signatory states”). In the first
settlement, PM USA settled the NPM Adjustment disputes for
2003-2015 with these 26 states in exchange for a total of $740
million. In the second settlement, related specifically to New
York, which was entered into in 2015, PM USA received
approximately $170 million for 2004-2015. Both settlements also
resolved certain disputes regarding the application of the NPM
Adjustment going forward.
2003 and Subsequent NPM Adjustment Disputes - Continuing
Disputes with States that have not Settled.
2003 NPM Adjustment. In September 2013, an arbitration
panel issued rulings regarding the 15 states and territories that
remained in the arbitration, ruling that six of them did not
establish valid defenses to the NPM Adjustment for 2003. Two of
these states later joined the first settlement discussed above. With
respect to the remaining four states, following the outcome of
challenges in state courts, PM USA ultimately recorded $74
million primarily as a reduction to cost of sales. Two potential
disputes remain outstanding regarding the amount of interest and
there is no assurance that PM USA will prevail in either of these
disputes.
2004 and Subsequent NPM Adjustments. PM USA has
continued to pursue the NPM Adjustments for 2004 and
subsequent years in multi-state arbitrations against the states that
did not join either of the settlements discussed above. New
Mexico is currently appealing a trial court ruling that the state
must participate in the multi-state arbitration for 2004. The
Montana state courts ruled that Montana may litigate its claims in
state court, rather than participate in arbitration.
The 2004 multi-state arbitration is currently pending with all
of the states that have not settled other than Montana and New
Mexico. Decisions are not expected until late 2018 at the earliest.
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 IA has calculated that PM USA’s share of the maximum
potential NPM Adjustments for 2004-2016 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; $214 million for 2012; $223 million for 2013;
$246 million for 2014; $292 million for 2015 and $296 million
for 2016. These maximum amounts will be reduced, likely
substantially, to reflect the settlements with the signatory states
and New York, and potentially for current and future calculation
disputes and other developments. Finally, PM USA’s recovery of
these amounts, even as reduced, is dependent upon subsequent
determinations regarding state-specific defenses.
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 and related settlements,
have been and may continue to be affected by R.J. Reynolds’
acquisition of Lorillard and its related sale of certain cigarette
brands to ITG (the “ITG brands”). In particular, R.J. Reynolds
and ITG have asserted that they do not have to make payments on
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the ITG brands under the Florida, Minnesota and Texas State
Settlement Agreements or include the ITG brands for purposes of
certain calculations under the State Settlement Agreements. PM
USA believes that R.J. Reynolds’ and ITG’s position violates the
State Settlement Agreements and applicable law. PM USA
further believes that these actions: (i) improperly increased PM
USA’s payments for 2015 and 2016 by at least $84 million; (ii)
may improperly increase PM USA’s payments for subsequent
years; (iii) may improperly decrease PM USA’s share of the 2015
and 2016 NPM Adjustments and the settlements of related
disputes; and (iv) may improperly decrease PM USA’s share of
NPM Adjustments and related settlements for subsequent years.
PM USA and the State of Florida each filed a motion in
Florida state court against R.J. Reynolds and ITG seeking to
enforce the Florida State Settlement Agreement. In December
2017, the Florida trial court ruled that R.J. Reynolds (and not
ITG) must make settlement payments under the Florida State
Settlement Agreement on the ITG brands.
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. The case
ultimately proceeded only under the civil provisions of RICO, and
the trial ended in June 2005. In August 2006, the district court
entered judgment in favor of the government. The court held that
certain defendants, including Altria Group, Inc. and PM USA,
violated RICO and engaged in seven of the eight “sub-schemes”
to defraud that the government had alleged. Specifically, the
court found that:
defendants falsely denied, distorted and minimized the
significant adverse health consequences of smoking;
defendants hid from the public that cigarette smoking
and nicotine are addictive;
defendants falsely denied that they control the level of
nicotine delivered to create and sustain addiction;
defendants falsely marketed and promoted “low tar/
light” cigarettes as less harmful than full-flavor
cigarettes;
defendants falsely denied that they intentionally
marketed to youth;
defendants publicly and falsely denied that ETS is
hazardous to non-smokers; and
defendants suppressed scientific research.
The court did not impose monetary penalties on defendants,
but ordered the following relief: (i) an injunction against
“committing any act of racketeering” relating to the
manufacturing, marketing, promotion, health consequences or
sale of cigarettes in the United States; (ii) an injunction against
participating directly or indirectly in the management or control
of the Council for Tobacco Research, the Tobacco Institute, or the
Center for Indoor Air Research, or any successor or affiliated
entities of each; (iii) an injunction against “making, or causing to
be made in any way, any material false, misleading, or deceptive
statement or representation or engaging in any public relations or
marketing endeavor that is disseminated to the United States
public and that misrepresents or suppresses information
concerning cigarettes”; (iv) an injunction against conveying any
express or implied health message or health descriptors on
cigarette packaging or in cigarette advertising or promotional
material, including “lights,” “ultra lights” and “low tar,” which
the court found could cause consumers to believe one cigarette
brand is less hazardous than another brand; (v) the issuance of
“corrective statements” in various media regarding the adverse
health effects of smoking, the addictiveness of smoking and
nicotine, the lack of any significant health benefit from smoking
“low tar” or “light” cigarettes, defendants’ manipulation of
cigarette design to ensure optimum nicotine delivery and the
adverse health effects of exposure to 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
(“D.C. Court of Appeals”) largely affirmed the trial court’s
remedial order, but 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.
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The appellate panel remanded the case for the trial court to
reconsider these four aspects of the injunction and to reformulate
its remedial order accordingly.
In November 2012, the district court issued its order
specifying the content of the corrective communications
described above and defendants appealed. In April 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, which the
district court approved in June 2014. In May 2015, the D.C.
Court of Appeals affirmed in part and reversed in part the appeal
on the content of the corrective communications, concluding that
certain portions of the statements exceeded the district court’s
jurisdiction under RICO, but upheld other portions challenged by
defendants. The D.C. Court of Appeals remanded the case to the
trial court for further proceedings.
In February 2016, the district court issued an order adopting
modified corrective statements. Defendants appealed and, in
April 2017, the D.C. Court of Appeals reversed in part the district
court’s decision on the content of the corrective communications,
striking certain content and remanding to the district court the
decision on how to revise certain other content. In June 2017, the
district court issued an order adopting modified corrective
statements. In October 2017, the court approved the parties’
proposed consent order implementing the corrective
communications remedy for newspapers and television. The
corrective statements began appearing in newspapers and on
television in the fourth quarter of 2017. In January 2018, the
parties submitted a status report and a request for a status
conference to address open issues regarding onsert and website
implementation details. The defendants also filed a motion in the
U.S. District Court for the District of Columbia seeking to
mediate the remaining implementation details and for an order
clarifying that the DOJ may not enforce the previous consent
order with respect to onserts and websites prior to resolution of all
implementation details.
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, though Altria
Group, Inc. and PM USA do not expect any change in this
estimate to be material.
The consent order approved by the district court in June 2014
did not address the requirements related to point-of-sale signage.
In May 2014, the district court ordered further briefing by the
parties on the issue of corrective statements on point-of-sale
signage, which was completed in June 2014.
In December 2011, the parties to the lawsuit entered into an
agreement as to the issues concerning the document repository.
Pursuant to this agreement, PM USA agreed to deposit an amount
of approximately $3.1 million into the district court in
installments over a five-year period.
“Lights/Ultra Lights” Cases
Overview: Plaintiffs have sought certification of their cases
as class actions, alleging 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 have sought 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 29, 2018, a total of three such cases are pending in
various U.S. state courts, none of which is active.
State “Lights” Cases Dismissed, Not Certified or Ordered
De-Certified: As of January 29, 2018, 21 state courts in 22
“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, all such cases have been dismissed by the courts at the
summary judgment stage, were settled by the parties or were
resolved in favor of PM USA, including Larsen discussed below.
Larsen: In August 2005, a Missouri Court of Appeals affirmed
the class certification order. 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. Upon retrial, in April 2016, the jury
returned a verdict in favor of PM USA. In August 2016, 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. On
appeal, in November 2017, the Missouri Court of Appeals
affirmed the judgment in favor of PM USA. Plaintiffs did not
seek further appellate review, concluding this litigation.
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
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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, which the court granted in March 2017.
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. Oral
argument occurred before a panel of the Delaware Supreme Court
in September 2017. In January 2018, the case was re-argued
before the Delaware Supreme Court en banc.
