2018
Altria Group, Inc.
Annual Report
A
l
t
r
i
a
G
r
o
u
p
,
I
n
c
.
2
0
1
8
A
n
n
u
a
l
R
e
p
o
r
t
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
an Altria Company
Philip Morris USA Inc.
P.O. Box 26603
Richmond, VA 23261-6603
philipmorrisusa.com
an Altria Company
U.S. Smokeless Tobacco Company LLC
P.O. Box 85107
Richmond, VA 23285-5107
ussmokeless.com
an Altria Company
John Middleton Co.
6601 W. Broad Street
Richmond, VA 23230-1723
johnmiddletonco.com
an Altria Company
Nat Sherman
10 Sterling Boulevard
Englewood, NJ 07631
shermangroupholdings.com
an Altria Company
Ste. Michelle Wine Estates Ltd.
P.O. Box 1976
Woodinville, WA 98072-1976
smwe.com
an Altria Company
Philip Morris Capital Corporation
225 High Ridge Road
Suite 300 West
Stamford, CT 06905-3000
philipmorriscapitalcorp.com
altria.com
43821 AR.indd 1
3/1/19 2:13 PM
Altria 2018 AR/10K Wrap | Andra Design Studio | Thursday, February 28, 2019 | 2:15pmAltria 2018 AR/10K Wrap | Andra Design Studio | Thursday, February 28, 2019 | 2:15pm
Dear Fellow Shareholders
PM USA successfully balanced brand momentum
this opportunity for adults. Altria is taking
with profitability. PM USA invested in Marlboro’s
decisive steps to address this alarming trend,
equity, resulting in stabilization of Marlboro
including investing an additional $100 million
full-year retail share at 43.1% and setting the
over two years to help reduce youth vaping. We
business up for long-term success. The Marlboro
also are advocating for raising the minimum age
Points West limited-time rewards program
to purchase all tobacco products to 21 at both
in Texas proved to be a successful test of
the federal and state levels, a policy that the
our proprietary pack-coding technology and
U.S. Surgeon General supports but that requires
advanced PM USA’s goals to increase its digital
legislative action.
leadership, brand engagement and loyalty.
PM USA expanded Marlboro Ice and Marlboro
Smooth with a reseal packaging innovation that
resonated with adult smokers.
We continue to focus on the three most
promising non-combustible product platforms
for harm reduction: e-vapor; heat-not-burn;
and smokeless tobacco products. And we
The smokeless products segment grew
believe we have access to the leading portfolio
adjusted operating companies income (OCI)
of non-combustible alternatives for adults.
7.5%. Copenhagen, the leading moist smokeless
First, through JUUL, we have found a unique
tobacco brand, grew its 2018 retail share by four
opportunity to participate in the e-vapor
tenths to 34.4%. In total, our highly profitable
category, with a truly satisfying product that
smokeless business represented a 54% share of
has demonstrated its ability to convert adult
the smokeless category and delivered superior
smokers. Second, we remain fully committed to
Howard A. Willard III
Chairman of the Board and CEO
Altria closed out 2018 with excellent growth
in adjusted diluted earnings per share (EPS)
and a transformed business platform. We
strengthened our core businesses and built
strategic positions that we believe enhance our
growth prospects and better position Altria to
reward the loyalty of our shareholders through
earnings growth and dividends over the long
term. We remain committed to our long-term
adjusted OCI margins of 68.7%.
Pursuing Global Growth
and Diversification
the success of IQOS in the U.S. and are excited
to deploy our robust commercialization plans
once authorized by the FDA. Lastly, we filed and
the FDA continues to review a modified risk
tobacco application for Copenhagen Snuff Fine
Cut. We believe this application is a meaningful
step towards providing adult smokers accurate
information about switching to smokeless
goals of delivering 7% to 9% adjusted diluted
In 2018, Altria announced two strategic invest-
EPS growth and maintaining a dividend payout
ments in companies that we believe have great
ratio target of approximately 80% of adjusted
potential for global growth, while also further
diversifying our future income streams.
diluted EPS.
2018 Highlights:
Grew adjusted diluted EPS by 17.7%, primarily
driven by benefits from U.S. federal income
tax reform;
Paid shareholders approximately $5.4 billion
in dividends, while increasing our dividend twice
resulting in a combined increase of 21.2% since
the beginning of the year — the 52nd and 53rd
increases in 49 years;
Repurchased approximately $1.7 billion in
Altria shares under an expanded $2 billion share
repurchase program; and
First, we acquired a 35% equity stake in JUUL,
tobacco products.
the U.S. e-vapor category leader. We expect
JUUL’s superior product, talented management
In Summary
team, growing brand equity and adult consumer
We continue to pursue our long-term EPS
loyalty, and a promising pipeline of products to
growth and dividend objectives. We believe
continue driving its global growth. We believe
the best way to achieve those is by establishing
our investment in JUUL is a key part of the
a diverse business platform with access to
portfolio approach to tobacco harm reduction
the leading brands in each major tobacco
that we’ve been following for many years.
profit pool.
Second, we further diversified our business
We believe our actions have positioned us to
with an adjacent investment in the emerging
succeed across multiple scenarios in global
global cannabis category. Altria agreed to
markets by relentlessly and responsibly
acquire a 45% stake in Cronos, with a warrant
expanding choices for adult consumers with
Announced strategic investments in JUUL
to achieve majority ownership. Our investment
satisfying, premium-branded products.
and Cronos in fast growing categories with
in Cronos creates a new growth opportunity
promising global opportunity.
in an adjacent category poised for rapid growth,
Growth through Our
Core Tobacco Businesses
Our category-leading core tobacco brands,
including Marlboro, Black & Mild and
while expanding our income opportunity
beyond the U.S.
Growth through Responsibility
and Harm Reduction
Copenhagen, generated strong performance
For more than 20 years, Altria has pursued a
Thank you for your ongoing commitment to
Altria and for your support as we continue our
track record of success.
in 2018, and we believe they will continue to be
goal of tobacco harm reduction and advocated
Howard A. Willard III
key drivers of our earnings growth and ability to
for regulation in support of this goal. Today,
Chairman of the Board and CEO
deliver cash returns to shareholders.
however, the rise in youth e-vapor use threatens
March 1, 2019
Board of Directors
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-Ennis1,5,6
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 1,2,3,6
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. Newman1,4
Senior Vice President and
Chief Financial Officer,
The Chemours Company
Director since 2018
Nabil Y. Sakkab 3,4,5,6
Retired Senior Vice President,
Corporate Research and
Development, The Procter
& Gamble Company
Director since 2008
Virginia E. Shanks1,2,5
Strategic Advisor,
Penn National Gaming, Inc.
Director since 2017
Howard A. Willard III 3
Chairman and
Chief Executive Officer,
Altria Group, Inc.
Director since 2018
Presiding Director
Thomas F. Farrell II
Committees
1 Member of Audit Committee,
George Muñoz, Chair
2 Member of Compensation Committee,
W. Leo Kiely III, Chair
3 Member of Executive Committee,
Howard A. Willard III, 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,
Kathryn B. McQuade, Chair
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.
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.
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).
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 Com-
mission (SEC), 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
The 2018 annual report was printed on FSC® certified
paper. The FSC® is an independent, non-governmental,
not-for-profit global organization established to promote
the responsible management of the world’s forests.
Internet Access Helps
Reduce Costs:
As a convenience to shareholders
and an important cost-reduction
and environmentally friendly
measure, you can register to
receive future shareholder
materials (i.e., Annual Report and
proxy statement) electronically.
Shareholders also can vote their
proxies electronically. For more
information, please visit our website
at: www.altria.com/investors
2019 Annual Meeting:
The Altria Annual Meeting of
Shareholders will be held at
9:00 a.m. (Eastern Time) on
Thursday, May 16, 2019 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 respective
websites of Altria and its subsidiar-
ies is not, and shall not be deemed
to be, a part of this report or incor-
porated 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.
Investor App
Stay up-to-date with
the latest investor
information on our app.
Download at the
Apple Store and
at Google Play.
Stock Exchange Listing:
The principal stock
exchange on which
Altria’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, 2019, there were
approximately 61,000 holders of
record of Altria’s common stock.
Independent Auditors:
PricewaterhouseCoopers LLP
1021 E. Cary Street, Suite 1250
Richmond, VA 23219
Transfer Agent and Registrar:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
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.
Terms used but not defined herein are defined in the enclosed Annual Report on Form 10-K.
Design: Andra Design andradesignstudio.com | Photography: Casey Templeton, Rhudy & Co. | Printer: Stephenson Printing Inc. © Copyright 2019 Altria
43821 AR.indd 2
3/4/19 11:17 AM
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, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia
(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
Common Stock, $0.33 1/3 par value
1.000% Notes due 2023
1.700% Notes due 2025
2.200% Notes due 2027
3.125% Notes due 2031
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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
Yes
No
No
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files)
Yes
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
Non-accelerated filer
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, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $107 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class
Common Stock, $0.33 1/3 par value
Outstanding at February 12, 2019
1,874,430,847 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 16, 2019, to be filed with the Securities and Exchange Commission on or about April 4, 2019, are incorporated by reference
into Part III hereof.
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 1
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
PART I
Item 1.
Item 1A.
PART I
Item 1.
Item 1A.
Business
Risk Factors
Business
Risk Factors
Item 1B.
Item 1B.
Unresolved Staff Comments
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 2.
Item 3.
Item 4.
Properties
Properties
Legal Proceedings
Legal Proceedings
Mine Safety Disclosures
Mine Safety Disclosures
PART II
PART II
TABLE OF CONTENTS
TABLE OF CONTENTS
Page
Page
1
4
10
10
11
11
1
4
10
10
11
11
Item 5.
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
12
12
Item 6.
Item 7.
Item 7A.
Item 6.
Item 7.
Item 7A.
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 8.
Item 9.
Item 9A.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 9B.
Item 9B.
Other Information
Other Information
PART III
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Corporate Governance
Item 11.
Item 11.
Executive Compensation
Executive Compensation
Item 12.
Item 12.
Item 13.
Item 13.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Item 14.
Principal Accounting Fees and Services
Principal Accounting Fees and Services
PART IV
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
Exhibits and Financial Statement Schedules
Item 16.
Item 16.
Form 10-K Summary
Form 10-K Summary
Signatures
Signatures
13
13
37
38
98
98
98
98
99
99
99
99
13
13
37
38
98
98
98
98
99
99
99
99
100
104
105
100
104
105
b
1
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 2
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Part I
Item 1. Business.
General Development of Business
General: Altria Group, Inc. (“Altria”) is a holding company
incorporated in the Commonwealth of Virginia in 1985. At
December 31, 2018, Altria’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’s other operating companies included Philip Morris Capital
Corporation (“PMCC”), which maintains a portfolio of finance
assets, substantially all of which are leveraged leases, and Nu
Mark LLC (“Nu Mark”), both of which are wholly-owned
subsidiaries. In December 2018, Altria announced the decision to
refocus its innovative product efforts, which included Nu Mark’s
discontinuation of production and distribution of all e-vapor
products. Prior to that time, Nu Mark was engaged in the
manufacture and sale of innovative tobacco products. Other
Altria wholly-owned subsidiaries included Altria Group
Distribution Company, which provides sales and distribution
services to certain Altria operating subsidiaries, and Altria Client
Services LLC (“ALCS”), which provides various support services
in areas such as legal, regulatory, consumer engagement, finance,
human resources and external affairs to Altria and its subsidiaries.
Altria’s 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’s innovative tobacco products businesses to Altria’s
consolidated results. For further information, see Note 16.
Segment Reporting to the consolidated financial statements in
Item 8. Financial Statements and Supplementary Data of this
Annual Report on Form 10-K (“Item 8”).
At September 30, 2016, Altria had an approximate 27%
ownership of SABMiller plc (“SABMiller”), which Altria
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
received cash and shares representing a 9.6% ownership in the
combined company (the “AB InBev 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
purchased approximately 12 million ordinary shares of AB InBev,
increasing Altria’s ownership to approximately 10.2% at
December 31, 2016. At December 31, 2018, Altria had an
approximate 10.1% ownership of AB InBev, which Altria
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 AB InBev Transaction, no earnings from
Altria’s equity investment in AB InBev were recorded for the year
ended December 31, 2016. For further discussion, see Note 7.
Investment in AB InBev/SABMiller to the consolidated financial
statements in Item 8 (“Note 7”).
In January 2017, Altria acquired Nat Sherman, which joined
PM USA and Middleton as part of Altria’s smokeable products
segment.
On December 20, 2018, Altria purchased, through a wholly-
owned subsidiary, shares of non-voting convertible common stock
of JUUL Labs, Inc. (“JUUL”), representing a 35% economic
interest for $12.8 billion. JUUL is engaged in the manufacture
and sale of e-vapor products globally. If and when antitrust
clearance is obtained, Altria’s non-voting shares will
automatically convert to voting shares (“Share Conversion”). At
December 31, 2018, Altria accounted for its investment in JUUL
as an investment in an equity security. Upon Share Conversion,
Altria expects to account for its investment in JUUL under the
equity method of accounting. For further discussion, see Note 8.
Investment in JUUL to the consolidated financial statements in
Item 8 (“Note 8”).
On December 7, 2018, Altria announced that it entered into
an agreement to purchase, through a subsidiary, approximately
146.2 million newly issued common shares of Cronos Group Inc.
(“Cronos”), a global cannabinoid company headquartered in
Toronto, Canada. Cronos shareholders approved the transaction
on February 21, 2019. The closing of this transaction remains
subject to certain customary closing conditions, including receipt
of required regulatory approval. Altria expects the transaction to
close in the first half of 2019. Upon completion of this
transaction, Altria will own an approximate 45% equity interest in
Cronos. Additionally, the agreement includes a warrant to
purchase up to an additional approximately 72.2 million common
shares of Cronos at a per share exercise price of Canadian dollar
(“CAD”) $19.00. The purchase price for the approximate 45%
equity interest and warrant is approximately CAD $2.4 billion
(approximately U.S. dollar (“USD”) $1.8 billion, based on the
CAD to USD exchange rate on February 22, 2019), to be paid on
the date of the closing of the transaction. Upon full exercise of
the warrant, which expires four years after issuance, Altria would
own approximately 55% of the outstanding common shares of
Cronos. The exercise price for the warrant is approximately CAD
$1.4 billion (approximately USD $1.0 billion, based on the CAD
to USD exchange rate on February 22, 2019). As part of the
agreement, upon completion of this transaction, Altria will have
the right to nominate four directors, including one independent
director, to serve on Cronos’ Board of Directors, which will be
expanded from five to seven directors. Altria expects to account
for its investment in Cronos under the equity method of
accounting.
In January and February 2019, Altria entered into derivative
financial instruments in the form of forward contracts, which
mature on April 15, 2019, to hedge Altria’s exposure to foreign
b
1
1
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 1
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio currency exchange rate movements in the CAD to USD, in
relation to the CAD $2.4 billion purchase price for the Cronos
transaction. The aggregate notional amounts of the forward
contracts were approximately USD $1.8 billion (CAD $2.4
billion). The forward contracts do not qualify for hedge
accounting; therefore, changes in the fair values of the forward
contracts will be recorded as gains or losses in Altria’s
consolidated statements of earnings in the periods in which the
changes occur.
Source of Funds: Because Altria 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. In addition, Altria
receives cash dividends on its interest in AB InBev and will
continue to do so as long as AB InBev pays dividends. Altria
expects to receive cash dividends from JUUL, if and when JUUL
pays such dividends.
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’s tobacco operating companies include PM USA, USSTC
and other subsidiaries of UST, Middleton and Nat Sherman.
Altria Group Distribution Company provides sales and
distribution services to Altria’s tobacco operating companies.
The products of Altria’s tobacco subsidiaries include
smokeable tobacco products, consisting of combustible cigarettes
manufactured and sold by PM USA and Nat Sherman, machine-
made large cigars and pipe tobacco manufactured and sold by
Middleton and premium cigars sold by Nat Sherman; smokeless
tobacco products, consisting of moist smokeless tobacco (“MST”)
and snus products manufactured and sold by USSTC; and
innovative tobacco products, including e-vapor products
previously 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 109.8 billion units in 2018, a decrease of 5.8% from
2017.
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 1.6 billion units in 2018, an
increase of 3.8% from 2017.
Smokeless tobacco products: USSTC is the leading
producer and marketer of 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 832.6 million units in 2018, a
decrease of 1.0% from 2017.
Innovative tobacco products: In December 2018, Altria
announced the decision to refocus its innovative product efforts,
which includes Nu Mark’s discontinuation of production and
distribution of all e-vapor products. Prior to that time, Nu Mark
participated in the e-vapor category and developed and
commercialized other innovative tobacco products. 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, which began selling e-vapor products in 2009. In 2018
and 2017, Altria’s subsidiaries purchased certain intellectual
property related to innovative tobacco products.
In December 2013, Altria’s subsidiaries entered into a series
of agreements with Philip Morris International Inc. (“PMI”),
including an agreement that grants Altria an exclusive right to
commercialize certain of PMI’s heated tobacco products in the
United States, subject to the United States Food and Drug
Administration’s (“FDA”) authorization. PMI submitted a pre-
market tobacco product application and a modified risk tobacco
product application for its electronically heated tobacco product,
IQOS, with the FDA’s Center for Tobacco Products in the first
quarter of 2017 and the fourth quarter of 2016, respectively.
Upon regulatory authorization by the FDA and subject to certain
performance obligations, Altria’s subsidiaries will have an
exclusive license to commercialize IQOS in the United States.
Distribution, Competition and Raw Materials: Altria’s
tobacco subsidiaries sell their tobacco products principally to
wholesalers (including distributors), large retail organizations,
including chain stores, and the armed services.
The market for tobacco products is highly competitive,
characterized by brand recognition and loyalty, with product
quality, taste, price, product innovation, marketing, packaging and
distribution constituting the significant methods of competition.
Promotional activities include, in certain instances and where
permitted by law, allowances, the distribution of incentive items,
price promotions, product promotions, coupons and other
discounts.
In June 2009, the President of the United States of America
signed into law the Family Smoking Prevention and Tobacco
Control Act (“FSPTCA”), which provides the 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,
2
2
3
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 2
2/27/19 3:35 PM
10-K ALTRIA AR RELEASE Thursday, March 1, 2018 Noon Andra Design LLC
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’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
Tobacco, Other Raw Materials and Component Parts 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 2018 wine shipment volume
of approximately 8.2 million cases decreased 3.3% from 2017.
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.
Other Matters
Customers: The largest customer of PM USA, USSTC,
Middleton and Nat Sherman, McLane Company, Inc., accounted
for approximately 27%, 26% and 25% of Altria’s consolidated net
revenues for the years ended December 31, 2018, 2017 and 2016,
respectively. In addition, Core-Mark Holding Company, Inc.
accounted for approximately 14% of Altria’s consolidated net
revenues for each of the years ended December 31, 2018, 2017
and 2016. Substantially all of these net revenues were reported in
the smokeable products and smokeless products segments.
Sales to two distributors accounted for approximately 64% of
net revenues for the wine segment for the year ended December
31, 2018. Sales to three distributors accounted for approximately
67% and 69% of net revenues for the wine segment for the years
ended December 31, 2017 and 2016, respectively.
Employees: At December 31, 2018, Altria and its
subsidiaries employed approximately 8,300 people. As a result of
the cost reduction program announced in December 2018, there
will be a reduction of approximately 900 employees, substantially
all of which are expected to depart by February 28, 2019.
Executive Officers of Altria: The disclosure regarding
executive officers is included in Item 10. Directors, Executive
Officers and Corporate Governance - Executive Officers as of
February 12, 2019 of this Annual Report on Form 10-K.
Intellectual Property: Trademarks are of material
importance to Altria and its operating companies, and are
protected by registration or otherwise. In addition, as of
2
3
3
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 3
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
December 31, 2018, the portfolio of approximately 950 United
States patents owned by Altria’s businesses, as a whole, was
material to Altria and its tobacco businesses. However, no one
patent or group of related patents was material to Altria’s business
or its tobacco businesses as of December 31, 2018. Altria’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 and its tobacco and wine businesses.
Environmental Regulation: Altria 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 are involved in
several matters subjecting them to potential costs of remediation
and natural resource damages under Superfund or other laws and
regulations. Altria’s subsidiaries expect to continue to make
capital and other expenditures in connection with environmental
laws and regulations. As discussed in Note 2. Summary of
Significant Accounting Policies to the consolidated financial
statements in Item 8 (“Note 2”), Altria 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 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’s
consolidated results of operations, capital expenditures, financial
position or cash flows.
Available Information
Altria is required to file annual, quarterly and current reports,
proxy statements and other information with the Securities and
Exchange Commission (“SEC”).
Altria 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 electronically files such material with, or furnishes it
to, the SEC. Investors can access Altria’s filings with the SEC by
visiting www.altria.com/secfilings.
The information on the respective websites of Altria and its
subsidiaries is not, and shall not be deemed to be, a part of this
report or incorporated into any other filings Altria makes with the
SEC.
Item 1A. Risk Factors.
The following risk factors should be read carefully in connection
with evaluating our business and the forward-looking statements
contained in this Annual Report on Form 10-K. Any of the
following risks could materially adversely affect our business, our
results of operations, our cash flows, our financial position and
the actual outcome of matters as to which forward-looking
statements are made in this Annual Report on Form 10-K.
We (1) may from time to time make written or oral forward-
looking statements, including earnings guidance and other
statements contained in filings with the SEC, reports to security
holders, press releases and investor webcasts. You can identify
these forward-looking statements by use of words such as
“strategy,” “expects,” “continues,” “plans,” “anticipates,”
“believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,”
“goals,” “objectives,” “guidance,” “targets” and other words of
similar meaning. You can also identify them by the fact that they
do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will
be realized, although we believe we have been prudent in our
plans, 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’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 Annual Report on Form 10-K 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 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
_________________________________________________
(1) This section uses the terms “we,” “our” and “us” when it is not
necessary to distinguish among Altria and its various operating
subsidiaries or when any distinction is clear from the context.
4
4
5
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 4
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio against Altria and its subsidiaries, including PM USA and UST
and its subsidiaries, as well as their respective indemnitees.
Various types of claims may be raised in these proceedings,
including product liability, consumer protection, antitrust, tax,
contraband-related claims, patent infringement, employment
matters, claims for contribution and claims of competitors,
shareholders 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 or its subsidiaries may face
the risk that one or more co-defendants decline or otherwise fail
to participate in the bonding required for an appeal or to pay their
proportionate or jury-allocated share of a judgment. As a result,
Altria or its subsidiaries under certain circumstances may have to
pay more than their proportionate share of any bonding- or
judgment-related amounts. Furthermore, in those cases where
plaintiffs are successful, Altria or its subsidiaries may also be
required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
verdicts have been appealed, there remains a risk that such relief
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico now
limit the dollar amount of bonds or require no bond at all. As
discussed in Note 19. Contingencies to the consolidated financial
statements in Item 8 (“Note 19”), tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. Although we
cannot predict the outcome of such challenges, it is possible that
the consolidated results of operations, cash flows or financial
position of Altria, 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 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
19, the district court did not impose monetary penalties but
ordered significant non-monetary remedies, including the
issuance of “corrective statements.”
Altria and its subsidiaries have achieved substantial success
in managing litigation. Nevertheless, litigation is subject to
uncertainty, and significant challenges remain.
It is possible that the consolidated results of operations, cash
flows or financial position of Altria, or 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 and
each of its subsidiaries named as a defendant believe, and each
has been so advised by counsel handling the respective cases, that
it has valid defenses to the litigation pending against it, as well as
valid bases for appeal of adverse verdicts. Each of the companies
has defended, and will continue to defend, vigorously against
litigation challenges. However, Altria and its subsidiaries may
enter into settlement discussions in particular cases if they believe
it is in the best interests of Altria to do so. See Item 3. Legal
Proceedings of this Annual Report on Form 10-K (“Item 3”),
Note 19 and Exhibits 99.1 and 99.2 to this Annual Report on
Form 10-K for a discussion of pending tobacco-related litigation.
Significant federal, state and local governmental actions,
including actions by the FDA, and various private sector
actions may continue to have an adverse impact on us and 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.
More broadly, 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 that
may be proposed by the FDA for nicotine and flavors), 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, rulemaking that bans menthol, a determination by
the FDA that one or more tobacco products do not satisfy the
statutory requirements for substantial equivalence, because the
FDA requires that a currently-marketed tobacco product proceed
through the pre-market review process or because the FDA
otherwise determines that removal is necessary for the protection
of public health), 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
4
5
5
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 5
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
impact on the business, consolidated results of operations, cash
flows or financial position of Altria 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’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 federal, state
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’s tobacco subsidiaries.
For further discussion, see Tobacco Space - Business Environment
- Excise Taxes in Item 7.
Our tobacco businesses face significant competition (including
across categories) and their failure to compete effectively
could have an adverse effect on the consolidated results of
operations or cash flows of Altria, or the business of Altria’s
tobacco subsidiaries.
Each of Altria’s tobacco subsidiaries operates in highly
competitive tobacco categories. This competition also exists
across categories as adult tobacco consumer preferences evolve.
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. See Tobacco Space - Business Environment - Summary in
Item 7 for additional discussion concerning evolving adult
tobacco consumer preferences, including e-vapor products.
Growth of the e-vapor product category and other innovative
tobacco products has further contributed to reductions in cigarette
consumption levels and cigarette industry sales volume and has
adversely affected the growth rates of other tobacco products.
Continued growth in these categories could have a material
adverse impact on the business, results of operations, cash flows
or financial position of PM USA and USSTC.
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, 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.
Altria 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, which could have an
adverse effect on the consolidated results of operations and
cash flows of Altria or the business of Altria’s tobacco
subsidiaries.
Each of our tobacco and wine subsidiaries is subject to intense
competition and changes in adult consumer preferences. To be
successful, they must continue to:
promote brand equity successfully;
anticipate and respond to new and evolving adult
consumer preferences;
develop, manufacture, market and distribute new and
innovative 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 and the immediately preceding risk factor for additional
discussion concerning evolving adult tobacco consumer
preferences, specifically the growth of e-vapor and other
innovative tobacco products and the effects on our tobacco
operating companies.
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 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
6
6
7
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 6
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
competitive conditions, PMCC may have to increase its
allowance for losses, which would adversely affect our earnings.
Price, Availability and Quality of Tobacco, Other Raw Materials
and Component Parts in Item 7.
Altria’s tobacco subsidiaries and investees 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 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,
such as e-vapor products. These efforts include arrangements
with, or investments in, third parties such as our minority
investment in JUUL. This minority investment subjects us to
non-competition obligations restricting us from investing or
engaging in the e-vapor business other than through JUUL,
subject to limited exceptions. Our tobacco subsidiaries and
investees 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 or investees 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 or investees may
be at a competitive disadvantage, which could have an adverse
effect on their financial performance.
Significant changes in price, availability or quality of tobacco,
other raw materials or component parts could have an
adverse effect on the profitability and business of Altria’s
tobacco subsidiaries.
Any significant change in prices, quality or availability of
tobacco, other raw materials or component parts could adversely
affect our tobacco subsidiaries’ profitability and business. For
further discussion, see Tobacco Space - Business Environment -
Because Altria’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
and its tobacco subsidiaries.
Altria’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’s tobacco subsidiaries
or the operations of any key suppliers of any of Altria’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’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 and its
tobacco subsidiaries.
Altria’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 and its subsidiaries.
In addition to a recall required by the FDA, as referenced above,
our subsidiaries could decide, or other 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. Product recalls could
have a material adverse effect on the business, reputation,
consolidated results of operations, cash flows or financial position
of Altria and its subsidiaries.
The failure of Altria’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 and its
subsidiaries.
Altria 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,
adult consumers and others. We continue to make investments in
6
7
7
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 7
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 and its
subsidiaries.
Unfavorable outcomes of any governmental investigations
could materially affect the businesses of Altria and its
subsidiaries.
From time to time, Altria 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.
A challenge to our tax positions could adversely affect our tax
rate, earnings or cash flow.
Tax laws and regulations, such as the 2017 Tax Cuts and Jobs Act
(the “Tax Reform Act”), are complex and subject to varying
interpretations. A successful challenge to one or more of Altria’s
tax positions could give rise to additional liabilities, including
interest and potential penalties, as well as adversely affect our tax
rate, earnings or cash flows.
International business operations subject Altria 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 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,
investees or third parties. Violations of these laws, or allegations
of such violations, could result in reputational harm, legal
challenges and/or significant costs.
Altria 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’s
credit rating, and Altria may not achieve its anticipated
strategic or financial objectives of a transaction.
From time to time, Altria considers acquisitions or investments
and may engage in confidential 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 investment or the occurrence of other events could
negatively impact our credit ratings or the outlook for those
ratings as occurred following our investment in JUUL (although
we continue to maintain investment grade 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 or an investment.
Disruption and uncertainty in the credit and capital markets
could adversely affect Altria’s access to these markets,
earnings and dividend rate.
Access to the credit and capital markets is important for us to
satisfy our liquidity and financing needs. Disruption and
uncertainty in these 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 may be required to write down intangible assets,
including goodwill, due to impairment, which could have a
material adverse effect on our results of operations or
financial position.
8
8
9
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 8
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
We periodically calculate the fair value of our reporting units and
intangible assets to test for impairment. This calculation may be
We periodically calculate the fair value of our reporting units and
affected by several factors, including general economic
intangible assets to test for impairment. This calculation may be
conditions, regulatory developments, changes in category growth
affected by several factors, including general economic
rates as a result of changing adult consumer preferences, success
conditions, regulatory developments, changes in category growth
of planned new product introductions, competitive activity and
rates as a result of changing adult consumer preferences, success
tobacco-related taxes. Certain events can also trigger an
of planned new product introductions, competitive activity and
immediate review of intangible assets. If an impairment is
tobacco-related taxes. Certain events can also trigger an
determined to exist in either situation, we will incur impairment
immediate review of intangible assets. If an impairment is
losses, which could have a material adverse effect on our results
determined to exist in either situation, we will incur impairment
of operations or financial position. In the fourth quarter of 2018,
losses, which could have a material adverse effect on our results
Altria incurred $209 million in goodwill and other intangible
of operations or financial position. In the fourth quarter of 2018,
asset impairment charges related to Altria’s decision to refocus its
Altria incurred $209 million in goodwill and other intangible
innovative product efforts and the impairment of the Columbia
asset impairment charges related to Altria’s decision to refocus its
Crest trademark (See Note 4. Goodwill and Other Intangible
innovative product efforts and the impairment of the Columbia
Assets, net to the consolidated financial statements in Item 8 for a
Crest trademark (See Note 4. Goodwill and Other Intangible
more detailed discussion).
Assets, net to the consolidated financial statements in Item 8 for a
more detailed discussion).
Competition, unfavorable changes in grape supply and new
governmental regulations or revisions to existing
Competition, unfavorable changes in grape supply and new
governmental regulations could adversely affect Ste.
governmental regulations or revisions to existing
Michelle’s wine business.
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
Ste. Michelle’s business is subject to significant competition,
international companies. The adequacy of Ste. Michelle’s grape
including from many large, well-established domestic and
supply is influenced by consumer demand for wine in relation to
international companies. The adequacy of Ste. Michelle’s grape
industry-wide production levels as well as by weather and crop
supply is influenced by consumer demand for wine in relation to
conditions, particularly in eastern Washington. Supply shortages
industry-wide production levels as well as by weather and crop
related to any one or more of these factors could increase
conditions, particularly in eastern Washington. Supply shortages
production costs and wine prices, which ultimately may have a
related to any one or more of these factors could increase
negative impact on Ste. Michelle’s sales. In addition, federal,
production costs and wine prices, which ultimately may have a
state and local governmental agencies regulate the alcohol
negative impact on Ste. Michelle’s sales. In addition, federal,
beverage industry through various means, including licensing
state and local governmental agencies regulate the alcohol
requirements, pricing, labeling and advertising restrictions, and
beverage industry through various means, including licensing
distribution and production policies. New regulations or revisions
requirements, pricing, labeling and advertising restrictions, and
to existing regulations, resulting in further restrictions or taxes on
distribution and production policies. New regulations or revisions
the manufacture and sale of alcoholic beverages may have an
to existing regulations, resulting in further restrictions or taxes on
adverse effect on Ste. Michelle’s wine business. For further
the manufacture and sale of alcoholic beverages may have an
discussion, see Wine Segment - Business Environment in Item 7.
adverse effect on Ste. Michelle’s wine business. For further
discussion, see Wine Segment - Business Environment in Item 7.
Altria’s reported earnings from and carrying value of its
equity investment in AB InBev and the dividends paid by AB
Altria’s reported earnings from and carrying value of its
InBev on shares owned by Altria may be adversely affected by
equity investment in AB InBev and the dividends paid by AB
various factors, including foreign currency exchange rates
InBev on shares owned by Altria may be adversely affected by
and AB InBev’s business results and stock price.
various factors, including foreign currency exchange rates
and AB InBev’s business results and stock price.
For purposes of financial reporting, the earnings from and
carrying value of our equity investment in AB InBev are
For purposes of financial reporting, the earnings from and
translated into U.S. dollars from various local currencies. In
carrying value of our equity investment in AB InBev are
addition, AB InBev pays dividends in euros, which we convert
translated into U.S. dollars from various local currencies. In
into U.S. dollars. During times of a strengthening U.S. dollar
addition, AB InBev pays dividends in euros, which we convert
against these currencies, our reported earnings from and carrying
into U.S. dollars. During times of a strengthening U.S. dollar
value of our equity investment in AB InBev will be reduced
against these currencies, our reported earnings from and carrying
because these currencies will translate into fewer U.S. dollars and
value of our equity investment in AB InBev will be reduced
because these currencies will translate into fewer U.S. dollars and
Dividends and earnings from and carrying value of our equity
Dividends and earnings from and carrying value of our equity
the dividends that we receive from AB InBev will convert into
fewer U.S. dollars.
the dividends that we receive from AB InBev will convert into
fewer U.S. dollars.
investment in AB InBev are also subject to the risks encountered
by AB InBev in its business. For example, in October 2018, AB
investment in AB InBev are also subject to the risks encountered
InBev announced a 50% rebase in the dividends it pays to its
by AB InBev in its business. For example, in October 2018, AB
shareholders, which will result in a reduction of cash dividends
InBev announced a 50% rebase in the dividends it pays to its
Altria receives from AB InBev. As discussed in the Discussion
shareholders, which will result in a reduction of cash dividends
and Analysis - Critical Accounting Policies and Estimates in Item
Altria receives from AB InBev. As discussed in the Discussion
7, if the carrying value of our investment in AB InBev exceeds its
and Analysis - Critical Accounting Policies and Estimates in Item
fair value and the loss in value is other than temporary, the
7, if the carrying value of our investment in AB InBev exceeds its
investment is considered impaired, which would result in
fair value and the loss in value is other than temporary, the
impairment losses and could have a material adverse effect on
investment is considered impaired, which would result in
Altria’s consolidated financial position or earnings. We cannot
impairment losses and could have a material adverse effect on
provide any assurance that AB InBev will successfully execute its
Altria’s consolidated financial position or earnings. We cannot
business plans and strategies. Earnings from and carrying value
provide any assurance that AB InBev will successfully execute its
of our equity investment in AB InBev are also subject to
business plans and strategies. Earnings from and carrying value
fluctuations in AB InBev’s stock price, for example through
of our equity investment in AB InBev are also subject to
mark-to-market losses on AB InBev’s derivative financial
fluctuations in AB InBev’s stock price, for example through
instruments used to hedge certain share commitments.
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 AB InBev Transaction in the form of restricted shares
We received a substantial portion of our consideration from
subject to a five-year lock-up. Furthermore, if our percentage
the AB InBev Transaction in the form of restricted shares
ownership in AB InBev were to decrease below certain levels,
subject to a five-year lock-up. Furthermore, if our percentage
we may be subject to additional tax liabilities, suffer a
ownership in AB InBev were to decrease below certain levels,
reduction in the number of directors that we can have
we may be subject to additional tax liabilities, suffer a
appointed to the AB InBev Board of Directors and be unable
reduction in the number of directors that we can have
to account for our investment under the equity method of
appointed to the AB InBev Board of Directors and be unable
accounting.
to account for our investment under the equity method of
accounting.