UST Litigation
Claims related to smokeless tobacco products generally fall
within the following categories:
First, UST and/or its tobacco subsidiaries have been named
in certain actions in West Virginia (See In re: Tobacco Litigation
above) brought by or on behalf of individual plaintiffs against
cigarette manufacturers, smokeless tobacco manufacturers and
other organizations seeking damages and other relief in
connection with injuries allegedly sustained as a result of tobacco
usage, including smokeless tobacco products. Included among
the plaintiffs are six 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. In May
2017, the court granted plaintiffs’ motion to dismiss all
defendants except USSTC.
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
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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, 2017,
Altria Group, Inc. and certain of its subsidiaries (i) had $57
million of unused letters of credit obtained in the ordinary course
of business; (ii) were contingently liable for $33 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, 2017 as the fair value
of this indemnification is insignificant.
As more fully discussed in Note 19. Condensed
Consolidating Financial Information, PM USA has issued
guarantees relating to Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under the Credit
Agreement and amounts outstanding under its commercial paper
program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of
Stag’s Leap Wine Cellars through one of its consolidated
subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in
which Ste. Michelle holds an 85% ownership interest with a 15%
noncontrolling interest held by Antinori California (“Antinori”).
In connection with the acquisition of Stag’s Leap Wine Cellars,
Ste. Michelle entered into a put arrangement with Antinori. The
put arrangement, as later amended, provides Antinori with the
right to require Ste. Michelle to purchase its 15% ownership
interest in Michelle-Antinori at a price equal to Antinori’s initial
investment of $27 million. The put arrangement became
exercisable in September 2010 and has no expiration date. As of
December 31, 2017, 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, 2017 and
2016.
Note 19. Condensed Consolidating Financial
Information
PM USA, which is a 100% owned subsidiary of Altria Group,
Inc., has guaranteed Altria Group, Inc.’s obligations under its
outstanding debt securities, borrowings under its Credit
Agreement and amounts outstanding under its commercial paper
program (the “Guarantees”). Pursuant to the Guarantees, PM
USA fully and unconditionally guarantees, as primary obligor, the
payment and performance of Altria Group, Inc.’s obligations
under the guaranteed debt instruments (the “Obligations”), subject
to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the
punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of the Obligations. The liability of PM
USA under the Guarantees is absolute and unconditional
irrespective of: any lack of validity, enforceability or genuineness
of any provision of any agreement or instrument relating thereto;
any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other
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.
96
96
97
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
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, 2017, 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, 2017 and 2016, condensed
consolidating statements of earnings and comprehensive earnings
for the years ended December 31, 2017, 2016 and 2015, and
condensed consolidating statements of cash flows for the years
ended December 31, 2017, 2016 and 2015 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.
96
97
97
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
Altria
Group, Inc.
______
PM USA
at December 31, 2017
Assets
at December 31, 2017
Assets
Cash and cash equivalents
Receivables
Inventories:
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Leaf tobacco
Finished product
Other raw materials
Work in process
Finished product
Due from Altria Group, Inc. and subsidiaries
Income taxes
Other current assets
Due from Altria Group, Inc. and subsidiaries
Income taxes
Property, plant and equipment, at cost
Other current assets
Less accumulated depreciation
Total current assets
Total current assets
Property, plant and equipment, at cost
Goodwill
Less accumulated depreciation
Other intangible assets, net
Investment in AB InBev
Goodwill
Investment in consolidated subsidiaries
Other intangible assets, net
Finance assets, net
Investment in AB InBev
Due from Altria Group, Inc. and subsidiaries
Investment in consolidated subsidiaries
Other assets
Finance assets, net
Total Assets
Due from Altria Group, Inc. and subsidiaries
Other assets
Total Assets
$
$
$
$
Altria
1,203
Group, Inc.
1
1,203
—
1
—
—
—
—
—
—
—
2
—
—
—
11
2
1,217
—
—
11
—
1,217
—
—
—
—
—
—
17,952
—
13,111
—
—
17,952
4,790
13,111
34
—
37,104
4,790
34
37,104
$
$
$
$
1
PM USA
10
1
579
10
111
5
579
128
111
823
5
2,413
128
542
823
147
2,413
3,936
542
2,930
147
2,086
3,936
844
2,930
—
2,086
2
844
—
—
2,818
2
—
—
—
2,818
671
—
8,271
—
671
8,271
$
$
$
$
Non-
Guarantor
Subsidiaries
Non-
49
Guarantor
Subsidiaries
131
Total
Consolidating
Adjustments
Total
— $
$
Consolidating
Adjustments
—
Consolidated
1,253
Consolidated
142
49
362
131
59
555
362
426
59
1,402
555
1,022
426
17
1,402
105
1,022
2,726
17
1,949
105
879
2,726
1,070
1,949
5,307
879
12,398
1,070
—
5,307
—
12,398
899
—
—
—
157
899
22,557
—
157
22,557
$
$
$
— $
—
—
—
—
—
—
—
—
—
(3,437)
—
(98)
—
—
(3,437)
(3,535)
(98)
—
—
—
(3,535)
—
—
—
—
—
—
—
—
(15,929)
—
—
—
(4,790)
(15,929)
(476)
—
(24,730) $
(4,790)
(476)
(24,730) $
1,253
941
142
170
560
941
554
170
2,225
560
—
554
461
2,225
263
—
4,344
461
4,879
263
2,965
4,344
1,914
4,879
5,307
2,965
12,400
1,914
17,952
5,307
—
12,400
899
17,952
—
—
386
899
43,202
—
386
43,202
98
98
98
99
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
Altria
____________________________
PM USA
Group, Inc.
at December 31, 2017
Liabilities
Current portion of long-term debt
at December 31, 2017
Accounts payable
Liabilities
Accrued liabilities:
Current portion of long-term debt
Marketing
Accounts payable
Employment costs
Accrued liabilities:
Settlement charges
Marketing
Other
Employment costs
Settlement charges
Other
Total current liabilities
Dividends payable
Due to Altria Group, Inc. and subsidiaries
Total current liabilities
Dividends payable
Long-term debt
Due to Altria Group, Inc. and subsidiaries
Deferred income taxes
Accrued pension costs
Long-term debt
Accrued postretirement health care costs
Deferred income taxes
Due to Altria Group, Inc. and subsidiaries
Accrued pension costs
Other liabilities
Accrued postretirement health care costs
Due to Altria Group, Inc. and subsidiaries
Other liabilities
Total liabilities
Contingencies
Redeemable noncontrolling interest
Total liabilities
Stockholders’ Equity
Contingencies
Common stock
Redeemable noncontrolling interest
Additional paid-in capital
Stockholders’ Equity
Earnings reinvested in the business
Common stock
Accumulated other comprehensive losses
Additional paid-in capital
Cost of repurchased stock
Earnings reinvested in the business
Accumulated other comprehensive losses
Noncontrolling interests
Cost of repurchased stock
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
Altria
864
$
Group, Inc.
2
$
$
— $
PM USA
91
— $
578
91
14
2,437
578
433
14
—
2,437
317
433
3,870
—
—
317
—
3,870
—
—
1,214
—
—
—
49
1,214
5,133
—
49
—
5,133
—
—
3,310
96
—
(268)
3,310
—
96
3,138
(268)
—
—
3,138
3,138
8,271
—
3,138
$
864
—
2
21
—
—
389
21
1,258
—
3,040
389
5,574
1,258
13,030
3,040
2,809
5,574
206
13,030
—
2,809
—
206
108
—
21,727
—
108
—
21,727
935
—
5,952
42,251
935
(1,897)
5,952
(31,864)
42,251
15,377
(1,897)
—
(31,864)
15,377
15,377
37,104
—
15,377
$
$
$
$
Non-
Guarantor
Subsidiaries
Non-
Guarantor
— $
Subsidiaries
281
Total
Consolidating
Adjustments
Total
Consolidating
— $
Adjustments
—
Consolidated
864
Consolidated
374
— $
117
281
153
5
117
247
153
—
5
80
247
883
—
—
80
2,914
883
239
—
773
2,914
4,790
239
126
773
9,725
4,790
126
38
9,725
9
38
12,045
2,243
9
(1,506)
12,045
—
2,243
12,791
(1,506)
3
—
12,794
12,791
22,557
3
12,794
$
— $
—
—
—
—
—
(98)
—
—
—
(3,437)
(98)
(3,535)
—
—
(3,437)
(476)
(3,535)
—
—
—
(476)
(4,790)
—
—
—
(8,801)
(4,790)
—
—
(8,801)
(9)
—
(15,355)
(2,339)
(9)
1,774
(15,355)
—
(2,339)
(15,929)
1,774
—
—
(15,929)
(15,929)
(24,730) $
—
(15,929)
864
695
374
188
2,442
695
971
188
1,258
2,442
—
971
6,792
1,258
13,030
—
5,247
6,792
445
13,030
1,987
5,247
—
445
283
1,987
27,784
—
283
38
27,784
935
38
5,952
42,251
935
(1,897)
5,952
(31,864)
42,251
15,377
(1,897)
3
(31,864)
15,380
15,377
43,202
3
15,380
43,202
37,104
$
8,271
$
22,557
$
(24,730) $
98
99
9999
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Balance
Sheets (in millions of dollars)
____________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
Altria
Group, Inc.