Upon completion of the AB InBev Transaction, we received a
substantial portion of our consideration in the form of restricted
Upon completion of the AB InBev Transaction, we received a
shares that cannot be sold or transferred for a period of five years
substantial portion of our consideration in the form of restricted
following the AB InBev Transaction, subject to limited
shares that cannot be sold or transferred for a period of five years
exceptions. These transfer restrictions will require us to bear the
following the AB InBev Transaction, subject to limited
risks associated with our investment in AB InBev for a five-year
exceptions. These transfer restrictions will require us to bear the
period that expires on October 10, 2021. Further, in the event that
risks associated with our investment in AB InBev for a five-year
our ownership percentage in AB InBev were to decrease below
period that expires on October 10, 2021. Further, in the event that
certain levels, we may be subject to additional tax liabilities, the
our ownership percentage in AB InBev were to decrease below
number of directors that we have the right to have appointed to
certain levels, we may be subject to additional tax liabilities, the
the AB InBev Board of Directors could be reduced from two to
number of directors that we have the right to have appointed to
one or zero and our use of the equity method of accounting for
the AB InBev Board of Directors could be reduced from two to
our investment in AB InBev could be challenged.
one or zero and our use of the equity method of accounting for
our investment in AB InBev could be challenged.
The tax treatment of the consideration Altria received in the
AB InBev Transaction may be challenged and the tax
The tax treatment of the consideration Altria received in the
treatment of the AB InBev investment may not be as
AB InBev Transaction may be challenged and the tax
favorable as Altria anticipates.
treatment of the AB InBev investment may not be as
favorable as Altria anticipates.
While we expect the equity consideration that we received from
the AB InBev Transaction to qualify for tax-deferred treatment,
While we expect the equity consideration that we received from
we cannot provide any assurance that federal and state tax
the AB InBev Transaction to qualify for tax-deferred treatment,
authorities will not challenge the expected tax treatment and, if
we cannot provide any assurance that federal and state tax
they do, what the outcome of any such challenge will be. In
authorities will not challenge the expected tax treatment and, if
addition, there is a risk that the tax treatment of our investment in
they do, what the outcome of any such challenge will be. In
AB InBev may not be as favorable as we anticipate.
addition, there is a risk that the tax treatment of our investment in
AB InBev may not be as favorable as we anticipate.
8
9
9
9
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 9
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Antitrust clearance required for the conversion of our non-
voting JUUL shares into voting shares may not be obtained in
Antitrust clearance required for the conversion of our non-
a timely manner or at all, and the expected benefits of the
voting JUUL shares into voting shares may not be obtained in
JUUL transaction may not materialize in the expected
a timely manner or at all, and the expected benefits of the
manner or timeframe or at all.
JUUL transaction may not materialize in the expected
manner or timeframe or at all.
Antitrust clearance required for the conversion of the non-voting
JUUL shares held by us into voting shares may not be obtained in
Antitrust clearance required for the conversion of the non-voting
a timely manner or at all, and such clearance may be subject to
JUUL shares held by us into voting shares may not be obtained in
unanticipated conditions. Unless and until such antitrust
a timely manner or at all, and such clearance may be subject to
clearance is obtained, including expiration or termination of any
unanticipated conditions. Unless and until such antitrust
applicable waiting period (or extension thereof) under the Hart-
clearance is obtained, including expiration or termination of any
Scott-Rodino Antitrust Improvements Act of 1976, as amended,
applicable waiting period (or extension thereof) under the Hart-
and any rules and regulations promulgated thereunder, our JUUL
Scott-Rodino Antitrust Improvements Act of 1976, as amended,
shares will not have voting rights and we will not be entitled to
and any rules and regulations promulgated thereunder, our JUUL
certain other rights, including the right to appoint any directors to
shares will not have voting rights and we will not be entitled to
the JUUL Board of Directors. Accordingly, failure to obtain
certain other rights, including the right to appoint any directors to
antitrust clearance would adversely affect us, including because it
the JUUL Board of Directors. Accordingly, failure to obtain
would substantially limit our rights with respect to our investment
antitrust clearance would adversely affect us, including because it
in JUUL and would prevent us from accounting for our
would substantially limit our rights with respect to our investment
investment in JUUL using the equity method.
in JUUL and would prevent us from accounting for our
In addition, regardless of whether antitrust clearance is
investment in JUUL using the equity method.
obtained, the expected benefits of the JUUL transaction, such as
In addition, regardless of whether antitrust clearance is
any equity earnings and receipt of cash dividends, may not
obtained, the expected benefits of the JUUL transaction, such as
materialize in the expected manner or timeframe or at all,
any equity earnings and receipt of cash dividends, may not
including due to the risks encountered by JUUL in its business,
materialize in the expected manner or timeframe or at all,
such as operational risks and regulatory risks at the international,
including due to the risks encountered by JUUL in its business,
federal and state levels, including actions by the FDA;
such as operational risks and regulatory risks at the international,
unanticipated impacts on JUUL’s relationships with employees,
federal and state levels, including actions by the FDA;
customers, suppliers and other third parties; potential disruptions
unanticipated impacts on JUUL’s relationships with employees,
to JUUL’s management or current or future plans and operations
customers, suppliers and other third parties; potential disruptions
due to the JUUL transaction; or domestic or international
to JUUL’s management or current or future plans and operations
litigation developments, investigations, or otherwise. See Item 7.
due to the JUUL transaction; or domestic or international
Tobacco Space - Business Environment for a discussion of certain
litigation developments, investigations, or otherwise. See Item 7.
FDA-related regulatory risks applicable to the e-vapor category.
Tobacco Space - Business Environment for a discussion of certain
Failure to realize the expected benefits of our JUUL investment
FDA-related regulatory risks applicable to the e-vapor category.
could adversely affect the value of the investment. As discussed
Failure to realize the expected benefits of our JUUL investment
in the Discussion and Analysis - Critical Accounting Policies and
could adversely affect the value of the investment. As discussed
Estimates in Item 7, if a qualitative assessment of impairment of
in the Discussion and Analysis - Critical Accounting Policies and
our JUUL investment were to indicate that its fair value is less
Estimates in Item 7, if a qualitative assessment of impairment of
than its carrying value, the investment would be written down to
our JUUL investment were to indicate that its fair value is less
its fair value, which could have a material adverse effect on
than its carrying value, the investment would be written down to
Altria’s consolidated financial position or earnings.
its fair value, which could have a material adverse effect on
Altria’s consolidated financial position or earnings.
Our investment in JUUL includes non-competition, standstill
and transfer restrictions that prevent us from gaining control
Our investment in JUUL includes non-competition, standstill
of JUUL. Furthermore, if our percentage ownership in JUUL
and transfer restrictions that prevent us from gaining control
were to decrease below certain levels, we would lose certain of
of JUUL. Furthermore, if our percentage ownership in JUUL
our governance, consent, preemptive and other rights with
were to decrease below certain levels, we would lose certain of
respect to our investment in JUUL and may be unable to
our governance, consent, preemptive and other rights with
account for the investment under the equity method.
respect to our investment in JUUL and may be unable to
account for the investment under the equity method.
The shares of JUUL we hold generally cannot be sold or
otherwise transferred for a six-year period that expires on
The shares of JUUL we hold generally cannot be sold or
December 20, 2024, subject to limited exceptions. We have also
otherwise transferred for a six-year period that expires on
generally agreed not to compete with JUUL in the e-vapor space
December 20, 2024, subject to limited exceptions. We have also
generally agreed not to compete with JUUL in the e-vapor space
for at least six years, which may be extended at our election. In
addition, following receipt of antitrust clearance, our designees
for at least six years, which may be extended at our election. In
will comprise no more than one third of the members of the JUUL
addition, following receipt of antitrust clearance, our designees
Board of Directors. As a result, JUUL’s strategy and its material
will comprise no more than one third of the members of the JUUL
decisions are not controlled by us, and the terms of our
Board of Directors. As a result, JUUL’s strategy and its material
agreements with JUUL mean that we are required to bear the risks
decisions are not controlled by us, and the terms of our
associated with our investment in JUUL for at least a six-year
agreements with JUUL mean that we are required to bear the risks
period. Further, in the event that our ownership percentage in
associated with our investment in JUUL for at least a six-year
JUUL were to decrease below certain levels due to transfers by us
period. Further, in the event that our ownership percentage in
or otherwise, or if we elect not to extend our non-competition
JUUL were to decrease below certain levels due to transfers by us
obligations beyond six years, we would lose some or all of our
or otherwise, or if we elect not to extend our non-competition
board designation rights, preemptive rights, consent rights and
obligations beyond six years, we would lose some or all of our
other rights with respect to our investment in JUUL. Loss of
board designation rights, preemptive rights, consent rights and
these rights could adversely affect us by impairing our ability to
other rights with respect to our investment in JUUL. Loss of
influence JUUL and may prevent us from accounting for our
these rights could adversely affect us by impairing our ability to
investment under the equity method.
influence JUUL and may prevent us from accounting for our
investment under the equity method.
Our proposed investment in Cronos may not be completed
within the anticipated timeframe or at all, and the expected
Our proposed investment in Cronos may not be completed
benefits of the Cronos transaction may not materialize in the
within the anticipated timeframe or at all, and the expected
expected manner or timeframe or at all.
benefits of the Cronos transaction may not materialize in the
expected manner or timeframe or at all.
On December 7, 2018, we agreed to acquire common shares
representing a 45% equity interest in Cronos and a warrant to
On December 7, 2018, we agreed to acquire common shares
acquire common shares representing an additional 10% equity
representing a 45% equity interest in Cronos and a warrant to
interest in Cronos. The proposed transaction is subject to a
acquire common shares representing an additional 10% equity
number of closing conditions, including receipt of required
interest in Cronos. The proposed transaction is subject to a
regulatory approval, which may take longer than expected. We
number of closing conditions, including receipt of required
cannot provide any assurance that the proposed transaction will
regulatory approval, which may take longer than expected. We
be completed or that there will not be a delay in the completion of
cannot provide any assurance that the proposed transaction will
the proposed transaction. There can also be no assurance that, if
be completed or that there will not be a delay in the completion of
we complete the Cronos transaction, we will be able to realize its
the proposed transaction. There can also be no assurance that, if
expected benefits, including due to the risks encountered by
we complete the Cronos transaction, we will be able to realize its
Cronos in its business, such as operational risks and legal and
expected benefits, including due to the risks encountered by
regulatory risks at the international, federal and state levels;
Cronos in its business, such as operational risks and legal and
unanticipated impacts on Cronos’s relationships with third parties,
regulatory risks at the international, federal and state levels;
its management, or its current or future plans and operations due
unanticipated impacts on Cronos’s relationships with third parties,
to the Cronos transaction; or domestic or international litigation
its management, or its current or future plans and operations due
developments, investigations, or otherwise.
to the Cronos transaction; or domestic or international litigation
developments, investigations, or otherwise.
Item 1B. Unresolved Staff Comments.
Item 1B. Unresolved Staff Comments.
None.
None.
Item 2. Properties.
Item 2. Properties.
At December 31, 2018, ALCS owned property in Richmond,
Virginia that serves as the headquarters facility for Altria, PM
At December 31, 2018, ALCS owned property in Richmond,
USA, USSTC, Middleton, and certain other subsidiaries.
Virginia that serves as the headquarters facility for Altria, PM
At December 31, 2018, PM USA owned and operated a
USA, USSTC, Middleton, and certain other subsidiaries.
manufacturing site located in Richmond, Virginia (“Richmond
At December 31, 2018, PM USA owned and operated a
Manufacturing Center”) that PM USA uses in the manufacturing
manufacturing site located in Richmond, Virginia (“Richmond
of cigarettes. PM USA leases portions of this facility to
Manufacturing Center”) that PM USA uses in the manufacturing
Middleton and USSTC for use in the manufacturing of cigars and
of cigarettes. PM USA leases portions of this facility to
smokeless tobacco products, respectively.
Middleton and USSTC for use in the manufacturing of cigars and
At December 31, 2018, the smokeable products segment used
smokeless tobacco products, respectively.
four manufacturing and processing facilities, including the
At December 31, 2018, the smokeable products segment used
four manufacturing and processing facilities, including the
10
10
10
11
10-K ALTRIA AR RELEASE Monday, February 25, 2019 9:00am
Andra Design Studio
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 10
2/27/19 3:35 PM
Item 4. Mine Safety Disclosures.
Not applicable.
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
leasing space at the Richmond Manufacturing Center, owns and
operates a manufacturing and processing facility in King of
Prussia, Pennsylvania that is 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 ALCS.
At December 31, 2018, in addition to the Richmond
Manufacturing Center, the smokeless products segment used four
smokeless tobacco manufacturing and processing facilities, one
located in Clarksville, Tennessee; one in Nashville, Tennessee;
and two facilities in Hopkinsville, Kentucky, all of which are
owned and operated by USSTC.
At December 31, 2018, 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 and its subsidiaries are maintained in good condition and
are believed to be suitable and adequate for present needs.
Item 3. Legal Proceedings.
The information required by this Item is included in Note 19 and
Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K.
Altria’s consolidated financial statements and accompanying
notes for the year ended December 31, 2018 were filed on Form
8-K on January 31, 2019 (such consolidated financial statements
and accompanying notes are also included in Item 8). The
following summarizes certain developments in Altria’s litigation
since the filing of the Form 8-K.
Recent Developments
Engle Progeny Trial Results:
In Chadwell, in February 2019, PM USA and plaintiff appealed
to the Florida Third District Court of Appeal.
In L. Martin, in February 2019, the Florida Third District Court
of Appeal affirmed the judgment in favor of plaintiff.
In Berger, in February 2019, PM USA filed motions
challenging the punitive damages award.
In Holliman, in February 2019, a Miami-Dade county jury
returned a verdict in favor of plaintiff and against PM USA
awarding approximately $3 million in compensatory damages and
no punitive damages.
In February 2019, the United States Supreme Court denied PM
USA’s petition for review in the McKeever, Pardue, Jordan, M.
Brown, Boatright and Searcy cases.
10
11
11
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 11
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Part II
Part II
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
of Equity Securities.
Securities.
Performance Graph
Performance Graph
Performance Graph
The graph below compares the cumulative total shareholder return of Altria’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 Peer Group (1). The graph assumes the investment
The graph below compares the cumulative total shareholder return of Altria’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 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, 2013 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
of $100 in common stock and each of the indices as of the market close on December 31, 2013 and the reinvestment of all
dividends on a quarterly basis.
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
$250
$200
$150
$100
$50
2013
2014
2015
2016
2017
2018
S&P 500
$
$
$
$
$
S&P 500
Date
Date
Date
December 2013
December 2013
December 2013
December 2014
December 2014
December 2014
December 2015
December 2015
December 2015
December 2016
December 2016
December 2016
December 2017
December 2017
December 2017
December 2018
December 2018
December 2018
Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1)In 2018, the Altria Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria’s operating companies subsidiaries
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
or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-Palmolive Company,
(1)In 2018, the Altria Peer Group consisted of U.S.-headquartered consumer product companies that are competitors to Altria’s operating companies subsidiaries
Conagra Brands, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Keurig Dr Pepper Inc., Kimberly-Clark Corporation, The Kraft Heinz
companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-
or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-Palmolive Company,
Company, Molson Coors Brewing Company,
Palmolive Company, Conagra Brands, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, The Kraft Heinz Company,
Conagra Brands, Inc., General Mills, Inc., The Hershey Company, Kellogg Company, Keurig Dr Pepper Inc., Kimberly-Clark Corporation, The Kraft Heinz
Company, Molson Coors Brewing Company,
Altria Group, Inc.
Altria Peer Group
Peer Group
Altria Peer Group
$
$
$
$
$
$
$
$
$
$
$
$
Altria
Altria
Group, Inc.
Altria
100.00
134.51
165.58
199.46
218.30
159.17
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
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
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
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,
Heinz Company (KHC). On June 12, 2015, Reynolds American Inc. (RAI) acquired Lorillard, Inc. (LO). On November 9, 2016, ConAgra Foods, Inc. (CAG) spun
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
British American Tobacco p.l.c. (BTI) acquired RAI. For 2018, Altria removed BTI from the Altria Peer Group as BTI no longer meets the pre-defined Altria Peer
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,
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
Group criteria as a U.S.-headquartered company. In addition, Altria has added U.S.-headquartered consumer product companies Keurig Dr Pepper Inc. and Molson
British American Tobacco p.l.c. (BTI) acquired RAI. For 2018, Altria removed BTI from the Altria Peer Group as BTI no longer meets the pre-defined Altria Peer
Depository Receipts for the remainder of the year.
Coors Brewing Company to the Altria Peer Group.
Group criteria as a U.S.-headquartered company. In addition, Altria has added U.S.-headquartered consumer product companies Keurig Dr Pepper Inc. and Molson
Coors Brewing Company to the Altria Peer Group.
100.00
100.00
112.06
112.06
128.34
128.34
136.93
136.93
147.96
147.96
141.06
141.06
100.00
100.00
134.51
134.51
165.58
165.58
199.46
199.46
218.30
218.30
159.17
159.17
$ 100.00
$ 113.68
$ 115.24
$ 129.02
$ 157.17
$ 150.27
100.00
112.06
128.34
136.93
147.96
141.06
Mondelēz International, Inc. and PepsiCo, Inc.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
S&P 500
$ 100.00
$ 113.68
$ 100.00
$ 113.68
$ 115.24
$ 129.02
$ 115.24
$ 129.02
$ 157.17
$ 150.27
$ 157.17
$ 150.27
11
12
12
12
13
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 12
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Market and Dividend Information
Market and Dividend Information
The principal stock exchange on which Altria’s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange
under the trading symbol “MO”. At February 12, 2019, there were approximately 61,000 holders of record of Altria’s common stock.
The principal stock exchange on which Altria’s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange
under the trading symbol “MO”. At February 12, 2019, there were approximately 61,000 holders of record of Altria’s common stock.
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2018
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2018
In January 2018, Altria’s Board of Directors (the “Board of Directors”) authorized a $1.0 billion share repurchase program that it
expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”), which Altria expects to complete by
the end of the second quarter of 2019. 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.
In January 2018, Altria’s Board of Directors (the “Board of Directors”) authorized a $1.0 billion share repurchase program that it
expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”), which Altria expects to complete by
the end of the second quarter of 2019. 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’s share repurchase activity for each of the three months in the period ended December 31, 2018, was as follows:
Altria’s share repurchase activity for each of the three months in the period ended December 31, 2018, was as follows:
Period
Period
October 1- October 31, 2018
October 1- October 31, 2018
November 1- November 30, 2018
November 1- November 30, 2018
December 1- December 31, 2018
December 1- December 31, 2018
Total Number
Total Number
of Shares
Purchased (1)
of Shares
Purchased (1)
2,136,142
Average
Price Paid
Per Share
Average
Price Paid
Per Share
61.78
$
Total Number of Shares
Total Number of Shares
Purchased as Part of Publicly
Purchased as Part of Publicly
Announced Plans or Programs
Announced Plans or Programs
2,136,091
Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs
Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs
2,136,142
2,000,726
2,000,726
2,075,772
2,075,772
$
$
$
$
$
61.78
59.80
59.80
52.52
52.52
2,136,091
1,909,568
1,909,568
2,075,590
2,075,590
$
$
$
$
$
$
569,444,104
569,444,104
454,690,573
454,690,573
345,671,297
345,671,297
For the Quarter Ended December 31, 2018
For the Quarter Ended December 31, 2018
(1) The total number of shares purchased includes (a) shares purchased under the January 2018 share repurchase program (which totaled 2,136,091
(1) The total number of shares purchased includes (a) shares purchased under the January 2018 share repurchase program (which totaled 2,136,091
shares in October, 1,909,568 shares in November and 2,075,590 shares in December) and (b) shares withheld by Altria in an amount equal to the
shares in October, 1,909,568 shares in November and 2,075,590 shares in December) and (b) shares withheld by Altria in an amount equal to the
statutory withholding taxes for holders who vested in stock-based awards (which totaled 51 shares in October, 91,158 shares in November and 182
statutory withholding taxes for holders who vested in stock-based awards (which totaled 51 shares in October, 91,158 shares in November and 182
shares in December).
shares in December).
6,212,640
6,121,249
6,212,640
6,121,249
58.05
58.05
$
$
Item 6. Selected Financial Data.
Item 6. Selected Financial Data.
(in millions of dollars, except per share data)
(in millions of dollars, except per share data)
$
$
$
$
$
$
$
$
$
Net revenues
Net revenues
Net earnings (1)(2)
Net earnings (1)(2)
Net earnings attributable to Altria (1)(2)
Net earnings attributable to Altria (1)(2)
Basic EPS — net earnings attributable to Altria (1)(2)
Basic EPS — net earnings attributable to Altria (1)(2)
Diluted EPS— net earnings attributable to Altria (1)(2)
Diluted EPS— net earnings attributable to Altria (1)(2)
Dividends declared per share
Dividends declared per share
Total assets (2)(3)
Total assets (2)(3)
Long-term debt
Long-term debt
Total debt (3)
Total debt (3)
(1) Certain 2018 and 2017 amounts include the impact of the enactment of the Tax Reform Act. For further discussion, see Note 15. Income Taxes to the consolidated
(1) Certain 2018 and 2017 amounts include the impact of the enactment of the Tax Reform Act. For further discussion, see Note 15. Income Taxes to the consolidated
financial statements in Item 8 (“Note 15”).
financial statements in Item 8 (“Note 15”).
(2) Certain 2016 amounts include the impact of the gain on the AB InBev/SABMiller business combination. For further information, see Note 7.
(2) Certain 2016 amounts include the impact of the gain on the AB InBev/SABMiller business combination. For further information, see Note 7.
(3) Certain 2018 amounts include the impact of the investment in JUUL. For further discussion, see Note 8 and Note 9. Short-Term Borrowings and Borrowing
(3) Certain 2018 amounts include the impact of the investment in JUUL. For further discussion, see Note 8 and Note 9. Short-Term Borrowings and Borrowing
Arrangements to the consolidated financial statements in Item 8 (“Note 9”).
Arrangements to the consolidated financial statements in Item 8 (“Note 9”).
$
2018
2018
25,364
25,364
6,967
6,967
6,963
6,963
3.69
3.69
3.68
3.68
3.00
3.00
55,638
55,638
11,898
11,898
25,746
25,746
2017
2017
25,576
25,576
10,227
10,227
10,222
10,222
5.31
5.31
5.31
5.31
2.54
2.54
43,202
43,202
13,030
13,030
13,894
13,894
2016
2016
25,744
25,744
14,244
14,244
14,239
14,239
7.28
7.28
7.28
7.28
2.35
2.35
45,932
45,932
13,881
13,881
13,881
13,881
2015
2015
25,434
25,434
5,243
5,243
5,241
5,241
2.67
2.67
2.67
2.67
2.17
2.17
31,459
31,459
12,843
12,843
12,847
12,847
2014
2014
24,522
24,522
5,070
5,070
5,070
5,070
2.56
2.56
2.56
2.56
2.00
2.00
33,440
33,440
13,610
13,610
14,610
14,610
Mondelēz International, Inc. and PepsiCo, Inc.
12
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
The Selected Financial Data should be read in conjunction with Item 7 and Item 8.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the
The following discussion should be read in conjunction with the
other sections of this Annual Report on Form 10-K, including the
other sections of this Annual Report on Form 10-K, including the
consolidated financial statements and related notes contained in
consolidated financial statements and related notes contained in
Item 8, and the discussion of cautionary factors that may affect
Item 8, and the discussion of cautionary factors that may affect
future results in Item 1A.
future results in Item 1A.
Description of the Company
Description of the Company
For a description of Altria, see Item 1. Business, and Background
in Note 1. Background and Basis of Presentation to the
consolidated financial statements in Item 8 (“Note 1”).
For a description of Altria, see Item 1. Business, and Background
in Note 1. Background and Basis of Presentation to the
consolidated financial statements in Item 8 (“Note 1”).
Altria’s reportable segments are smokeable products,
smokeless products and wine. The financial services and the
Altria’s reportable segments are smokeable products,
smokeless products and wine. The financial services and the
13
13
13
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 13
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Change in Tax Rate: The change in tax rate was driven
primarily by the Tax Reform Act, which reduced the U.S.
federal statutory corporate income tax rate from 35% to 21%
effective January 1, 2018. For further discussion, see Note
15.
Operations: The increase of $12 million in operations
shown in the table above was due primarily to the following:
higher earnings from Altria’s equity investment in AB
InBev; and
higher income from the smokeless products segment;
partially offset by:
lower income from the smokeable products and wine
segments; and
higher investment spending in the innovative tobacco
products businesses.
For further details, see the Consolidated Operating Results and
Operating Results by Business Segment sections of the following
Discussion and Analysis.
2019 Forecasted Results
In January 2019, Altria forecasted that its 2019 full-year adjusted
diluted EPS growth rate is expected to be in the range of 4% to
7% over its 2018 full-year adjusted diluted EPS base of $3.99.
This forecasted growth rate excludes the 2019 forecasted expense
items in the second table below. Altria’s 2019 guidance reflects
its expectation for a higher full-year adjusted effective tax rate,
primarily resulting from lower dividends from AB InBev;
increased interest expense from the debt incurred from the Cronos
and JUUL transactions; savings from the cost reduction program
announced in December 2018, which Altria expects to build over
the course of the year to an annualized level of approximately
$575 million; and increased investments related to PM USA’s
lead market plans for launching IQOS, once authorized by the
FDA. The guidance assumes little-to-no earnings or cash
contributions from the Cronos and JUUL investments. Altria
expects the adjusted diluted EPS growth to come in the last three
quarters of 2019, with a mid-single digit decline in the first
quarter. In the first quarter of 2019, Altria will have the increased
interest expense without the full benefits of the cost reduction
program and one fewer shipping day in the smokeable products
segment. Altria expects its 2019 full-year adjusted effective tax
rate will be in a range of approximately 23.5% to 24.5%.
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’s innovative tobacco products businesses to Altria’s
consolidated results.
As discussed in Note 1, on January 1, 2018, Altria adopted
several accounting standard updates (“ASU”). In connection with
the adoption of two of these ASUs (ASU No. 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash and ASU No.
2017-07, Compensation-Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost), Altria restated certain prior
year amounts.
Executive Summary
Consolidated Results of Operations
The changes in Altria’s net earnings and diluted earnings per
share (“EPS”) attributable to Altria for the year ended December
31, 2018, from the year ended December 31, 2017, were due
primarily to the following:
(in millions, except per share data)
For the year ended December 31, 2017
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
2018 NPM Adjustment Items
2018 Asset impairment, exit, implementation
and acquisition-related costs
2018 Tobacco and health litigation items
2018 AB InBev special items
2018 Loss on AB InBev/SABMiller business
combination
2018 Tax items
Subtotal 2018 special items
Fewer shares outstanding
Change in tax rate
Operations
For the year ended December 31, 2018
Net
Earnings
10,222
2
$
Diluted
EPS
5.31
—
$
55
50
105
0.03
0.03
0.05
(289)
(0.15)
49
(3,674)
(3,702)
109
(432)
(98)
68
(26)
(197)
(576)
—
1,007
12
6,963
$
0.03
(1.91)
(1.92)
0.06
(0.23)
(0.05)
0.03
(0.01)
(0.11)
(0.31)
0.07
0.53
—
3.68
$
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 2018 compared with 2017 were due primarily to
shares repurchased by Altria under its share repurchase
programs.
14
14
15
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 14
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Reconciliation of 2018 Reported Diluted EPS to 2018
Adjusted Diluted EPS
2018 Reported diluted EPS
NPM Adjustment Items
Asset impairment, exit, implementation and
acquisition-related costs
Tobacco and health litigation items
AB InBev special items
Loss on AB InBev/SABMiller
business combination
Tax items
2018 Adjusted diluted EPS
2018
3.68
(0.06)
0.23
0.05
(0.03)
0.01
0.11
3.99
$
$
Altria’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, asset impairment charges, loss/gain on AB InBev/
SABMiller business combination, AB InBev 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 19).
Altria’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’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 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.
The factors described in Item 1A represent continuing risks to
this forecast.
Expense Excluded from 2019 Forecasted Adjusted
Diluted EPS
Asset impairment, exit, implementation and
acquisition-related costs (1)
Tax items (2)
2019
$
$
0.08
0.04
0.12
(1) Represents $0.04 for acquisition-related costs associated with the
Cronos and JUUL transactions and $0.04 for the cost reduction program
announced in December 2018.
(2) Represents a partial reversal of the tax basis benefit recorded in 2017
attributable to the deemed repatriation tax related to Altria’s investment
in AB InBev. For further discussion, see Note 15.
Altria reports its financial results in accordance with U.S.
GAAP. Altria’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’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 trends and results. Altria’s
management also reviews income tax rates on an adjusted basis.
Altria’s adjusted effective tax rate may exclude certain tax items
from its reported effective tax rate. 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. Adjusted
financial measures are used by management and regularly
provided to Altria’s chief operating decision maker (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’s consolidated
financial statements. In most instances, Altria 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’s consolidated results of
operations for the period in which the actual amounts become
known. Historically, the aggregate differences, if any, between
Altria’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’s consolidated financial
statements:
Consolidation: The consolidated financial statements
include Altria, as well as its wholly-owned and majority-owned
subsidiaries. Investments in which Altria has the ability to
exercise significant influence over the operating and financial
policies of the investee are accounted for under the equity method
of accounting. Equity investments in which Altria does not have
the ability to exercise significant influence over the operating and
financial policies of the investee are accounted for as an
investment in an equity security. All intercompany transactions
and balances have been eliminated.
14
15
15
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 15
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Revenue Recognition: On January 1, 2018, Altria adopted
ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606) and all related ASU amendments.
Altria’s businesses generate substantially all of their revenue
from sales contracts with customers. While Altria’s businesses
enter into separate sales contracts with each customer for each
product type, all sales contracts are similarly structured. These
contracts create an obligation to transfer product to the customer.
All performance obligations are satisfied within one year;
therefore, costs to obtain contracts are expensed as incurred and
unsatisfied performance obligations are not disclosed. There is no
financing component because Altria expects, at contract
inception, that the period between when Altria transfers product to
the customer and when the customer pays for that product will be
one year or less.
Altria’s businesses define net revenues as revenues, which
include excise taxes and shipping and handling charges billed to
customers, net of cash discounts for prompt payment, sales
returns (also referred to as returned goods) and sales incentives.
Altria’s businesses exclude from the transaction price sales taxes
and value-added taxes imposed at the time of sale (which do not
include excise taxes on cigarettes, cigars, smokeless tobacco or
wine billed to customers).
Altria’s businesses recognize revenues from sales contracts
with customers upon shipment of goods when control of such
products is obtained by the customer. Altria’s businesses
determine that a customer obtains control of the product upon
shipment when title of such product and risk of loss transfers to
the customer. Altria’s businesses account for shipping and
handling costs as fulfillment costs and such amounts are classified
as part of cost of sales in Altria’s consolidated statements of
earnings. Altria’s businesses record an allowance for returned
goods, based principally on historical volume and return rates,
which is included in other accrued liabilities on Altria’s
consolidated balance sheets. Altria’s businesses record sales
incentives, which consist of consumer incentives and trade
promotion activities, as a reduction to revenues (a portion of
which is based on amounts estimated as being due to wholesalers,
retailers and consumers at the end of a period) based principally
on historical volume, utilization and redemption rates. Expected
payments for sales incentives are included in accrued marketing
liabilities on Altria’s consolidated balance sheets.
Payment terms vary depending on product type. Altria’s
businesses consider payments received in advance of product
shipment as deferred revenue, which is included in other accrued
liabilities on Altria’s consolidated balance sheets until revenue is
recognized. PM USA receives payment in advance of a customer
obtaining control of the product. USSTC receives substantially
all payments within one business day of the customer obtaining
control of the product. Ste. Michelle receives substantially all
payments from customers within 45 days of the customer
obtaining control of the product. Amounts due from customers
are included in receivables on Altria’s consolidated balance
sheets.
For further discussion, see Note 3. Revenues from Contracts
with Customers to the consolidated financial statements in Item 8.
Depreciation, Amortization, Impairment Testing and
Asset Valuation: Altria 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 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 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
groups assets and liabilities at the lowest level for which cash
flows are separately identifiable. If Altria determines that an
impairment exists, 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 also reviews the estimated remaining useful
lives of long-lived assets whenever events or changes in business
circumstances indicate the lives may have changed.
Substantially all of the goodwill and indefinite-lived
intangible assets recorded by Altria at December 31, 2018 relate
to the 2017 acquisition of Nat Sherman, the 2009 acquisition of
UST and the 2007 acquisition of Middleton. Altria 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 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 intangible asset is considered impaired and is reduced to fair
value. For 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, 2018 were as follows:
(in millions)
Cigarettes
Smokeless products
Cigars
Wine
Total
Goodwill
22
5,023
77
74
5,196
$
$
Indefinite-Lived
Intangible Asset
172
$
8,801
2,640
233
11,846
$
During 2018, Altria recorded goodwill and other intangible
asset impairment charges of $111 million and $44 million,
respectively, related to Altria’s decision in the fourth quarter of
2018 to refocus its innovative product efforts, which includes Nu
Mark’s discontinuation of production and distribution of all e-
vapor products.
In addition, during 2018, Altria completed its quantitative
annual impairment test of goodwill and indefinite-lived intangible
16
16
17
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 16
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio assets. Upon completion of this testing, Altria concluded, in the
wine segment, that the Columbia Crest trademark of $54 million
was fully impaired as Columbia Crest has been negatively
impacted by an accelerated decline in the $7 to $10 premium
wine segment, increased competition and reduction in trade
support. The results of the 2018 quantitative annual impairment
test of goodwill and indefinite-lived intangible assets for the other
reporting units and trademarks are indicated below.
At December 31, 2018, the estimated fair values of the
cigarettes and cigars reporting units and the indefinite-lived
intangible assets within those reporting units substantially
exceeded their carrying values.
At December 31, 2018, the estimated fair values of the
smokeless products reporting unit and the indefinite-lived
intangible assets within the reporting unit substantially exceeded
its carrying values, with the exception of the Skoal trademark. At
December 31, 2018, the estimated fair value of the Skoal
trademark exceeded its carrying value of $3.9 billion by
approximately 20%. Skoal continues to be impacted by slowing
category volumes and increased competitive activities due to
higher pricing and adult tobacco consumer movement among
tobacco products.
At December 31, 2018, the estimated fair value of the wine
reporting unit did not substantially exceed its carrying value. The
estimated fair values of the indefinite-lived intangible assets
within the wine reporting unit, with the exception of Columbia
Crest (discussed above), substantially exceeded their carrying
values. At December 31, 2018, the wine reporting unit exceeded
its carrying value of $1.5 billion by approximately 14%. The
wine reporting unit continues to be impacted by the slowing
growth rate in the premium wine category and higher trade
inventories.
During 2017 and 2016, Altria’s quantitative annual
impairment test of goodwill and indefinite-lived intangible assets
resulted in no impairment charges.
In 2018, Altria used an income approach to estimate the fair
values of 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 10%.
In performing the 2018 discounted cash flow analysis, Altria
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’s long-term financial forecast, which is used by Altria’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’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’s control.
Although Altria’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’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’s management believes that the estimated fair
values of each reporting unit and indefinite-lived intangible asset
are reasonable, actual performance in the short-term or long-term
could be significantly different from forecasted performance,
which could result in impairment charges in future periods.
For additional information on goodwill and other intangible
assets, see Note 4. Goodwill and Other Intangible Assets, net to
the consolidated financial statements in Item 8.
Altria reviews its investment in AB InBev for impairment by
comparing the fair value of its investment to its carrying value. If
the carrying value of Altria’s investment exceeds its fair value and
the loss in value is other than temporary, the investment is
considered impaired and impairment is recognized in the period
identified. The factors used to make this determination include
the duration and magnitude of the fair value decline, AB InBev’s
financial condition and near-term prospects, and Altria’s intent
and ability to hold its investment in AB InBev until recovery.
The fair value of Altria’s equity investment in AB InBev at
December 31, 2018 and December 31, 2017 was $13.1 billion and
$22.1 billion, respectively, compared with its carrying value of
$17.7 billion and $18.0 billion, respectively. At December 31,
2018, the fair value of Altria’s equity investment in AB InBev
was less than its carrying value by approximately 26%. At
February 22, 2019, the fair value of Altria’s equity investment in
AB InBev was approximately $14.7 billion (approximately 17%
below its carrying value). Altria concluded that the decline in fair
value of its investment in AB InBev below its carrying value is
temporary and, therefore, no impairment was recorded. This
conclusion is based on: (i) the fair value of Altria’s equity
investment in AB InBev having historically exceeded its carrying
value since October 2016, when Altria obtained its ownership
interest in AB InBev, (ii) the period of time that AB InBev shares
have traded below Altria’s carrying value (began in September
2018) and the magnitude by which the carrying value of Altria’s
investment in AB InBev exceeds its fair value, (iii) AB InBev’s
global platform (world’s largest brewer by volume and one of the
world’s top five consumer products companies by revenue) with
strong market positions in key markets, geographic
diversification, experienced management team, financial
condition, expected earnings and history of performance, and (iv)
Altria’s ownership of restricted shares being subject to a five-year
lock-up (subject to limited exceptions) ending October 10, 2021,
16
17
17
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 17
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio which Altria believes provides sufficient time to allow for an
anticipated recovery in the fair value of its investment in AB
InBev.
If Altria were to conclude that the decline in fair value is
other than temporary, Altria would determine and recognize, in
the period identified, the impairment of its investment in AB
InBev, which could result in a material adverse effect on Altria’s
consolidated financial position or earnings. For additional
information, see Note 7.
Altria reviews its investment in JUUL for impairment by
performing a qualitative assessment of impairment indicators. If
a qualitative assessment indicates that Altria’s investment in
JUUL is impaired and the fair value of the investment is less than
its carrying value, the investment is written down to its fair value.
At December 31, 2018, there was no indication of impairment.
For additional information, see Note 8.
Marketing Costs: Altria’s businesses promote their products
with consumer incentives, trade promotions and consumer
engagement programs. These consumer incentive and trade
promotion activities, which include discounts, coupons, rebates,
in-store display incentives and volume-based incentives, do not
create a distinct deliverable and are, therefore, recorded as a
reduction of revenues. Consumer engagement program payments
are made to third parties. Altria’s businesses expense these
consumer engagement programs, which include event marketing,
as incurred and such expenses are included in marketing,
administration and research costs in Altria’s consolidated
statements of earnings. For interim reporting purposes, Altria’s
businesses charge consumer engagement programs and certain
consumer incentive expenses to operations as a percentage of
sales, based on estimated sales and related expenses for the full
year.
Contingencies: As discussed in Note 19 and Item 3, legal
proceedings covering a wide range of matters are pending or
threatened in various United States and foreign jurisdictions
against Altria 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
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’s
subsidiaries account for the cost of the State Settlement
Agreements and FDA user fees as a component of cost of sales.
Altria’s subsidiaries recorded approximately $4.5 billion, $4.7
billion and $4.9 billion of charges to cost of sales for the years
ended December 31, 2018, 2017 and 2016, respectively, in
connection with the State Settlement Agreements and FDA user
fees.
Altria and its subsidiaries record provisions in the
consolidated financial statements for pending litigation when they
determine that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. At the present
time, while it is reasonably possible that an unfavorable outcome
in a case may occur, except to the extent discussed in Note 19 and
Item 3: (i) management has concluded that it is not probable that a
loss has been incurred in any of the pending tobacco-related
cases; (ii) management is unable to estimate the possible loss or
range of loss that could result from an unfavorable outcome in
any of the pending tobacco-related cases; and (iii) accordingly,
management has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. Litigation
defense costs are expensed as incurred and included in marketing,
administration and research costs in the consolidated statements
of earnings.
Employee Benefit Plans: As discussed in Note 17. Benefit
Plans to the consolidated financial statements in Item 8 (“Note
17”), Altria provides a range of benefits to certain employees and
retired employees, including pension, postretirement health care
and postemployment benefits. Altria 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 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 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, 2018, Altria’s discount rate assumptions for
its pension and postretirement plans obligations increased from
3.7% to 4.4% at December 31, 2018. Altria presently anticipates
a decrease of approximately $15 million in its 2019 pre-tax
pension and postretirement expense versus 2018, excluding
amounts in each year related to termination, settlement and
curtailment. This anticipated decrease is due primarily to lower
amortization of unrecognized losses, partially offset by higher
interest costs, each driven by the impact of higher discount rates.
Assuming no change to the shape of the yield curve, a 50 basis
point decrease in Altria’s discount rates would increase Altria’s
pension and postretirement expense by approximately $46
18
18
19
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 18
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
million, and a 50 basis point increase in Altria’s discount rates
would decrease Altria’s pension and postretirement expense by
approximately $42 million. Similarly, a 50 basis point decrease
(increase) in the expected return on plan assets would increase
(decrease) Altria’s pension and postretirement expense by
approximately $38 million. See Note 17 for a sensitivity
discussion of the assumed health care cost trend rates.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions. 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 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 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 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 recognized income tax benefits and charges in the
consolidated statements of earnings during 2018, 2017 and 2016
as a result of various tax events, including the impact of the Tax
Reform Act.
The main provisions of the Tax Reform Act that impact Altria
include: (i) a reduction in the U.S. federal statutory corporate
income tax rate from 35% to 21% effective January 1, 2018, and
(ii) changes in the treatment of foreign-source income, commonly
referred to as a modified territorial tax system.
The transition to a modified territorial tax system required
Altria to record a deemed repatriation tax and an associated tax
basis benefit in 2017. 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’s share of AB InBev’s accumulated earnings and
associated taxes. Altria recorded adjustments to the provisional
estimates in 2018. The accounting for the repatriation tax is
complete; therefore, no further adjustments to the provisional
estimates are required.
For additional information on income taxes, see Note 15.
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
Corporate asset impairment and
exit costs
Operating income
For the Years Ended December 31,
2018
2017
2016
$ 22,297
2,262
691
114
$ 25,364
$ 22,636
2,155
698
87
$ 25,576
$ 22,851
2,051
746
96
$ 25,744
$
$
$
$
$
$
5,585
131
21
5,737
8,408
1,431
50
(421)
(38)
(315)
$
$
$
5,927
132
23
6,082
8,426
1,306
146
(51)
(21)
(213)
6,247
135
25
6,407
7,766
1,172
164
(98)
(21)
(217)
—
9,115
$
—
9,593
(5)
8,761
$
$
As discussed further in Note 16. Segment Reporting to the
consolidated financial statements in Item 8 (“Note 16”), the
CODM reviews operating companies income to evaluate the
performance of, and allocate resources to, the segments.
Operating companies income for the segments is defined as
operating income before general corporate expenses and
amortization of intangibles. Management believes it is
appropriate to disclose this measure to help investors analyze the
business performance and trends of the various business
segments.
The following events that occurred during 2018, 2017 and
2016 affected the comparability of statement of earnings amounts.
Asset Impairment, Exit, Implementation and Acquisition-
Related Costs: Pre-tax asset impairment, exit, implementation
and acquisition-related costs for the years ended December 31,
2018, 2017 and 2016 were $538 million, $89 million and $206
million, respectively.
In December 2018, Altria:
announced its decision to refocus its innovative product
efforts, which includes Nu Mark’s discontinuation of
production and distribution of all e-vapor products;
announced a cost reduction program (which includes,
among other things, reducing third-party spending and
workforce reductions across the businesses) that it
expects will deliver approximately $575 million in
annualized cost savings by the end of 2019; and
incurred pre-tax acquisition-related costs to effect the
investment in JUUL (For further information regarding
Altria’s investment in JUUL, see Note 8).
In October 2016, Altria announced the consolidation of
18
19
19
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 19
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
certain of its operating companies’ manufacturing facilities to
streamline operations and achieve greater efficiencies. The
consolidation was completed in the first quarter of 2018 and
delivered Altria’s goal of approximately $50 million in annualized
cost savings as of December 31, 2018.
In January 2016, Altria announced a productivity initiative
designed to maintain its operating companies’ leadership and cost
competitiveness. The initiative, which reduced spending on
certain selling, general and administrative infrastructure and
implemented a leaner organizational structure, delivered Altria’s
goal of approximately $300 million in annualized productivity
savings as of December 31, 2017.
For further discussion on asset impairment, exit and
implementation costs, including a breakdown of these costs by
segment, see Note 5. Asset Impairment, Exit and Implementation
Costs to the consolidated financial statements in Item 8.
Loss/gain on AB InBev/SABMiller Business Combination:
For the years ended December 31, 2018 and 2017, Altria recorded
a pre-tax loss of $33 million and a pre-tax gain of $445 million,
respectively, related to AB InBev’s divestitures of certain
SABMiller assets and businesses in connection with Legacy AB
InBev obtaining necessary regulatory clearances for the AB InBev
Transaction. As a result of the AB InBev Transaction, for the year
ended December 31, 2016, Altria recorded a pre-tax gain of
approximately $13.9 billion. For further discussion, see Note 7.
NPM Adjustment Items: For a discussion of NPM
Adjustment Items and a breakdown of these items by segment,
see Health Care Cost Recovery Litigation - NPM Adjustment
Disputes in Note 19 and NPM Adjustment Items in Note 16,
respectively.
Tobacco and Health Litigation Items: For a discussion of
tobacco and health litigation items and a breakdown of these costs
by segment, see Note 19 and Note 16, respectively.
Settlement for Lump Sum Pension Payments: In the third
quarter of 2017, Altria 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 net periodic benefit (income) cost, excluding service
cost, in Altria’s consolidated statement of earnings. For further
discussion, see Note 16.
• Loss on Early Extinguishment of Debt: During 2016,
Altria completed a debt tender offer to purchase for cash certain
of its senior unsecured notes in aggregate principal amount of
$0.9 billion.
As a result of the debt tender offer, a pre-tax loss on early
extinguishment of debt was recorded as follows:
(in millions)
Premiums and fees
Write-off of unamortized debt discounts and debt
issuance costs
Total
2016
$
809
14
823
$
For further discussion, see Note 10. Long-Term Debt to the
consolidated financial statements in Item 8 (“Note 10”).
AB InBev/SABMiller Special Items: Altria’s earnings from
its equity investment in AB InBev for 2018 included net pre-tax
income of $85 million, consisting primarily of Altria’s share of
AB InBev’s estimated effect of the Tax Reform Act and gains
related to AB InBev’s merger and acquisition activities, partially
offset by Altria’s share of AB InBev’s mark-to-market losses on
AB InBev’s derivative financial instruments used to hedge certain
share commitments.
Altria’s earnings from its equity investment in AB InBev for
2017 included net pre-tax charges of $160 million, consisting
primarily of Altria’s share of AB InBev’s Brazilian tax item and
Altria’s share of AB InBev’s mark-to-market losses on AB
InBev’s derivative financial instruments used to hedge certain
share commitments.
Altria’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’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’s share of
SABMiller’s costs related to the AB InBev Transaction and asset
impairment charges.
Tax Items: Tax items for 2018 included tax expense of
$188 million related to the Tax Reform Act as follows: (i) tax
expense of $140 million resulting from a partial reversal of the
tax basis benefit associated with the deemed repatriation tax
recorded in 2017; (ii) tax expense of $34 million for a valuation
allowance on foreign tax credit carryforwards that are not
realizable as a result of updates to the provisional estimates
recorded in 2017; and (iii) tax expense of $14 million for an
adjustment to the provisional estimates for the repatriation tax
recorded in 2017.
Tax items for 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 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 and its consolidated subsidiaries’
2010-2013 tax years (“IRS 2010-2013 Audit”), partially offset by
20
20
21
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 20
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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.
For further discussion, see Note 15.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers,
decreased $212 million (0.8%), due primarily to lower net
revenues in the smokeable products segment, partially offset by
higher net revenues in the smokeless products segment.
Cost of sales decreased $158 million (2.1%), due primarily to
lower shipment volume in the smokeable products segment and
higher NPM Adjustment Items, partially offset by higher costs in
the smokeable products segment and higher implementation costs.
Excise taxes on products decreased $345 million (5.7%), due
primarily to lower smokeable products segment shipment volume.
Marketing, administration and research costs increased $418
million (17.9%), due primarily to higher costs in the smokeable
products segment and the wine segment, acquisition-related costs
to effect the investment in JUUL and higher investment spending
in the innovative tobacco products businesses.
Operating income decreased $478 million (5.0%), due
primarily to lower operating results from the innovative tobacco
products businesses (which included asset impairment, exit and
implementation costs) and wine segment, and acquisition-related
costs to effect the investment in JUUL, partially offset by higher
operating results from the smokeless products segment.
Earnings from Altria’s equity investment in AB InBev, which
increased $358 million (67.3%), were positively impacted by AB
InBev special items.
Altria’s effective income tax rate increased 29.5 percentage
points to an effective income tax provision rate of 25.4%,
substantially all of which was due to the Tax Reform Act. For
further discussion, see Note 15.
Net earnings attributable to Altria of $6,963 million
decreased $3,259 million (31.9%), due primarily to a higher
effective income tax rate, lower operating income and a 2017 gain
on the AB InBev Transaction, partially offset by higher earnings
from Altria’s equity investment in AB InBev. Basic and diluted
EPS attributable to Altria of $3.69 and $3.68, respectively,
decreased by 30.5% and 30.7%, respectively, due to lower net
earnings attributable to Altria, partially offset by fewer shares
outstanding.
2017 Compared with 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 $234 million (3.0%), 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 $324
million (12.2%), due primarily to lower costs in the smokeable
products segment.
Operating income increased $832 million (9.5%), 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’s equity investment in AB InBev/
SABMiller, which decreased $263 million (33.1%), were
negatively impacted by AB InBev/SABMiller special items.
Altria’s effective income tax rate decreased 38.9 percentage
points to an effective income tax benefit rate of 4.1%,
substantially all of which was due to the Tax Reform Act. For
further discussion, see Note 15.
Net earnings attributable to Altria of $10,222 million
decreased $4,017 million (28.2%), due primarily to a lower gain
on the AB InBev Transaction in 2017 and lower earnings from
Altria’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.
Basic and diluted EPS attributable to Altria of $5.31, each
decreased by 27.1% due to lower net earnings attributable to
Altria, partially offset by 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 investees and our consolidated results of
operations, cash flows or financial position. These challenges,
some of which are discussed in more detail in Note 19, Item 1A
and Item 3, include:
pending and threatened litigation and bonding
requirements;
restrictions and requirements imposed by the FSPTCA,
and restrictions and requirements (and related
enforcement actions) that have been, and in the future
will be, imposed by the FDA;
actual and proposed excise tax increases, as well as
changes in tax structures and tax stamping requirements;
bans and restrictions on tobacco use imposed by
governmental entities and private establishments and
employers;
other federal, state and local government actions,
including:
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;
20
21
21
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 21
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 prices, availability and
quality of tobacco, other raw materials and component
parts.
In addition to and in connection with the foregoing, evolving
adult tobacco consumer preferences pose challenges for Altria’s
tobacco subsidiaries. Our tobacco subsidiaries believe that a
significant number of adult tobacco consumers switch among
tobacco categories, use multiple forms of tobacco products and
try innovative tobacco products, such as e-vapor products and oral
tobacco-derived nicotine products. The e-vapor category grew
rapidly from 2012 through early 2015 off a small base, but then
plateaued. The growth trend resumed in 2017 and accelerated
rapidly in 2018. Growth of the e-vapor category and other
innovative tobacco products has negatively impacted
consumption levels and sales volume of other tobacco product
categories. In connection with this rapid growth trend in the e-
vapor category, Altria anticipates that the U.S. cigarette industry
volume decline rate may exceed the recent long-term decline rate,
with expected annual decline rates of 3.5% - 5% in 2019 and 4% -
5% in 2019 through 2023. Altria and its tobacco subsidiaries
believe the innovative tobacco product categories will continue to
be dynamic as adult tobacco consumers explore a variety of
tobacco product options and as the regulatory environment for
these innovative tobacco products evolves.
Altria 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 Item 1A
for certain risks associated with the foregoing discussion.
We have provided additional detail on the following topics
below:
FSPTCA and FDA Regulation;
Excise Taxes;
International Treaty on Tobacco Control;
State Settlement Agreements;
Other Federal, State and Local Regulation and Activity;
Illicit Trade in Tobacco Products;
Price, Availability and Quality of Tobacco, Other Raw
Materials and Component Parts; 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
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
22
22
23
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 22
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 - Potential 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
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:
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 -
Potential Product Standards below);
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);
the FDA’s reconsideration of its approach to reviewing
substantial equivalence reports for provisional products
(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.
In September 2018, the FDA announced that, while it
continues to be committed to the approach outlined in the July
2017 Comprehensive Plan, it is taking a number of steps to
address underage use of e-vapor products, including (i) re-
examining the FDA’s compliance policy that extended the dates
for manufacturers of certain e-vapor products to submit
applications for pre-market authorization and (ii) issuing letters to
the manufacturers of certain e-vapor products requiring them to
submit to the FDA plans for addressing youth access and use of e-
vapor products. See FDA Regulatory Actions - Underage Access
and Use of E-vapor Products below for steps Altria has taken in
response to this request from the FDA.
In November 2018, the FDA announced additional steps it is
considering taking with respect to flavored tobacco products
because of concerns that these products are appealing to youth,
including:
22
23
23
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 23
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
revisiting its compliance policy regarding sales of
flavored e-vapor products other than tobacco, mint and
menthol by restricting sales to age-restricted, in-person
locations and, if sold online, under heightened practices
for age verification;
proposing rulemaking that would seek to ban menthol in
combustible tobacco products, including cigarettes and
cigars;
revisiting the extended timeline to submit applications
for flavored cigars that were on the market as of August
8, 2016; and
proposing a product standard to ban flavors in all cigars
including products on the market as of August 8, 2016.
The FDA is monitoring youth tobacco usage rates,
particularly usage rates of e-vapor products, and has indicated that
it may exercise its regulatory authority by implementing measures
designed to decrease youth tobacco use, potentially including the
removal of e-vapor products from the market.
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’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 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 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, 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 or otherwise
have a material adverse effect on the business, consolidated
results of operations, cash flows or financial position of Altria and
its tobacco subsidiaries.
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
24
24
25
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 24
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 certain limitations arising from legal challenges,
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.
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, the
FDA 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. Most 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. In April 2018, the FDA
announced that it will not review a certain subset of
provisional product substantial equivalence reports and that
those products can generally continue to be legally marketed
without further FDA review. PM USA and USSTC have
provisional products included in this subset of products, but
also have provisional products that will continue to be subject
to the substantial equivalence review process as discussed
below. In addition, PM USA and USSTC 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. The provisional
products that were found to be not substantially equivalent
(all smokeless tobacco products) 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. In June 2018, the FDA reversed
its determination and found that such products were
substantially equivalent. As a result, USSTC dismissed its
lawsuit.
There remain a significant number of substantial
equivalence reports for products for which the FDA has not
announced decisions and that do not fall within the scope of
the FDA’s April 2018 announcement discussed above. 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
24
25
25
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 25
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 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. However, as discussed below under
Underage Access and Use of E-vapor Products, in September
2018, the FDA announced that it is re-examining these
timelines for certain e-vapor products. Also, as noted above
under FDA’s Comprehensive Regulatory Plan for Tobacco
and Nicotine Regulation, the FDA announced in November
2018 that it proposes to revisit the extended compliance date
by which manufacturers of flavored cigars first introduced
into the market between February 15, 2007 and August 8,
2016 would have to submit substantial equivalence reports or
new tobacco product applications for such products.
Because of the limited number of e-vapor products on
the market as of February 15, 2007, e-vapor manufacturers
may not be able to file substantial equivalence reports with
the FDA on their e-vapor products in the market as of August
8, 2016. In such case, the e-vapor manufacturer 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, before
introducing the products into the market, 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.
The FDA issued guidance on the substantial equivalence
process in 2015 entitled “Guidance for Industry:
Demonstrating the Substantial Equivalence of a New
Tobacco Product: Responses to Frequently Asked
Questions” (“Substantial Equivalence Guidance”). The
guidance provides 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. In a 2016 industry
legal challenge, the court concluded that a modification to an
existing product’s label does not result in a “new tobacco
product” subject to the substantial equivalence review
process and upheld the Substantial Equivalence Guidance in
all other respects. Our cigarette and smokeless tobacco
subsidiaries market various products that fall within the
scope of the Substantial Equivalence Guidance.
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 Nat Sherman. 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 connection with a 2016 lawsuit
initiated by Middleton, the Department of Justice, on behalf
of the FDA, informed Middleton that at present the FDA does
not intend to bring an enforcement action against Middleton
for the use of the term “mild” in the trademark “Black &
Mild.” Consequently, Middleton dismissed its lawsuit
without prejudice. If the FDA were to change its mind at
some later date, Middleton would have the opportunity to
make a submission to the FDA and ultimately, if necessary, to
bring another lawsuit.
Underage Access and Use of E-vapor Products: The FDA
announced in September 2018 that it is using its regulatory
authority to address underage access and use of e-vapor
products. As part of this effort, the FDA issued letters to
manufacturers of certain e-vapor products, including Nu
Mark and JUUL, requiring them to (1) discuss with the FDA
the steps each manufacturer intends to take to address youth
access and use of its e-vapor products and (2) within 60 days
provide a detailed written plan to address underage access
and use.
26
26
27
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 26
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio In October 2018, Altria responded to the FDA’s request
for a written plan setting forth the actions it was taking to
address underage access and met with the FDA. In
December 2018, Altria refocused its innovative product
efforts, which included the discontinuation of all Nu Mark e-
vapor products. Altria’s decision was based on current and
expected financial performance of its innovative products, as
well as regulatory restrictions limiting the ability to quickly
improve such products. Later in December, Altria purchased,
through a wholly owned subsidiary, a 35% economic interest
in JUUL. Following the announcement of this investment,
Altria requested a meeting with the FDA to discuss the
transaction and its ongoing support for underage tobacco
prevention. In February 2018, the FDA sent Altria a letter
expressing concern about this investment given the rise in
underage use of e-vapor products and issued a statement
indicating that, if the increased trend in underage use of e-
vapor products does not reverse, the FDA may unilaterally
take action to address the trend. Altria responded by
reaffirming its ongoing and long-standing investment in
underage tobacco prevention efforts. For example, Altria is
advocating raising the minimum legal age to purchase all
tobacco products to 21 at the federal and state levels to
further address underage tobacco use. Altria will meet with
the FDA to continue discussing underage e-vapor use.
If the FDA determines that it should use its regulatory
authority, such as through enforcement of the pre-market
authorization requirements for e-vapor products,
manufacturers of such products could be required to remove
the products from the market until they receive pre-market
authorization.
Potential Product Standards
Nicotine and Flavors: Pursuant to the July 2017
Comprehensive Plan, in March 2018 the FDA issued an
ANPRM on the following matters:
Nicotine in cigarettes and potentially other combustible
tobacco products: 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 is seeking comments on the
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. The FDA is also
seeking comments on whether a nicotine product
standard should apply to other combustible tobacco
products, including cigars.
PM USA, Middleton and Nat Sherman submitted
public comments in response to the ANPRM regarding
nicotine in cigarettes and potentially other combustible
tobacco products in July 2018. This ANPRM process
may ultimately lead to the FDA’s development of
product standards for nicotine in combustible tobacco
products such as cigarettes and cigars. If such
regulations 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, PM USA, Middleton and
Nat Sherman.
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. The FDA previously released its preliminary
scientific evaluation on menthol, which states “that
menthol cigarettes pose a public health risk above that
seen with non-menthol cigarettes.” FDA’s evaluation
followed an earlier report to the FDA from TPSAC on
the impact of the use of menthol in cigarettes on the
public health and included a recommendation that the
“[r]emoval of menthol cigarettes from the marketplace
would benefit public health in the United States” and an
observation that any ban on menthol cigarettes could
lead to an increase in contraband cigarettes and other
potential unintended consequences. As discussed above
under FDA’s Comprehensive Regulatory Plan for
Tobacco and Nicotine Regulation, in November 2018,
the FDA indicated that it is considering proposing
rulemaking that would seek to ban menthol in
combustible tobacco products, including cigarettes and
cigars, and that it intends to propose a product standard
that would ban flavors in all cigars including products on
the market as of August 8, 2016. 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.
Altria’s tobacco subsidiaries submitted public
comments in response to the ANPRM regarding flavors
in tobacco products in July 2018. This ANPRM process
may ultimately lead to the FDA’s development of
product standards for characterizing flavors in all
tobacco products, including menthol in cigarettes. If
such regulations 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 and its tobacco
subsidiaries.
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.
NNN in Smokeless Tobacco: In January 2017, the FDA
proposed a product standard for N-nitrosonornicotine
(“NNN”) levels in finished smokeless tobacco products.
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
26
27
27
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 27
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio results of operations, cash flows or financial position of
Altria and USSTC.
Good Manufacturing Practices: The FSPTCA requires
that the FDA promulgate good manufacturing practice
regulations (referred to by the FDA as “Requirements for
Tobacco Product Manufacturing Practice”) for tobacco
product manufacturers, but does not specify a timeframe
for such regulations.
Excise Taxes
Tobacco products are subject to substantial excise taxes in the
United States. Significant increases in tobacco-related taxes or
fees have been proposed or enacted (including with respect to e-
vapor products) and are likely to continue to be proposed or
enacted at the federal, state and local levels within the United
States.
Federal, state and local excise taxes have increased
substantially over the past decade, far outpacing the rate of
inflation. By way of example, in 2009, the federal excise tax
(“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
22, 2019, the weighted-average state and certain local cigarette
excise taxes increased from $0.36 to $1.79 per pack. In 2018,
Kentucky, Oklahoma and Washington D.C. enacted cigarette
excise tax increases. As of February 22, 2019, no state has
increased its cigarette excise tax in 2019, 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’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’s subsidiaries support legislation to convert ad valorem
taxes on smokeless tobacco to a weight-based methodology
because, unlike the ad valorem tax, a weight-based tax subjects
cans of equal weight to the same tax. As of February 22, 2019,
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 22, 2019, 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
Protocol to Eliminate Illicit Trade in Tobacco Products (the
“Protocol”) was approved by the Conference of Parties to the
FCTC in November 2012. It includes provisions related to the
tracking and tracing of tobacco products through the distribution
chain and numerous other provisions regarding the regulation of
the manufacture, distribution and sale of tobacco products. The
Protocol has not yet entered into force, but in any event will not
apply to the United States until the Senate ratifies the FCTC and
until the President signs, and the Senate ratifies, the Protocol. It
is not possible to predict the outcome of these proposals or the
impact of any FCTC actions on legislation or regulation in the
United States, either indirectly or as a result of the United States
becoming a party to the FCTC, or whether or how these actions
might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 19, during 1997 and 1998, PM USA and
other major domestic tobacco product manufacturers entered into
the State Settlement Agreements. These settlements require
participating manufacturers to make substantial annual payments,
which are adjusted for several factors, including inflation,
operating income, market share and industry volume. For a
discussion of the impact of the State Settlement Agreements on
Altria, see Financial Review - Off-Balance Sheet Arrangement
and Contractual Obligations - Payments Under State Settlement
Agreements and FDA Regulation below and Note 19. The State
Settlement Agreements also place numerous requirements and
restrictions on participating manufacturers’ business operations,
28
28
29
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 28
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio including prohibitions and restrictions on the advertising and
marketing of cigarettes and smokeless tobacco products. Among
these are prohibitions of outdoor and transit brand advertising,
payments for product placement and free sampling (except in
adult-only facilities). Restrictions are also placed on the use of
brand name sponsorships and brand name non-tobacco products.
The State Settlement Agreements also place prohibitions on
targeting youth and the use of cartoon characters. In addition, the
State Settlement Agreements require companies to affirm
corporate principles directed at reducing underage use of
cigarettes; impose requirements regarding lobbying activities;
mandate public disclosure of certain industry documents; limit the
industry’s ability to challenge certain tobacco control and
underage use laws; and provide for the dissolution of certain
tobacco-related organizations and place restrictions on the
establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless
Tobacco Master Settlement Agreement (the “STMSA”) with the
attorneys general of various states and United States territories to
resolve the remaining health care cost reimbursement cases
initiated against USSTC. The STMSA required USSTC to adopt
various marketing and advertising restrictions. USSTC is the
only smokeless tobacco manufacturer to sign the STMSA.
Other Federal, State and Local Regulation and Activity
Federal, State and Local Regulation: A number of states
and localities have enacted or proposed legislation that imposes
restrictions on tobacco products (including innovative tobacco
products, such as e-vapor products), such as legislation that (1)
prohibits the sale of certain tobacco products with certain
characterizing flavors, 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’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: Virginia (21), California (21), Hawaii (21), Alabama
(19), Alaska (19), New Jersey (21), Utah (19), Oregon (21),
Maine (21) and Massachusetts (21). Many localities (including
New York City (21) and Chicago (21)) have taken similar actions.
Virginia enacted legislation to increase the minimum age to
purchase all tobacco products, including e-vapor products, to 21
in February 2019 and legislation is under consideration in various
other states. Although an increase in the minimum age to
purchase tobacco products may have a negative impact on sales
volume of our tobacco businesses, as discussed above under
Underage Access and Use of E-vapor Products, Altria supports
raising the minimum legal age to purchase all tobacco products to
21 at the federal and state levels, reflecting its longstanding
commitment to combat underage tobacco use.
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 and its tobacco subsidiaries believe that the public
should be guided by the messages of the U.S. 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 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 and its tobacco
subsidiaries.
28
29
29
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 29
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
With respect to tobacco, as with other agriculture
commodities, the price of tobacco leaf can be influenced
by economic conditions and imbalances in supply and demand,
and crop quality and availability can be influenced by variations
in weather patterns, including those caused by climate change.
Tobacco production in certain countries is subject to a variety of
controls, including government mandated prices and production
control programs. Changes in the patterns of demand for
agricultural products and the cost of tobacco production could
impact tobacco leaf prices and tobacco supply. Certain types of
tobacco are only available in limited geographies, including
geographies experiencing political instability, and loss of their
availability could impair our subsidiaries’ ability to continue
marketing existing products or impact adult tobacco consumer
product acceptability.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are
subject to many influences that can impact the timing of sales to
customers, including the timing of holidays and other annual or
special events, the timing of promotions, customer incentive
programs and customer inventory programs, as well as the actual
or speculated timing of pricing actions and tax-driven price
increases.
Operating Results
The following table summarizes operating results for the
smokeable and smokeless products segments:
For the Years Ended December 31,
Net Revenues
Operating Companies
Income
(in millions)
2018
2017
2016
2018
2017
2016
Smokeable
products
Smokeless
products
Total
smokeable
and
smokeless
products
$ 22,297
$ 22,636
$ 22,851
$ 8,408
$ 8,426
$ 7,766
2,262
2,155
2,051
1,431
1,306
1,172
$ 24,559
$ 24,791
$ 24,902
$ 9,839
$ 9,732
$ 8,938
Governmental Investigations: From time to time, Altria
and its subsidiaries are subject to governmental investigations on
a range of matters. Altria 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 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’s tobacco
subsidiaries have made in legitimate distribution channels.
Moreover, illicit trade in tobacco products results in federal, state
and local governments losing tax revenues. Losses in tax
revenues can cause such governments to take various actions,
including increasing excise taxes; imposing legislative or
regulatory requirements that may adversely impact Altria’s
consolidated results of operations and cash flows and the
businesses of its tobacco subsidiaries; or asserting claims against
manufacturers of tobacco products or members of the trade
channels through which such tobacco products are distributed and
sold.
Altria and its tobacco subsidiaries devote resources to help
prevent illicit trade in tobacco products and to protect legitimate
trade channels. For example, Altria’s tobacco subsidiaries engage
in a number of initiatives to help prevent illicit trade in tobacco
products, including communication with wholesale and retail
trade members regarding illicit trade in tobacco products and how
they can help prevent such activities; enforcement of wholesale
and retail trade programs and policies that address illicit trade in
tobacco products and, when necessary, litigation to protect their
trademarks.
Price, Availability and Quality of Tobacco, Other Raw
Materials and Component Parts
Shifts in crops (such as those driven by economic conditions and
adverse weather patterns), government mandated prices,
economic trade sanctions, import duties and tariffs, geopolitical
instability and production control programs may increase or
decrease the cost or reduce the supply or quality of tobacco, other
raw materials or component parts used to manufacture our
companies’ products. Any significant change in the price, quality
or availability of tobacco, other raw materials or component parts
used to manufacture our products, could restrict our subsidiaries’
ability to continue marketing existing products or impact adult
consumer product acceptability and adversely affect
our subsidiaries’ profitability and businesses.
30
30
31
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 30
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Smokeable Products Segment
The following table summarizes the smokeable products
segment shipment volume performance:
(sticks in millions)
Cigarettes:
Marlboro
Other premium
Discount
Total cigarettes
Cigars:
Black & Mild
Other
Total cigars
Total smokeable products
Shipment Volume
For the Years Ended December 31,
2018
2017
2016
94,770
5,552
9,469
109,791
1,590
11
1,601
111,392
99,974
5,967
10,665
116,606
1,527
15
1,542
118,148
105,297
6,382
11,251
122,930
1,379
24
1,403
124,333
Cigarettes shipment volume includes Marlboro; Other
premium brands, such as Virginia Slims, Parliament and Benson
& Hedges; and Discount brands, which include L&M and Basic.
Cigarettes volume includes units sold as well as promotional
units, but excludes units sold for distribution to 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,
2018
2017
2016
43.1%
2.6
4.4
50.1%
43.4%
2.7
4.6
50.7%
43.8%
2.8
4.6
51.2%
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.
For a discussion of volume trends and factors that impact
volume and retail share performance, see Tobacco Space -
Business Environment above.
PM USA and Middleton executed the following pricing and
promotional allowance actions during 2018, 2017 and 2016:
Effective February 24, 2019, PM USA increased the list
price on Marlboro and L&M by $0.11 per pack and
Parliament and Virginia Slims by $0.16 per pack. In
addition, PM USA increased the list price on all of its other
cigarette brands by $0.31 per pack.
Effective September 23, 2018, PM USA increased the list
price on Marlboro and L&M by $0.10 per pack and
Parliament and Virginia Slims by $0.15 per pack. In
addition, PM USA increased the list price on all of its other
cigarette brands by $0.50 per pack.
Effective May 6, 2018, Middleton increased various list
prices across substantially all of its cigar brands resulting in a
weighted-average increase of approximately $0.11 per five-
pack.
Effective March 25, 2018, PM USA increased the list price
on all of its cigarette brands by $0.09 per pack.
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.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers,
decreased $339 million (1.5%), due primarily to lower shipment
volume ($1,438 million), partially offset by higher pricing
($1,104 million), which includes lower promotional investments.
Operating companies income was essentially unchanged as
lower shipment volume ($779 million), higher costs ($343
million, which includes investments in strategic initiatives, higher
asset impairment, exit and implementation costs and higher
tobacco and health litigation items) and higher per unit settlement
charges, were offset by higher pricing ($1,092 million), which
includes lower promotional investments, and higher NPM
Adjustment Items ($140 million).
Marketing, administration and research costs for the
smokeable products segment include PM USA’s cost of
administering and litigating product liability claims. Litigation
defense costs are influenced by a number of factors, including the
number and types of cases filed, the number of cases tried
annually, the results of trials and appeals, the development of the
30
31
31
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 31
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
law controlling relevant legal issues, and litigation strategy and
tactics. For further discussion on these matters, see Note 19 and
Item 3. For the years ended December 31, 2018, 2017 and 2016,
product liability defense costs for PM USA were $179 million,
$179 million and $234 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.
The smokeable products segment’s reported domestic
cigarettes shipment volume decreased 5.8%, driven primarily by
the industry’s rate of decline, retail share losses and trade
inventory movements, partially offset by one extra shipping day.
When adjusted for trade inventory movements and one extra
shipping day, the smokeable products segment’s domestic
cigarettes shipment volume decreased an estimated 5.5%. Total
domestic cigarette industry volumes declined by an estimated
4.5%.
Shipments of premium cigarettes accounted for 91.4% of
smokeable products’ reported domestic cigarettes shipment
volume for 2018, versus 90.9% for 2017.
PM USA stabilized Marlboro retail share in 2018 at a full-
year share of 43.1 share points, unchanged compared to
Marlboro’s share in the fourth quarter of 2017.
2017 Compared with 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 $660 million (8.5%),
due primarily to higher pricing ($1,023 million), which includes
higher promotional investments, lower marketing, administration
and research costs ($261 million, which includes 2016 state
excise tax ballot initiative spending and lower product liability
defense costs), lower asset impairment and exit costs ($97
million) and lower manufacturing costs. These factors were
partially offset by lower shipment volume ($691 million) and
higher per unit settlement charges.