PM USA
at December 31, 2016
Assets
at December 31, 2016
Assets
Cash and cash equivalents
Receivables
Inventories:
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Leaf tobacco
Finished product
Other raw materials
Work in process
Finished product
Due from Altria Group, Inc. and subsidiaries
Income taxes
Other current assets
Due from Altria Group, Inc. and subsidiaries
Income taxes
Property, plant and equipment, at cost
Other current assets
Less accumulated depreciation
Total current assets
Total current assets
Property, plant and equipment, at cost
Goodwill
Less accumulated depreciation
Other intangible assets, net
Investment in AB InBev
Goodwill
Investment in consolidated subsidiaries
Other intangible assets, net
Finance assets, net
Investment in AB InBev
Due from Altria Group, Inc. and subsidiaries
Investment in consolidated subsidiaries
Other assets
Finance assets, net
Total Assets
Due from Altria Group, Inc. and subsidiaries
Other assets
Total Assets
Altria
4,521
Group, Inc.
—
4,521
—
—
—
—
—
—
—
—
—
—
—
167
—
3
—
4,691
167
—
3
—
4,691
—
—
—
—
—
—
17,852
—
11,636
—
—
17,852
4,790
11,636
18
—
38,987
4,790
18
38,987
$
$
$
$
$
$
$
$
1
PM USA
8
1
541
8
111
3
541
112
111
767
3
3,797
112
10
767
108
3,797
4,691
10
2,971
108
2,073
4,691
898
2,971
—
2,073
2
898
—
—
2,632
2
—
—
—
2,632
1,748
—
9,971
—
1,748
9,971
$
$
$
$
Non-
Guarantor
Subsidiaries
Non-
Guarantor
47
Subsidiaries
143
Total
Consolidating
Adjustments
Total
Consolidating
$
— $
Adjustments
—
Consolidated
4,569
Consolidated
151
47
351
143
53
509
351
371
53
1,284
509
1,511
371
92
1,284
109
1,511
3,186
92
1,864
109
804
3,186
1,060
1,864
5,285
804
12,034
1,060
—
5,285
—
12,034
1,028
—
—
—
131
1,028
22,724
—
131
22,724
$
$
$
— $
—
—
—
—
—
—
—
—
—
(5,308)
—
—
—
—
(5,308)
(5,308)
—
—
—
—
(5,308)
—
—
—
—
—
—
—
—
(14,268)
—
—
—
(4,790)
(14,268)
(1,384)
—
(25,750) $
(4,790)
(1,384)
(25,750) $
4,569
892
151
164
512
892
483
164
2,051
512
—
483
269
2,051
220
—
7,260
269
4,835
220
2,877
7,260
1,958
4,835
5,285
2,877
12,036
1,958
17,852
5,285
—
12,036
1,028
17,852
—
—
513
1,028
45,932
—
513
45,932
100
100
100
101
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
Altria
____________________________
Group, Inc.
PM USA
Altria
$
1
Group, Inc.
$
92
PM USA
Non-
Guarantor
Subsidiaries
Non-
Guarantor
332
Subsidiaries
Total
Consolidating
Adjustments
Total
Consolidating
$
Adjustments
Consolidated
— $
425
Consolidated
at December 31, 2016
Liabilities
Accounts payable
at December 31, 2016
Accrued liabilities:
Liabilities
Marketing
Accounts payable
Employment costs
Accrued liabilities:
Settlement charges
Marketing
Other
Employment costs
Settlement charges
Other
Dividends payable
Due to Altria Group, Inc. and subsidiaries
Total current liabilities
Total liabilities
Total current liabilities
Dividends payable
Long-term debt
Due to Altria Group, Inc. and subsidiaries
Deferred income taxes
Accrued pension costs
Long-term debt
Accrued postretirement health care costs
Deferred income taxes
Due to Altria Group, Inc. and subsidiaries
Accrued pension costs
Other liabilities
Accrued postretirement health care costs
Due to Altria Group, Inc. and subsidiaries
Other liabilities
Contingencies
Redeemable noncontrolling interest
Total liabilities
Stockholders’ Equity
Contingencies
Redeemable noncontrolling interest
Stockholders’ Equity
Common stock
Additional paid-in capital
Earnings reinvested in the business
Common stock
Accumulated other comprehensive losses
Additional paid-in capital
Cost of repurchased stock
Earnings reinvested in the business
Accumulated other comprehensive losses
Noncontrolling interests
Cost of repurchased stock
Total stockholders’ equity attributable to Altria Group, Inc.
Total stockholders’ equity
Total stockholders’ equity attributable to Altria Group, Inc.
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
$
$
$
—
1
104
—
—
261
104
1,188
—
5,030
261
6,584
1,188
13,881
5,030
5,424
6,584
207
13,881
—
5,424
—
207
121
—
26,217
—
121
—
26,217
935
—
5,893
36,906
935
(2,052)
5,893
(28,912)
36,906
12,770
(2,052)
—
(28,912)
12,770
12,770
38,987
—
12,770
$
$
619
92
14
3,696
619
438
14
—
3,696
237
438
5,096
—
—
237
—
5,096
—
—
1,453
—
—
—
146
1,453
6,695
—
146
—
6,695
—
—
3,310
237
—
(271)
3,310
—
237
3,276
(271)
—
—
3,276
3,276
9,971
—
3,276
$
$
$
$
$
128
332
171
5
128
326
171
—
5
41
326
1,003
—
—
41
4,376
1,003
598
—
764
4,376
4,790
598
160
764
11,691
4,790
160
38
11,691
9
38
11,585
1,118
9
(1,720)
11,585
—
1,118
10,992
(1,720)
3
—
10,995
10,992
22,724
3
10,995
—
— $
—
—
—
—
—
—
—
(5,308)
—
(5,308)
—
—
(5,308)
(1,384)
(5,308)
—
—
—
(1,384)
(4,790)
—
—
—
(11,482)
(4,790)
—
—
(11,482)
(9)
—
(14,895)
(1,355)
(9)
1,991
(14,895)
—
(1,355)
(14,268)
1,991
—
—
(14,268)
(14,268)
(25,750) $
—
(14,268)
747
425
289
3,701
747
1,025
289
1,188
3,701
—
1,025
7,375
1,188
13,881
—
8,416
7,375
805
13,881
2,217
8,416
—
805
427
2,217
33,121
—
427
38
33,121
935
38
5,893
36,906
935
(2,052)
5,893
(28,912)
36,906
12,770
(2,052)
3
(28,912)
12,773
12,770
45,932
3
12,773
45,932
38,987
$
9,971
$
22,724
$
(25,750) $
100
101
101
101
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
Altria
_____________________________
Group, Inc.
for the year ended December 31, 2017
Net revenues
Cost of sales
for the year ended December 31, 2017
Excise taxes on products
Net revenues
Gross profit
Cost of sales
Marketing, administration and research costs
Excise taxes on products
Asset impairment and exit costs
Gross profit
Operating (expense) income
Marketing, administration and research costs
Interest and other debt expense (income), net
Asset impairment and exit costs
Earnings from equity investment in AB InBev
Operating (expense) income
Gain on AB InBev/SABMiller business combination
Interest and other debt expense (income), net
Earnings from equity investment in AB InBev
Gain on AB InBev/SABMiller business combination
(Benefit) provision for income taxes
Equity earnings of subsidiaries
Earnings before income taxes and equity earnings of
Earnings before income taxes and equity earnings of
subsidiaries
subsidiaries
Net earnings
(Benefit) provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to Altria Group, Inc.