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 domestic 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.
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.
Smokeless Products Segment
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,
2016
525.1
260.9
786.0
67.5
853.5
2017
531.6
241.9
773.5
67.8
841.3
2018
531.7
231.1
762.8
69.8
832.6
Smokeless products shipment volume includes cans and
packs sold, as well as promotional units, but excludes
international volume, which is not material to the smokeless
products segment. New types of smokeless products, as well as
new packaging configurations of existing smokeless products,
may or may not be equivalent to existing MST products on a can-
for-can basis. To calculate volumes of cans and packs shipped,
one pack of snus, irrespective of the number of pouches in the
pack, is assumed to be equivalent to one can of MST.
The following table summarizes smokeless products segment
retail share performance (excluding international volume):
Copenhagen
Skoal
Copenhagen and Skoal
Other
Total smokeless products
Retail Share
For the Years Ended December 31,
2016
33.5%
18.2
51.7
3.3
55.0%
2018
34.4%
16.2
50.6
3.4
54.0%
2017
34.0%
16.7
50.7
3.3
54.0%
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.
For a discussion of volume trends and factors that impact
volume and retail share performance, see Tobacco Space -
Business Environment above.
USSTC executed the following pricing actions during 2018,
2017 and 2016:
Effective November 20, 2018, USSTC increased the list
price on its Skoal X-TRA products and select Copenhagen
32
32
33
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 32
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio products by $0.17 per can. USSTC also increased the list
price on its Husky brand and on the balance of its
Copenhagen and Skoal products by $0.07 per can. In
addition, USSTC decreased the price on its Red Seal brand
by $0.08 per can.
Effective June 5, 2018, USSTC increased the list price on
all its brands by $0.07 per can.
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.
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers,
increased $107 million (5.0%), due primarily to higher pricing
($138 million), which includes lower promotional investments,
partially offset by lower shipment volume.
Operating companies income increased $125 million (9.6%),
due primarily to higher pricing ($138 million), which includes
lower promotional investments, and lower asset impairment, exit
and implementation costs ($33 million), partially offset by lower
shipment volume and higher costs (including investments in
strategic investments).
The smokeless products segment’s reported domestic
shipment volume decreased 1.0%, driven primarily by the
industry’s rate of decline. When adjusted for trade inventory
movements and calendar differences, the smokeless products
segment’s domestic shipment volume declined an estimated 1%.
The smokeless products category volume declined an
estimated 1.5% over the six months ended December 31, 2018.
2017 Compared with 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 $134 million
(11.4%), due primarily to higher pricing ($168 million), which
includes lower promotional investments, and lower
manufacturing costs, partially offset by unfavorable mix and
lower shipment volume ($18 million).
The smokeless products segment’s reported domestic
shipment volume decreased 1.4%, driven primarily by declines in
Skoal. After adjusting for trade inventory movements and other
factors, the smokeless products segment’s domestic shipment
volume declined an estimated 2%. The estimated smokeless
products category volume was essentially unchanged over the six
months ended December 31, 2017.
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
The following table summarizes operating results for the
wine segment:
(in millions)
Net revenues
Operating companies income
For the Years Ended December 31,
2018
691
50
$
$
2017
698
146
$
$
2016
746
164
$
$
2018 Compared with 2017
Net revenues, which include excise taxes billed to customers,
decreased $7 million (1.0%), due primarily to lower shipment
volume, partially offset by favorable premium mix.
Operating companies income decreased $96 million (65.8%),
due primarily to the impairment of the Columbia Crest trademark
($54 million), higher costs and lower shipment volume, partially
offset by favorable premium mix.
32
33
33
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 33
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
For 2018, Ste. Michelle’s reported wine shipment volume of
8,246 thousand cases decreased 3.3%.
2017 Compared with 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 $18 million (11.0%),
due primarily to lower shipment volume.
For 2017, Ste. Michelle’s reported wine shipment volume of
8,530 thousand cases decreased 8.6%.
Financial Review
Net Cash Provided by Operating Activities
During 2018, net cash provided by operating activities was $8.4
billion compared with $4.9 billion during 2017. This increase
was due primarily to lower payments of settlement charges and
income taxes in 2018.
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
AB InBev Transaction and gains from exercising
derivative financial instruments associated with the AB
InBev Transaction in 2016;
higher operating companies income in the smokeable
and smokeless products segments;
lower contributions to Altria’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.
Altria had a working capital deficit at December 31, 2018
and 2017. Altria’s management believes that Altria has the ability
to fund working capital deficits with cash provided by operating
activities and/or short-term borrowings under its commercial
paper program and borrowings through its access to credit and
capital markets.
At December 31, 2018, Altria’s working capital deficit
included approximately $13.9 billion of debt coming due by
December 31, 2019. In addition, Altria has an additional $1.0
billion of debt coming due by January 31, 2020. As discussed in
the Debt and Liquidity - Debt section below, in February 2019,
Altria repaid all the outstanding $12.8 billion of short-term
borrowings under the Term Loan Agreement (defined below) with
proceeds from the issuance of long-term senior unsecured notes.
Net Cash Provided by/Used in Investing Activities
During 2018, net cash used in investing activities was $13.0
billion compared with $0.5 billion during 2017. This increase
was due primarily to Altria’s $12.8 billion investment in JUUL in
2018.
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 AB InBev Transaction
during 2016;
proceeds of $0.5 billion from exercising derivative
financial instruments associated with the AB InBev
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.
Capital expenditures for 2018 increased 19.6% to $238
million, due primarily to spending related to manufacturing.
Capital expenditures for 2019 are expected to be in the range of
$225 million to $275 million, and are expected to be funded from
operating cash flows.
Net Cash Used in Financing Activities
During 2018, net cash provided by financing activities was $4.7
billion compared with net cash used in financing activities of $7.8
billion during 2017. This change was due primarily to the
following:
$12.8 billion of short-term borrowings used to finance
Altria’s investment in JUUL in 2018; and
lower repurchases of common stock during 2018;
partially offset by:
higher dividends paid during 2018; and
$0.9 billion repayment of Altria senior unsecured notes
at scheduled maturity in 2018.
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.
Debt and Liquidity
Credit Ratings - Altria’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’s credit agreement is discussed in Note 9.
34
34
35
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 34
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
See the discussion in Item 1A regarding the potential adverse
impact of certain events on Altria’s credit ratings.
At December 31, 2018, the credit ratings and outlook for
Altria’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”)
Short-term
Debt
P-2
Long-term
Debt
Outlook
A3 Negative(1)
A-2(2)
BBB(2)
Stable
F2
BBB(3)
Stable
(1) On December 20, 2018, Moody’s lowered the outlook for Altria to
Negative from Stable.
(2) On December 20, 2018, Standard & Poor’s lowered the short-term
debt credit rating for Altria to A-2 from A-1 and lowered the long-term
debt credit rating for Altria to BBB from A-.
(3) On December 20, 2018, Fitch lowered the long-term debt credit rating
for Altria to BBB from A-.
Credit Lines - From time to time, Altria has short-term
borrowing needs to meet its working capital requirements and
generally uses its commercial paper program to meet those needs.
At December 31, 2018, 2017 and 2016, Altria had no short-term
borrowings under its commercial paper program.
On December 20, 2018, Altria entered into a senior
unsecured term loan agreement (the “Term Loan Agreement”) in
connection with its investments in JUUL and Cronos. At
December 31, 2018, Altria had aggregate short-term borrowings
under the Term Loan Agreement of $12.8 billion. Borrowings
under the Term Loan Agreement were set to mature on December
19, 2019. In February 2019, Altria repaid all of the outstanding
$12.8 billion of short-term borrowings under the Term Loan
Agreement with net proceeds from the issuance of long-term
senior unsecured notes. Upon such repayment, the Term Loan
Agreement terminated in accordance with its terms. For further
discussion, see the Debt section below.
On August 1, 2018, Altria entered into a senior unsecured 5-
year revolving credit agreement, which is used for general
corporate purposes that was subsequently amended on January
25, 2019 to include certain covenants that become effective upon
the completion of Altria’s pending investment in Cronos (as
amended, the “Credit Agreement”). At December 31, 2018 and
2017, Altria had no borrowings under the Credit Agreement. At
December 31, 2018, credit available to Altria under the Credit
Agreement was $3.0 billion.
At December 31, 2018, Altria was in compliance with its
covenants associated with the Term Loan Agreement and Credit
Agreement. Altria expects to continue to meet its covenants
associated with the Credit Agreement. For further discussion, see
Note 9.
Any commercial paper issued by Altria and borrowings under
the Credit Agreement are guaranteed by PM USA as further
discussed in Note 20. Condensed Consolidating Financial
Information to the consolidated financial statements in Item 8
(“Note 20”).
Financial Market Environment - Altria believes it has
adequate liquidity and access to financial resources to meet its
anticipated obligations and ongoing business needs in the
foreseeable future. Altria monitors the credit quality of its bank
group and is not aware of any potential non-performing credit
provider in that group. Altria believes the lenders in its bank
group will be willing and able to advance funds in accordance
with their legal obligations. See Item 1A for certain risk factors
associated with the foregoing discussion.
Investment in AB InBev - In October 2018, AB InBev
announced a 50% rebase in the dividends it pays to its
shareholders, which results in a reduction of cash dividends Altria
receives from AB InBev. Altria does not expect the reduction to
have a material impact on its consolidated financial position,
liquidity or earnings. See Item 1A for a discussion of risks
associated with the dividends paid by AB InBev on shares owned
by Altria.
Debt - At December 31, 2018 and 2017, Altria’s total debt
was $25.7 billion and $13.9 billion, respectively. The increase in
debt was due primarily to $12.8 billion of short-term borrowings
under the Term Loan Agreement incurred in connection with the
investment in JUUL, partially offset by a repayment of $0.9
billion of debt at scheduled maturity in 2018.
The interest rate on Altria’s short-term borrowings, which is
variable rate debt, was approximately 3.5% at December 31,
2018. Altria had no short-term borrowings at December 31,
2017.
All of Altria’s long-term debt outstanding at December 31,
2018 and 2017 was fixed-rate debt. The weighted-average
coupon interest rate on total long-term debt was approximately
4.6% and 4.9% at December 31, 2018 and 2017, respectively.
In February 2019, Altria issued U.S. dollar denominated and
Euro denominated long-term senior unsecured notes in the
aggregate principal amounts of $11.5 billion and €4.25 billion,
respectively (collectively, the “Notes”). Altria immediately
converted the proceeds of the Euro denominated notes into U.S.
dollars of $4.8 billion. The net proceeds from the Euro notes and
a portion of the net proceeds from the U.S. dollar notes were used
to repay in full the $12.8 billion of short-term borrowings under
the Term Loan Agreement. The remaining net proceeds from the
U.S. dollar notes are expected to be used to finance Altria’s
investment in Cronos and for other general corporate purposes.
The obligations of Altria under the Notes are fully and
unconditionally guaranteed by PM USA. The Notes contain the
following terms:
U.S. dollar denominated notes
$1.0 billion at 3.490%, due 2022, interest payable
semiannually beginning August 14, 2019;
$1.0 billion at 3.800%, due 2024, interest payable
semiannually beginning August 14, 2019;
$1.5 billion at 4.400%, due 2026, interest payable
semiannually beginning August 14, 2019;
$3.0 billion at 4.800%, due 2029, interest payable
semiannually beginning August 14, 2019;
$2.0 billion at 5.800%, due 2039, interest payable
semiannually beginning August 14, 2019;
35
35
$2.5 billion at 5.950%, due 2049, interest payable
semiannually beginning August 14, 2019; and
$0.5 billion at 6.200%, due 2059, interest payable
semiannually beginning August 14, 2019.
Euro denominated notes
€1.25 billion at 1.000%, due 2023, interest payable
annually beginning February 15, 2020;
€0.75 billion at 1.700%, due 2025, interest payable
annually beginning June 15, 2020;
€1.0 billion at 2.200%, due 2027, interest payable
annually beginning June 15, 2020; and
€1.25 billion at 3.125%, due 2031, interest payable
annually beginning June 15, 2020.
The other terms of the Notes are similar to Altria’s other
senior unsecured notes, as discussed in Note 10.
Altria designated its Euro denominated notes as a net
investment hedge of its investment in AB InBev.
For further details on short-term borrowings and long-term
debt, see Note 9 and Note 10, respectively.
In October 2017, Altria filed a registration statement on Form
S-3 with the SEC, under which Altria 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 has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that
are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 19, Altria 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, 2018. From time to time, subsidiaries of Altria also issue lines of credit to affiliated entities. In addition, as
discussed in Note 20, PM USA has issued guarantees relating to Altria’s obligations under its outstanding debt securities, borrowings
under its Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not
expected to have, a significant impact on Altria’s liquidity. For further discussion regarding Altria’s liquidity, see the Debt and Liquidity
section above.
Aggregate Contractual Obligations - The following table summarizes Altria’s contractual obligations at December 31, 2018:
(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)
Total
13,153
7,710
182
3,896
1,027
4,923
1,848
27,816
$
$
$
$
Payments Due
2019
1,144
610
41
940
614
1,554
74
3,423
$
$
2020 - 2021
2,500
933
66
$
2022 - 2023
2,250
753
41
1,232
254
1,486
149
5,134
$
573
159
732
230
4,006
2024 and
Thereafter
7,259
5,414
34
1,151
—
1,151
1,395
15,253
$
$
(1) Amounts represent the expected cash payments of Altria’s long-term debt.
(2) Amounts represent the expected cash payments of Altria’s interest expense on its long-term debt. Interest on Altria’s long-term debt, which was all
fixed-rate debt at December 31, 2018, 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 2019 through 2023.
Contributions beyond 2023 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 is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee
payments, and payments for FDA user fees, as discussed below
and in Note 19, are excluded from the table above, as the
payments are subject to adjustment for several factors, including
36
36
37
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 36
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
inflation, operating income, market share and industry volume.
Litigation escrow deposits, as discussed below and in Note 19, are
also excluded from the table above since these deposits will be
returned to PM USA should it prevail on appeal.
Payments Under State Settlement Agreements and FDA
Regulation - As discussed previously and in Note 19, 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. Altria’s subsidiaries recorded
approximately $4.5 billion, $4.7 billion and $4.9 billion of
charges to cost of sales for the years ended December 31, 2018,
2017 and 2016, 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 19.
Based on current agreements, 2018 market share and
estimated annual industry volume decline rates, the estimated
amounts that Altria’s subsidiaries may charge to cost of sales for
payments related to State Settlement Agreements and FDA user
fees approximate $4.7 billion in 2019 and 2020 and $4.6 billion
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, 2018, PM USA
had posted appeal bonds totaling approximately $100 million,
which have been collateralized with restricted cash that 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 in a particular fiscal quarter or fiscal
year, as more fully disclosed in Note 19, Item 3 and Item 1A,
management expects cash flow from operations, together with
Altria’s access to capital markets, to provide sufficient liquidity to
meet ongoing business needs.
Equity and Dividends
As discussed in Note 12. Stock Plans to the consolidated financial
statements in Item 8, during 2018 Altria granted an aggregate of
0.9 million restricted stock units and 0.2 million performance
stock units to eligible employees.
At December 31, 2018, the number of shares to be issued
upon vesting of restricted stock units and performance stock units
was not significant.
Dividends paid in 2018 and 2017 were approximately $5.4
billion and $4.8 billion, respectively, an increase of 12.6%,
reflecting a higher dividend rate, partially offset by fewer shares
outstanding as a result of shares repurchased by Altria under its
share repurchase programs.
During the first quarter of 2018, the Board of Directors
approved a 6.1% increase in the quarterly dividend rate to $0.70
per share of Altria common stock versus the previous rate of
$0.66 per share. During the third quarter of 2018, the Board of
Directors approved an additional 14.3% increase in the quarterly
dividend rate to $0.80 per share of Altria common stock, resulting
in an overall quarterly dividend rate increase of 21.2% since the
beginning of 2018. Altria expects to continue to maintain a
dividend payout ratio target of approximately 80% of its adjusted
diluted EPS. The current annualized dividend rate is $3.20 per
share. Future dividend payments remain subject to the discretion
of the Board of Directors.
For a discussion of Altria’s share repurchase programs, see
Note 11. Capital Stock to the consolidated financial statements in
Item 8 and Part II, Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities of this Annual Report on Form 10-K.
New Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of issued accounting guidance
applicable to, but not yet adopted by, Altria.
Contingencies
See Note 19 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
Interest Rates
At December 31, 2018 and 2017, the fair value of Altria’s long-
term debt was $12.5 billion and $15.3 billion, respectively. The
fair value of Altria’s long-term debt is subject to fluctuations
resulting from changes in market interest rates. A 1% increase in
market interest rates at December 31, 2018 and 2017 would
decrease the fair value of Altria’s long-term debt by
approximately $0.8 billion and $1.2 billion, respectively. A 1%
decrease in market interest rates at December 31, 2018 and 2017
would increase the fair value of Altria’s long-term debt by
approximately $0.9 billion and $1.3 billion, respectively.
Interest rates on borrowings under the Credit Agreement are
expected to be based on the London Interbank Offered Rate
(“LIBOR”) plus a percentage based on the higher of the ratings of
Altria’s long-term senior unsecured debt from Moody’s and
Standard & Poor’s. The applicable percentage based on Altria’s
long-term senior unsecured debt ratings at December 31, 2018 for
borrowings under the Credit Agreement was 1.0%. At December
31, 2018, Altria had no borrowings under the Credit Agreement.
36
37
37
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 37
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
at December 31,
Assets
Cash and cash equivalents
Receivables
Inventories:
Leaf tobacco
Other raw materials
Work in process
Finished product
Income taxes
Other current assets
Total current assets
Property, plant and equipment, at cost:
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress
Less accumulated depreciation
Goodwill
Other intangible assets, net
Investment in AB InBev
Investment in JUUL
Other assets
Total Assets
See notes to consolidated financial statements.
$
2018
$
1,333
142
940
186
647
558
2,331
167
326
4,299
309
1,442
2,981
218
4,950
3,012
1,938
5,196
12,279
17,696
12,800
1,430
55,638
$
$
2017
1,253
142
941
170
560
554
2,225
461
263
4,344
302
1,437
2,975
165
4,879
2,965
1,914
5,307
12,400
17,952
—
1,285
43,202
38
38
39
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 38
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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)
____________________________________________
2018
2017
at December 31,
Liabilities
at December 31,
Liabilities
Short-term borrowings
Current portion of long-term debt
Short-term borrowings
Accounts payable
Current portion of long-term debt
Accrued liabilities:
Accounts payable
Marketing
Accrued liabilities:
Employment costs
Marketing
Settlement charges
Employment costs
Other
Settlement charges
Other
Total current liabilities
Dividends payable
Total current liabilities
Dividends payable
Long-term debt
Deferred income taxes
Long-term debt
Accrued pension costs
Deferred income taxes
Accrued postretirement health care costs
Accrued pension costs
Other liabilities
Accrued postretirement health care costs
Other liabilities
Contingencies (Note 19)
Redeemable noncontrolling interest
Contingencies (Note 19)
Stockholders’ Equity
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
(2,805,961,317 shares issued)
Earnings reinvested in the business
Additional paid-in capital
Accumulated other comprehensive losses
Earnings reinvested in the business
Cost of repurchased stock
Accumulated other comprehensive losses
Cost of repurchased stock
(931,903,722 shares at December 31, 2018 and
904,702,125 shares at December 31, 2017)
Total stockholders’ equity attributable to Altria
(931,903,722 shares at December 31, 2018 and
904,702,125 shares at December 31, 2017)
Noncontrolling interests
Total stockholders’ equity attributable to Altria
Total stockholders’ equity
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
See notes to consolidated financial statements.
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
$
$
$
$
12,704
2018
1,144
12,704
399
1,144
399
586
189
586
3,454
189
1,214
3,454
1,503
1,214
21,193
1,503
21,193
11,898
5,172
11,898
544
5,172
1,749
544
254
1,749
40,810
254
40,810
39
39
935
5,961
935
43,962
5,961
(2,547)
43,962
(2,547)
(33,524)
14,787
(33,524)
2
14,787
14,789
2
55,638
14,789
55,638
$
$
$
$
—
2017
864
—
374
864
374
695
188
695
2,442
188
971
2,442
1,258
971
6,792
1,258
6,792
13,030
5,247
13,030
445
5,247
1,987
445
283
1,987
27,784
283
27,784
38
38
935
5,952
935
42,251
5,952
(1,897)
42,251
(1,897)
(31,864)
15,377
(31,864)
3
15,377
15,380
3
43,202
15,380
43,202
38
39
39
39
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 39
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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,
Net revenues
Excise taxes on products
Cost of sales
Gross profit
Gross profit
Excise taxes on products
Marketing, administration and research costs
Asset impairment and exit costs
Marketing, administration and research costs
Asset impairment and exit costs
Interest and other debt expense, net
Operating income
Operating income
Loss on early extinguishment of debt
Interest and other debt expense, net
Net periodic benefit (income) cost, excluding service cost
Loss on early extinguishment of debt
Earnings from equity investment in AB InBev/SABMiller
Net periodic benefit (income) cost, excluding service cost
Loss (gain) on AB InBev/SABMiller business combination
Earnings from equity investment in AB InBev/SABMiller
Loss (gain) on AB InBev/SABMiller business combination
Provision (benefit) for income taxes
Earnings before income taxes
Earnings before income taxes
Net earnings
Provision (benefit) for income taxes
Net earnings attributable to noncontrolling interests
Net earnings
Net earnings attributable to Altria
Net earnings attributable to noncontrolling interests
Per share data:
Net earnings attributable to Altria
Basic earnings per share attributable to Altria
Per share data:
Diluted earnings per share attributable to Altria
Basic earnings per share attributable to Altria
See notes to consolidated financial statements.
Diluted earnings per share attributable to Altria
See notes to consolidated financial statements.
2018
25,364
7,373
2018
25,364
5,737
7,373
12,254
5,737
2,756
12,254
383
2,756
9,115
383
665
9,115
—
665
(34)
—
(890)
(34)
33
(890)
9,341
33
2,374
9,341
6,967
2,374
(4)
6,967
6,963
(4)
6,963
3.69
3.68
3.69
3.68
$
$
$
$
$
$
$
$
2017
25,576
7,531
2017
25,576
6,082
7,531
11,963
6,082
2,338
11,963
32
2,338
9,593
32
705
9,593
—
705
37
—
(532)
37
(445)
(532)
9,828
(445)
(399)
9,828
10,227
(399)
(5)
10,227
10,222
(5)
10,222
5.31
5.31
5.31
5.31
$
$
$
$
$
$
$
$
2016
25,744
7,765
2016
25,744
6,407
7,765
11,572
6,407
2,662
11,572
149
2,662
8,761
149
747
8,761
823
747
(1)
823
(795)
(1)
(13,865)
(795)
21,852
(13,865)
7,608
21,852
14,244
7,608
(5)
14,244
14,239
(5)
14,239
7.28
7.28
7.28
7.28
$
$
$
$
$
$
$
$
40
40
40
41
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 40
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
Altria Group, Inc. and Subsidiaries
(in millions of dollars)
_______________________
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
_______________________
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
Other comprehensive earnings (losses), net of deferred income taxes:
Benefit plans
AB InBev/SABMiller
Benefit plans
Currency translation adjustments and other
AB InBev/SABMiller
Currency translation adjustments and other
Other comprehensive (losses) earnings, net of deferred income taxes
Other comprehensive (losses) earnings, net of deferred income taxes
Comprehensive earnings
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings
Comprehensive earnings attributable to Altria
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to Altria
See notes to consolidated financial statements.
See notes to consolidated financial statements.
$
$
$
$
2018
6,967
2018
6,967
68
(309)
68
(1)
(309)
(242)
(1)
(242)
6,725
(4)
6,725
6,721
(4)
6,721
2017
10,227
2017
10,227
209
(54)
209
—
(54)
155
—
155
10,382
(5)
10,382
10,377
(5)
10,377
$
$
$
$
2016
14,244
2016
14,244
(38)
1,265
(38)
1
1,265
1,228
1
1,228
15,472
(5)
15,472
15,467
(5)
15,467
$
$
$
$
40
41
41
41
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 41
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
for the years ended December 31,
Cash Provided by (Used in) Operating Activities
Adjustments to reconcile net earnings to operating cash flows:
Net earnings
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization
Deferred income tax (benefit) provision
Depreciation and amortization
Earnings from equity investment in AB InBev/SABMiller
Deferred income tax (benefit) provision
Loss (gain) on AB InBev/SABMiller business combination
Earnings from equity investment in AB InBev/SABMiller
Dividends from AB InBev/SABMiller
Loss (gain) on AB InBev/SABMiller business combination
Asset impairment and exit costs, net of cash paid
Dividends from AB InBev/SABMiller
Loss on early extinguishment of debt
Asset impairment and exit costs, net of cash paid
Cash effects of changes:
Loss on early extinguishment of debt
Cash effects of changes:
Receivables
Inventories
Receivables
Accounts payable
Inventories
Income taxes
Accounts payable
Accrued liabilities and other current assets
Income taxes
Accrued settlement charges
Accrued liabilities and other current assets
Pension and postretirement plans contributions
Pension provisions and postretirement, net
Pension and postretirement plans contributions
Other, net
Pension provisions and postretirement, net
Net cash provided by operating activities
Accrued settlement charges
Cash Provided by (Used in) Investing Activities
Other, net
Cash Provided by (Used in) Investing Activities
Net cash provided by operating activities
Capital expenditures
Acquisitions of businesses and assets
Capital expenditures
Investment in JUUL
Acquisitions of businesses and assets
Proceeds from finance assets
Investment in JUUL
Proceeds from AB InBev/SABMiller business combination
Proceeds from finance assets
Purchase of AB InBev ordinary shares
Proceeds from AB InBev/SABMiller business combination
Proceeds from derivative financial instruments
Purchase of AB InBev ordinary shares
Other, net
Proceeds from derivative financial instruments
Net cash (used in) provided by investing activities
Other, net
Net cash (used in) provided by investing activities
$
$
2018
6,967
2018
6,967
227
(57)
227
(890)
(57)
33
(890)
657
33
354
657
—
354
—
—
(129)
—
27
(129)
218
27
(21)
218
980
(21)
(41)
980
(13)
(41)
79
(13)
8,391
79
8,391
(238)
(15)
(238)
(12,800)
(15)
37
(12,800)
—
37
—
—
35
—
(7)
35
(12,988)
(7)
(12,988)
2017
2016
$
$
10,227
2017
10,227
209
(3,126)
209
(532)
(3,126)
(445)
(532)
806
(445)
(38)
806
—
(38)
—
10
(171)
10
(55)
(171)
(294)
(55)
(85)
(294)
(1,259)
(85)
(294)
(1,259)
(11)
(294)
(41)
(11)
4,901
(41)
4,901
(199)
(415)
(199)
—
(415)
133
—
—
133
—
—
—
—
14
—
(467)
14
(467)
14,244
2016
14,244
204
3,119
204
(795)
3,119
(13,865)
(795)
739
(13,865)
106
739
823
106
823
(27)
(34)
(27)
24
(34)
(231)
24
(113)
(231)
111
(113)
(531)
111
(73)
(531)
125
(73)
3,826
125
3,826
(189)
(45)
(189)
—
(45)
231
—
4,773
231
(1,578)
4,773
510
(1,578)
6
510
3,708
6
3,708
42
42
42
43
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 42
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Altria Group, Inc. and Subsidiaries
(in millions of dollars)
__________________
Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
__________________
2018
for the years ended December 31,
2017
2016
Cash Provided by (Used in) Financing Activities
for the years ended December 31,
Proceeds from short-term borrowings
Cash Provided by (Used in) Financing Activities
Long-term debt issued
Proceeds from short-term borrowings
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
Premiums and fees related to early extinguishment of debt
Dividends paid on common stock
Other, net
Premiums and fees related to early extinguishment of debt
Net cash provided by (used in) financing activities
Other, net
Cash, cash equivalents and restricted cash:
Net cash provided by (used in) financing activities
Cash, cash equivalents and restricted cash:
Increase (decrease)
Balance at beginning of year
Increase (decrease)
Balance at end of year
Balance at beginning of year
Balance at end of year
Income taxes
Cash paid: Interest
Cash paid: Interest
Income taxes
$
$
$
$
$
$
$
$
2018
12,800
—
12,800
(864)
—
(1,673)
(864)
(5,415)
(1,673)
—
(5,415)
(132)
—
4,716
(132)
4,716
119
1,314
119
1,433
1,314
704
1,433
2,307
704
2,307
$
$
$
$
$
$
$
$
2017
— $
—
— $
—
—
(2,917)
—
(4,807)
(2,917)
—
(4,807)
(47)
—
(7,771)
(47)
(7,771)
(3,337)
4,651
(3,337)
1,314
4,651
696
1,314
3,036
696
3,036
$
$
$
$
$
$
2016
—
1,976
—
(933)
1,976
(1,030)
(933)
(4,512)
(1,030)
(809)
(4,512)
(21)
(809)
(5,329)
(21)
(5,329)
2,205
2,446
2,205
4,651
2,446
775
4,651
4,664
775
4,664
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s
consolidated balance sheets:
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s
at December 31,
consolidated balance sheets:
Cash and cash equivalents
at December 31,
Restricted cash included in other current assets (1)
Cash and cash equivalents
Restricted cash included in other assets (1)
Restricted cash included in other current assets (1)
Restricted cash included in other assets (1)
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
See notes to consolidated financial statements.
appeals. See Note 19. Contingencies.
2018
1,333
2018
57
1,333
43
57
1,433
43
1,433
2017
1,253
2017
25
1,253
36
25
1,314
36
1,314
Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash
$
$
$
$
$
$
$
$
$
$
$
$
2016
4,569
2016
—
4,569
82
—
4,651
82
4,651
See notes to consolidated financial statements.
42
43
43
43
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 43
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(in millions of dollars, except per share data)
(in millions of dollars, except per share data)
____________________________________
____________________________________
____________________________________
Attributable to Altria
Attributable to Altria
Additional
Additional
Paid-in
Paid-in
Capital
Capital
5,813
5,813
—
—
Earnings
Earnings
Reinvested in
Reinvested in
the Business
the Business
27,257
27,257
14,239
14,239
$
$
Accumulated
Accumulated
$
Other
Other
Comprehensive
Comprehensive
Losses
Losses
(3,280) $
(3,280) $
—
—
$
$
2018
25,364
$
Cost of
Cost of
Repurchased
Repurchased
7,373
Stock
Stock
5,737
(27,845) $
(27,845) $
—
—
2017
25,576
Non-
Non-
controlling
controlling
7,531
Interests
Interests
6,082
11,963
$
2016
25,744
Total
Total
Stockholders’
Stockholders’
7,765
Equity
Equity
2,873
2,873
14,239
14,239
6,407
11,572
(7) $
(7) $
—
—
for the years ended December 31,
$
$
$
$
Gross profit
Operating income
of deferred income taxes
of deferred income taxes
Balances, December 31, 2016
Balances, December 31, 2016
—
—
—
—
—
—
—
—
—
—
935
935
—
—
Common
Common
Stock
Stock
935
935
—
—
Net revenues
Cost of sales
Balances, December 31, 2015
Excise taxes on products
Balances, December 31, 2015
Net earnings (1)
Net earnings (1)
Other comprehensive earnings, net
Other comprehensive earnings, net
Marketing, administration and research costs
Asset impairment and exit costs
Stock award activity
Stock award activity
Cash dividends declared ($2.35 per share)
Cash dividends declared ($2.35 per share)
Repurchases of common stock
Interest and other debt expense, net
Repurchases of common stock
Other
Other
Loss on early extinguishment of debt
Net periodic benefit (income) cost, excluding service cost
Net earnings (1)
Net earnings (1)
Earnings from equity investment in AB InBev/SABMiller
Other comprehensive earnings, net
Other comprehensive earnings, net
Loss (gain) on AB InBev/SABMiller business combination
Stock award activity
Stock award activity
Earnings before income taxes
Cash dividends declared ($2.54 per share)
Cash dividends declared ($2.54 per share)
Provision (benefit) for income taxes
Repurchases of common stock
Repurchases of common stock
Balances, December 31, 2017
Balances, December 31, 2017
—
—
—
—
—
—
—
—
935
935
Net earnings attributable to noncontrolling interests
Reclassification due to adoption of ASU 2018-02 (2)
—
Reclassification due to adoption of ASU 2018-02 (2)
—
Net earnings (1)
Net earnings attributable to Altria
—
Net earnings (1)
—
Other comprehensive losses, net of deferred
Per share data:
Other comprehensive losses, net of deferred
income taxes
income taxes
Stock award activity
Stock award activity
Cash dividends declared ($3.00 per share)
Cash dividends declared ($3.00 per share)
Repurchases of common stock
Repurchases of common stock
Other
Other
See notes to consolidated financial statements.
—
—
—
—
—
—
Diluted earnings per share attributable to Altria
—
—
—
—
935
935
Basic earnings per share attributable to Altria
Balances, December 31, 2018
Balances, December 31, 2018
of deferred income taxes
of deferred income taxes
Net earnings
$
$
$
$
—
—
90
90
—
—
—
—
(10)
(10)
5,893
5,893
—
—
—
—
59
59
—
—
—
—
5,952
5,952
—
—
—
—
—
—
9
9
—
—
—
—
—
—
5,961
5,961
$
$
—
—
—
—
(4,590)
(4,590)
—
—
—
—
36,906
36,906
10,222
10,222
—
—
—
—
(4,877)
(4,877)
—
—
42,251
42,251
408
408
6,963
6,963
—
—
—
—
(5,660)
(5,660)
—
—
—
—
43,962
43,962
12,254
2,756
—
—
(37)
(37)
—
—
(1,030)
(1,030)
—
—
(28,912)
(28,912)
—
—
—
—
(35)
(35)
—
—
(2,917)
(2,917)
(31,864)
(31,864)
—
—
$
—
—
383
9,115
665
—
(34)
(890)
33
9,341
2,374
6,967
(4)
6,963
1,228
1,228
—
—
—
—
—
—
—
—
(2,052)
(2,052)
—
—
155
155
—
—
—
—
—
—
(1,897)
(1,897)
(408)
(408)
$
—
—
2,338
32
9,593
705
—
37
(532)
(445)
9,828
(399)
10,227
(5)
10,222
—
—
—
—
—
—
—
—
10
10
3
3
—
—
—
—
—
—
—
—
—
—
3
3
—
—
—
—
(242)
(242)
—
$
—
—
—
$
—
—
—
—
(2,547) $
(2,547) $
$
$
3.69
3.68
—
—
13
$
13
—
—
$
(1,673)
(1,673)
—
—
(33,524) $
(33,524) $
5.31
5.31
—
—
—
—
—
—
—
—
(1)
(1)
2
2
2,662
1,228
1,228
149
53
53
(4,590)
8,761
(4,590)
(1,030)
747
(1,030)
—
—
823
12,773
12,773
(1)
10,222
10,222
(795)
(13,865)
21,852
155
155
24
24
(4,877)
(4,877)
(2,917)
(2,917)
15,380
15,380
(5)
—
—
14,239
6,963
6,963
7,608
14,244
7.28
7.28
(242)
(242)
22
22
(5,660)
(5,660)
(1,673)
(1,673)
(1)
(1)
14,789
14,789
$
$
$
$
$
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2018, 2017 and 2016 exclude net earnings of $4 million, $5 million and $5
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2018, 2017 and 2016 exclude net earnings of $4 million, $5 million and $5
million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the
million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the
consolidated balance sheets at December 31, 2018, 2017 and 2016. See Note 19. Contingencies.
consolidated balance sheets at December 31, 2018, 2017 and 2016. See Note 19. Contingencies.
(2) For further discussion, see Note 15. Income Taxes.
(2) For further discussion, see Note 15. Income Taxes.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
44
44
40
44
45
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 44
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_______________________________
Note 1. Background and Basis of Presentation
Background: At December 31, 2018, Altria Group, Inc.’s
(“Altria”) wholly-owned subsidiaries included Philip Morris USA
Inc. (“PM USA”), which is engaged in the manufacture and sale
of cigarettes in the United States; John Middleton Co.
(“Middleton”), which is engaged in the manufacture and sale of
machine-made large cigars and pipe tobacco and is a wholly-
owned subsidiary of PM USA; Sherman Group Holdings, LLC
and its subsidiaries (“Nat Sherman”), which are engaged in the
manufacture and sale of super premium cigarettes and the sale of
premium cigars; and UST LLC (“UST”), which through its
wholly-owned subsidiaries, including U.S. Smokeless Tobacco
Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd.
(“Ste. Michelle”), is engaged in the manufacture and sale of
smokeless tobacco products and wine. Altria’s other operating
companies included Philip Morris Capital Corporation
(“PMCC”), which maintains a portfolio of finance assets,
substantially all of which are leveraged leases, and Nu Mark LLC
(“Nu Mark”), both of which are wholly-owned subsidiaries. In
December 2018, Altria announced the decision to refocus its
innovative product efforts, which includes the discontinuation of
production and distribution of all MarkTen and Green Smoke e-
vapor products. Prior to that time, Nu Mark was engaged in the
manufacture and sale of innovative tobacco products. Other
Altria wholly-owned subsidiaries included Altria Group
Distribution Company, which provides sales and distribution
services to certain Altria operating subsidiaries, and Altria Client
Services LLC, which provides various support services in areas
such as legal, regulatory, consumer engagement, finance, human
resources and external affairs to Altria and its subsidiaries.
Altria’s access to the operating cash flows of its wholly-owned
subsidiaries consists of cash received from the payment of
dividends and distributions, and the payment of interest on
intercompany loans by its subsidiaries. At December 31, 2018,
Altria’s principal wholly-owned subsidiaries were not limited by
long-term debt or other agreements in their ability to pay cash
dividends or make other distributions with respect to their equity
interests.
At September 30, 2016, Altria had an approximate 27%
ownership of SABMiller plc (“SABMiller”), which Altria
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
received cash and shares representing a 9.6% ownership in the
combined company (the “AB InBev 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
purchased approximately 12 million ordinary shares of AB InBev,
increasing Altria’s ownership to approximately 10.2% at
December 31, 2016. At December 31, 2018, Altria had an
approximate 10.1% ownership of AB InBev, which Altria
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 AB InBev Transaction, no earnings from
Altria’s equity investment in AB InBev were recorded for the year
ended December 31, 2016. Altria receives cash dividends on its
interest in AB InBev if and when AB InBev pays such dividends.
For further discussion, see Note 7. Investment in AB InBev/
SABMiller.
On December 20, 2018, Altria purchased, through a wholly-
owned subsidiary, shares of non-voting convertible common stock
of JUUL Labs, Inc. (“JUUL”), representing a 35% economic
interest for $12.8 billion. JUUL is engaged in the manufacture
and sale of e-vapor products globally. If and when antitrust
clearance is obtained, Altria’s non-voting shares will
automatically convert to voting shares (“Share Conversion”). At
December 31, 2018, Altria accounted for its investment in JUUL
as an investment in an equity security. Upon Share Conversion,
Altria expects to account for its investment in JUUL under the
equity method of accounting. Altria will receive cash dividends
on its interest in JUUL if and when JUUL pays such dividends.
For further discussion, see Note 8. Investment in JUUL.
On December 7, 2018, Altria announced that it entered into
an agreement to purchase, through a subsidiary, approximately
146.2 million newly issued common shares of Cronos Group Inc.
(“Cronos”), a global cannabinoid company headquartered in
Toronto, Canada. Altria expects the transaction to close in the
first half of 2019. Upon completion of this transaction, Altria will
own an approximate 45% equity interest in Cronos. Additionally,
the agreement includes a warrant to purchase up to an additional
approximately 72.2 million common shares of Cronos at a per
share exercise price of Canadian dollar (“CAD”) $19.00. The
purchase price for the approximate 45% equity interest and
warrant is approximately CAD $2.4 billion (approximately U.S.
dollar (“USD”) $1.8 billion, based on the CAD to USD exchange
rate on January 25, 2019), to be paid on the date of the closing of
the transaction. Upon full exercise of the warrant, which expires
four years after issuance, Altria would own approximately 55% of
the outstanding common shares of Cronos. The exercise price for
the warrant is approximately CAD $1.4 billion (approximately
USD $1.0 billion, based on the CAD to USD exchange rate on
January 25, 2019). As part of the agreement, upon completion of
this transaction, Altria will have the right to nominate four
directors, including one independent director, to serve on Cronos’
Board of Directors, which will be expanded from five to seven
directors. Altria expects to account for its investment in Cronos
under the equity method of accounting. The closing of this
transaction is subject to certain customary closing conditions,
including approval of Cronos shareholders and receipt of
regulatory approvals.
In January 2019, Altria entered into derivative financial
instruments in the form of forward contracts, which mature on
April 15, 2019, to hedge a portion of Altria’s exposure to foreign
currency exchange rate movements in the CAD to USD, in
relation to the CAD $2.4 billion aggregate purchase price for the
Cronos transaction. The aggregate notional amounts of the
forward contracts were approximately USD $1.1 billion (CAD
44
45
45
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 45
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio $1.5 billion). The forward contracts do not qualify for hedge
accounting; therefore, changes in the fair values of the forward
contracts will be recorded as gains or losses in Altria’s
consolidated statements of earnings in the periods in which the
changes occur.
Basis of Presentation: The consolidated financial statements
include Altria, as well as its wholly-owned and majority-owned
subsidiaries. Investments in which Altria has the ability to
exercise significant influence over the operating and financial
policies of the investee are accounted for under the equity method
of accounting. Equity investments in which Altria does not have
the ability to exercise significant influence over the operating and
financial policies of the investee are accounted for as an
investment in an equity security. 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, impairment evaluations for equity
investments, marketing programs, income taxes, and the
allowance for losses and estimated residual values of finance
leases. Actual results could differ from those estimates.
On January 1, 2018, Altria adopted the following Accounting
Standards Updates (“ASU”):
ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) and all related ASU amendments
(collectively “ASU No. 2014-09”), as discussed in Note
2. Summary of Significant Accounting Policies and Note
3. Revenues from Contracts with Customers;
ASU No. 2016-01, Financial Instruments-Overall
(Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities and the
related ASU amendment (collectively “ASU No.
2016-01”);
ASU No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments (“ASU No. 2016-15”);
ASU No. 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash (“ASU No. 2016-18”); and
ASU No. 2017-07, Compensation-Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit
Cost (“ASU No. 2017-07”), as discussed in Note 17.
Benefit Plans.
Additionally, on October 1, 2018, Altria adopted ASU No.
2018-02, Income Statement-Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income (“ASU No.
2018-02”), as discussed in Note 15. Income Taxes.
The adoption of ASU No. 2016-01, which addresses certain
aspects of the recognition, measurement, presentation and
disclosure of financial instruments, did not impact Altria’s
consolidated financial statements.
The adoption of ASU No. 2016-15, which addresses how
eight specific cash flow issues are to be presented and classified
in the statement of cash flows, did not impact Altria’s
consolidated statements of cash flows. In addition, Altria made
an accounting policy election to continue to classify distributions
received from equity method investees using the nature of
distribution approach.
ASU No. 2016-18, which Altria adopted retrospectively,
requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents and amounts
generally described as restricted cash and restricted cash
equivalents. As a result of the adoption, restricted cash of $61
million and $82 million at December 31, 2017 and 2016,
respectively, was included in cash, cash equivalents and restricted
cash on Altria’s consolidated statements of cash flows.
Certain prior year amounts have been reclassified to conform
with the current year’s presentation due primarily to Altria’s 2018
adoption of ASU No. 2016-18 and ASU No. 2017-07.
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 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 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 groups assets and liabilities at the
lowest level for which cash flows are separately identifiable. If
Altria determines that an impairment exists, 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
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 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 to perform an interim review. If the carrying
value of goodwill exceeds its fair value, which is determined
46
46
47
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 46
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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.
Altria reviews its investment in AB InBev for impairment by
comparing the fair value of its investment to its carrying value. If
the carrying value of Altria’s investment exceeds its fair value and
the loss in value is other than temporary, the investment is
considered impaired and impairment is recognized in the period
identified. The factors used to make this determination include
the duration and magnitude of the fair value decline, AB InBev’s
financial condition and near-term prospects, and Altria’s intent
and ability to hold its investment in AB InBev until recovery.
Altria reviews its investment in JUUL for impairment by
performing a qualitative assessment of impairment indicators. If
a qualitative assessment indicates that Altria’s investment in
JUUL is impaired and the fair value of the investment is less than
its carrying value, the investment is written down to its fair value.
Derivative Financial Instruments: Altria enters into
derivatives to mitigate the potential impact of certain market
risks, including foreign currency exchange rate risk. Altria 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’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 offsetting changes in the fair
value of the hedged risk during the period that the hedge is
designated. Altria 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 would no longer be
considered 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 does not enter into or hold derivative financial
instruments for trading or speculative purposes.
Employee Benefit Plans: Altria provides a range of benefits
to certain employees and retired employees, including pension,
postretirement health care and postemployment benefits. Altria
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 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 is subject to laws and
regulations relating to the protection of the environment. Altria
provides for expenses associated with environmental remediation
obligations on an undiscounted basis when such amounts are
probable and can be reasonably estimated. Such accruals are
adjusted as new information develops or circumstances change.
Compliance with environmental laws and regulations,
including the payment of any remediation and compliance costs
or damages and the making of related expenditures, has not had,
and is not expected to have, a material adverse effect on Altria’s
consolidated results of operations, capital expenditures, financial
position or cash flows (see Note 19. Contingencies -
Environmental Regulation).
Fair Value Measurements: Altria 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 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:
46
47
47
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 47
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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.
Guarantees: Altria recognizes a liability for the fair value of
the obligation of qualifying guarantee activities. See Note 19.
Contingencies for a further discussion of guarantees.
Income Taxes: Significant judgment is required in
determining income tax provisions and in evaluating tax
positions.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Altria 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 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 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 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. See Note 19.
Contingencies.
Marketing Costs: Altria’s businesses promote their products
with consumer incentives, trade promotions and consumer
engagement programs. These consumer incentive and trade
promotion activities, which include discounts, coupons, rebates,
in-store display incentives and volume-based incentives, do not
create a distinct deliverable and are, therefore, recorded as a
reduction of revenues. Consumer engagement program payments
are made to third parties. Altria’s businesses expense these
consumer engagement programs, which include event marketing,
as incurred and such expenses are included in marketing,
administration and research costs in Altria’s consolidated
statements of earnings. For interim reporting purposes, Altria’s
businesses charge consumer engagement programs and certain
consumer incentive expenses to operations as a percentage of
sales, based on estimated sales and related expenses for the full
year.
Revenue Recognition: On January 1, 2018, Altria adopted
ASU No. 2014-09. For further discussion, see Note 3. Revenues
from Contracts with Customers.
Altria’s businesses generate substantially all of their revenue
from sales contracts with customers. While Altria’s businesses
enter into separate sales contracts with each customer for each
product type, all sales contracts are similarly structured. These
contracts create an obligation to transfer product to the customer.
All performance obligations are satisfied within one year;
therefore, costs to obtain contracts are expensed as incurred and
unsatisfied performance obligations are not disclosed. There is no
financing component because Altria expects, at contract
inception, that the period between when Altria transfers product to
the customer and when the customer pays for that product will be
one year or less.
Altria’s businesses define net revenues as revenues, which
include excise taxes and shipping and handling charges billed to
customers, net of cash discounts for prompt payment, sales
returns (also referred to as returned goods) and sales incentives.
Altria’s businesses exclude from the transaction price sales taxes
and value-added taxes imposed at the time of sale (which do not
include excise taxes on cigarettes, cigars, smokeless tobacco or
wine billed to customers).
Altria’s businesses recognize revenues from sales contracts
with customers upon shipment of goods when control of such
products is obtained by the customer. Altria’s businesses
determine that a customer obtains control of the product upon
shipment when title of such product and risk of loss transfers to
the customer. Altria’s businesses account for shipping and
handling costs as fulfillment costs and such amounts are classified
as part of cost of sales in Altria’s consolidated statements of
earnings. Altria’s businesses record an allowance for returned
goods, based principally on historical volume and return rates,
which is included in other accrued liabilities on Altria’s
consolidated balance sheets. Altria’s businesses record sales
incentives, which consist of consumer incentives and trade
promotion activities, as a reduction to revenues (a portion of
which is based on amounts estimated as being due to wholesalers,
retailers and consumers at the end of a period) based principally
on historical volume, utilization and redemption rates. Expected
payments for sales incentives are included in accrued marketing
liabilities on Altria’s consolidated balance sheets.
Payment terms vary depending on product type. Altria’s
businesses consider payments received in advance of product
48
48
49
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 48
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
shipment as deferred revenue, which is included in other accrued
liabilities on Altria’s consolidated balance sheets until revenue is
recognized. PM USA receives payment in advance of a customer
obtaining control of the product. USSTC receives substantially
all payments within one business day of the customer obtaining
control of the product. Ste. Michelle receives substantially all
payments from customers within 45 days of the customer
obtaining control of the product. Amounts due from customers
are included in receivables on Altria’s consolidated balance
sheets.
New Accounting Guidance Not Yet Adopted: The following table provides a description of issued accounting guidance applicable
to, but not yet adopted by, Altria:
Standards
ASU Nos. 2016-02;
2018-01; 2018-10;
2018-11; 2018-20
Leases (Topic 842)
Description
The guidance requires entities to
recognize lease assets and lease
liabilities on the balance sheet and
disclose key information about
leasing arrangements.
Effective Date for Public Entity
The guidance is effective for
annual reporting periods beginning
after December 15, 2018, including
interim periods within that
reporting period. Early adoption is
permitted.
ASU Nos. 2016-13
and 2018-19
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.
Effect on Financial Statements
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 lessees,
Altria and its subsidiaries’ various leases under
existing guidance are classified as operating leases
that are not recorded on Altria’s consolidated
balance sheets but are recorded in Altria’s
consolidated statements of earnings as expense is
incurred. Altria plans to apply the new guidance
retrospectively at the beginning of the period of
adoption and will record substantially all leases on
its consolidated balance sheets as right-of-use
assets and lease liabilities. Altria does not expect
its adoption of this guidance to have a material
impact on Altria’s consolidated financial
statements. The adoption of this guidance will
result in expanded footnote disclosures.
The adoption of this guidance is not expected to
have a material impact on Altria’s consolidated
financial statements.
ASU No. 2018-15
Customer’s Accounting
for Implementation
Costs Incurred in a
Cloud Computing
Arrangement That Is a
Service Contract
(Subtopic 350-40)
The guidance aligns the
requirements for capitalizing
implementation costs incurred in a
hosting arrangement that is a
service contract with the
requirements for capitalizing
implementation costs incurred to
develop or obtain internal-use
software (and hosting arrangements
that include an internal-use
software license).
The guidance is effective for fiscal
years beginning after December 15,
2019 and interim periods within
those fiscal years. Early adoption
is permitted, including adoption in
any interim period.
Altria is in the process of evaluating the impact of
this guidance on its consolidated financial
statements and related disclosures.
48
49
49
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 49
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Note 3. Revenues from Contracts with Customers
On January 1, 2018, Altria adopted ASU No. 2014-09, which
establishes principles for reporting information about the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from an entity’s contracts with customers. Altria elected to apply
the guidance using the modified retrospective transition method.
The adoption of this guidance had no impact on the amount and
timing of revenue recognized by Altria’s businesses; therefore, no
adjustments were recorded to Altria’s consolidated financial
statements.
Altria disaggregates net revenues based on product type. For
further discussion, see Note 16. Segment Reporting.
Altria’s businesses offer cash discounts to customers for
prompt payment and calculate cash discounts as a percentage of
the list price based on historical experience and agreed-upon
payment terms. Altria’s businesses record an allowance for cash
discounts, which is included as a contra-asset against receivables
on Altria’s consolidated balance sheets. There was no allowance
for cash discounts at December 31, 2018 and 2017, and there
were no differences between amounts recorded as an allowance
for cash discounts and cash discounts subsequently given to
customers.
Altria’s businesses that receive payments in advance of
product shipment record such payments as deferred revenue.
These payments are included in other accrued liabilities on
Altria’s consolidated balance sheets until control of such products
is obtained by the customer. Deferred revenue was $288 million
and $267 million at December 31, 2018 and 2017, respectively.
When cash is received in advance of product shipment, Altria’s
businesses satisfy their performance obligations within three days
of receiving payment. At December 31, 2018 and 2017, there
were no differences between amounts recorded as deferred
revenue and amounts subsequently recognized as revenue.
Receivables, which primarily reflect sales of wine produced
and/or distributed by Ste. Michelle, were $142 million at
December 31, 2018 and 2017. At December 31, 2018 and 2017,
there were no expected differences between amounts recorded
and subsequently received, and Altria’s businesses did not record
an allowance for doubtful accounts against these receivables.
Altria’s businesses record an allowance for returned goods,
which is included in other accrued liabilities on Altria’s
Note 4. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows:
consolidated balance sheets. While all of Altria’s tobacco
operating companies sell tobacco products with dates relative to
freshness as printed on product packaging, due to the limited shelf
life of USSTC’s smokeless tobacco products, it is USSTC’s
policy to accept authorized sales returns from its customers for
products that have passed such dates. Altria’s businesses record
estimated sales returns, which are based principally on historical
volume and return rates, as a reduction to revenues. Actual sales
returns will differ from estimated sales returns to the extent actual
results differ from estimated assumptions. Altria’s businesses
reflect differences between actual and estimated sales returns in
the period in which the actual amounts become known. These
differences, if any, have not had a material impact on Altria’s
consolidated financial statements. All returned goods are
destroyed upon return and not included in inventory.
Consequently, Altria’s businesses do not record an asset for their
right to recover goods from customers upon return.
Sales incentives include variable payments related to goods
sold by Altria’s businesses. Altria’s businesses include estimates
of variable consideration as a reduction to revenues upon
shipment of goods to customers. The sales incentives that require
significant estimates and judgments are as follows:
Price promotion payments- Altria’s businesses make
price promotion payments, substantially all of which are
made to their retail partners to incent the promotion of certain
product offerings in select geographic areas.
Wholesale and retail participation payments- Altria’s
businesses make payments to their wholesale and retail
partners to incent merchandising and sharing of sales data in
accordance with each business’s trade agreements.
These estimates primarily include estimated wholesale to
retail sales volume and historical acceptance rates. Actual
payments will differ from estimated payments to the extent actual
results differ from estimated assumptions. Differences between
actual and estimated payments are reflected in the period such
information becomes available. These differences, if any, have
not had a material impact on Altria’s consolidated financial
statements.
(in millions)
Smokeable products
Smokeless products
Wine
Other
Total
Goodwill
Other Intangible Assets, net
December 31, 2018
99
$
5,023
74
—
5,196
$
December 31, 2017
99
$
5,023
74
111
5,307
$
December 31, 2018
3,037
$
8,825
239
178
12,279
$
December 31, 2017
3,054
$
8,827
294
225
12,400
$
Goodwill relates to the 2017 acquisition of Nat Sherman, the 2014 acquisition of Green Smoke, Inc. and its affiliates, the 2009
acquisition of UST and the 2007 acquisition of Middleton.
50
50
51
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 50
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
December 31, 2018
December 31, 2017
Gross Carrying
Amount
11,846
654
12,500
$
$
$
$
Accumulated
Amortization
— $
221
221
$
Gross Carrying
Amount
12,125
465
12,590
Accumulated
Amortization
—
190
190
$
$
During 2018, Altria recorded goodwill and other intangible
asset impairment charges of $111 million and $44 million,
respectively, related to Altria’s decision in the fourth quarter of
2018 to refocus its innovative product efforts, which includes the
discontinuation of production and distribution of all MarkTen and
Green Smoke e-vapor products.
In addition, during 2018, Altria completed its quantitative
annual impairment test of goodwill and indefinite-lived intangible
assets. Upon completion of this testing, Altria concluded, in the
wine segment, that the Columbia Crest trademark of $54 million
was fully impaired as Columbia Crest has been negatively
impacted by an accelerated decline in the $7 to $10 premium
wine segment, increased competition and reduction in trade
support.
During 2017 and 2016, Altria’s quantitative annual
impairment test of goodwill and indefinite-lived intangible assets
resulted in no impairment charges. In addition, there were no
accumulated impairment losses related to goodwill and other
intangible assets, net at December 31, 2017.
Other intangible assets consisted of the following:
(in millions)
Indefinite-lived intangible assets
Definite-lived intangible assets
Total other intangible assets
At December 31, 2018, indefinite-lived intangible assets
consist substantially of trademarks from Altria’s 2009 acquisition
of UST ($9.0 billion) and 2007 acquisition of Middleton ($2.6
billion). Definite-lived intangible assets, which consist primarily
of customer relationships, certain cigarette trademarks and
intellectual property, are amortized over periods up to 25 years.
Pre-tax amortization expense for definite-lived intangible assets
during the years ended December 31, 2018, 2017 and 2016, was
$38 million, $21 million and $21 million, respectively. Annual
amortization expense for each of the next five years is estimated
to be approximately $30 million, assuming no additional
transactions occur that require the amortization of intangible
assets.
The changes in goodwill and net carrying amount of
intangible assets are as follows:
2018
2017
Goodwill
$ 5,307
(in millions)
Balance at January 1
Changes due to:
Acquisitions (1)
—
Asset impairment (2)
(111)
—
Amortization
Balance at December 31 $ 5,196
Other
Intangible
Assets,
net
$ 12,400
Goodwill
$ 5,285
Other
Intangible
Assets,
net
$ 12,036
15
(98)
(38)
$ 12,279
22
—
—
$ 5,307
385
—
(21)
$ 12,400
(1) Reflects the 2018 and 2017 purchase of certain intellectual property
primarily related to innovative tobacco products, and the 2017
acquisition of Nat Sherman.
(2) Reflects asset impairment of goodwill and other intangible assets, net
related to e-vapor products, and the Columbia Crest trademark.
50
51
51
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 51
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Note 5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs consisted of the following:
(in millions)
For the year ended December 31,
Smokeable products
Smokeless products
Wine (3)
All other
General corporate
Total
Less amounts included in net periodic
benefit (income) cost, excluding
service cost
Total
Asset Impairment
and Exit Costs
$
$
2018
82
20
54
227
3
386
$
$
2017
5
28
—
—
—
33
2016
125
42
—
7
5
179
$
$
Implementation Costs
2017 (1)
17
28
—
—
—
45
2018 (1)
1
3
—
63
—
67
2016 (2)
9
15
—
—
—
24
$
$
Total
2017
22
56
—
—
—
78
2018
83
23
54
290
3
453
$
2016
134
57
—
7
5
203
3
383
$
$
1
32
$
30
149
$
—
67
$
—
45
$
—
24
$
3
450
$
1
77
$
30
173
(1) Included in cost of sales in Altria’s consolidated statements of earnings.
(2) Included in cost of sales ($17 million) and marketing, administration and research costs ($7 million) in Altria’s consolidated statement of earnings.
(3) Reflects impairment of the Columbia Crest trademark. See Note 4. Goodwill and Other Intangible Assets, net.
Substantially all of the 2018 pre-tax asset impairment,
exit and implementation costs are related to Altria’s decision
to refocus its innovative product efforts, the cost reduction
program discussed below and the impairment of the Columbia
Crest trademark.
The pre-tax asset impairment, exit and implementation
costs for 2017 are related to the facilities consolidation. The
pre-tax asset impairment, exit and implementation costs for
2016 are related to both the facilities consolidation and the
productivity initiative.
The movement in the restructuring liabilities,
substantially all of which are severance liabilities, for the
years ended December 31, 2018 and 2017 was as follows:
(in millions)
Balances at December 31, 2016
Charges
Cash spent
Balances at December 31, 2017
Charges
Cash spent
Balances at December 31, 2018
$
$
79
25
(71)
33
154
(32)
155
Refocus of Innovative Product Efforts: During the fourth
quarter of 2018, Altria announced its decision to refocus its
innovative product efforts, which includes the discontinuation of
production and distribution of all MarkTen and Green Smoke e-
vapor products. This decision was based upon the current and
expected financial performance of these products, coupled with
regulatory restrictions that burden Altria’s ability to quickly
improve these products. As a result, during 2018, Altria incurred
pre-tax charges of $272 million, consisting of asset impairment
and exit costs of $209 million and other charges of $63 million.
The asset impairment and exit costs primarily relate to the
impairment of goodwill and other intangible assets. See Note 4.
Goodwill and Other Intangible Assets, net. The other charges
relate to inventory write-offs and accelerated depreciation.
The majority of the charges related to these efforts will not
result in cash payments.
Cost Reduction Program: In December 2018, Altria
announced a cost reduction program that it expects will deliver
approximately $575 million in annualized cost savings by the end
of 2019. This program includes, among other things, reducing
third-party spending across the business and workforce reductions.
As a result of the cost reduction program, Altria expects to
record total pre-tax restructuring charges of approximately $210
million. Of these amounts, during 2018, Altria incurred pre-tax
charges of $121 million and expects to record the remainder in
2019. The total estimated charges, substantially all of which will
result in cash expenditures, relate primarily to employee
separation costs of approximately $160 million and other costs of
approximately $50 million. There were no cash payments related
to this program in 2018.
For the year ended December 31, 2018, total pre-tax asset
impairment and exit costs for the cost reduction program of $121
million were recorded in the smokeable products segment ($86
million), smokeless products segment ($14 million), all other ($18
million) and general corporate ($3 million).
Facilities Consolidation: In October 2016, Altria announced
the consolidation of certain of its operating companies’
manufacturing facilities to streamline operations and achieve
greater efficiencies. In the first quarter of 2018, Middleton
completed the transfer of its Limerick, Pennsylvania operations to
the Manufacturing Center site in Richmond, Virginia (“Richmond
Manufacturing Center”), and USSTC completed the transfer of its
Franklin Park, Illinois operations to its Nashville, Tennessee
facility and the Richmond Manufacturing Center. The pre-tax
charges related to the consolidation have been completed.
As a result of the consolidation, Altria recorded total pre-tax
charges of $155 million. During 2018, 2017 and 2016, Altria
recorded pre-tax charges of $6 million, $78 million and $71
million, respectively. The total charges related primarily to
accelerated depreciation and asset impairment ($55 million),
52
52
53
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 52
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio employee separation costs ($40 million) and other exit and
implementation costs ($60 million).
Cash payments related to the consolidation of $34 million
were made during the year ended December 31, 2018, for total
cash payments of $97 million since inception. At December 31,
2018, cash payments related to the consolidation were
substantially completed.
Productivity Initiative: In January 2016, Altria 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 incurred total pre-tax
restructuring charges of $132 million, substantially all of which
resulted 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.
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. At December 31, 2017,
cash payments related to the initiative were substantially
completed.
Note 6. Inventories
The cost of approximately 58% and 59% of inventories at
December 31, 2018 and 2017, 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, 2018 and 2017.
Note 7. Investment in AB InBev/SABMiller
At December 31, 2018, Altria had an approximate 10.1%
ownership of AB InBev, consisting of approximately 185 million
restricted shares of AB InBev (the “Restricted Shares”) and
approximately 12 million ordinary shares of AB InBev. Altria
accounts for its investment in AB InBev under the equity method
of accounting because Altria has the ability to exercise significant
influence over the operating and financial policies of AB InBev,
including having active representation on AB InBev’s Board of
Directors (“AB InBev Board”) and certain AB InBev Board
Committees. Through this representation, Altria participates in
AB InBev policy making processes.
Altria 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 to record them in the concurrent period.
Pre-tax earnings from Altria’s equity investment in AB InBev
were $890 million and $532 million for the years ended
December 31, 2018 and 2017, respectively. As a result of the
one-quarter lag and the timing of the completion of the AB InBev
Transaction, no earnings from Altria’s equity investment in AB
InBev were recorded for the year ended December 31, 2016.
At September 30, 2018, AB InBev had derivative financial
instruments used to hedge the share price related to 92.4 million
of its share commitments. AB InBev’s share price in Euros at
December 31, 2018 and September 30, 2018 was €57.70 and
€75.22, respectively. Consistent with the one-quarter lag for
reporting AB InBev’s results in Altria’s financial results, Altria
will record its share of AB InBev’s fourth quarter 2018 mark-to-
market losses associated with these derivative financial
instruments in the first quarter of 2019.
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’s Year Ended
December 31,
2018 (1)
2017 (1)
55,500 $
34,986 $
9,020 $
9,020 $
7,641 $
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,
2018 (1)
2017 (1)
20,289
207,921
32,019
130,812
7,251
$
$
$
$
$
30,920
213,696
37,765
134,236
10,639
(1) Reflects the one-quarter lag.
At December 31, 2018, Altria’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 $11.8 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’s equity investment in AB InBev is
based on: (i) unadjusted quoted prices in active markets for AB
InBev’s ordinary shares and was classified in Level 1 of the fair
value hierarchy and (ii) observable inputs other than Level 1
prices, such as quoted prices for similar assets for the Restricted
Shares, and was classified in Level 2 of the fair value hierarchy.
Altria may, in certain instances, pledge or otherwise grant a
security interest in all or part of its Restricted Shares. In the event
the pledgee or security interest holder forecloses on the Restricted
Shares, the relevant Restricted Shares will be automatically
converted, one-for-one, into ordinary shares. Therefore, the fair
value of each Restricted Share is based on the value of an
ordinary share.
The fair value of Altria’s equity investment in AB InBev at
December 31, 2018 and 2017 was $13.1 billion and $22.1 billion,
respectively, compared with its carrying value of $17.7 billion
and $18.0 billion, respectively. Based on Altria’s evaluation of
the duration and magnitude of the fair value decline, AB InBev’s
financial condition and near-term prospects, and Altria’s intent
and ability to hold its investment in AB InBev until recovery,
Altria concluded that the decline in fair value of its investment in
52
53
53
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 53
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio AB InBev below its carrying value is temporary and, therefore, no
impairment was recorded.
The Restricted Shares:
are unlisted and not admitted to trading on any stock
Prior to the completion of the AB InBev Transaction in
October 2016, Altria held an approximate 27% ownership of
SABMiller that was accounted for under the equity method of
accounting.
Pre-tax earnings from Altria’s equity investment in
SABMiller were $795 million for the year ended December 31,
2016. Altria’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’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 AB InBev Transaction, Altria’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 to SABMiller
For the Year Ended
December 31, 2016 (1)
14,543
$
2,099
$
1,803
$
(1) As a result of the timing of the completion of the AB InBev
Transaction, summary financial data of SABMiller for the year ended
December 31, 2016 included approximately nine months of SABMiller’s
results.
AB InBev and SABMiller Business Combination: On
October 10, 2016, Legacy AB InBev completed the AB InBev
Transaction, and AB InBev became the holding company for the
combined SABMiller and Legacy AB InBev businesses. Under
the terms of the AB InBev 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 elected the PSA.
Upon completion of the AB InBev Transaction and taking
into account proration, Altria 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 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 AB InBev Transaction, totaled
approximately $5.3 billion in pre-tax cash. Subsequently, Altria
purchased approximately 12 million ordinary shares of AB InBev
for a total cost of approximately $1.6 billion, thereby increasing
Altria’s ownership of AB InBev to approximately 10.2% at
December 31, 2016.
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 AB InBev Transaction, for the year ended
December 31, 2016, Altria 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’s investment in SABMiller,
including Altria’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 AB InBev Transaction (“AB InBev
divestitures”) that occurred by December 31, 2016.
For the years ended December 31, 2018 and 2017, Altria recorded
pre-tax losses of $33 million and gains of $445 million,
respectively, related to the planned completion of the remaining
AB InBev divestitures in loss (gain) on AB InBev/SABMiller
business combination in Altria’s consolidated statements of
earnings.
Altria’s net gain on the AB InBev 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 entered into a derivative financial
instrument, each in the form of a put option (together the
“options”) to hedge Altria’s exposure to foreign currency
exchange rate movements in the GBP to the USD, in relation
to the pre-tax cash consideration that Altria 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’s consolidated statements of earnings in the periods in
which the changes occurred. For the year ended December
31, 2016, Altria recorded pre-tax gains associated with the
November 2015 and August 2016 options of $330 million
and $19 million, respectively, for the changes in the fair
values of the options in loss (gain) on AB InBev/SABMiller
54
54
55
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 54
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
business combination in Altria’s consolidated statement of
earnings. 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 8. Investment in JUUL
On December 20, 2018, Altria entered into a stock purchase
agreement with JUUL, the U.S. leader in e-vapor, pursuant to
which Altria, through a wholly-owned subsidiary, purchased
shares of JUUL’s non-voting Class C-1 Common Stock for an
aggregate price of $12.8 billion, which will convert automatically
to shares of voting Class C Common Stock upon antitrust
clearance, and a security convertible into additional shares of
Class C-1 Common Stock or Class C Common Stock, as
applicable, for no additional payment upon settlement or exercise
of certain JUUL convertible securities (the “JUUL Transaction”).
As a result of the JUUL Transaction, Altria owns 35% of the
issued and outstanding capital stock of JUUL.
Upon Share Conversion, Altria will possess 35% of JUUL’s
outstanding voting power, except to the extent that Altria’s
percentage ownership has decreased, and have the right to
designate one-third of the members of the JUUL Board of
Directors, subject to proportionate downward adjustment if
Altria’s percentage ownership falls below 30%.
Altria received a broad preemptive right to purchase JUUL
shares to maintain its ownership percentage and is subject to a
standstill restriction under which it may not acquire additional
JUUL shares above its 35% interest. Furthermore, Altria agreed
not to sell or transfer any of its JUUL shares for six years from
December 20, 2018.
Altria and JUUL entered into a services agreement pursuant
to which Altria has agreed to provide JUUL with certain
commercial services, as requested by JUUL, for an initial term of
six years. Among other things, Altria may provide services to
JUUL with respect to logistics and distribution, access to retail
shelf space, youth vaping prevention, cigarette pack inserts and
onserts, regulatory matters and government affairs. Altria has
also agreed to grant JUUL a non-exclusive, royalty-free perpetual,
irrevocable, sublicensable license to Altria’s non-trademark
licensable intellectual property rights in the e-vapor field, subject
to the terms and conditions set forth in an intellectual property
license agreement between the parties.
Altria has agreed to non-competition obligations generally
requiring that it participate in the e-vapor business only through
JUUL as long as Altria is supplying JUUL services, which Altria
is committed to doing for at least six years.
At December 31, 2018, Altria accounts for its investment in
JUUL as an investment in an equity security. Since the JUUL
shares do not have a readily determinable fair value, Altria has
elected to measure its investment in JUUL at its cost minus any
impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for the identical
or a similar investment of the same issuer. Upon Share
Conversion, Altria expects to account for its investment in JUUL
under the equity method of accounting.
As disclosed in Note 9. Short-term Borrowings and
Borrowing Arrangements, Altria financed the JUUL Transaction
through a senior unsecured term loan agreement (the “Term Loan
Agreement”). Costs incurred to effect the investment in JUUL
are being recognized as expenses in Altria’s consolidated
statement of earnings. For the year ended December 31, 2018,
Altria incurred $85 million of pre-tax acquisition-related costs,
consisting primarily of advisory fees, substantially all of which
were recorded in marketing, administration and research costs.
Note 9. Short-Term Borrowings and Borrowing
Arrangements
At December 31, 2018, Altria had $12.7 billion of short-term
borrowings, which is net of $96 million of debt issuance costs,
resulting from the Term Loan Agreement discussed below. At
December 31, 2017, Altria had no short-term borrowings.
On December 20, 2018, Altria entered into the Term Loan
Agreement in connection with its investments in JUUL and
Cronos. The Term Loan Agreement provides for borrowings up
to an aggregate principal amount of $14.6 billion and is
comprised of: (i) a $12.8 billion tranche, which Altria used to
finance the JUUL Transaction, and (ii) a $1.8 billion tranche,
which Altria intends to use to finance its investment in Cronos.
Borrowings under the Term Loan Agreement mature on
December 19, 2019, and interest rates on borrowings are, and
expect to be, based on the London Interbank Offered Rate
(“LIBOR”) plus a percentage based on the higher of the ratings of
Altria’s long-term senior unsecured debt from Moody’s Investors
Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings
Services (“Standard & Poor’s”). The applicable percentage based
on Altria’s long-term senior unsecured debt ratings at December
31, 2018 for borrowings under the Term Loan Agreement was
1.0%. In addition, the Term Loan Agreement includes a one-time
duration fee of 0.125% on any advances outstanding 180 days
from December 20, 2018.