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive earnings, net of deferred income taxes
Comprehensive earnings
Net earnings
Comprehensive earnings attributable to noncontrolling
Other comprehensive earnings, net of deferred income taxes
Comprehensive earnings
Comprehensive earnings attributable to
Comprehensive earnings attributable to noncontrolling
interests
Altria Group, Inc.
interests
Comprehensive earnings attributable to
Altria Group, Inc.
— $
Altria
—
Group, Inc.
—
— $
—
—
173
—
—
—
(173)
173
510
—
(532)
(173)
(445)
510
(532)
294
(445)
(2,624)
7,304
294
10,222
(2,624)
—
7,304
10,222
10,222
—
10,222
10,222
155
10,377
10,222
155
—
10,377
$
$
$
$
$
$
$
$
$
$
$
$
PM USA
21,826
6,414
PM USA
5,864
21,826
9,548
6,414
1,710
5,864
1
9,548
7,837
1,710
(20)
1
—
7,837
—
(20)
—
7,857
—
3,127
558
7,857
5,288
3,127
—
558
5,288
5,288
—
5,288
5,288
3
5,291
5,288
3
—
5,291
$
$
$
$
$
$
$
$
Non-
Guarantor
Subsidiaries
3,787
Non-
Guarantor
1,166
Subsidiaries
218
3,787
2,403
1,166
479
218
32
2,403
1,892
479
215
32
—
1,892
—
215
—
1,677
—
(902)
—
1,677
2,579
(902)
(5)
—
2,574
2,579
(5)
2,574
2,579
214
2,793
2,579
214
(5)
2,793
$
Total
Consolidating
Adjustments
$
(37) $
Total
Consolidating
(37)
Adjustments
—
(37) $
—
(37)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,862)
—
(7,862)
—
—
(7,862)
(7,862) $
(7,862)
—
(7,862) $
(7,862) $
(217)
(8,079)
(7,862) $
(217)
—
(8,079)
$
$
$
$
Consolidated
25,576
7,543
Consolidated
6,082
25,576
11,951
7,543
2,362
6,082
33
11,951
9,556
2,362
705
33
(532)
9,556
(445)
705
(532)
9,828
(445)
(399)
—
9,828
10,227
(399)
(5)
—
10,222
10,227
(5)
10,222
10,227
155
10,382
10,227
155
(5)
10,382
10,377
—
10,377
$
$
5,291
—
5,291
2,788
(5)
2,788
$
$
(8,079) $
—
10,377
(5)
(8,079) $
10,377
102
102
102
103
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
Altria
_____________________________
Group, Inc.
for the year ended December 31, 2016
Net revenues
Cost of sales
for the year ended December 31, 2016
Excise taxes on products
Net revenues
Gross profit
Cost of sales
Marketing, administration and research costs
Excise taxes on products
Asset impairment and exit costs
Gross profit
Operating (expense) income
Marketing, administration and research costs
Interest and other debt expense, net
Asset impairment and exit costs
Loss on early extinguishment of debt
Operating (expense) income
Earnings from equity investment in SABMiller
Interest and other debt expense, net
Gain on AB InBev/SABMiller business combination
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Gain on AB InBev/SABMiller business combination
Provision for income taxes
Equity earnings of subsidiaries
Earnings before income taxes and equity earnings of
Earnings before income taxes and equity earnings of
subsidiaries
subsidiaries
Net earnings
Provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to Altria Group, Inc.
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive earnings (losses), net of deferred
Net earnings
Comprehensive earnings
Other comprehensive earnings (losses), net of deferred
Comprehensive earnings attributable to noncontrolling
income taxes
income taxes
interests
Comprehensive earnings
Comprehensive earnings attributable to
Comprehensive earnings attributable to noncontrolling
Altria Group, Inc.
interests
Comprehensive earnings attributable to
Altria Group, Inc.
— $
Altria
—
Group, Inc.
—
— $
—
—
165
—
5
—
(170)
165
519
5
823
(170)
(795)
519
(13,865)
823
(795)
13,148
(13,865)
4,453
5,544
13,148
14,239
4,453
—
5,544
14,239
14,239
—
14,239
14,239
$
$
$
1,228
14,239
15,467
1,228
—
15,467
15,467
—
$
$
$
$
$
$
$
$
$
$
Non-
Guarantor
Subsidiaries
3,633
Non-
Guarantor
1,153
Subsidiaries
220
3,633
2,260
1,153
489
220
77
2,260
1,694
489
218
77
—
1,694
—
218
—
—
—
1,476
—
524
—
1,476
952
524
(5)
—
947
952
(5)
947
952
$
Total
Consolidating
Adjustments
$
(35) $
Total
Consolidating
(35)
Adjustments
—
(35) $
—
(35)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,812)
—
(5,812)
—
—
(5,812)
(5,812) $
(5,812)
—
(5,812) $
(5,812) $
$
$
$
Consolidated
25,744
7,746
Consolidated
6,407
25,744
11,591
7,746
2,650
6,407
179
11,591
8,762
2,650
747
179
823
8,762
(795)
747
(13,865)
823
(795)
21,852
(13,865)
7,608
—
21,852
14,244
7,608
(5)
—
14,239
14,244
(5)
14,239
14,244
PM USA
22,146
6,628
PM USA
6,187
22,146
9,331
6,628
1,996
6,187
97
9,331
7,238
1,996
10
97
—
7,238
—
10
—
—
—
7,228
—
2,631
268
7,228
4,865
2,631
—
268
4,865
4,865
—
4,865
4,865
$
$
$
$
$
$
(16)
4,865
4,849
(16)
—
4,849
4,849
—
$
(28)
952
924
(28)
(5)
924
919
(5)
$
$
44
(5,812) $
(5,768)
44
—
(5,768)
(5,768) $
—
1,228
14,244
15,472
1,228
(5)
15,472
15,467
(5)
15,467
$
4,849
$
919
$
(5,768) $
15,467
102
103
103
103
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
Altria
_____________________________
Group, Inc.
for the year ended December 31, 2015
Net revenues
Cost of sales
for the year ended December 31, 2015
Excise taxes on products
Net revenues
Gross profit
Cost of sales
Marketing, administration and research costs
Excise taxes on products
Reduction of PMI tax-related receivable
Asset impairment and exit costs
Marketing, administration and research costs
Operating (expense) income
Gross profit
Reduction of PMI tax-related receivable
Interest and other debt expense, net
Asset impairment and exit costs
Loss on early extinguishment of debt
Operating (expense) income
Earnings from equity investment in SABMiller
Interest and other debt expense, net
Gain on AB InBev/SABMiller business combination
Loss on early extinguishment of debt
Earnings from equity investment in SABMiller
Gain on AB InBev/SABMiller business combination
(Benefit) provision for income taxes
Equity earnings of subsidiaries
subsidiaries
(Loss) earnings before income taxes and equity earnings of
(Loss) earnings before income taxes and equity earnings of
subsidiaries
Net earnings
(Benefit) provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to Altria Group, Inc.
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria Group, Inc.
Net earnings
Other comprehensive (losses) earnings, net of deferred
Net earnings
Comprehensive earnings
Other comprehensive (losses) earnings, net of deferred
Comprehensive earnings attributable to noncontrolling
income taxes
income taxes
interests
Comprehensive earnings
Comprehensive earnings attributable to
Comprehensive earnings attributable to noncontrolling
Altria Group, Inc.
interests
Comprehensive earnings attributable to
Altria Group, Inc.
$
$
$
$
$
$
$
$
— $
Altria
—
Group, Inc.