At December 31, 2018, Altria had aggregate borrowings
under the Term Loan Agreement of $12.8 billion at an interest
rate of approximately 3.5%.
Altria’s estimate of the fair value of its short-term borrowings
is derived from discounted future cash flows based on the
contractual terms of the Term Loan Agreement and observable
interest rates and is classified in Level 2 of the fair value
hierarchy. The fair value of Altria’s short-term borrowings at
December 31, 2018 approximated its carrying value.
At December 31, 2018, accrued interest on short-term
borrowings of $15 million was included in other accrued
liabilities on Altria’s consolidated balance sheet.
On August 1, 2018, Altria entered into a senior unsecured 5-
year revolving credit agreement, which was subsequently
amended on January 25, 2019 to include certain covenants that
become effective upon the completion of Altria’s pending
investment in Cronos (as amended, the “Credit Agreement”). The
Credit Agreement, which is used for general corporate purposes,
provides for borrowings up to an aggregate principal amount of
54
55
55
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 55
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio $3.0 billion. The Credit Agreement expires on August 1, 2023
and includes an option, subject to certain conditions, for Altria to
extend the Credit Agreement for two additional one-year periods.
The Credit Agreement replaced Altria’s prior $3.0 billion senior
unsecured 5-year revolving credit agreement, which was to expire
on August 19, 2020 and was terminated effective August 1, 2018.
Pricing for interest and fees under the Credit Agreement may be
modified in the event of a change in the rating of Altria’s long-
term senior unsecured debt. Interest rates on borrowings under
the Credit Agreement are expected to be based on LIBOR plus a
percentage based on the higher of the ratings of Altria’s long-term
senior unsecured debt from Moody’s and Standard & Poor’s. The
applicable percentage based on Altria’s long-term senior
unsecured debt ratings at December 31, 2018 for borrowings
under the Credit Agreement was 1.0%. The Credit Agreement
does not include any other rating triggers, or any provisions that
could require the posting of collateral. At December 31, 2018 and
2017, Altria had no borrowings under the Credit Agreement. The
credit line available to Altria at December 31, 2018 under the
Credit Agreement was $3.0 billion.
The Term Loan Agreement and the Credit Agreement
(collectively, the “Borrowing Agreements”) include various
covenants, one of which requires Altria to maintain a ratio of
consolidated earnings before interest, taxes, depreciation and
amortization (“EBITDA”) to Consolidated Interest Expense of
not less than 4.0 to 1.0, calculated as of the end of the applicable
quarter on a rolling four quarters basis. At December 31, 2018,
the ratio of consolidated EBITDA to Consolidated Interest
Expense, calculated in accordance with the Borrowing
Agreements, was 14.4 to 1.0. At December 31, 2018, Altria was
in compliance with its covenants associated with the Borrowing
Agreements. The terms “Consolidated EBITDA” and
“Consolidated Interest Expense,” each as defined in the
Borrowing Agreements, include certain adjustments.
Any commercial paper issued by Altria and borrowings under
the Borrowing Agreements are guaranteed by PM USA as further
discussed in Note 20. Condensed Consolidating
Financial Information.
At December 31, 2018, Altria had a working capital deficit
that included approximately $13.9 billion of debt coming due by
December 31, 2019. In addition, Altria has an additional $1.0
billion of debt coming due by January 31, 2020. Although Altria
does not currently have the liquid funds necessary to repay all of
the $14.9 billion of debt coming due by January 31, 2020, Altria
expects to access the credit and capital markets to refinance the
debt prior to maturity. Altria believes it is probable that it will
implement its refinancing plan because of its profitability, its
credit rating, which continues to be investment grade, and history
of obtaining financing on reasonable commercial terms.
Note 10. Long-Term Debt
At December 31, 2018 and 2017, Altria’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-
2018
2017
$
13,000
$
13,852
annually, due 2027
Less current portion of long-term debt
42
13,894
864
13,030
(1) Weighted-average coupon interest rate of 4.6% and 4.9% at December
31, 2018 and 2017, respectively.
42
13,042
1,144
11,898
$
$
At December 31, 2018, aggregate maturities of Altria’s long-
term debt were as follows:
(in millions)
2019
2020
2021
2022
2023
Thereafter
Less: debt issuance costs
debt discounts
$
$
1,144
1,000
1,500
1,900
350
7,259
13,153
60
51
13,042
Altria’s estimate of the fair value of its debt is based on
observable market information derived from a third party pricing
source and is classified in Level 2 of the fair value hierarchy. The
aggregate fair value of Altria’s total long-term debt at December
31, 2018 and 2017, was $12.5 billion and $15.3 billion,
respectively, as compared with its carrying value of $13.0 billion
and $13.9 billion, respectively.
At December 31, 2018 and 2017, accrued interest on long-
term debt of $207 million and $219 million, respectively, was
included in other accrued liabilities on Altria’s consolidated
balance sheets.
Altria Senior Notes: The notes of Altria are senior
unsecured obligations and rank equally in right of payment with
all of Altria’s existing and future senior unsecured indebtedness.
Upon the occurrence of both (i) a change of control of Altria 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 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.
During 2018, Altria repaid in full at maturity notes in the
aggregate principal amount of $864 million.
The obligations of Altria under the notes are guaranteed by
PM USA as further discussed in Note 20. Condensed
Consolidating Financial Information.
56
56
57
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 56
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Debt Tender Offer: During 2016, Altria completed a debt
tender offer to purchase for cash certain of its notes in aggregate
principal amount of $0.9 billion.
Details of the debt tender offer and the associated pre-tax loss
on early extinguishment of debt recorded by Altria were as
follows:
(in millions)
Notes Purchased
9.95% Notes due 2038
10.20% Notes due 2039
Total
Pre-tax Loss on Early Extinguishment of Debt
Premiums and fees
Write-off of unamortized debt discounts and debt
issuance costs
Total
2016
441
492
933
809
14
823
$
$
$
$
Note 11. Capital Stock
At December 31, 2018, Altria had 12 billion shares of authorized
common stock; issued, repurchased and outstanding shares of
common stock were as follows:
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
Stock award
activity
Repurchases of
common stock
Balances,
December 31,
2018
Shares Issued
Shares
Repurchased
Shares
Outstanding
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
—
—
676,727
676,727
(27,878,324)
(27,878,324)
2,805,961,317
(931,903,722)
1,874,057,595
stock versus the previous rate of $0.66 per share. During the third
quarter of 2018, the Board of Directors approved an additional
14.3% increase in the quarterly dividend rate to $0.80 per share of
Altria common stock, resulting in an overall quarterly dividend
rate increase of 21.2% since the beginning of 2018. The current
annualized dividend rate is $3.20 per share. Future dividend
payments remain subject to the discretion of the Board of
Directors.
Share Repurchases: 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 2018, 2017 and 2016, Altria repurchased 0.3
million shares, 41.6 million shares, and 16.2 million shares,
respectively, of its common stock (at an aggregate cost of
approximately $18 million, $2,917 million and $1,030 million,
respectively, and at an average price of $71.68 per share, $70.10
per share and $63.48 per share, respectively) under the July 2015
share repurchase program. In January 2018, Altria 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.
Following the completion of the July 2015 share
repurchase program, the Board of Directors authorized a new
$1.0 billion share repurchase program in January 2018 that it
expanded to $2.0 billion in May 2018 (as expanded, the
“January 2018 share repurchase program”). During 2018,
Altria repurchased 27.6 million shares of its common stock
(at an aggregate cost of approximately $1,655 million and at
an average price of $59.89 per share) under the January 2018
share repurchase program. At December 31, 2018, Altria had
approximately $345 million remaining in the January 2018
share repurchase program. The timing of share repurchases
under this program depends upon marketplace conditions and
other factors, and the program remains subject to the
discretion of the Board of Directors.
For the years ended December 31, 2018, 2017 and 2016,
Altria’s total share repurchase activity was as follows:
2018
2017
2016
(in millions, except per share data)
Total number of shares
repurchased
Aggregate cost of shares
repurchased
Average price per share of
shares repurchased
$
$
27.9
41.6
16.2
1,673 $
2,917 $
1,030
60.00 $
70.10 $
63.48
At December 31, 2018, 40,400,278 shares of common stock
were reserved for stock-based awards under Altria’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 first quarter of 2018, Altria’s Board of
Directors (the “Board of Directors”) approved a 6.1% increase in
the quarterly dividend rate to $0.70 per share of Altria common
Note 12. Stock Plans
Under the Altria 2015 Performance Incentive Plan (the “2015
Plan”), Altria may grant stock options, stock appreciation rights,
restricted stock, restricted stock units (“RSUs”), deferred stock
units and other stock-based awards, as well as cash-based annual
and long-term incentive awards to employees of Altria or any of
its subsidiaries or affiliates. Any awards granted pursuant to the
2015 Plan may be in the form of performance-based awards,
56
57
57
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 57
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
including performance stock units (“PSUs”), 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 may grant up to one million shares of
common stock to members of the Board of Directors who are not
employees of Altria.
Shares available to be granted under the 2015 Plan and the
Directors Plan at December 31, 2018, were 37,033,741 and
880,291, respectively.
Restricted Stock and RSUs: 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 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 RSUs generally vest three years after the
grant date.
The fair value of the shares of restricted stock and RSUs at
the date of grant, net of estimated forfeitures, is amortized to
expense ratably over the restriction period, which is generally
three years. Altria recorded pre-tax compensation expense related
to restricted stock and RSUs for the years ended December 31,
2018, 2017 and 2016 of $39 million, $49 million and $44 million,
respectively. The deferred tax benefit recorded related to this
compensation expense was $9 million, $18 million and $17
million for the years ended December 31, 2018, 2017 and 2016,
respectively. The unamortized compensation expense related to
RSUs was $62 million at December 31, 2018 and is expected to
be recognized over a weighted-average period of approximately
two years. Altria has not granted any restricted stock after 2014
and had no restricted stock outstanding at December 31, 2017.
RSU activity was as follows for the year ended December 31,
2018:
Balance at December 31, 2017
Granted
Vested
Forfeited
Balance at December 31, 2018
Number of
Shares
$
2,384,501
896,962
$
(998,145) $
(153,692) $
$
2,129,626
Weighted-Average
Grant Date Fair
Value Per Share
60.40
67.17
56.44
62.56
64.94
The weighted-average grant date fair value of RSUs granted
during the years ended December 31, 2018, 2017 and 2016 was
$60 million, $46 million and $56 million, respectively, or $67.17,
$71.05 and $59.38 per RSU, respectively. The total fair value of
restricted stock and RSUs that vested during the years ended
December 31, 2018, 2017 and 2016 was $65 million, $95 million
and $78 million, respectively.
PSUs: Altria granted an aggregate of 177,338 and 187,886 of
PSUs during 2018 and 2017, respectively. Altria did not grant
any PSUs during 2016. The payout of PSUs 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’s adjusted
diluted earnings per share compounded annual growth rate and
Altria’s total shareholder return relative to a predetermined peer
group. PSUs are also subject to forfeiture if certain employment
conditions are not met. At December 31, 2018, Altria had
274,324 PSUs remaining, with a weighted-average grant date fair
value of $65.90 per PSU. The fair value of PSUs at the date of
grant, net of estimated forfeitures, is amortized to expense over
the performance period. Altria recorded pre-tax compensation
expense related to PSUs for the year ended December 31, 2018
and 2017 of $7 million and $6 million, respectively. The
unamortized compensation expense related to PSUs was $10
million at December 31, 2018.
Note 13. Earnings per Share
Basic and diluted earnings per share (“EPS”) were calculated
using the following:
(in millions)
Net earnings attributable
to Altria
Less: Distributed and
undistributed earnings
attributable to
share-based awards
Earnings for basic and
diluted EPS
For the Years Ended December 31,
2018
2017
2016
$
6,963
$ 10,222
$ 14,239
(8)
(14)
(24)
$
6,955
$ 10,208
$ 14,215
Weighted-average shares for
basic EPS
Plus: contingently issuable PSUs
Weighted-average shares for
diluted EPS
1,887
1
1,921
—
1,952
—
1,888
1,921
1,952
58
58
59
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 58
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Note 14. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes,
attributable to Altria:
(in millions)
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
Balances, December 31, 2017
Adoption of ASU No. 2018-02 (4)
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
Benefit Plans
AB InBev/
SABMiller
Currency
Translation
Adjustments
and Other
Accumulated
Other
Comprehensive
Losses
$
(2,010) $
(1,265)
$
(5) $
(247)
96
(151)
178
(65)
113
(38)
(2,048)
52
(21)
31
291
(113)
178
209
(1,839)
(397)
(151)
39
(112)
241
(61)
180
68
787
(276)
(1)
511
1,160
(406)
(2)
754
1,265
(3)
—
(91)
32
(59)
8
(3)
5
(54)
(54)
(11)
(323)
64
(259)
(64)
14
(50)
(3)
(309)
1
—
1
—
—
—
1
(4)
—
—
—
—
—
—
—
(4)
—
(1)
—
(1)
—
—
—
(1)
(3,280)
541
(180)
361
1,338
(471)
867
1,228
(2,052)
(39)
11
(28)
299
(116)
183
155
(1,897)
(408)
(475)
103
(372)
177
(47)
130
(242)
Balances, December 31, 2018
(1)As a result of the AB InBev Transaction, Altria 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.
(2) As a result of the AB InBev Transaction, Altria recognized $737 million of its accumulated other comprehensive losses directly attributable to
SABMiller.
(3) Primarily reflects currency translation adjustments.
(4) Reflects the reclassification of the stranded income tax effects of the Tax Reform Act. For further discussion, see Note 15. Income Taxes.
(2,168) $
(5) $
(374)
$
$
(2,547)
58
59
59
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 59
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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,
2018
2017
2016
$
$
276
(35)
241
(64)
325
(34)
291
8
$
223
(45)
178
1,160
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 17. Benefit Plans.
(2) For the years ended December 31, 2018 and 2017, amounts are primarily included in earnings from equity investment in AB InBev. 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 7. Investment in AB InBev/SABMiller.
1,338
177
299
$
$
$
Note 15. Income Taxes
On December 22, 2017, the U.S. Government enacted
comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Reform Act”). As a result of the Tax
Reform Act, Altria 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 include:
(i) a reduction in the U.S. federal statutory corporate income tax
rate from 35% to 21% effective January 1, 2018, and (ii) changes
in the treatment of foreign-source income, commonly referred to
as a modified territorial tax system.
The transition to a modified territorial tax system required
Altria to record a deemed repatriation tax and an associated tax
basis benefit in 2017. Substantially all of the deemed repatriation
tax was related to Altria’s share of AB InBev’s accumulated
earnings. Dividends received from AB InBev beginning in 2017,
to the extent that such dividends represent previously taxed
income attributable to the deemed repatriation tax, result in an
associated tax basis expense, which reverses the tax basis benefit
recorded in 2017. The Tax Reform Act also includes a provision
to tax global intangible low-taxed income (“GILTI”) of foreign
subsidiaries. Altria made an accounting policy election to treat
taxes due under the GILTI provision as a current period expense.
Earnings before income taxes and provision (benefit) for
income taxes consisted of the following for the years ended
December 31, 2018, 2017 and 2016:
(in millions)
Earnings (loss) before income
taxes:
United States
Outside United States
Total
Provision (benefit) for
income taxes:
Current:
Federal
State and local
Outside United States
Deferred:
Federal
State and local
Outside United States
2018
2017
2016
$
$
$
$
$
$
9,441
(100)
9,341
1,911
519
1
2,431
9,809
19
9,828
$ 21,867
(15)
$ 21,852
2,346
366
15
2,727
$ 4,093
390
6
4,489
(18)
(42)
3
(57)
(3,213)
86
1
(3,126)
3,102
20
(3)
3,119
Total provision (benefit) for
income taxes
$
2,374
$
(399) $ 7,608
Altria’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 2014 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 2014 and forward.
Certain of Altria’s state tax returns are currently under
examination by various states as part of routine audits conducted
in the ordinary course of business.
60
60
61
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 60
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31, 2018,
2017 and 2016 was as follows:
(in millions)
Balance at beginning of year
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
Balance at end of year
$
2018
66
$
2017
169
$
2016
158
$
—
22
—
(1)
(2)
85
$
—
129
(4)
(208)
(20)
66
$
15
29
(4)
(28)
(1)
169
Unrecognized tax benefits and Altria’s consolidated liability
for tax contingencies at December 31, 2018 and 2017 were as
follows:
(in millions)
Unrecognized tax benefits
Accrued interest and penalties
Tax credits and other indirect benefits
Liability for tax contingencies
2018
85
13
(1)
97
$
$
2017
66
9
(1)
74
$
$
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate at December 31, 2018 was $59
million, along with $26 million affecting deferred taxes. 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.
Altria recognizes accrued interest and penalties associated
with uncertain tax positions as part of the tax provision.
For the years ended December 31, 2018, 2017 and 2016,
Altria recognized in its consolidated statements of earnings $5
million, $(13) million and $9 million, respectively, of gross
interest expense (income) associated with uncertain tax positions.
Altria is subject to income taxation in many jurisdictions.
Unrecognized tax benefits 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. 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 $45
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, 2018, 2017 and 2016:
U.S. federal statutory rate
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
Investment in AB InBev/SABMiller
Domestic manufacturing deduction
Other
Effective tax rate
2018
21.0% 35.0 %
2017
2016
35.0%
4.0
3.5
1.2
(31.2)
(7.8)
4.2
(0.9)
(5.9)
(1.8)
0.8
—
1.5
0.1
0.1
(1.1)
—
(0.2)
25.4% (4.1)%
—
—
—
—
(0.6)
(0.8)
—
34.8%
The tax provision in 2018 included tax expense of $188
million related to the Tax Reform Act as follows: (i) tax expense
of $140 million resulting from a partial reversal of the tax basis
benefit associated with the deemed repatriation tax recorded in
2017; (ii) tax expense of $34 million for a valuation allowance on
foreign tax credit carryforwards that are not realizable as a result
of updates to the provisional estimates recorded in 2017 and (iii)
tax expense of $14 million for an adjustment to the provisional
estimates for the repatriation tax recorded in 2017.
Substantially all of the 2018 amounts related to the tax basis
adjustment, valuation allowance on foreign tax credits and
repatriation tax relate to Altria’s share of AB InBev’s accumulated
earnings and associated taxes. The adjustments recorded in 2018
to the provisional estimates recorded in 2017 were based on (i)
additional guidance related to, or interpretation of, the Tax
Reform Act and associated tax laws and (ii) additional
information received from AB InBev, including information
regarding AB InBev’s accumulated earnings and associated taxes
for the 2016 and 2017 tax years. The accounting for the
repatriation tax is complete; therefore, no further adjustments to
the provisional estimates are required.
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 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 2017 amounts 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’s
share of AB InBev’s accumulated earnings and associated taxes.
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 investment in AB
InBev/SABMiller 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 and its consolidated
subsidiaries’ 2010-2013 tax years, partially offset by tax expense
60
61
61
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 61
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 AB InBev Transaction.
The tax effects of temporary differences that gave rise to
deferred income tax assets and liabilities consisted of the
following at December 31, 2018 and 2017:
(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
Total deferred income tax liabilities
Valuation allowances
Net deferred income tax liabilities
2018
2017
$
500
864
155
57
1,576
(251)
(2,689)
(3,038)
(313)
(115)
(6,406)
(71)
(4,901) $
539
614
136
18
1,307
(261)
(2,674)
(2,859)
(404)
(121)
(6,319)
—
(5,012)
$
$
At December 31, 2018, Altria had estimated gross state tax
net operating losses of $658 million that, if unused, will expire in
2019 through 2038. The 2018 valuation allowance is primarily
related to foreign tax credit and state net operating loss
carryforwards that more-likely-than-not will not be realized.
On October 1, 2018, Altria adopted ASU 2018-02 and elected
to reclassify the stranded income tax effects of the Tax Reform
Act on items within accumulated other comprehensive losses to
earnings reinvested in the business. The adjustment relates to the
change in the U.S. federal statutory corporate income tax rate.
This election resulted in an increase to both accumulated other
comprehensive losses and earnings reinvested in the business of
$408 million on October 1, 2018.
Note 16. Segment Reporting
The products of Altria’s subsidiaries include smokeable tobacco
products, consisting of combustible cigarettes manufactured and
sold by PM USA and Nat Sherman, machine-made large cigars
and pipe tobacco manufactured and sold by Middleton and
premium cigars sold by Nat Sherman; smokeless tobacco
products, consisting of moist smokeless tobacco and snus
products manufactured and sold by USSTC; and wine produced
and/or distributed by Ste. Michelle. The products and services of
these subsidiaries constitute Altria’s reportable segments of
smokeable products, smokeless products and wine. The financial
services and the innovative tobacco products businesses are
included in all other.
As discussed in Note 17. Benefit Plans, on January 1, 2018,
Altria adopted ASU 2017-07, which resulted in a change to prior-
period operating income. As a result, certain immaterial prior-
period operating companies income (loss) data has been restated.
Altria’s chief operating decision maker (the “CODM”)
reviews operating companies income to evaluate the performance
of, and allocate resources to, the segments. Operating companies
income for the segments is defined as operating income before
general corporate expenses and amortization of intangibles.
Interest and other debt expense, net, net periodic benefit cost/
income, excluding service cost, and provision for income taxes
are centrally managed at the corporate level and, accordingly,
such items are not presented by segment since they are excluded
from the measure of segment profitability reviewed by the
CODM. Information about total assets by segment is not
disclosed because such information is not reported to or used by
the CODM. Substantially all of Altria’s long-lived assets are
located in the United States. Segment goodwill and other
intangible assets, net, are disclosed in Note 4. Goodwill and Other
Intangible Assets, net. The accounting policies of the segments
are the same as those described in Note 2. Summary of Significant
Accounting Policies.
Segment data were as follows:
For the Years Ended December 31,
2016
2018
2017
$
$
$
$
$
$
22,297
2,262
691
114
25,364
8,408
1,431
50
(421)
(38)
(315)
—
9,115
$
$
$
22,636
2,155
698
87
25,576
8,426
1,306
146
(51)
(21)
(213)
—
9,593
(665)
(705)
22,851
2,051
746
96
25,744
7,766
1,172
164
(98)
(21)
(217)
(5)
8,761
(747)
(823)
—
34
—
(37)
1
(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
Corporate asset impairment
and exit costs
Operating income
Interest and other debt
expense, net
Loss on early extinguishment
of debt
Net periodic benefit income
(cost), excluding
service cost
Earnings from equity
investment in AB InBev/
SABMiller
(Loss) gain on AB InBev/
SABMiller business
combination
Earnings before income taxes
$
62
62
890
532
795
(33)
9,341
$
445
9,828
13,865
21,852
$
63
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 62
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
The smokeable products segment included net revenues of
$21,506 million, $21,900 million and $22,199 million for the
years ended December 31, 2018, 2017 and 2016, respectively,
related to cigarettes and net revenues of $791 million, $736
million and $652 million for the years ended December 31, 2018,
2017 and 2016, respectively, related to cigars.
Substantially all of Altria’s net revenues are from sales
generated in the United States for the years ended December 31,
2018, 2017 and 2016. PM USA, USSTC, Middleton and Nat
Sherman’s largest customer, McLane Company, Inc., accounted
for approximately 27%, 26% and 25% of Altria’s consolidated net
revenues for the years ended December 31, 2018, 2017 and 2016,
respectively. In addition, Core-Mark Holding Company, Inc.
accounted for approximately 14% of Altria’s consolidated net
revenues for each of the years ended December 31, 2018, 2017
and 2016. Substantially all of these net revenues were reported in
the smokeable products and smokeless products segments. Sales
to two distributors accounted for approximately 64% of net
revenues for the wine segment for the year ended December 31,
2018. Sales to three distributors accounted for approximately
67% and 69% of net revenues for the wine segment for the years
ended December 31, 2017 and 2016, respectively.
Details of Altria’s depreciation expense and capital
expenditures were as follows:
(in millions)
Depreciation expense:
Smokeable products
Smokeless products
Wine
General corporate and other
Total depreciation expense
Capital expenditures:
Smokeable products
Smokeless products
Wine
General corporate and other
Total capital expenditures
For the Years Ended December 31,
2016
2017
2018
$
$
$
$
90
28
40
31
189
81
73
40
44
238
$
$
$
$
93
29
40
26
188
39
61
53
46
199
$
$
$
$
93
26
36
28
183
55
52
59
23
189
The comparability of operating companies income for the
reportable segments was affected by the following:
Non-Participating Manufacturer (“NPM”) Adjustment
Items: For the years ended December 31, 2018, 2017 and 2016,
pre-tax (income) expense for NPM adjustment items was
recorded in Altria’s consolidated statements of earnings as
follows:
(in millions)
Smokeable products segment
Interest and other debt expense, net
Total
2018
(145) $
—
(145) $
$
$
2017
(5) $
9
4
$
2016
12
6
18
NPM adjustment items result from the resolutions of certain
disputes with states and territories related to the NPM adjustment
provision under the 1998 Master Settlement Agreement (such
dispute resolutions are referred to as “NPM Adjustment Items”
63
63
62
and are more fully described in Health Care Cost Recovery
Litigation - NPM Adjustment Disputes in Note 19.
Contingencies). The amounts shown in the table above for the
smokeable products segment were recorded by PM USA as
(reductions) increases to cost of sales, which (increased)
decreased operating companies income in the smokeable products
segment.
Tobacco and Health Litigation Items: For the years ended
December 31, 2018, 2017 and 2016, pre-tax charges related to
certain tobacco and health litigation items were recorded in
Altria’s consolidated statements of earnings as follows:
(in millions)
Smokeable products segment
Smokeless products segment
Interest and other debt expense, net
Total
2018
103
10
18
131
2017
72
—
8
80
$
$
$
$
2016
88
—
17
105
$
$
The amounts shown in the table above for the smokeable and
smokeless products segments were recorded in marketing,
administration and research costs. For further discussion, see
Note 19. Contingencies.
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 estimated that the
Recall reduced smokeless products segment operating companies
income by approximately $60 million in 2017.
Asset Impairment, Exit and Implementation Costs: See
Note 5. Asset Impairment, Exit and Implementation Costs for a
breakdown of these costs by segment.
Note 17. Benefit Plans
Subsidiaries of Altria sponsor noncontributory defined benefit
pension plans covering certain employees of Altria and its
subsidiaries. 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 and its
subsidiaries also provide postretirement health care and other
benefits to certain retired employees.
The plan assets and benefit obligations of Altria’s pension
plans and postretirement plans are measured at December 31 of
each year. In December 2017, Altria made a contribution of $270
million to a trust to fund certain postretirement benefits. Prior to
this contribution, Altria’s postretirement plans were not funded.
The discount rates for Altria’s plans were based on a yield
curve developed from a model portfolio of high-quality corporate
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 63
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
bonds with durations that match the expected future cash flows of
the pension and postretirement benefit obligations.
On January 1, 2018 Altria adopted ASU No. 2017-07, which
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
statements of earnings separately from the service cost component
and outside the subtotal of operating income. Additionally, only
the service cost component is eligible for capitalization. Altria
retrospectively adopted the guidance for the presentation of the
service cost component and the other components of net periodic
pension cost and net periodic postretirement benefit cost in its
consolidated statements of earnings, and prospectively adopted
the capitalization of service cost. Altria used the practical
expedient provided in ASU No. 2017-07 that permits Altria to use
the amounts disclosed in its benefit plans note for the prior
comparative periods as the estimation basis for applying the
retrospective presentation requirements. For the year ended
December 31, 2017, the adoption of ASU No. 2017-07 resulted in
a reclassification of net periodic benefit cost of $12 million, $24
million and $1 million from cost of sales, marketing,
administration and research costs, and asset impairment and exit
costs, respectively, to net periodic benefit (income) cost,
excluding service cost in Altria’s consolidated statement of
earnings. For the year ended December 31, 2016, the adoption
resulted in a reclassification of net periodic benefit income of $19
million and $12 million from cost of sales and marketing,
administration and research costs, respectively, and a
reclassification of net periodic benefit cost of $30 million from
asset impairment and exit costs, to net periodic benefit (income)
cost, excluding service cost in Altria’s consolidated statement of
earnings. In addition, certain prior-period segment data has been
reclassified to conform with the current period’s presentation. For
further discussion, see Note 16. Segment Reporting.
Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria’s pension and postretirement plans
at December 31, 2018 and 2017 were as follows:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gains) 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’s consolidated balance sheets were as follows:
Other accrued liabilities
Accrued pension costs
Other assets
Accrued postretirement health care costs
Pension
Postretirement
2018
2017
2018
2017
$
8,510
81
276
(488)
(660)
(18)
25
7,726
8,015
(430)
41
(488)
7,138
(588) $
(44) $
(544)
—
—
(588) $
8,312
75
288
(703)
589
(51)
—
8,510
7,475
1,219
24
(703)
8,015
(495)
(51)
(445)
1
—
(495)
$
$
$
$
$
2,335
18
70
(130)
(298)
—
45
2,040
270
(14)
—
(45)
211
(1,829) $
(80) $
—
—
(1,749)
(1,829) $
2,364
16
76
(139)
56
—
(38)
2,335
—
—
270
—
270
(2,065)
(78)
—
—
(1,987)
(2,065)
$
$
$
$
The table above presents the projected benefit obligation for
Altria’s pension plans. The accumulated benefit obligation,
which represents benefits earned to date, for the pension plans
was $7.4 billion and $8.2 billion at December 31, 2018 and 2017,
respectively.
For plans with accumulated benefit obligations in excess of
assets were $7,598 million, $7,239 million and $7,012 million,
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.
plan assets at December 31, 2018, the projected benefit
obligation, accumulated benefit obligation and fair value of plan
The Patient Protection and Affordable Care Act (“PPACA”),
as amended by the Health Care and Education Reconciliation Act
64
64
65
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 64
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
additional accumulated postretirement liability resulting from the
PPACA, which is not material to Altria, has been included in
Altria’s accumulated postretirement benefit obligation at
December 31, 2018 and 2017. Given the complexity of the
PPACA and the extended time period during which
implementation is expected to occur, future adjustments to
Altria’s accumulated postretirement benefit obligation may be
necessary.
The following assumptions were used to determine Altria’s pension and postretirement benefit obligations at December 31:
Discount rate
Rate of compensation increase
Health care cost trend rate assumed for next year
Ultimate trend rate
Year that the rate reaches the ultimate trend rate
Pension
Postretirement
2018
4.4%
4.0
—
—
—
2017
3.7%
4.0
—
—
—
2018
4.4%
—
6.5
5.0
2025
2017
3.7%
—
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,
2018, 2017 and 2016:
(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
2018
81
276
(585)
225
4
16
17
$
$
2017
75
288
(601)
197
4
86
49
$
$
2016
76
281
(553)
171
5
34
14
$
$
2018
18
70
(19)
21
(42)
—
48
$
$
2017
16
76
—
25
(38)
—
79
$
$
2016
17
77
—
25
(39)
(2)
78
$
$
Termination, settlement and curtailment shown in the table
above primarily relate to the settlement charge discussed below,
and the cost reduction program, productivity initiative and
facilities consolidation discussed in Note 5. Asset Impairment,
Exit and Implementation Costs.
In the third quarter of 2017, Altria 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 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:
(in millions)
Benefit obligation
Other comprehensive
earnings/losses:
Net loss
Prior service cost
(credit)
Pension
2018
2017
$ — $ — $
2016
23
13
86
3
16 $
—
86 $
$
9
2
34
$
$
Post-
retirement
2016
11
—
(13)
(2)
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 2019 is as follows:
(in millions)
Net loss
Prior service cost (credit)
$
Pension
169
6
Postretirement
12
$
(32)
64
65
65
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 65
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio The following assumptions were used to determine Altria’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
2018
2017
2016
2018
2017
2016
3.8%
3.3
7.8
4.0
—
4.3%
3.5
8.0
4.0
—
4.7%
3.6
8.0
4.0
—
3.8%
3.3
7.8
—
7.0
4.3%
3.5
—
—
7.0
4.5%
3.4
—
—
6.5
Assumed health care cost trend rates have a significant effect on
the amounts reported for the postretirement health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have had the following effects as of December 31,
2018:
Effect on total of postretirement
service and interest cost
Effect on postretirement benefit
obligation
One-
Percentage-
Point Increase
One-
Percentage-
Point Decrease
7.5%
5.6%
(6.3)%
(4.8)%
Defined Contribution Plans: Altria sponsors deferred
profit-sharing plans covering certain salaried, non-union and
union employees. Contributions and costs are determined
generally as a percentage of earnings, as defined by the plans.
Amounts charged to expense for these defined contribution plans
totaled $85 million, $83 million and $93 million in 2018, 2017
and 2016, respectively.
Pension and Postretirement Plan Assets: Altria’s
investment strategy for its pension and postretirement plan assets
is based on an expectation that equity securities will outperform
debt securities over the long term. Altria 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’s plan assets at December 31, 2018
was broadly characterized with the following allocation:
Equity securities
Corporate bonds
U.S. Treasury and foreign
government securities
Pension
Postretirement
48%
32%
20%
48%
42%
10%
Altria’s plan asset allocations at December 31, 2018 reflect
fourth quarter 2018 equity market underperformance and are
monitored on an ongoing basis to adjust as necessary.
Substantially all pension and all postretirement assets can be
used to make monthly benefit payments.
Altria’s investment objective for its pension and
postretirement plan assets is accomplished by investing in U.S.
and international equity index strategies that are intended to
mirror indices including, but not limited to, the Standard & Poor’s
500 Index and Morgan Stanley Capital International (“MSCI”)
Europe, Australasia, and the Far East (“EAFE”) Index. Altria’s
pension and postretirement 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. For
pension plan assets, the allocation to below investment grade
securities represented 14% of the fixed income holdings or 7% of
the total plan assets at December 31, 2018. The allocation to
emerging markets represented 1% of equity holdings or less than
1% of total plan assets at December 31, 2018. For postretirement
plan assets, the allocation to below investment grade securities
represented 13% of the fixed income holdings or 6% of the total
plan assets at December 31, 2018. There were no postretirement
plan assets invested in emerging markets at December 31, 2018.
Altria’s risk management practices for its pension and
postretirement 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’s expected rate of return on pension and postretirement
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.
66
66
67
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 66
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio The fair values of Altria’s pension plan assets by asset category at December 31, 2018 and 2017 were as follows:
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2018
2017
U.S. and foreign government securities or
their agencies:
U.S. government and agencies
$
— $
868
$
— $
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
Cash and cash equivalents
Other, net
Investments measured at NAV as a practical
expedient for fair value:
Collective investment funds
U.S. large cap
U.S. small cap
International developed markets
Total investments measured at NAV
Other
Fair value of plan assets, net
—
—
—
—
237
1,082
—
36
73
115
1,726
478
—
—
303
36
—
—
—
—
—
—
—
—
868
73
115
1,726
478
237
1,082
303
72
$
— $
588
$
— $
—
—
—
—
1,396
831
—
47
81
150
1,789
511
—
—
106
42
—
—
—
—
—
—
—
—
588
81
150
1,789
511
1,396
831
106
89
$ 1,355
$ 3,599
$
— $ 4,954
$ 2,274
$ 3,267
$
— $ 5,541
$ 1,722
328
86
$ 2,136
48
$ 7,138
$ 2,014
361
100
$ 2,475
(1)
$ 8,015
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2018 and 2017.
66
67
67
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 67
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio The fair value of Altria’s postretirement plan assets at December
31, 2018 were as follows:
(in millions)
U.S. and foreign government securities
or their agencies:
2018
Level 1 Level 2
Total
U.S. government and agencies
$ — $
Foreign government and agencies
Corporate debt instruments:
Above investment grade
Below investment grade and no rating
Other, net
—
—
—
2
$
13
3
71
8
2
13
3
71
8
4
$
2 $
97
$
99
Investments measured at NAV as a
practical expedient for fair value:
Collective investment funds:
U.S. large cap
International developed markets
Total investments measured at NAV
Other
Fair value of plan assets, net
$
$
77
26
103
9
$
211
At December 31, 2017, postretirement plan assets totaled
$270 million, of which $148 million was invested in collective
investment funds and $122 million was held in a non-interest
bearing cash account. There were no postretirement plan
investments classified in Level 1, Level 2 or Level 3 of the fair
value hierarchy at December 31, 2017.
There were no Level 3 postretirement plan holdings or
transactions during 2018 and 2017.
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.
Collective Investment Funds: Collective investment funds
consist of funds that are intended to mirror indices such as
Standard & Poor’s 500 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 collective investment funds.
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.
Cash Flows: Altria makes contributions to the pension plans to
the extent that the contributions are tax deductible and pays
benefits that relate to plans for salaried employees that cannot be
funded under IRS regulations. Currently, Altria anticipates
making employer contributions to its pension plans of up to
approximately $50 million in 2019 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. Currently,
Altria anticipates making employer contributions to its
postretirement plans of up to approximately $60 million in 2019.
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, 2018 were as follows:
(in millions)
2019
2020
2021
2022
2023
2024-2028
$
Pension
484
464
468
470
474
2,362
$
Postretirement
132
130
129
129
125
598
68
68
69
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 68
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2018 consisted of the following:
(in millions)
Net loss
Prior service (cost) credit
Deferred income taxes
Amounts recorded in accumulated other comprehensive losses
Pension
(2,591) $
(34)
679
Post-
retirement
Post-
employment
(327) $
108
61
(78) $
(6)
20
Total
(2,996)
68
760
(1,946) $
(158) $
(64) $
(2,168)
$
$
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
Post-
retirement
Post-
employment
Total
(2,493) $
(612) $
(93) $
(3,198)
(15)
979
195
166
—
34
180
1,179
(1,529) $
(251) $
(59) $
(1,839)
$
$
The movements in other comprehensive earnings/losses during the year ended December 31, 2018 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
Prior service cost/credit
Deferred income taxes
Other movements during the year:
Adoption of ASU 2018-02 (1)
Net loss
Prior service cost/credit
Deferred income taxes
Total movements in other comprehensive earnings/losses
$
$
$
$
$
$
225
4
13
3
(61)
184
$
(330) $
(336)
(26)
91
(601) $
(417) $
$
21
(42)
—
—
4
(17) $
(55) $
264
(45)
(54)
110
93
$
$
17
—
—
—
(4)
13
$
$
(12) $
(2)
(6)
2
(18) $
(5) $
263
(38)
13
3
(61)
180
(397)
(74)
(77)
39
(509)
(329)
(1) Reflects the reclassification of the stranded income tax effects of the Tax Reform Act. For further discussion, see Note 15. Income Taxes.
68
69
69
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 69
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
86
(113)
174
81
—
(32)
49
223
$
$
$
$
$
$
25
(38)
—
6
(7) $
(56) $
38
7
(11) $
(18) $
17
—
—
(6)
11
$
$
(11) $
—
4
(7) $
$
4
239
(34)
86
(113)
178
14
38
(21)
31
209
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
Note 18. Additional Information
(in millions)
Research and development expense
Advertising expense
Interest and other debt expense, net:
Interest expense
Interest income
Interest related to NPM Adjustment Items
Rent expense
$
$
$
$
$
$
171
5
9
2
(69)
118
$
(232) $
(4)
92
(144) $
(26) $
$
25
(39)
—
(13)
11
(16) $
(18) $
16
1
(1) $
(17) $
$
18
—
—
—
(7)
11
$
(9) $
—
3
(6) $
$
5
For the Years Ended December 31,
$
$
$
$
$
2018
252
37
697
(32)
—
665
42
$
$
$
$
$
2017
241
29
727
(31)
9
705
43
$
$
$
$
$
214
(34)
9
(11)
(65)
113
(259)
12
96
(151)
(38)
2016
203
27
754
(13)
6
747
53
70
70
71
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 70
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2018 were as
follows:
(in millions)
2019
2020
2021
2022
2023
Thereafter
Rental Commitments
41
$
35
31
24
17
34
182
$
$
$
Sublease Income
5
5
5
5
5
2
27
The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2018, 2017 and
2016 was as follows:
(in millions)
2018
2017
2016
Balance at beginning of year
Charged to costs and expenses
Deductions (1)
Balance at end of year
(1) Represents the recording of discounts and returns for which allowances were created.
— $
620
(620)
— $
$
$
Discounts
$
Returned
Goods
40
97
(105)
32
Discounts
$
— $
626
(626)
— $
Returned
Goods
49
130
(139)
40
Discounts
$
— $
628
(628)
$
— $
Returned
Goods
68
133
(152)
49
The activity in the allowance for losses on finance assets for the years ended December 31, 2018, 2017 and 2016 was as follows:
2018
2017
2016
$
$
23
(4)
19
$
$
32
(9)
23
$
$
42
(10)
32
(in millions)
Balance at beginning of year
Decrease to allowance
Balance at end of year
Note 19. Contingencies
Legal proceedings covering a wide range of matters are pending
or threatened in various United States and foreign jurisdictions
against Altria and its subsidiaries, including PM USA and UST
and its subsidiaries, as well as their respective indemnitees.
Various types of claims may be raised in these proceedings,
including product liability, consumer protection, antitrust, tax,
contraband shipments, patent infringement, employment matters,
claims for contribution and claims of competitors, shareholders or
distributors.
Litigation is subject to uncertainty and it is possible that there
could be adverse developments in pending or future cases. An
unfavorable outcome or settlement of pending tobacco-related or
other litigation could encourage the commencement of additional
litigation. Damages claimed in some tobacco-related and other
litigation are or can be significant and, in certain cases, have
ranged in the billions of dollars. The variability in pleadings in
multiple jurisdictions, together with the actual experience of
management in litigating claims, demonstrate that the monetary
relief that may be specified in a lawsuit bears little relevance to
the ultimate outcome. In certain cases, plaintiffs claim that
defendants’ liability is joint and several. In such cases, Altria or
its subsidiaries may face the risk that one or more co-defendants
decline or otherwise fail to participate in the bonding required for
an appeal or to pay their proportionate or jury-allocated share of a
71
71
70
judgment. As a result, Altria or its subsidiaries under certain
circumstances may have to pay more than their proportionate
share of any bonding- or judgment-related amounts. Furthermore,
in those cases where plaintiffs are successful, Altria or its
subsidiaries may also be required to pay interest and attorneys’
fees.
Although PM USA has historically been able to obtain
required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse
verdicts have been appealed, there remains a risk that such relief
may not be obtainable in all cases. This risk has been
substantially reduced given that 47 states and Puerto Rico limit
the dollar amount of bonds or require no bond at all. As
discussed below, however, tobacco litigation plaintiffs have
challenged the constitutionality of Florida’s bond cap statute in
several cases and plaintiffs may challenge state bond cap statutes
in other jurisdictions as well. Such challenges may include the
applicability of state bond caps in federal court. States, including
Florida, may also seek to repeal or alter bond cap statutes through
legislation. Although Altria cannot predict the outcome of such
challenges, it is possible that the consolidated results of
operations, cash flows or financial position of Altria, or one or
more of its subsidiaries, could be materially affected in a
particular fiscal quarter or fiscal year by an unfavorable outcome
of one or more such challenges.
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 71
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Altria and its subsidiaries record provisions in the
consolidated financial statements for pending litigation when they
determine that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. At the present
time, while it is reasonably possible that an unfavorable outcome
in a case may occur, except to the extent discussed elsewhere in
this Note 19 Contingencies: (i) management has concluded that it
is not probable that a loss has been incurred in any of the pending
tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related cases;
and (iii) accordingly, management has not provided any amounts
in the consolidated financial statements for unfavorable outcomes,
if any. Litigation defense costs are expensed as incurred.
Altria and its subsidiaries have achieved substantial success
in managing litigation. Nevertheless, litigation is subject to
uncertainty and significant challenges remain. It is possible that
the consolidated results of operations, cash flows or financial
position of Altria, or one or more of its subsidiaries, could be
materially affected in a particular fiscal quarter or fiscal year by
an unfavorable outcome or settlement of certain pending
litigation. Altria and each of its subsidiaries named as a defendant
believe, and each has been so advised by counsel handling the
respective cases, that it has valid defenses to the litigation
pending against it, as well as valid bases for appeal of adverse
verdicts. Each of the companies has defended, and will continue
to defend, vigorously against litigation challenges. However,
Altria and its subsidiaries may enter into settlement discussions in
particular cases if they believe it is in the best interests of Altria to
do so.
Overview of Altria and/or PM USA Tobacco-Related
Litigation
Types and Number of Cases: Claims related to tobacco
products generally fall within the following categories:
(i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs; (ii) smoking and health cases
primarily alleging personal injury or seeking court-supervised
programs for ongoing medical monitoring and purporting to be
brought on behalf of a class of individual plaintiffs, including
cases in which the aggregated claims of a number of individual
plaintiffs are to be tried in a single proceeding; (iii) health care
cost recovery cases brought by governmental (both domestic and
foreign) plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits; (iv) class action suits alleging that the
uses of the terms “Lights” and “Ultra Lights” constitute deceptive
and unfair trade practices, common law or statutory fraud, unjust
enrichment, breach of warranty or violations of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”); and
(v) other tobacco-related litigation described below. Plaintiffs’
theories of recovery and the defenses raised in pending smoking
and health, health care cost recovery and “Lights/Ultra Lights”
cases are discussed below.
The table below lists the number of certain tobacco-related
cases pending in the United States against PM USA and, in some
instances, Altria as of December 31, 2018, 2017 and 2016:
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
2018
100
2017
92
2016
70
2
1
2
4
1
3
5
1
8
(1) Includes 30 cases filed in Massachusetts and 37 non-Engle cases filed in
Florida. Does not include individual smoking and health cases brought by or on
behalf of plaintiffs in Florida state and federal courts following the decertification
of the Engle case (these Engle progeny cases are discussed below in Smoking and
Health Litigation - Engle Class Action). Also does not include 1,490 cases
brought by flight attendants seeking compensatory damages for personal injuries
allegedly caused by exposure to environmental tobacco smoke (“ETS”). The
flight attendants allege that they are members of an ETS smoking and health class
action in Florida, which was settled in 1997 (Broin). The terms of the court-
approved settlement in that case allowed class members to file individual lawsuits
seeking compensatory damages, but prohibited them from seeking punitive
damages. In March 2018, 923 of these cases were voluntarily dismissed without
prejudice.
(2)
The 2016 and 2017 pending cases include as one case the 30 civil actions that
were to be tried in six consolidated trials in West Virginia (In re: Tobacco
Litigation). PM USA was a defendant in nine of the 30 cases. The parties
resolved these cases for an immaterial amount, and in the second quarter of 2018,
the court dismissed all 30 cases.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit
below.
International Tobacco-Related Cases: As of January 29, 2019,
PM USA is a named defendant in 10 health care cost recovery
actions in Canada, eight of which also name Altria as a defendant.
PM USA and Altria are also named defendants in seven smoking
and health class actions filed in various Canadian provinces. See
Guarantees and Other Similar Matters below for a discussion of
the Distribution Agreement between Altria and Philip Morris
International Inc. (“PMI”) that provides for indemnities for
certain liabilities concerning tobacco products.
Tobacco-Related Cases Set for Trial: As of January 29, 2019,
10 Engle progeny cases are set for trial through March 31, 2019.
In addition, there are no individual smoking and health cases
against PM USA set for trial during this period. Cases against
other companies in the tobacco industry may also be scheduled
for trial during this period. Trial dates are subject to change.
Trial Results: Since January 1999, excluding the Engle progeny
cases (separately discussed below), verdicts have been returned in
65 smoking and health, “Lights/Ultra Lights” and health care cost
recovery cases in which PM USA was a defendant. Verdicts in
favor of PM USA and other defendants were returned in 43 of the
65 cases. These 43 cases were tried in Alaska (1), California (7),
Connecticut (1), Florida (10), Louisiana (1), Massachusetts (3),
Mississippi (1), Missouri (4), New Hampshire (1), New Jersey
(1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1),
Tennessee (2) and West Virginia (2). A motion for a new trial was
granted in one of the cases in Florida and in the case in Alaska. In
the Alaska case (Hunter), the jury returned a verdict in favor of
72
72
73
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 72
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
PM USA in April 2018 in the third trial of this case. In May 2018,
plaintiff filed a motion for a new trial, which the court denied.
Of the 22 non-Engle progeny cases in which verdicts were
returned in favor of plaintiffs, 19 have reached final resolution.
See Smoking and Health Litigation - Engle Progeny Trial
Results below for a discussion of verdicts in state and federal
Engle progeny cases involving PM USA as of January 29, 2019.
Judgments Paid and Provisions for Tobacco and Health
Litigation Items (Including Engle Progeny Litigation): After
exhausting all appeals in those cases resulting in adverse verdicts
associated with tobacco-related litigation, since October 2004,
PM USA has paid in the aggregate judgments and settlements
(including related costs and fees) totaling approximately $578
million and interest totaling approximately $195 million as of
December 31, 2018. These amounts include payments for Engle
progeny judgments (and related costs and fees) totaling
approximately $186 million, interest totaling approximately $33
million and payment of approximately $43 million in connection
with the Federal Engle Agreement, discussed below.
The changes in Altria’s accrued liability for tobacco and
health litigation items, including related interest costs, for the
periods specified below are as follows:
(in millions)
Accrued liability for tobacco and
health litigation items at
beginning of year (1)
Pre-tax charges for:
Tobacco and health litigation
Related interest costs
Payments (1)
Accrued liability for tobacco and
health litigation items at end of
year (1)
2018
2017
2016
$
106
$
47
$
132
113
18
(125)
72
8
(21)
88
17
(190)
$
112
$
106
$
47
(1) Includes amounts related to the costs of implementing the corrective
communications remedy related to the Federal Government’s Lawsuit discussed
below.
The accrued liability for tobacco and health litigation items,
including related interest costs, was included in liabilities on
Altria’s consolidated balance sheets. Pre-tax charges for tobacco
and health litigation were included in marketing, administration
and research costs on Altria’s consolidated statements of earnings.
Pre-tax charges for related interest costs were included in interest
and other debt expense, net on Altria’s consolidated statements of
earnings.
Security for Judgments: To obtain stays of judgments pending
appeal, PM USA has posted various forms of security. As of
December 31, 2018, PM USA has posted appeal bonds totaling
approximately $100 million, which have been collateralized with
restricted cash that are included in assets on the consolidated
balance sheet.
Smoking and Health Litigation
Overview: Plaintiffs’ allegations of liability in smoking and
health cases are based on various theories of recovery, including
negligence, gross negligence, strict liability, fraud,
misrepresentation, design defect, failure to warn, nuisance, breach
of express and implied warranties, breach of special duty,
conspiracy, concert of action, violations of deceptive trade
practice laws and consumer protection statutes, and claims under
the federal and state anti-racketeering statutes. Plaintiffs in the
smoking and health cases seek various forms of relief, including
compensatory and punitive damages, treble/multiple damages and
other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of profits,
and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, statutes of
limitations and preemption by the Federal Cigarette Labeling and
Advertising Act.
Non-Engle Progeny Litigation: Summarized below are the non-
Engle progeny smoking and health cases pending during 2018 in
which a verdict was returned in favor of plaintiff and against PM
USA. Charts listing certain verdicts for plaintiffs in the Engle
progeny cases can be found in Smoking and Health Litigation -
Engle Progeny Trial Results below.
Capone: In December 2018, a jury in a Florida state court
returned a verdict in favor of plaintiff, awarding $225,000 in
compensatory damages.
Gentile: In October 2017, a jury in a Florida state court returned
a verdict in favor of plaintiff, awarding approximately $7.1
million in compensatory damages and allocating 75% of the fault
to PM USA (an amount of approximately $5.3 million). In April
2018, the trial court entered final judgment in favor of plaintiff
and PM USA posted a bond in the amount of approximately $8
million. In May 2018, PM USA filed a notice of appeal to the
Florida Fourth District Court of Appeal.
Bullock: In December 2015, a jury in the U.S. District Court for
the Central District of California returned a verdict in favor of
plaintiff, awarding $900,000 in compensatory damages. On
appeal, the U.S. Court of Appeals for the Ninth Circuit affirmed
the judgment. In the fourth quarter of 2017, PM USA recorded a
provision on its consolidated balance sheet of approximately $1
million for the judgment, interest and associated costs. In the first
quarter of 2018, PM USA paid this amount, concluding this
litigation.
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
72
73
73
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 73
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 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.
In August 2006, PM USA and plaintiffs sought rehearing
from the Florida Supreme Court on parts of its July 2006 opinion.
In December 2006, the Florida Supreme Court refused to revise
its July 2006 ruling, except that it revised the set of Phase I
findings entitled to res judicata effect by excluding finding
(v) listed above (relating to agreement to misrepresent
information), and added the finding that defendants sold or
supplied cigarettes that, at the time of sale or supply, did not
conform to the representations of fact made by defendants. In
January 2007, the Florida Supreme Court issued the mandate
from its revised opinion. In May 2007, defendants filed a petition
for writ of certiorari with the United States Supreme Court,
which was denied. In February 2008, the trial court decertified
the class.
Engle Progeny Cases: The deadline for filing Engle progeny
cases expired in January 2008. As of January 29, 2019,
approximately 2,100 state court cases were pending against PM
USA or Altria asserting individual claims by or on behalf of
approximately 3,000 state court plaintiffs. Because of a number
of factors, including 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, 2019, approximately seven 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”). Federal cases that were in trial and
those that previously reached final verdict were not included in
the Federal Engle Agreement.
Engle Progeny Trial Results: As of January 29, 2019, 126
federal and state Engle progeny cases involving PM USA have
resulted in verdicts since the Florida Supreme Court Engle
decision. Sixty-nine verdicts were returned in favor of plaintiffs
and seven verdicts (Skolnick, Calloway, McCoy, Duignan,
Caprio, Oshinsky-Blacker and McCall) 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 on
plaintiff’s concealment and conspiracy claims; 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; McCoy was 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-seven verdicts were returned in favor of PM USA, of
which 39 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, 2019. Three verdicts (D. Cohen, Collar, and Chacon)
that were returned in favor of PM USA were subsequently
reversed for new trials. Juries in two cases (Reider and Banks)
returned zero damages verdicts in favor of PM USA. Juries in
two other cases (Weingart and Hancock) returned verdicts against
PM USA awarding no damages, but the trial court in each case
granted an additur. One case, Pollari, resulted in a verdict in
favor of PM USA following a retrial of an initial verdict returned
in favor of plaintiff. Florida’s Fourth District Court of Appeal
reversed the verdict in favor of plaintiff. Plaintiff petitioned the
Florida Supreme Court to review the District Court of Appeal’s
decision, but subsequently dismissed their petition.
The charts below list the verdicts and post-trial developments
in certain Engle progeny cases in which verdicts were returned in
favor of plaintiffs. The first chart lists such cases that are pending
as of January 29, 2019 where PM USA has recorded a provision
in its consolidated financial statements because an unfavorable
outcome is probable and the amount of the loss can be reasonably
estimated; the second chart lists other such cases that are pending
as of January 29, 2019 but where an unfavorable outcome is not
probable and the amount of loss cannot be reasonably estimated;
the third chart lists other such cases that have concluded within
the previous 12 months. Unless otherwise noted for a particular
74
74
75
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 74
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio case, the jury’s award for compensatory damages will not be
reduced by any finding of plaintiff’s comparative fault (see Engle
Progeny Appellate Issues below for a discussion of the Florida
Supreme Court’s decision in Schoeff). Further, the damages noted
reflect adjustments based on post-trial or appellate rulings.
Currently Pending Engle Cases with Accrued Liabilities
(rounded to nearest $ million)
Plaintiff Verdict Date
Berger
(Cote)
September 2014
Defendant(s)
PM USA
Court
Federal Court
- Middle
District of
Florida
Compensatory
Damages (All
Defendants)
$6 million
Punitive
Damages
(PM USA)
$21 million
McKeever February 2015
PM USA
Broward
$6 million
$12 million
Pardue
December 2016
PM USA and
R.J. Reynolds
Alachua
$5 million
$7 million
Jordan
August 2015
PM USA
Duval
$6 million
$3 million
M. Brown May 2015
PM USA
Duval
$6 million
$0
Boatright November 2014
PM USA and
Liggett Group
LLC (“Liggett
Group”)
Polk
$15 million
$20 million
Searcy
April 2013
PM USA and
R.J. Reynolds
<$1 million
$2 million
Federal Court
- Middle
District of
Florida
Appeal Status
The Eleventh Circuit Court
of Appeals reinstated the
punitive and compensatory
damages awards and
remanded the case to the
district court. PM USA
intends to challenge the
punitive damages award.
Fourth District Court of
Appeal reduced
compensatory damages;
Florida Supreme Court
remanded case to reinstate
full compensatory damages
award; PM USA’s petition
for review by the U.S.
Supreme Court is pending.
First District Court of
Appeal affirmed the
judgment; defendants’
petition for review by the
U.S. Supreme Court is
pending.
First District Court of
Appeal affirmed the
judgment; PM USA’s
petition for review by the
U.S. Supreme Court is
pending.
First District Court of
Appeal affirmed the
judgment; PM USA’s
petition for review by the
U.S. Supreme Court is
pending. Trial court
awarded plaintiff
approximately $7 million in
attorneys’ fees. PM USA
filed a motion for rehearing.
Florida Supreme Court
upheld the full amount of the
trial court judgment without
a reduction for plaintiff’s
comparative fault and denied
PM USA’s request for
reconsideration; defendants’
petition for review by the
U.S. Supreme Court is
pending.
U.S. Court of Appeals for
the Eleventh Circuit
affirmed the judgment;
defendants’ petition for
review by the U.S. Supreme
Court is pending.
Accrual(1)
$6 million accrual
in the fourth quarter
of 2018
$20 million accrual
in fourth quarter of
2017
$10 million accrual
($9 million in
second quarter of
2018 and $1 million
in third quarter of
2018)
$11 million accrual
in second quarter of
2018
$7 million accrual
in second quarter of
2018
$41 million accrual
in second quarter of
2018
$2 million accrual
in third quarter of
2018
74
75
75
(1)Accrual amounts include interest and associated costs if applicable. For cases with multiple defendants, accrual amounts reflect the portion of compensatory damages
PM USA believes it will have to pay if the case is ultimately decided in plaintiff’s favor after taking into account any portion potentially payable by the other defendant(s).
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 75
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Other Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
Plaintiff
Chadwell
Verdict Date
September 2018 PM USA
Defendant(s)
Court
Miami-Dade
Compensatory
Damages(1)
$2 million
Punitive
Damages
(PM USA)
$0
Kaplan
July 2018
Landi
June 2018
Theis
May 2018
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
Broward
$2 million
$2 million
Broward
$8 million
$5 million
Sarasota
$7 million
$10 million
Freeman March 2018
PM USA
Alachua
$4 million
$0
Gloger
February 2018
PM USA and
R.J. Reynolds
Miami-Dade
$8 million
$5 million
Bryant
December 2017 PM USA
Escambia
<$1 million
<$1 million
R. Douglas November 2017 PM USA
Duval
<$1 million
$0
Wallace
October 2017
PM USA and
R.J. Reynolds
Brevard
$12 million
$16 million
L. Martin May 2017
PM USA
Miami-Dade
$1 million
(<$1 million PM USA)
$1 million
Sommers
April 2017
PM USA
Miami-Dade
$1 million
Santoro
March 2017
J. Brown
February 2017
PM USA, R.J.
Reynolds and
Liggett Group
PM USA and
R.J. Reynolds
Broward
$2 million
Pinellas
$5 million
<$1 million
S. Martin
November 2016 PM USA and
R.J. Reynolds
Broward
$5 million
$0
Danielson November 2015 PM USA
Escambia
$3 million
<$1 million
Cooper
September 2015 PM USA and
R.J. Reynolds
Broward
$5 million
(<$1 million PM USA)
$0
McCoy
July 2015
PM USA,
R.J. Reynolds
and Lorillard
Broward
$2 million
(<$1 million PM USA)
$3 million
D. Brown
January 2015
PM USA
Federal Court -
Middle District
of Florida
$8 million
$9 million
$0
$0
Appeal Status
Trial court denied post-trial motions.
PM USA intends to appeal the trial
court decision.
Appeals by plaintiff and defendants to
Fourth District Court of Appeal
pending.
Appeals by plaintiff and defendants to
Fourth District Court of Appeal
pending.
Defendants’ appeal to Second District
Court of Appeal pending.
Defendant’s appeal to First District
Court of Appeal pending.
Defendants’ appeal to Third District
Court of Appeal pending.
Defendant’s appeal to First District
Court of Appeal pending.
Awaiting entry of final judgment by
the trial court.
Appeals by plaintiff and defendants to
Fifth District Court of Appeal pending.
Appeals by plaintiff and defendant to
Third District Court of Appeal
pending.
New trial ordered on punitive
damages; appeals by plaintiff and
defendant to Third District Court of
Appeal pending.
Trial court set aside punitive damages
award; appeals by plaintiff and
defendants to Fourth District Court of
Appeal pending.
Second District Court of Appeals
issued a per curiam affirmance of the
judgment; defendants’ motion for a
written opinion pending.
Fourth District Court of Appeal
vacated the punitive damages and
reinstated the entire compensatory
damages award.
Appeals by plaintiff and defendant to
First District Court of Appeal pending.
Fourth District Court of Appeal
affirmed judgment and granted a new
trial on punitive damages.
Fourth District Court of Appeal
reversed judgment and ordered a new
trial; plaintiff requested review by the
Florida Supreme Court; case stayed
pending decision in Pollari, discussed
above.
Appeal to U.S. Court of Appeals for
the Eleventh Circuit stayed pending
final disposition in the Searcy case,
discussed below.
76
76
77
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 76
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Other Currently Pending Engle Cases with Verdicts Against PM USA
(rounded to nearest $ million)
Plaintiff
Kerrivan
Verdict Date
October 2014
Harris
July 2014
Skolnick
June 2013
Defendant(s)
PM USA and
R.J. Reynolds
PM USA,
R.J. Reynolds
and Lorillard
PM USA and
R.J. Reynolds
Compensatory
Damages(1)
$16 million
$2 million
Court
Federal Court -
Middle District
of Florida
Federal Court -
Middle District
of Florida
Palm Beach
$0
Punitive
Damages
(PM USA)
$16 million
$0
$0
Appeal Status
Appeals by plaintiff and defendants to
U.S. Court of Appeals for the Eleventh
Circuit pending.
Post-trial motions pending.
Fourth District Court of Appeal
reversed compensatory damages
award, ruled in favor of defendants on
strict liability and negligence claims
and remanded conspiracy and
concealment claims for a new trial.
Currently pending limited retrial.
(1)PM USA’s portion of the compensatory damages award is noted parenthetically where the court has ruled that comparative fault applies.
Engle Cases Concluded Within Past 12 Months
(rounded to nearest $ million)
Plaintiff
Boulter
Verdict Date
December 2018
Simon
September 2018
Perrotto
November 2014
Gore
Putney
March 2015
April 2010
Sermons
July 2016
Tognoli
Howles
Purdo
Griffin
November 2015
November 2016
April 2016
June 2014
Ledoux
December 2015
Burkhart
May 2014
Defendant(s)
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
PM USA,
R.J. Reynolds and
Lorillard
PM USA and
R.J. Reynolds
PM USA,
R.J. Reynolds and
Liggett Group
PM USA and
R.J. Reynolds
PM USA
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
PM USA
PM USA and
R.J. Reynolds
Court
Lee
Accrual Date
Fourth quarter of 2018
Payment
Amount
(if any)
<$1 million
Payment Date
January 2019
Broward
Fourth quarter of 2018
<$1 million
October 2018
Palm Beach
Third quarter of 2018
$1 million
September 2018
Indian River
First quarter of 2018
$1 million
September 2018
Broward
Third quarter of 2018
$5 million
September 2018
Duval
Third quarter of 2018
<$1 million
August 2018
Broward
Broward
Fourth quarter of 2017
$1 million
May 2018
First quarter of 2018
$6 million
May 2018
Palm Beach
First quarter of 2018
$10 million
May 2018
Federal Court -
Middle District
of Florida
Second quarter of 2017
$1 million
May 2018
Miami-Dade
Fourth quarter of 2017
$20 million
May 2018
PM USA,
R.J. Reynolds and
Lorillard
Federal Court -
Middle District
of Florida
Second quarter of 2018
$2 million
May 2018
Barbose
November 2015
Allen
November 2014
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
Pasco
Duval
Fourth quarter of 2017
$12 million
May 2018
First quarter of 2018
$10 million
May 2018
76
77
77
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 77
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Engle Cases Concluded Within Past 12 Months
(rounded to nearest $ million)
Plaintiff
Ahrens
Verdict Date
February 2016
Starr-Blundell
June 2013
Zamboni
February 2015
Graham
May 2013
Defendant(s)
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
PM USA and
R.J. Reynolds
Court
Pinellas
Duval
Federal Court -
Middle District
of Florida
Federal Court -
Middle District
of Florida
Accrual Date
Fourth quarter of 2017
Payment
Amount
(if any)
$7 million
Payment Date
May 2018
First quarters of 2016 and
2018
<$1 million
March 2018
First quarter of 2018
<$1 million
March 2018
Second quarter of 2017
$1 million
January 2018
November 2009
PM USA
Broward
Second quarter of 2017
$14 million
January 2018
Naugle
Lourie
October 2014
Marchese
October 2015
PM USA,
R.J. Reynolds and
Lorillard
PM USA and
R.J. Reynolds
Hillsborough
Second quarter of 2017
$3 million
January 2018
Broward
Fourth quarter of 2017
$1 million
January 2018
________________________________________________________________________________________________________________________________________
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 Burkhart and Searcy, Engle progeny cases against PM
USA and R.J. Reynolds, defendants argued that application of the
Engle findings to the Engle progeny plaintiffs’ concealment and
conspiracy claims violated defendants’ due process rights. In
March 2018, in Burkhart, the Eleventh Circuit rejected
defendants’ due process arguments and affirmed the final
judgment entered in plaintiff’s favor. Defendants filed a motion
for rehearing challenging that decision, which the Eleventh
Circuit denied. In September 2018, in Searcy, the Eleventh
Circuit also affirmed the judgment in plaintiff’s favor; defendants’
petition for review by the United States Supreme Court is
pending.
In Soffer, an Engle progeny case against R.J. Reynolds, the
Florida Supreme Court ruled in 2016 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, another Engle progeny case against R.J. Reynolds, the
Florida Supreme Court ruled in 2016 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
78
78
79
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 78
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
the plaintiffs’ bond cap statute challenges in those cases. The
plaintiffs unsuccessfully appealed these rulings.
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. 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.
From time to time, legislation has been presented to the
Florida legislature that would repeal the 2009 appeal bond cap
statute; however to date, no legislation repealing the statute has
passed.
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, 2019, PM USA and Altria 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 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 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 and PM USA are named as defendants in
the New Brunswick, Ontario, Newfoundland and Labrador,
Alberta, Manitoba, Saskatchewan, Prince Edward Island and
Nova Scotia cases. The Nunavut Territory and Northwest
Territory have passed similar legislation. See Guarantees and
Other Similar Matters below for a discussion of the Distribution
Agreement between Altria 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
78
79
79
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 79
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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, 2018, 2017 and 2016, the aggregate
amount recorded in cost of sales with respect to the State
Settlement Agreements was approximately $4.2 billion, $4.5
billion and $4.6 billion, respectively. These amounts include PM
USA’s estimate of amounts related to NPM Adjustments
discussed below.
NPM Adjustment Disputes: PM USA is participating in
proceedings regarding the NPM Adjustment for 2003-2017. The
“NPM Adjustment” is a reduction in MSA payments made by the
OPMs and those manufacturers that are subsequent signatories to
the MSA (collectively, the “participating manufacturers” or
“PMs”) 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.
NPM Adjustment Disputes - Settlement with 36 States and
Territories and Settlement with New York. PM USA has entered
into two settlements of NPM Adjustment disputes with a total of
37 states and territories, one with 36 states and territories (the
“multi-state settlement”) and the other with the State of New
York. The multi-state settlement was originally entered into in
2012 with 19 states and territories and to date has been expanded
to include a total of 36 of the 52 MSA states and territories (the
“signatory states”). In the multi-state settlement, PM USA by the
end of October 2017 had settled the NPM Adjustment disputes for
2003-2015 with 26 states in exchange for a total of $740 million.
In 2018, there have been three principal developments with
respect to this settlement. First, in the first quarter of 2018, PM
USA settled the NPM Adjustment disputes for 2004-2017 with
the states of Alaska, Colorado, Delaware, Hawaii, Maine, North
Dakota, South Dakota, Utah and Vermont. As a result of these
additional nine states joining the multi-state settlement, PM USA
will receive approximately $81 million for 2004-2017 ($13
million of which relates to the 2015-2017 “transition years”), $68
million of which it received in April 2018. In connection with
this settlement, PM USA recorded a reduction to cost of sales in
the amount of $81 million in the first quarter of 2018. Second, in
the second quarter of 2018, Pennsylvania joined the multi-state
settlement for 2004-2017. As a result, PM USA will receive
approximately $90 million for 2004-2017 ($13 million of which
relates to the 2015-2017 “transition years”). In connection with
this settlement, PM USA recorded a reduction to cost of sales in
the amount of $90 million in the second quarter of 2018. Third,
in the second quarter of 2018, PM USA agreed to settle the NPM
Adjustment disputes for 2016 and 2017 with the 26 signatory
states mentioned above. As a result, PM USA will receive
approximately $77 million for 2016 and 2017. In connection with
this settlement, PM USA recorded a reduction to cost of sales in
the amount of $38 million for the 2017 NPM Adjustment in the
second quarter of 2018, having previously recorded a reduction to
cost of sales in the amount of $39 million for the 2016 NPM
Adjustment in the third quarter of 2017 based on PM USA’s then
best estimate regarding 2016.
In the NPM Adjustment settlement with New York, which
was entered into in 2015, PM USA has received a total of
approximately $217 million for 2004-2016. Both the New York
settlement and the multi-state settlement also contain provisions
resolving certain disputes regarding the application of the NPM
Adjustment going forward, although the applicability of those
provisions with respect to the signatory states that joined the
multi-state settlement after 2017 is contingent on satisfaction, in
the PMs’ sole discretion, of certain conditions.
2003 and Subsequent NPM Adjustments - 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 multi-state 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 due to PM USA 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 a multi-state arbitration and
the PMs have agreed not to contest the applicability of the 2004
NPM Adjustment to Montana.
The 2004 multi-state arbitration is currently proceeding with
all of the states that have not settled other than Montana and New
Mexico. Decisions are not expected until the middle of 2019 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
80
80
81
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 80
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
for 2008; $211 million for 2009; $218 million for 2010; $166
million for 2011; $214 million for 2012; $224 million for 2013;
$253 million for 2014; $300 million for 2015; $295 million for
2016 and $288 million for 2017. 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
and disputes with other PMs.
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’s
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
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’s 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 2015-2018; (ii) may improperly increase PM
USA’s payments for subsequent years; (iii) may improperly
decrease PM USA’s share of the 2015-2018 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.
In January 2017, 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. In May 2018, the
Florida trial court issued an order stating that, for purposes of the
Florida State Settlement Agreement, R.J. Reynolds’s settlement
payment on the ITG brands should be calculated as if R.J.
Reynolds is continuing to sell those brands. In August 2018, the
Florida trial court entered final judgment ordering R.J. Reynolds
to pay PM USA approximately $9.8 million for the 2015-2017
period. R.J. Reynolds and PM USA have each filed notices of
appeal of the trial court’s decision, which proceedings may result
in further modifications to PM USA’s settlement payments under
the Florida State Settlement Agreement.
In March 2018, PM USA and the State of Minnesota filed
pleadings in Minnesota state court asserting claims against R.J.
Reynolds and ITG similar to those made in Florida and seeking to
enforce the Minnesota State Settlement Agreement.
In December 2018, PM USA filed a motion in Mississippi
state court seeking to enforce the Mississippi State Settlement
Agreement against R.J. Reynolds and ITG with respect to the
accuracy of certain submissions made by R.J. Reynolds and ITG
relating to payments on the ITG brands.
In January 2019, PM USA and the State of Texas each filed a
motion in federal court for the Eastern District of Texas against
R.J. Reynolds and ITG seeking to enforce the Texas State
Settlement Agreement.
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, asserting claims
under three federal statutes. The case ultimately proceeded only
under the civil provisions of RICO. In August 2006, the district
court held that certain defendants, including Altria 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
80
81
81
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 81
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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, the U.S. 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.