—
— $
—
—
189
—
41
—
—
189
(230)
41
560
—
228
(230)
(757)
560
(5)
228
(757)
(256)
(5)
(184)
5,313
(256)
5,241
(184)
—
5,313
5,241
5,241
—
5,241
5,241
$
$
$
PM USA
22,133
6,664
PM USA
6,369
22,133
9,100
6,664
2,094
6,369
—
9,100
—
2,094
7,006
—
33
—
—
7,006
—
33
—
—
—
6,973
—
2,536
268
6,973
4,705
2,536
—
268
4,705
4,705
—
4,705
4,705
Non-
Guarantor
Subsidiaries
3,342
Non-
Guarantor
1,117
Subsidiaries
211
3,342
2,014
1,117
425
211
—
2,014
4
425
1,585
—
224
4
—
1,585
—
224
—
—
—
1,361
—
483
—
1,361
878
483
(2)
—
876
878
(2)
876
878
$
Total
Consolidating
Adjustments
$
(41) $
Total
Consolidating
(41)
Adjustments
—
(41) $
—
(41)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,581)
—
(5,581)
—
—
(5,581)
(5,581) $
(5,581)
—
(5,581) $
(5,581) $
$
$
$
Consolidated
25,434
7,740
Consolidated
6,580
25,434
11,114
7,740
2,708
6,580
41
11,114
4
2,708
8,361
41
817
4
228
8,361
(757)
817
(5)
228
(757)
8,078
(5)
2,835
—
8,078
5,243
2,835
(2)
—
5,241
5,243
(2)
5,241
5,243
$
(598)
5,241
4,643
(598)
—
4,643
4,643
—
$
86
4,705
4,791
86
—
4,791
4,791
—
(69)
878
809
(69)
(2)
809
807
(2)
$
$
(17)
(5,581) $
(5,598)
(17)
—
(5,598)
(5,598) $
—
(598)
5,243
4,645
(598)
(2)
4,645
4,643
(2)
$
$
$
$
$
$
$
4,643
$
4,791
$
807
$
(5,598) $
4,643
104
104
104
105
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
for the year ended December 31, 2017
Cash Provided by Operating Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Acquisitions of businesses and assets
Proceeds from finance assets
Payment for derivative financial instruments
Other
Net cash used in investing activities
Cash Provided by (Used in) Financing Activities
Repurchases of common stock
Dividends paid on common stock
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
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
$
6,910
$
4,049
$
841
$
(6,878) $
4,922
—
—
—
(5)
—
(5)
(2,917)
(4,807)
(2,459)
—
(40)
(10,223)
(34)
—
—
—
4
(30)
—
—
1,410
(5,429)
—
(4,019)
(165)
(415)
133
—
15
(432)
—
—
1,049
(1,449)
(7)
(407)
—
—
—
—
—
—
—
—
—
6,878
—
6,878
(3,318)
4,521
1,203
$
$
—
1
1
$
2
47
49
$
—
—
— $
(199)
(415)
133
(5)
19
(467)
(2,917)
(4,807)
—
—
(47)
(7,771)
(3,316)
4,569
1,253
104
105
105
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
(in millions of dollars)
_____________________________
for the year ended December 31, 2016
Cash Provided by Operating Activities
for the year ended December 31, 2016
Net cash provided by operating activities
Cash Provided by Operating Activities
Cash Provided by (Used in) Investing Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Acquisition of assets
Capital expenditures
Proceeds from finance assets
Acquisition of assets
Proceeds from AB InBev/SABMiller business combination
Proceeds from finance assets
Purchase of AB InBev ordinary shares
Proceeds from AB InBev/SABMiller business combination
Payment for derivative financial instrument
Purchase of AB InBev ordinary shares
Proceeds from derivative financial instruments
Payment for derivative financial instrument
Other
Proceeds from derivative financial instruments
Other
Net cash provided by (used in) investing activities
Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) investing activities
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Long-term debt repaid
Long-term debt issued
Repurchases of common stock
Long-term debt repaid
Dividends paid on common stock
Repurchases of common stock
Changes in amounts due to/from Altria Group, Inc.
Dividends paid on common stock
and subsidiaries
and subsidiaries
Changes in amounts due to/from Altria Group, Inc.
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Premiums and fees related to early extinguishment of debt
Other
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash and cash equivalents:
Net cash used in financing activities
Cash and cash equivalents:
Increase (decrease)
Balance at beginning of year
Increase (decrease)
Balance at end of year
Balance at beginning of year
Balance at end of year
PM USA
PM USA
5,138
5,138
(45)
—
(45)
—
—
—
—
—
—
—
—
—
—
—
—
(45)
—
(45)
—
—
—
—
—
—
—
—
(28)
—
(28)
(5,064)
—
—
(5,064)
(5,092)
—
(5,092)
1
—
1
1
—
1
$
$
$
$
$
$
$
$
$
$
$
$
Altria
Group, Inc.
Altria
Group, Inc.
4,356
4,356
—
—
—
—
—
4,773
—
(1,578)
4,773
(3)
(1,578)
510
(3)
—
510
3,702
—
3,702
1,976
(933)
1,976
(1,030)
(933)
(4,512)
(1,030)
(4,512)
(530)
(809)
(530)
—
(809)
(12)
—
(5,850)
(12)
(5,850)
2,208
2,313
2,208
4,521
2,313
4,521
106
106
106
Non-
Guarantor
Non-
Subsidiaries
Guarantor
Subsidiaries
319
Total
Consolidating
Total
Adjustments
Consolidating
Adjustments
$
(5,992) $
Consolidated
Consolidated
3,821
319
(144)
(45)
(144)
231
(45)
—
231
—
—
—
—
—
—
9
—
51
9
51
—
—
—
—
—
—
—
—
558
—
558
(928)
—
(9)
(928)
(379)
(9)
(379)
(9)
56
(9)
47
56
47
$
$
$
(5,992) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,992
—
—
5,992
5,992
—
5,992
—
—
—
— $
—
— $
3,821
(189)
(45)
(189)
231
(45)
4,773
231
(1,578)
4,773
(3)
(1,578)
510
(3)
9
510
3,708
9
3,708
1,976
(933)
1,976
(1,030)
(933)
(4,512)
(1,030)
(4,512)
—
(809)
—
—
(809)
(21)
—
(5,329)
(21)
(5,329)
2,200
2,369
2,200
4,569
2,369
4,569
107
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Total
Consolidating
Total
Adjustments
Consolidating
Adjustments
Consolidated
Consolidated
5,843
(5,440) $
(5,440) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,440
—
—
5,440
5,440
—
5,440
—
—
—
— $
—
— $
5,843
(229)
354
(229)
(132)
354
(8)
(132)
(15)
(8)
(15)
(1,793)
(554)
(1,793)
(4,179)
(554)
(4,179)
—
(226)
—
—
(226)
(28)
—
(6,780)
(28)
(6,780)
(952)
3,321
(952)
2,369
3,321
2,369
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
(in millions of dollars)
_____________________________
for the year ended December 31, 2015
Cash Provided by Operating Activities
for the year ended December 31, 2015
Net cash provided by operating activities
Cash Provided by Operating Activities
Cash Provided by (Used in) Investing Activities
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Proceeds from finance assets
Capital expenditures
Payment for derivative financial instrument
Proceeds from finance assets
Other
Payment for derivative financial instrument
Other
Net cash (used in) provided by investing activities
Cash Provided by (Used in) Financing Activities
Net cash (used in) provided by investing activities
Cash Provided by (Used in) Financing Activities
Long-term debt repaid
Repurchases of common stock
Long-term debt repaid
Dividends paid on common stock
Repurchases of common stock
Changes in amounts due to/from Altria Group, Inc.
Dividends paid on common stock
and subsidiaries
and subsidiaries
Changes in amounts due to/from Altria Group, Inc.
Premiums and fees related to early extinguishment of debt
Cash dividends paid to parent
Premiums and fees related to early extinguishment of debt
Other
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash and cash equivalents:
Net cash used in financing activities
Cash and cash equivalents:
(Decrease) increase
Balance at beginning of year
(Decrease) increase
Balance at end of year
Balance at beginning of year
Balance at end of year
Altria
Group, Inc.
Altria
Group, Inc.
5,118
5,118
—
—
—
(132)
—
—
(132)
(132)
—
(132)
(1,793)
(554)
(1,793)
(4,179)
(554)
(4,179)
814
(226)
814
—
(226)
(16)
—
(5,954)
(16)
(5,954)
(968)
3,281
(968)
2,313
3,281
2,313
$
$
$
$
$
$
PM USA
PM USA
5,204
5,204
(51)
—
(51)
—
—
10
—
(41)
10
(41)
—
—
—
—
—
—
(495)
—
(495)
(4,671)
—
—
(4,671)
(5,166)
—
(5,166)
(3)
3
(3)
— $
3
— $
$
$
$
$
Non-
Guarantor
Non-
Subsidiaries
Guarantor
Subsidiaries
961
961
(178)
354
(178)
—
354
(18)
—
158
(18)
158
—
—
—
—
—
—
(319)
—
(319)
(769)
—
(12)
(769)
(1,100)
(12)
(1,100)
19
37
19
56
37
56
106
107
107
107
$
$
$
$
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Note 20. Quarterly Financial Data (Unaudited)
(in millions, except per share data)
Net revenues
Gross profit
Net earnings
Net earnings attributable to Altria Group, Inc.
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.
(in millions, except per share data)
Net revenues
Gross profit
Net earnings
Net earnings attributable to Altria Group, Inc.
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.
1st
6,083
2,779
1,402
1,401
0.72
1st
6,066
2,656
1,218
1,217
0.62
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017 Quarters
2nd
6,663
3,119
1,990
1,989
1.03
$
$
$
$
$
2016 Quarters
2nd
6,521
2,957
1,654
1,653
0.84
$
$
$
$
$
3rd
6,729
3,183
1,867
1,866
0.97
3rd
6,905
3,150
1,094
1,093
0.56
$
$
$
$
$
$
$
$
$
$
4th
6,101
2,870
4,968
4,966
2.60
4th
6,252
2,828
10,278
10,276
5.27
During 2017 and 2016, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.:
(in millions)
NPM Adjustment Items
Tobacco and health litigation items, including accrued interest
Asset impairment, exit, implementation and acquisition-related costs
Settlement charge for lump sum pension payments
Gain on AB InBev/SABMiller business combination
AB InBev special items
(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
1st
(1) $
1
30
—
—
73
103
$
1st
18
38
—
122
—
(40)
166
304
$
$
2017 Quarters
2nd
— $
17
30
—
(408)
2
(359) $
3rd
5
—
17
—
(37)
34
19
$
$
4th
—
62
12
81
—
51
206
2016 Quarters
2nd
— $
5
—
5
—
(117)
21
(86) $
3rd
— $
45
—
6
823
(48)
(40)
786
4th
—
17
21
73
—
(13,660)
(236)
$ (13,785)
$
$
$
$
As discussed in Note 14. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated
statements of earnings during 2017 and 2016 as a result of various tax events, including the impact of the Tax Reform Act in the fourth
quarter of 2017.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Report of Independent Registered Public
Accounting Firm
To the Board of Directors and
Stockholders of Altria Group, Inc.:
Opinions on the Financial Statements and Internal Control
over Financial Reporting
We have audited the accompanying consolidated balance sheets
of Altria Group, Inc. and its subsidiaries as of December 31, 2017
and 2016, and the related consolidated statements of earnings,
comprehensive earnings, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2017,
including the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited Altria
Group, Inc.’s internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Altria Group, Inc. and its subsidiaries at December 31, 2017
and 2016, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2017
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, 2017, based on criteria
established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
Altria Group, Inc.’s management is responsible for these
consolidated 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 Altria Group, Inc.’s consolidated financial
statements and on Altria Group, Inc.’s internal control over
financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to Altria Group, Inc. in accordance
with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all
material respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial
Reporting
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
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, 2018
We have served as the Company’s auditor since at least 1934,
which is when the Company became subject to SEC reporting
requirements. We have not determined the specific year we began
serving as auditor of the Company.
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10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Based on this assessment, management determined that, as of
December 31, 2017, 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, 2017,
as stated in their report herein.
February 1, 2018
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,
2017. 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.
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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 17, 2018 that will be filed with the SEC on or about April 5, 2018 (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 Our Board of Directors” sections of
the proxy statement.
Executive Officers as of February 13, 2018:
Name
Martin J. Barrington
Daniel J. Bryant
Office
Chairman, Chief Executive Officer and President
Vice President and Treasurer
Kevin C. Crosthwaite, Jr.
James E. Dillard III
Ivan S. Feldman
Murray R. Garnick
William F. Gifford, Jr.
Craig A. Johnson
Salvatore Mancuso
Brian W. Quigley
W. Hildebrandt Surgner, Jr. Vice President, Corporate Secretary and Associate General Counsel
Charles N. Whitaker
President and Chief Executive Officer, Philip Morris USA Inc.
Senior Vice President, Research, Development and Sciences
Vice President and Controller
Executive Vice President and General Counsel
Executive Vice President and Chief Financial Officer
President and Chief Executive Officer, Altria Group Distribution Company
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
64
48
42
54
51
58
47
65
52
44
52
51
54
All of the above-mentioned officers have been employed
by Altria Group, Inc. or its subsidiaries in various capacities
during the past five years.
Effective April 25, 2017, Mr. Crosthwaite was appointed
President and Chief Executive Officer, Philip Morris USA Inc.
Mr. Crosthwaite has been continuously employed by Altria
Group, Inc. subsidiaries in positions across their businesses,
including Strategy and Business Development, Brand
Management and Sales since 1997.
Effective July 1, 2017, Mr. Garnick was appointed
Executive Vice President and General Counsel of Altria Group,
Inc. Mr. Garnick previously served as Deputy General Counsel of
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Altria Client Services LLC and has been continuously employed
by Altria Group, Inc. or its subsidiaries since 2008.
Effective August 24, 2017, Mr. Dillard, previously Senior
Vice President, Research, Development and Regulatory Affairs of
Altria Group, Inc., was appointed Senior Vice President,
Research, Development and Sciences of Altria Group, Inc.
Effective January 1, 2018, Mr. Surgner, previously
Corporate Secretary and Senior Assistant General Counsel of
Altria Group, Inc., was appointed Vice President, Corporate
Secretary and Associate General Counsel of Altria Group, Inc.
As previously announced, effective upon the conclusion of
the Annual Meeting of Shareholders on May 17, 2018, Mr.
Barrington will retire as Chairman, Chief Executive Officer and
President and Mr. Willard will become Chairman and Chief
Executive Officer. Additionally, Mr. Gifford will become Vice
Chairman and Chief Financial Officer, effective upon the
conclusion of the Annual Meeting of Shareholders.
Mr. Whitaker’s wife and Mr. Surgner’s wife are first
cousins.
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
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.
Item 11. Executive Compensation.
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, 2017” 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, 2017, 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)
2,606,482 (2)
$—
39,082,184 (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 2,384,501 shares of restricted stock units and 221,981 shares that may be issued upon vesting of performance stock units if
(3)
maximum performance measures are achieved.
Includes 38,161,242 shares available under the 2015 Performance Incentive Plan and 920,942 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.
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113
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.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Earnings for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting
Page
39
41
42
43
44
45
109
110
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, 2017 will
be filed by amendment within six months after AB InBev’s year ended December 31, 2017.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
2.1
2.2
2.3
2.4
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).
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3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
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).
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).
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10.8
10.9
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
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).
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).
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.
Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2016 (File No. 1-08940).*
Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).*
Form of Supplemental Employee Grantor Trust Enrollment Agreement. Incorporated by reference to
Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No.
1-08940).*
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10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
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).*
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).*
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 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 Restricted Stock Unit Agreement, dated as of January 30, 2017. Incorporated by reference
to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File
No. 1-08940).*
Form of Performance Stock Unit Agreement, dated as of January 30, 2017. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31,
2017 (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).*
Agreement and General Release between Altria Group, Inc. and Denise F. Keane, dated June 29,
2017. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the
period ended June 30, 2017 (File No. 1-08940).*
12
Statements regarding computation of ratios of earnings to fixed charges.
116
116
117
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC 21
23
24
31.1
31.2
32.1
32.2
99.1
99.2
99.3
Subsidiaries of Altria Group, Inc.
Consent of independent registered public accounting firm.
Powers of attorney.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certain Litigation Matters.
Trial Schedule for Certain Cases.
Definitions of Terms Related to Financial Covenants Included in Altria Group, Inc.’s Amended and
Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30,
2013 (File No. 1-08940).
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
101.LAB
XBRL Taxonomy Extension Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to
participate.
Item 16. Form 10-K Summary.
None.
116
117
117
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC 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, 2018
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, 2018
/s/ WILLIAM F. GIFFORD, JR.
(William F. Gifford, Jr.)
Executive Vice President and
Chief Financial Officer
February 27, 2018
/s/ IVAN S. FELDMAN
(Ivan S. Feldman)
Vice President and Controller
February 27, 2018
Directors
* GERALD L. BALILES,
JOHN T. CASTEEN III,
DINYAR S. DEVITRE,
THOMAS F. FARRELL II,
DEBRA J. KELLY-ENNIS,
W. LEO KIELY III,
KATHRYN B. MCQUADE,
GEORGE MUÑOZ,
MARK E. NEWMAN,
NABIL Y. SAKKAB,
VIRGINIA E. SHANKS,
HOWARD A. WILLARD III
*By:
/s/ MARTIN J. BARRINGTON
(MARTIN J. BARRINGTON
ATTORNEY-IN-FACT)
February 27, 2018
118
118
119
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC [THIS PAGE LEFT INTENTIONALLY BLANK]
118
119
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Disclosure of Non-GAAP Financial Measures
Disclosure of Non-GAAP Financial Measures
Disclosure of Non-GAAP Financial Measures
Altria reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP).
Altria reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP).
Altria reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP).
Altria’s management reviews certain financial results, including OCI, OCI margins and diluted EPS, on an adjusted
Altria’s management reviews certain financial results, including OCI, OCI margins and diluted EPS, on an adjusted
Altria’s management reviews certain financial results, including OCI, OCI margins and diluted EPS, on an adjusted
basis, which exclude certain income and expense items that management believes are not part of underlying
basis, which exclude certain income and expense items that management believes are not part of underlying
basis, which exclude 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
operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, gain
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
on AB InBev/SABMiller business combination, AB InBev/SABMiller special items, certain tax items, charges
on AB InBev/SABMiller business combination, AB InBev/SABMiller special items, certain tax items, charges
associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer (NPM)
associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer (NPM)
associated with tobacco and health litigation items, and resolutions of certain non-participating manufacturer (NPM)
adjustment disputes under the Master Settlement Agreement (such dispute resolutions are referred to as NPM
adjustment disputes under the Master Settlement Agreement (such dispute resolutions are referred to as NPM
adjustment disputes under the Master Settlement Agreement (such dispute resolutions are referred to as NPM
Adjustment Items). Altria’s management does not view any of these special items to be part of Altria’s underlying
Adjustment Items). Altria’s management does not view any of these special items to be part of Altria’s underlying
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, may be infrequent, are difficult to predict and can distort underlying business
results as they may be highly variable, may be infrequent, are difficult to predict and can distort underlying business
results as they may be highly variable, may be infrequent, are difficult to predict and can distort underlying business
trends and results. Altria’s management believes that adjusted financial measures provide useful additional insight
trends and results. Altria’s management believes that adjusted financial measures provide useful additional insight
trends and results. Altria’s management believes that adjusted financial measures provide useful additional insight
into underlying business trends and results and provide a more meaningful comparison of year-over-year results.
into underlying business trends and results and provide a more meaningful comparison of year-over-year results.
into underlying business trends and results and provide a more meaningful comparison of year-over-year results.
Altria’s management uses adjusted financial measures for planning, forecasting and evaluating business and financial
Altria’s management uses adjusted financial measures for planning, forecasting and evaluating business and financial
Altria’s management uses adjusted financial measures for planning, forecasting and evaluating business and financial
performance, including allocating resources and evaluating results relative to employee compensation targets.
performance, including allocating resources and evaluating results relative to employee compensation targets.
performance, including allocating resources and evaluating results relative to employee compensation targets.
These adjusted financial measures are not consistent with GAAP and may not be calculated the same as similarly
These adjusted financial measures are not consistent with GAAP and may not be calculated the same as similarly
These adjusted financial measures are not consistent with 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
titled measures used by other companies. These adjusted financial measures should thus be considered as
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
supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared
supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared
in accordance with GAAP. Reconciliations of historical adjusted financial measures to corresponding GAAP
in accordance with GAAP. Reconciliations of historical adjusted financial measures to corresponding GAAP
in accordance with GAAP. Reconciliations of historical adjusted financial measures to corresponding GAAP
measures are provided below.
measures are provided below.
measures are provided below.
Reconciliations of Adjusted OCI
($ in millions)
Reconciliations of Adjusted OCI
Reconciliations of Adjusted OCI
($ in millions)
($ in millions)
Smokeable Products
Smokeable Products
Smokeable Products
Smokeless Products
Smokeless Products
Smokeless Products
2017
2017
2017
2012
2012
2012
(5,927 )
(5,927)
(5,927)
For the years ended December 31,
For the years ended December 31,
For the years ended December 31,
Net revenues
Excise taxes
Net revenues
Net revenues
Excise taxes
Excise taxes
Revenues net of excise taxes
Revenues net of excise taxes
Revenues net of excise taxes
Reported OCI
NPM Adjustment Items
Reported OCI
Reported OCI
Asset impairment, exit, implementation and
NPM Adjustment Items
NPM Adjustment Items
acquisition-related costs
Asset impairment, exit, implementation and
Asset impairment, exit, implementation and
acquisition-related costs
acquisition-related costs
Tobacco and health litigation items
Tobacco and health litigation items
Tobacco and health litigation items
Settlement charge for lump sum pension payments
Settlement charge for lump sum pension payments
Settlement charge for lump sum pension payments
Adjusted OCI
Adjusted OCI
Adjusted OCI
Adjusted OCI margin**
Adjusted OCI margin change (2012-2017)
Adjusted OCI margin**
Adjusted OCI margin**
Adjusted OCI margin change (2012-2017)
Adjusted OCI margin change (2012-2017)
*CAGR is compounded annual growth rate.
* CAGR is compounded annual growth rate
* CAGR is compounded annual growth rate
**Adjusted OCI margin is calculated as adjusted OCI divided by revenues net of excise taxes.
**Adjusted OCI margin is calculated as adjusted OCI divided by revenues net of excise taxes.
**Adjusted OCI margin is calculated as adjusted OCI divided by revenues net of excise taxes.
$ 22,636 $ 22,216
$ 22,216
$ 22,636
(6,984 )
$ 22,216
$ 22,636
(6,984)
(6,984)
$ 16,709 $ 15,232
$ 15,232
$ 16,709
$ 15,232
$ 16,709
$ 8,408 $ 6,239
—
$ 6,239
$ 8,408
(5 )
$ 6,239
$ 8,408
—
(5)
(5)
—
28
29
28
29
28
29
4
72
4
72
4
72
—
57
—
57
—
57
$ 8,561 $ 6,271
$ 6,271
$ 8,561
$ 6,271
$ 8,561
41.2%
51.2%
41.2%
51.2%
51.2%
41.2%
10.0pp
10.0pp
10.0pp
CAGR*
CAGR*
CAGR*
2017
2017
2017
2012
2012
2012
(132 )
(132)
(132)
$ 2,155 $ 1,691
$ 1,691
$ 2,155
(113 )
$ 1,691
$ 2,155
(113)
(113)
$ 2,023 $ 1,578
$ 1,578
$ 2,023
$ 1,578
$ 2,023
931
$ 1,300 $
—
—
931
$
$ 1,300
931
$ 1,300
$
—
—
—
—
28
56
28
56
28
56
—
—
—
—
—
—
—
16
—
16
—
16
959
959
959
60.8%
60.8%
60.8%
6.4 % $ 1,372 $
$
6.4% $ 1,372
6.4% $ 1,372
$
67.8%
67.8%
67.8%
7.0pp
7.0pp
7.0pp
CAGR
CAGR
CAGR
7.4 %
7.4%
7.4%
Reconciliation of Free Cash Flow
Reconciliation of Free Cash Flow
Reconciliation of Free Cash Flow
($ in millions)
($ in millions)
($ in millions)
For the years ended December 31,
For the years ended December 31,
For the years ended December 31,
Net cash provided by operating activities
Net cash provided by operating activities
Capital expenditures
Net cash provided by operating activities
Capital expenditures
Capital expenditures
Free cash flow
Free cash flow
Free cash flow
5-year average free cash flow
5-year average free cash flow
5-year average free cash flow
2017
2017
4,922
2017
4,922
(199 )
4,922
(199)
(199)
4,723
4,723
4,723
4,543
4,543
4,543
$
$
$
$
$
$
$
$
$
2016
2016
3,821
2016
3,821
(189 )
3,821
(189)
(189)
3,632
3,632
3,632
$
$
$
$
$
$
2015
2015
5,843
2015
5,843
(229 )
5,843
(229)
(229)
5,614
5,614
5,614
$
$
$
$
$
$
2014
2014
4,663
2014
4,663
(163 )
4,663
(163)
(163)
4,500
4,500
4,500
2013
2013
4,375
2013
4,375
(131 )
4,375
(131)
(131)
4,244
4,244
4,244
$
$
$
$
$
$
$
$
$
$
$
$
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Disclosure of Non-GAAP Financial Measures (continued)
Disclosure of Non-GAAP Financial Measures (continued)
Reconciliations of Adjusted Diluted EPS
Reconciliations of Adjusted Diluted EPS
($ in millions, except per share data)
($ in millions, except per share data)
For the year ended December 31, 2017
For the year ended December 31, 2017
2017 Reported
2017 Reported
NPM Adjustment Items
NPM Adjustment Items
Tobacco and health litigation items
Tobacco and health litigation items
AB InBev special items
AB InBev special items
Asset impairment, exit, implementation and
Asset impairment, exit, implementation and
acquisition-related costs
acquisition-related costs
Gain on AB InBev/SABMiller business
Gain on AB InBev/SABMiller business
combination
combination
Settlement charge for lump sum pension payments
Settlement charge for lump sum pension payments
Tax items
Tax items
2017 Adjusted for Special Items
2017 Adjusted for Special Items
Adjusted diluted EPS growth 2016-2017
Adjusted diluted EPS growth 2016-2017
Adjusted diluted EPS CAGR 2012-2017
Adjusted diluted EPS CAGR 2012-2017
For the year ended December 31, 2016
For the year ended December 31, 2016
2016 Reported
2016 Reported
NPM Adjustment Items
NPM Adjustment Items
Tobacco and health litigation items
Tobacco and health litigation items
SABMiller special items
SABMiller special items
Loss on early extinguishment of debt
Loss on early extinguishment of debt
Asset impairment, exit, implementation and
Asset impairment, exit, implementation and
acquisition-related costs
acquisition-related costs
Patent litigation settlement
Patent litigation settlement
Gain on AB InBev/SABMiller business
Gain on AB InBev/SABMiller business
combination
combination
Tax items
Tax items
2016 Adjusted for Special Items
2016 Adjusted for Special Items
For the year ended December 31, 2012
For the year ended December 31, 2012
2012 Reported
2012 Reported
Asset impairment, exit and implementation costs
Asset impairment, exit and implementation costs
SABMiller special items
SABMiller special items
PMCC leveraged lease benefit
PMCC leveraged lease benefit
Loss on early extinguishment of debt
Loss on early extinguishment of debt
Tobacco and health litigation items
Tobacco and health litigation items
Tax items
Tax items
2012 Adjusted for Special Items
2012 Adjusted for Special Items
Earnings
Earnings
before
before
Income
Income
Taxes
Taxes
(Benefit)
(Benefit)
Provision
Provision
for Income
for Income
Taxes
Taxes
Net
Net
Earnings
Earnings
Net Earnings
Net Earnings
Attributable to
Attributable to
Altria Group, Inc.
Altria Group, Inc.
Diluted
Diluted
EPS
EPS
$
$
$
$
$
$
$
$
$
$
$
$
9,828 $
9,828 $
4
4
80
80
160
160
89
89
(445)
(445 )
81
81
—
—
9,797 $
9,797 $
21,852 $
21,852 $
18
18
105
105
(89)
(89 )
823
823
206
206
21
21
(399) $ 10,227 $
(399 ) $ 10,227 $
2
2
30
30
55
55
2
2
50
50
105
105
34
34
(156)
(156 )
32
32
3,674
3,674
3,272 $
3,272 $
55
55
(289)
(289 )
49
49
(3,674)
(3,674 )
6,525 $
6,525 $
7,608 $ 14,244 $
7,608 $ 14,244 $
7
7
34
34
(32)
(32 )
282
282
11
11
71
71
(57)
(57 )
541
541
71
71
8
8
135
135
13
13
(13,865)
(13,865 )
—
—
9,071 $
9,071 $
(4,864)
(4,864 )
30
30
3,144 $
3,144 $
(9,001)
(9,001 )
(30)
(30 )
5,927 $
5,927 $
6,477 $
6,477 $
56
56
(248)
(248 )
7
7
874
874
5
5
(52)
(52 )
7,119 $
7,119 $
2,294 $
2,294 $
21
21
(87)
(87 )
75
75
315
315
1
1
14
14
2,633 $
2,633 $
4,183 $
4,183 $
35
35
(161)
(161 )
(68)
(68 )
559
559
4
4
(66)
(66 )
4,486 $
4,486 $
10,222 $
10,222 $
2
2
50
50
105
105
55
55
5.31
5.31
—
—
0.03
0.03
0.05
0.05
0.03
0.03
(289)
(289 )
49
49
(3,674)
(3,674 )
6,520 $
6,520 $
(0.15)
(0.15 )
0.03
0.03
(1.91)
(1.91 )
3.39
3.39
11.9%
11.9 %
8.9%
8.9 %
7.28
7.28
0.01
0.01
0.04
0.04
(0.03)
(0.03 )
0.28
0.28
0.07
0.07
0.01
0.01
(4.61)
(4.61 )
(0.02)
(0.02 )
3.03
3.03
2.06
2.06
0.01
0.01
(0.08)
(0.08 )
(0.03)
(0.03 )
0.28
0.28
—
—
(0.03)
(0.03 )
2.21
2.21
14,239 $
14,239 $
11
11
71
71
(57)
(57 )
541
541
135
135
13
13
(9,001)
(9,001 )
(30)
(30 )
5,922 $
5,922 $
4,180 $
4,180 $
35
35
(161)
(161 )
(68)
(68 )
559
559
4
4
(66)
(66 )
4,483 $
4,483 $
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC [THIS PAGE LEFT INTENTIONALLY BLANK]
10-K ALTRIAAR RELEASE Tuesday, February 27, 2018 10:00pmAndra Design LLC Shareholder Information
Shareholder
Response Center:
Computershare Trust Company,
N.A. (Computershare), our
transfer agent, will be happy to
answer questions about your
accounts, certificates, dividends
or the Direct Stock Purchase and
Dividend Reinvestment Plan.
Within the U.S. and Canada,
shareholders may call toll-free:
1-800-442-0077
From outside the U.S. or
Canada, shareholders may call:
1-781-575-3572
Postal address:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
To eliminate duplicate mailings,
please contact Computershare (if
you are a registered shareholder)
or your broker (if you hold your
shares through a brokerage firm).
Direct Stock Purchase and
Dividend Reinvestment Plan:
Altria offers a Direct Stock
Purchase and Dividend
Reinvestment Plan, administered
by Computershare. For more
information, please contact
Computershare.
Shareholder Publications:
Altria makes a variety of publica-
tions and reports available.
These include the Annual Report,
news releases and other
publications. For copies, please
visit our website at:
www.altria.com/investors
Altria 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/SECfilings
If you do not have Internet
access, you may call:
1-804-484-8222
Internet 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/investors
Mailing Addresses
2018 Annual Meeting:
The Altria Annual Meeting of
Shareholders will be held at
9:00 a.m. (Eastern Time) on
Thursday, May 17, 2018 at
The Greater Richmond
Convention Center,
403 North Third Street,
Richmond, VA 23219.
For further information, call:
1-804-484-8838
Additional Information:
The information on the respec-
tive websites of Altria and its
subsidiaries is not, and shall not
be deemed to be, a part of
this report or incorporated into
any filings Altria makes with
the SEC.
Trademarks and service marks
in this report are the registered
property of or licensed by Altria
or its subsidiaries.
Stock Exchange Listing:
The principal
stock exchange
on which Altria’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,
2018, there were approximately
64,000 holders of record of
Altria’s common stock.
Investor App
Stay up-to-date with
the latest investor
information on our app.
Download at the
Apple Store and
at Google Play.
l
Download the
Altria Investor App
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
altria.com
Philip Morris USA Inc.
P.O. Box 26603
Richmond, VA 23261-6603
philipmorrisusa.com
U.S. Smokeless Tobacco
Company LLC
P.O. Box 85107
Richmond, VA 23285-5107
ussmokeless.com
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John Middleton Co.
6601 W. Broad Street
Richmond, VA 23230-1723
johnmiddletonco.com
Nat Sherman
10 Sterling Boulevard
Englewood, NJ 07631
shermangroupholdings.com
Nu Mark LLC
6603 West Broad Street
Richmond, VA 23230-1723
nu-mark.com
Ste. Michelle Wine
Estates Ltd.
P.O. Box 1976
Woodinville, WA 98072-1976
smwe.com
Philip Morris
Capital Corporation
225 High Ridge Road
Suite 300 West
Stamford, CT 06905-3000
philipmorriscapitalcorp.com
Independent Auditors:
PricewaterhouseCoopers LLP
1021 E. Cary St., Suite 1250
Richmond, VA 23219
Transfer Agent
and Registrar:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
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Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
an Altria Company
an Altria Company
an Altria Company
an Altria Company
An Altria Innovation Company
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