The D.C. Court of Appeals remanded the case for the trial court to
reconsider these four aspects of the injunction and to reformulate
its remedial order accordingly.
Following several years of appeals relating to the content of
the corrective statements remedy described above, in October
2017, the district court approved the parties’ proposed consent
order implementing corrective statements in newspapers and on
television. The corrective statements began appearing in
newspapers and on television in the fourth quarter of 2017. In
April 2018, the parties reached agreement on the implementation
of corrective statements on websites and onserts. The corrective
statements began appearing on websites in the second quarter of
2018 and the onserts began appearing in the fourth quarter of
2018.
In 2014, Altria and PM USA recorded provisions totaling $31
million for the estimated costs of implementing the corrective
communications remedy.
The requirements related to corrective statements at point-of-
sale remain outstanding. In May 2014, the district court ordered
further briefing on the issue, which was completed in June 2014.
In May 2018, the parties submitted a joint status report on point-
of-sale signage to the district court and the court approved the
parties’ proposed briefing schedule. The briefing is complete and
the matter is pending before the district court.
“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 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, 2019, a
total of two 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, 2019, 21 state courts in 23 “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.
Certain Other Tobacco-Related Litigation
Ignition Propensity Case: PM USA and Altria have faced
litigation alleging that a fire caused by cigarettes led to
individuals’ deaths. In a Kentucky case (Walker) brought against
various parties including PM USA and Altria, the Kentucky state
court granted PM USA’s and Altria’s motion to dismiss in March
2017. This ruling followed a series of remand and removal
motions, rulings and related appeals between 2009 and 2014. The
case is now concluded.
UST Litigation: UST and/or its tobacco subsidiaries have been
named in a number of individual tobacco and health suits over
time. Plaintiffs’ allegations of liability in these cases have been
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 have typically sought 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 were named as defendants, along with other named
defendants, in one such case in California (Gwynn). In August
2018, the parties agreed to settle the Gwynn case and in
September 2018, plaintiffs dismissed their claims with prejudice.
82
82
Environmental Regulation
Altria 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 are involved in several matters
subjecting them to potential costs of remediation and natural
resource damages under Superfund or other laws and regulations.
Altria’s subsidiaries expect to continue to make capital and other
expenditures in connection with environmental laws and
regulations.
Altria 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 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’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
have agreed to indemnify a limited number of third parties in the
event of future litigation. At December 31, 2018, Altria 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 $30 million of guarantees, consisting
primarily of surety bonds, related to their own performance; and
(iii) had a redeemable noncontrolling interest of $39 million
recorded on its consolidated balance sheet. In addition, from time
to time, subsidiaries of Altria issue lines of credit to affiliated
entities. These items have not had, and are not expected to have,
a significant impact on Altria’s liquidity.
Under the terms of a distribution agreement between Altria
and PMI (the “Distribution Agreement”), entered into as a result
of Altria’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 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 does not have a related
liability recorded on its consolidated balance sheet at December
31, 2018 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 20. Condensed
Consolidating Financial Information, PM USA has issued
guarantees relating to Altria’s obligations under its outstanding
debt securities, borrowings under the Borrowing Agreements 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, 2018, 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, 2018 and
2017.
Note 20. Condensed Consolidating Financial
Information
PM USA, which is a 100% owned subsidiary of Altria, has
guaranteed Altria’s obligations under its outstanding debt
securities, borrowings under the Borrowing Agreements 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’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
82
83
83
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 83
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio otherwise constitute a defense available to, or a discharge of,
Altria or PM USA.
The obligations of PM USA under the Guarantees are limited
to the maximum amount as will not result in PM USA’s
obligations under the Guarantees constituting a fraudulent transfer
or conveyance, after giving effect to such maximum amount and
all other contingent and fixed liabilities of PM USA that are
relevant under Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any
similar federal or state law to the extent applicable to the
Guarantees. For this purpose, “Bankruptcy Law” means Title 11,
U.S. Code, or any similar federal or state law for the relief of
debtors.
PM USA will be unconditionally released and discharged
from the Obligations upon the earliest to occur of:
the date, if any, on which PM USA consolidates with or
merges into Altria or any successor;
the date, if any, on which Altria 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’s long-term senior unsecured debt by
Standard & Poor’s of A or higher.
At December 31, 2018, the respective principal 100% owned
subsidiaries of Altria 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, 2018 and 2017, condensed
consolidating statements of earnings and comprehensive earnings
for the years ended December 31, 2018, 2017 and 2016, and
condensed consolidating statements of cash flows for the years
ended December 31, 2018, 2017 and 2016 for Altria, PM USA
and, collectively, Altria’s other subsidiaries that are not guarantors
of Altria’s debt instruments (the “Non-Guarantor Subsidiaries”).
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 and PM USA account for investments in their subsidiaries
under the equity method of accounting.
84
84
85
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 84
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
at December 31, 2018
Assets
at December 31, 2018
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 and subsidiaries
Income taxes
Other current assets
Due from Altria and subsidiaries
Total current assets
Income taxes
Property, plant and equipment, at cost
Other current assets
Less accumulated depreciation
Total current assets
Property, plant and equipment, at cost
Goodwill
Less accumulated depreciation
Other intangible assets, net
Investment in AB InBev
Goodwill
Investment in JUUL
Other intangible assets, net
Investment in consolidated subsidiaries
Investment in AB InBev
Due from Altria and subsidiaries
Investment in JUUL
Other assets
Investment in consolidated subsidiaries
Due from Altria and subsidiaries
Other assets
Total Assets
Total Assets
84
Non-
Guarantor
Subsidiaries
Non-
Guarantor
56
Subsidiaries
124
Total
Consolidating
Adjustments
Total
Consolidating
— $
$
Adjustments
—
Consolidated
1,333
Consolidated
142
56
379
124
63
645
379
430
63
1,517
645
1,194
430
—
1,517
118
1,194
3,009
—
2,022
118
901
3,009
1,121
2,022
5,196
901
12,277
1,121
—
5,196
12,800
12,277
—
—
—
12,800
952
—
35,355
—
952
35,355
$
$
$
— $
—
—
—
—
—
—
—
—
—
(5,068)
—
(27)
—
—
(5,068)
(5,095)
(27)
—
—
—
(5,095)
—
—
—
—
—
—
—
—
—
—
(28,821)
—
(4,790)
—
(670)
(28,821)
(39,376) $
(4,790)
(670)
(39,376) $
1,333
940
142
186
647
940
558
186
2,331
647
—
558
167
2,331
326
—
4,299
167
4,950
326
3,012
4,299
1,938
4,950
5,196
3,012
12,279
1,938
17,696
5,196
12,800
12,279
—
17,696
—
12,800
1,430
—
55,638
—
1,430
55,638
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
PM USA
Altria
— $
PM USA
18
— $
561
18
123
2
561
128
123
814
2
3,828
128
94
814
167
3,828
4,921
94
2,928
167
2,111
4,921
817
2,928
—
2,111
2
817
—
—
—
2
2,825
—
—
—
955
2,825
9,520
—
955
9,520
$
$
$
$
$
$
1,277
Altria
—
1,277
—
—
—
—
—
—
—
—
—
46
—
100
—
41
46
1,464
100
—
41
—
1,464
—
—
—
—
—
—
17,696
—
—
—
25,996
17,696
4,790
—
193
25,996
50,139
4,790
193
50,139
$
$
$
$
85
85
85
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 85
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
Condensed Consolidating Balance Sheets (Continued)
____________________________
(in millions of dollars)
____________________________
PM USA
Altria
at December 31, 2018
Liabilities
at December 31, 2018
Liabilities
Short-term borrowings
Current portion of long-term debt
Accounts payable
Short-term borrowings
Accrued liabilities:
Current portion of long-term debt
Marketing
Accounts payable
Employment costs
Accrued liabilities:
Settlement charges
Marketing
Other
Employment costs
Dividends payable
Settlement charges
Due to Altria and subsidiaries
Other
Total current liabilities
Dividends payable
Long-term debt
Due to Altria and subsidiaries
Deferred income taxes
Total current liabilities
Accrued pension costs
Long-term debt
Accrued postretirement health care costs
Deferred income taxes
Due to Altria and subsidiaries
Accrued pension costs
Other liabilities
Accrued postretirement health care costs
Due to Altria 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
Cost of repurchased stock
Noncontrolling interests
Total stockholders’ equity attributable to Altria
Total stockholders’ equity
Total stockholders’ equity attributable to Altria
Noncontrolling interests
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
12,704
Altria
1,144
1
12,704
1,144
—
1
16
—
—
279
16
1,503
—
4,499
279
20,146
1,503
11,898
4,499
3,010
20,146
187
11,898
—
3,010
—
187
111
—
35,352
—
111
—
35,352
$
$
— $
PM USA
—
91
— $
—
483
91
11
3,448
483
513
11
—
3,448
407
513
4,953
—
—
407
—
4,953
—
—
1,072
—
—
—
47
1,072
6,072
—
47
—
6,072
935
—
5,961
43,962
935
(2,547)
5,961
(33,524)
43,962
(2,547)
14,787
(33,524)
—
14,787
14,787
—
50,139
14,787
50,139
$
$
—
—
3,310
359
—
(221)
3,310
—
359
(221)
3,448
—
—
3,448
3,448
—
9,520
3,448
9,520
$
$
Non-
Guarantor
Subsidiaries
Non-
Guarantor
— $
Subsidiaries
—
307
— $
—
103
307
162
6
103
449
162
—
6
162
449
1,189
—
—
162
2,832
1,189
357
—
677
2,832
4,790
357
96
677
9,941
4,790
96
39
9,941
Total
Consolidating
Adjustments
Total
Consolidating
— $
Adjustments
—
—
— $
—
—
—
—
—
—
(27)
—
—
—
(5,068)
(27)
(5,095)
—
—
(5,068)
(670)
(5,095)
—
—
—
(670)
(4,790)
—
—
—
(10,555)
(4,790)
—
—
(10,555)
Consolidated
12,704
Consolidated
1,144
399
12,704
1,144
586
399
189
3,454
586
1,214
189
1,503
3,454
—
1,214
21,193
1,503
11,898
—
5,172
21,193
544
11,898
1,749
5,172
—
544
254
1,749
40,810
—
254
39
40,810
9
39
25,047
2,201
9
(1,884)
25,047
—
2,201
(1,884)
25,373
—
2
25,375
25,373
2
35,355
25,375
35,355
$
$
(9)
—
(28,357)
(2,560)
(9)
2,105
(28,357)
—
(2,560)
2,105
(28,821)
—
—
(28,821)
(28,821)
—
(39,376) $
(28,821)
(39,376) $
935
39
5,961
43,962
935
(2,547)
5,961
(33,524)
43,962
(2,547)
14,787
(33,524)
2
14,789
14,787
2
55,638
14,789
55,638
86
86
86
87
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 86
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Condensed Consolidating Balance Sheets
(in millions of dollars)
Condensed Consolidating Balance Sheets
____________________________
(in millions of dollars)
____________________________
Altria
PM USA
$
$
$
$
1,203
Altria
1
1,203
—
1
—
—
—
—
—
—
—
2
—
—
—
11
2
1,217
—
—
11
—
1,217
—
—
—
—
—
—
17,952
—
13,111
—
4,790
17,952
34
13,111
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
—
—
671
2,818
8,271
—
671
8,271
$
$
$
$
Non-
Guarantor
Subsidiaries
Non-
Guarantor
49
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
—
—
1,056
—
22,557
—
1,056
22,557
$
$
$
— $
—
—
—
—
—
—
—
—
—
(3,437)
—
(98)
—
—
(3,437)
(3,535)
(98)
—
—
—
(3,535)
—
—
—
—
—
—
—
—
(15,929)
—
(4,790)
—
(476)
(15,929)
(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
—
17,952
1,285
—
43,202
—
1,285
43,202
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 and subsidiaries
Income taxes
Other current assets
Due from Altria and subsidiaries
Total current assets
Income taxes
Property, plant and equipment, at cost
Other current assets
Less accumulated depreciation
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
Due from Altria and subsidiaries
Investment in AB InBev
Other assets
Investment in consolidated subsidiaries
Due from Altria and subsidiaries
Other assets
Total Assets
Total Assets
86
87
87
87
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 87
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
Condensed Consolidating Balance Sheets (Continued)
____________________________
(in millions of dollars)
____________________________
Altria
PM USA
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
Dividends payable
Due to Altria and subsidiaries
Total current liabilities
Total liabilities
Total current liabilities
Dividends payable
Long-term debt
Due to Altria and subsidiaries
Deferred income taxes
Accrued pension costs
Long-term debt
Accrued postretirement health care costs
Deferred income taxes
Due to Altria and subsidiaries
Accrued pension costs
Other liabilities
Accrued postretirement health care costs
Due to Altria 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
Total stockholders’ equity
Total stockholders’ equity attributable to Altria
Total Liabilities and Stockholders’ Equity
Noncontrolling interests
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
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
22,557
$
$
— $
—
—
—
—
—
(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)
(24,730) $
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
$
$
$
$
$
$
864
Altria
2
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
37,104
$
$
— $
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
8,271
$
$
88
88
88
89
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 88
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
for the year ended December 31, 2018
Net revenues
Cost of sales
for the year ended December 31, 2018
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
Net periodic benefit cost (income), excluding service cost
Operating (expense) income
Earnings from equity investment in AB InBev
Interest and other debt expense (income), net
Loss on AB InBev/SABMiller business combination
Net periodic benefit cost (income), excluding service cost
Earnings before income taxes and equity earnings
Earnings from equity investment in AB InBev
Loss on AB InBev/SABMiller business combination
Provision for income taxes
Earnings before income taxes and equity earnings
Equity earnings of subsidiaries
of subsidiaries
of subsidiaries
Net earnings
Provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to Altria
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria
Net earnings
Other comprehensive (losses) earnings, net of deferred
income taxes
Net earnings
Comprehensive earnings
Other comprehensive (losses) earnings, net of deferred
Comprehensive earnings attributable to noncontrolling
income taxes
interests
Comprehensive earnings
Comprehensive earnings attributable to Altria
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to Altria
$
$
$
$
$
$
$
$
PM USA
21,422
6,153
PM USA
5,517
21,422
9,752
6,153
1,892
5,517
81
9,752
7,779
1,892
(61)
81
(41)
7,779
—
(61)
—
(41)
—
7,881
—
1,980
402
7,881
6,303
1,980
—
402
6,303
6,303
—
6,303
6,303
Non-
Guarantor
Subsidiaries
Non-
3,980
Guarantor
1,258
Subsidiaries
220
3,980
2,502
1,258
645
220
302
2,502
1,555
645
215
302
(9)
1,555
—
215
—
(9)
—
1,349
—
358
—
1,349
991
358
(4)
—
987
991
(4)
987
991
$
Total
Consolidating
Adjustments
Total
(38) $
$
Consolidating
(38)
Adjustments
—
(38) $
—
(38)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,290)
—
(7,290)
—
—
(7,290)
(7,290) $
(7,290)
—
(7,290) $
(7,290) $
$
$
$
Consolidated
25,364
7,373
Consolidated
5,737
25,364
12,254
7,373
2,756
5,737
383
12,254
9,115
2,756
665
383
(34)
9,115
(890)
665
33
(34)
(890)
9,341
33
2,374
—
9,341
6,967
2,374
(4)
—
6,963
6,967
(4)
6,963
6,967
— $
—
Altria
—
— $
—
—
219
—
—
—
(219)
219
511
—
16
(219)
(890)
511
33
16
(890)
111
33
36
6,888
111
6,963
36
—
6,888
6,963
6,963
—
6,963
6,963
$
$
$
(242)
6,963
6,721
(242)
—
6,721
6,721
—
6,721
$
$
$
104
6,303
6,407
104
—
6,407
6,407
—
6,407
(54)
991
937
(54)
(4)
937
933
(4)
933
$
$
$
(50)
(7,290) $
(7,340)
(50)
—
(7,340)
(7,340) $
—
(7,340) $
(242)
6,967
6,725
(242)
(4)
6,725
6,721
(4)
6,721
$
$
$
$
$
$
$
$
88
89
89
89
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 89
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
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
Net periodic benefit cost, excluding service cost
Operating (expense) income
Earnings from equity investment in AB InBev
Interest and other debt expense (income), net
Gain on AB InBev/SABMiller business combination
Net periodic benefit cost, excluding service cost
Earnings before income taxes and equity earnings
Earnings from equity investment in AB InBev
Gain on AB InBev/SABMiller business combination
(Benefit) provision for income taxes
Earnings before income taxes and equity earnings
Equity earnings of subsidiaries
of subsidiaries
of subsidiaries
Net earnings
(Benefit) provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings attributable to Altria
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria
Net earnings
Other comprehensive earnings, net of deferred
income taxes
Net earnings
Comprehensive earnings
Other comprehensive earnings, net of deferred
Comprehensive earnings attributable to noncontrolling
income taxes
interests
Comprehensive earnings
Comprehensive earnings attributable to Altria
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to Altria
PM USA
21,826
6,394
PM USA
5,864
21,826
9,568
6,394
1,713
5,864
—
9,568
7,855
1,713
(20)
—
18
7,855
—
(20)
—
18
—
7,857
—
3,127
558
7,857
5,288
3,127
—
558
5,288
5,288
—
5,288
5,288
Non-
Guarantor
Subsidiaries
Non-
3,787
Guarantor
1,174
Subsidiaries
218
3,787
2,395
1,174
464
218
32
2,395
1,899
464
215
32
7
1,899
—
215
—
7
—
1,677
—
(902)
—
1,677
2,579
(902)
(5)
—
2,574
2,579
(5)
2,574
2,579
$
Total
Consolidating
Adjustments
Total
(37) $
$
Consolidating
(37)
Adjustments
—
(37) $
—
(37)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,862)
—
(7,862)
—
—
(7,862)
(7,862) $
(7,862)
—
(7,862) $
(7,862) $
$
$
$
Consolidated
25,576
7,531
Consolidated
6,082
25,576
11,963
7,531
2,338
6,082
32
11,963
9,593
2,338
705
32
37
9,593
(532)
705
(445)
37
(532)
9,828
(445)
(399)
—
9,828
10,227
(399)
(5)
—
10,222
10,227
(5)
10,222
10,227
— $
—
Altria
—
— $
—
—
161
—
—
—
(161)
161
510
—
12
(161)
(532)
510
(445)
12
(532)
294
(445)
(2,624)
7,304
294
10,222
(2,624)
—
7,304
10,222
10,222
—
10,222
10,222
$
$
$
155
10,222
10,377
155
—
10,377
10,377
—
10,377
$
$
$
3
5,288
5,291
3
—
5,291
5,291
—
5,291
214
2,579
2,793
214
(5)
2,793
2,788
(5)
2,788
$
$
$
(217)
(7,862) $
(8,079)
(217)
—
(8,079)
(8,079) $
—
(8,079) $
155
10,227
10,382
155
(5)
10,382
10,377
(5)
10,377
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
90
90
90
91
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 90
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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
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
Interest and other debt expense, net
Net periodic benefit cost (income), excluding service cost
Earnings from equity investment in SABMiller
Loss on early extinguishment of debt
Gain on AB InBev/SABMiller business combination
Net periodic benefit cost (income), excluding service cost
Earnings before income taxes and equity earnings
Earnings from equity investment in SABMiller
of subsidiaries
Gain on AB InBev/SABMiller business combination
Provision for income taxes
Earnings before income taxes and equity earnings
Equity earnings of subsidiaries
of subsidiaries
Provision for income taxes
Net earnings attributable to noncontrolling interests
Equity earnings of subsidiaries
Net earnings
Net earnings attributable to Altria
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Altria
Net earnings
Other comprehensive earnings (losses), net of deferred
income taxes
Net earnings
Comprehensive earnings
Other comprehensive earnings (losses), net of deferred
Comprehensive earnings attributable to noncontrolling
income taxes
interests
Comprehensive earnings
Comprehensive earnings attributable to Altria
Comprehensive earnings attributable to noncontrolling
interests
Comprehensive earnings attributable to Altria
PM USA
22,146
6,641
PM USA
6,187
22,146
9,318
6,641
2,009
6,187
77
9,318
7,232
2,009
10
77
—
7,232
10
(6)
—
—
—
(6)
—
7,228
—
2,631
268
7,228
4,865
2,631
—
268
4,865
4,865
—
4,865
4,865
Non-
Guarantor
Subsidiaries
Non-
3,633
Guarantor
1,159
Subsidiaries
220
3,633
2,254
1,159
493
220
67
2,254
1,694
493
218
67
—
1,694
218
—
—
—
—
—
—
1,476
—
524
—
1,476
952
524
(5)
—
947
952
(5)
947
952
$
Total
Consolidating
Adjustments
Total
$
(35) $
Consolidating
(35)
Adjustments
—
(35) $
—
(35)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,812)
—
(5,812)
—
—
(5,812)
(5,812) $
(5,812)
—
(5,812) $
(5,812) $
$
$
$
Consolidated
25,744
7,765
Consolidated
6,407
25,744
11,572
7,765
2,662
6,407
149
11,572
8,761
2,662
747
149
823
8,761
747
(1)
(795)
823
(13,865)
(1)
(795)
21,852
(13,865)
7,608
—
21,852
14,244
7,608
(5)
—
14,239
14,244
(5)
14,239
14,244
— $
—
Altria
—
— $
—
—
160
—
5
—
(165)
160
519
5
823
(165)
519
5
(795)
823
(13,865)
5
(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
—
15,467
$
$
$
(16)
4,865
4,849
(16)
—
4,849
4,849
—
4,849
(28)
952
924
(28)
(5)
924
919
(5)
919
$
$
$
44
(5,812) $
(5,768)
44
—
(5,768)
(5,768) $
—
(5,768) $
1,228
14,244
15,472
1,228
(5)
15,472
15,467
(5)
15,467
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
90
91
91
91
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 91
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio for the year ended December 31, 2018
Cash Provided by Operating Activities
for the year ended December 31, 2018
Net cash provided by operating activities
Cash Provided by Operating Activities
Cash Provided by (Used in) Investing Activities
Capital expenditures
Net cash provided by operating activities
Cash Provided by (Used in) Investing Activities
Acquisitions of businesses and assets
Capital expenditures
Investment in JUUL
Acquisitions of businesses and assets
Proceeds from finance assets
Investment in JUUL
Proceeds from derivative financial instruments
Proceeds from finance assets
Investment in consolidated subsidiaries
Proceeds from derivative financial instruments
Other, net
Investment in consolidated subsidiaries
Net cash provided by (used in) investing activities
Cash Provided by (Used in) Financing Activities
Other, net
Proceeds from short-term borrowings
Net cash provided by (used in) investing activities
Cash Provided by (Used in) Financing Activities
Long-term debt repaid
Proceeds from short-term borrowings
Repurchases of common stock
Long-term debt repaid
Dividends paid on common stock
Repurchases of common stock
Changes in amounts due to/from Altria and subsidiaries
Dividends paid on common stock
Cash dividends paid to parent
Changes in amounts due to/from Altria and subsidiaries
Other
Cash dividends paid to parent
Net cash (used in) provided by financing activities
Cash, cash equivalents and restricted cash (1):
Other
Increase
Net cash (used in) provided by financing activities
Cash, cash equivalents and restricted cash (1):
Balance at beginning of year
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
(in millions of dollars)
_____________________________
Altria
PM USA
Non-
Guarantor
Subsidiaries
Non-
Guarantor
1,354
Subsidiaries
Total
Consolidating
Adjustments
Total
Consolidating
$
Adjustments
Consolidated
PM USA
7,580
$
(7,450) $
Consolidated
8,391
$
$
Altria
6,907
6,907
—
$
$
7,580
(57)
$
1,354
(181)
$
(7,450) $
—
—
—
—
—
—
—
35
—
(13,003)
35
—
(13,003)
(12,968)
—
(12,968)
12,800
(864)
12,800
(1,673)
(864)
(5,415)
(1,673)
1,415
(5,415)
—
1,415
(128)
—
6,135
(128)
6,135
74
1,203
74
1,277
1,203
—
(57)
—
—
—
—
—
—
—
—
—
—
(57)
—
(57)
—
—
—
—
—
—
—
(1,388)
—
(6,097)
(1,388)
—
(6,097)
(7,485)
—
(7,485)
38
62
$
38
100
$
62
(15)
(181)
(12,800)
(15)
37
(12,800)
—
37
—
—
(7)
—
(12,966)
(7)
(12,966)
—
—
—
—
—
—
—
12,976
—
(1,353)
12,976
(4)
(1,353)
11,619
(4)
11,619
7
—
—
—
—
—
—
—
—
13,003
—
—
13,003
13,003
—
13,003
—
—
—
—
—
—
—
(13,003)
—
7,450
(13,003)
—
7,450
(5,553)
—
(5,553)
—
49
7
56
49
$
—
—
— $
—
8,391
(238)
(15)
(238)
(12,800)
(15)
37
(12,800)
35
37
—
35
(7)
—
(12,988)
(7)
(12,988)
12,800
(864)
12,800
(1,673)
(864)
(5,415)
(1,673)
—
(5,415)
—
—
(132)
—
4,716
(132)
4,716
119
1,314
119
1,433
1,314
1,433
Increase
Balance at end of year
Balance at beginning of year
$
Balance at end of year
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
— $
1,277
100
56
$
$
$
$
92
92
92
93
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 92
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
(in millions of dollars)
_____________________________
Altria
PM USA
Non-
Guarantor
Subsidiaries
Non-
Guarantor
841
Subsidiaries
Total
Consolidating
Adjustments
Total
Consolidating
$
Adjustments
for the year ended December 31, 2017
Cash Provided by Operating Activities
Net cash provided by operating activities
for the year ended December 31, 2017
Cash Provided by (Used in) Investing Activities
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
Capital expenditures
Investment in consolidated subsidiaries
Acquisitions of businesses and assets
Other, net
Proceeds from finance assets
Net cash used in investing activities
Investment in consolidated subsidiaries
Other, net
Repurchases of common stock
Dividends paid on common stock
Net cash used in investing activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Repurchases of common stock
Changes in amounts due to/from Altria and subsidiaries
Dividends paid on common stock
Cash dividends paid to parent
Other
Changes in amounts due to/from Altria and subsidiaries
Cash dividends paid to parent
Other
Net cash used in financing activities
Cash, cash equivalents and restricted cash (1):
Net cash used in financing activities
Cash, cash equivalents and restricted cash (1):
(Decrease) increase
Balance at beginning of year
Balance at end of year
(Decrease) increase
Balance at beginning of year
Balance at end of year
$
$
$
$
$
$
6,910
Altria
—
6,910
—
—
—
(460)
—
(5)
—
(465)
(460)
(5)
(2,917)
(465)
(4,807)
(2,917)
(1,999)
(4,807)
—
(40)
(1,999)
(9,763)
—
(40)
(9,763)
(3,318)
4,521
1,203
(3,318)
4,521
1,203
$
$
$
4,028
PM USA
(34)
4,028
—
—
(34)
—
—
4
—
(30)
—
4
—
(30)
—
—
1,410
—
(5,429)
—
1,410
(4,019)
(5,429)
—
(4,019)
(21)
83
62
(21)
83
62
$
$
(165)
841
(415)
133
(165)
—
(415)
15
133
(432)
—
15
—
(432)
—
—
1,049
—
(1,449)
(7)
1,049
(407)
(1,449)
(7)
(407)
2
47
49
2
47
49
Consolidated
(6,878) $
4,901
Consolidated
—
(6,878) $
—
—
—
460
—
—
—
460
460
—
—
460
—
(199)
4,901
(415)
133
(199)
—
(415)
14
133
(467)
—
14
(2,917)
(467)
(4,807)
—
(460)
—
6,878
—
(460)
6,418
6,878
—
6,418
—
—
— $
—
—
— $
(2,917)
—
(4,807)
—
(47)
—
(7,771)
—
(47)
(7,771)
(3,337)
4,651
1,314
(3,337)
4,651
1,314
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
$
$
$
$
92
93
93
93
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 93
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
Condensed Consolidating Statements of Cash Flows
_____________________________
(in millions of dollars)
_____________________________
Altria
PM USA
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
319
Total
Consolidating
Adjustments
Total
Consolidating
Adjustments
$
Consolidated
Altria
4,356
PM USA
5,143
(5,992) $
Consolidated
3,826
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
Proceeds from derivative financial instruments
Purchase of AB InBev ordinary shares
Investment in consolidated subsidiaries
Proceeds from derivative financial instruments
Other, net
Investment in consolidated subsidiaries
Other, net
Net cash provided by (used in) investing activities
Cash Provided by (Used in) Financing Activities
Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) investing 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 and subsidiaries
Dividends paid on common stock
Premiums and fees related to early extinguishment of debt
Changes in amounts due to/from Altria and subsidiaries
Cash dividends paid to parent
Premiums and fees related to early extinguishment of debt
Other, net
Cash dividends paid to parent
Other, net
Net cash used in financing activities
Cash, cash equivalents and restricted cash (1):
Net cash used in financing activities
Cash, cash equivalents and restricted cash (1):
Increase (decrease)
Balance at beginning of year
Increase (decrease)
Balance at end of year
Balance at beginning of year
Balance at end of year
$
$
$
$
$
$
$
$
4,356
—
—
—
—
—
4,773
—
(1,578)
4,773
510
(1,578)
(138)
510
(3)
(138)
3,564
(3)
3,564
1,976
(933)
1,976
(1,030)
(933)
(4,512)
(1,030)
(392)
(4,512)
(809)
(392)
—
(809)
(12)
—
(5,712)
(12)
(5,712)
2,208
2,313
2,208
4,521
2,313
4,521
$
$
$
$
5,143
(45)
—
(45)
—
—
—
—
—
—
—
—
—
—
—
—
(45)
—
(45)
—
—
—
—
—
—
—
(28)
—
—
(28)
(5,064)
—
—
(5,064)
(5,092)
—
(5,092)
6
77
6
83
77
83
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) $
—
—
—
—
—
—
—
—
—
—
—
138
—
—
138
138
—
138
—
—
—
—
—
—
—
(138)
—
—
(138)
5,992
—
—
5,992
5,854
—
5,854
—
—
—
— $
—
— $
3,826
(189)
(45)
(189)
231
(45)
4,773
231
(1,578)
4,773
510
(1,578)
—
510
6
—
3,708
6
3,708
1,976
(933)
1,976
(1,030)
(933)
(4,512)
(1,030)
—
(4,512)
(809)
—
—
(809)
(21)
—
(5,329)
(21)
(5,329)
2,205
2,446
2,205
4,651
2,446
4,651
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
(1) Restricted cash consisted of cash deposits collateralizing appeal bonds posted by PM USA to obtain stays of judgments pending
appeals. See Note 19. Contingencies.
94
94
94
95
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 94
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Note 21. Quarterly Financial Data (Unaudited)
(in millions, except per share data)
Net revenues
Gross profit
Net earnings
Net earnings attributable to Altria
Per share data:
Basic EPS attributable to Altria
Diluted EPS attributable to Altria
(in millions, except per share data)
Net revenues
Gross profit (1)
Net earnings
Net earnings attributable to Altria
Per share data:
Basic and diluted EPS attributable to Altria
1st
6,108
2,936
1,895
1,894
1.00
1.00
1st
6,083
2,776
1,402
1,401
0.72
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018 Quarters
2nd
6,305
3,141
1,877
1,876
0.99
0.99
$
$
$
$
$
$
2017 Quarters
2nd
6,663
3,114
1,990
1,989
1.03
$
$
$
$
$
3rd
6,837
3,255
1,944
1,943
1.03
1.03
3rd
6,729
3,171
1,867
1,866
0.97
$
$
$
$
$
$
$
$
$
$
$
4th
6,114
2,922
1,251
1,250
0.67
0.66
4th
6,101
2,902
4,968
4,966
2.60
(1) Certain prior year amounts have been reclassified to conform with the current year’s presentation due to Altria’s adoption of ASU 2017-07. For
further discussion, see Note 17. Benefit Plans.
During 2018 and 2017, the following pre-tax (gains) or charges were included in net earnings attributable to Altria:
(in millions)
NPM Adjustment Items
Tobacco and health litigation items, including accrued interest
Asset impairment, exit, implementation and acquisition-related costs
Loss on AB InBev/SABMiller business combination
AB InBev special items
(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
$
$
$
2018 Quarters
1st
(68) $
28
3
33
(117)
(121) $
2nd
(77) $
70
6
—
(72)
(73) $
3rd
— $
21
(3)
—
35
53
$
2017 Quarters
1st
(1) $
1
30
—
—
73
2nd
— $
17
30
—
(408)
2
(359) $
$
3rd
5
—
17
—
(37)
34
4th
—
12
532
—
69
613
4th
—
62
12
81
—
51
$
103
$
19
$
206
94
95
95
As discussed in Note 15. Income Taxes, Altria has recognized income tax benefits and charges in the consolidated statements of
earnings during 2018 and 2017 as a result of various tax events, including the impact of the Tax Reform Act in 2018 and the fourth
quarter of 2017.
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 95
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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, 2018
and 2017, 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, 2018,
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, 2018, 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 as of December 31, 2018
and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018 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, 2018, 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
January 31, 2019
We have served as Altria Group, Inc.’s auditor since at least 1934,
which is when Altria Group, Inc. became subject to SEC reporting
requirements. We have not been able to determine the specific
year we began serving as auditor of Altria Group, Inc.
96
96
97
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 96
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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, 2018,
as stated in their report herein.
January 31, 2019
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,
2018. 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.
Based on this assessment, management determined that, as of
December 31, 2018, Altria Group, Inc. maintained effective
internal control over financial reporting.
96
97
97
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 97
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Altria carried out an evaluation, with the participation of Altria’s
management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its 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’s Chief Executive
Officer and Chief Financial Officer concluded that Altria’s
disclosure controls and procedures are effective.
There have been no changes in Altria’s internal control over
financial reporting during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
its 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’s definitive proxy statement for use in connection with its Annual Meeting of Shareholders to be held
on May 16, 2019 that is expected to be filed with the SEC on or about April 4, 2019 (the “proxy statement”), and, except as indicated
therein, made a part hereof.
Item 10. Directors, Executive Officers and Corporate Governance.
Refer to “Board and Governance Matters - Proposal 1 - Election of Directors,” “Ownership of Equity Securities of Altria - Section 16(a)
Beneficial Ownership Reporting Compliance” and “Board and Governance Matters - Board and Committee Governance” sections of the
proxy statement.
Executive Officers as of February 12, 2019:
Name
Jody L. Begley
Daniel J. Bryant
Office
Senior Vice President, Tobacco Products
Vice President and Treasurer
Senior Vice President, Chief Strategy and Growth Officer
Vice President and Controller
Executive Vice President and General Counsel
Vice Chairman and Chief Financial Officer
President and Chief Executive Officer, Altria Group Distribution Company
Senior Vice President, Finance and Procurement
Kevin C. Crosthwaite, Jr.
Ivan S. Feldman
Murray R. Garnick
William F. Gifford, Jr.
Craig A. Johnson
Salvatore Mancuso
W. Hildebrandt Surgner, Jr. Vice President, Corporate Secretary and Associate General Counsel
Charles N. Whitaker
Howard A. Willard III
Senior Vice President, Chief Human Resources Officer and Chief Compliance Officer
Chairman and Chief Executive Officer
Age
47
49
43
52
59
48
66
53
53
52
55
All of the above-mentioned officers have been employed by
Altria or its subsidiaries in various capacities during the past five
years.
Effective June 1, 2018, Mr. Begley was elected Senior Vice
President, Tobacco Products of Altria. Mr. Begley has been
continuously employed by Altria subsidiaries in positions across
their businesses, including Innovative Tobacco Products, Brand
Management, and Strategy and Business Development, since
1995.
Accounting and Reporting, a position he has held since August
2014. Prior to this role, he served as Director, Reporting and
Analysis from 2008 through July 2014. Mr. D’Ambrosia has
been continuously employed by Altria subsidiaries in various
accounting, financial reporting, planning and analysis positions
since 1995.
In addition, as previously announced, Mr. Johnson will retire
as President and Chief Executive Officer, Altria Group
Distribution Company, effective March 1, 2019.
As previously announced, Mr. Feldman will retire as Vice
Mr. Whitaker’s wife and Mr. Surgner’s wife are first cousins.
President and Controller, effective April 30, 2019. Steven
D’Ambrosia was elected to replace Mr. Feldman upon his
retirement. Mr. D’Ambrosia currently serves as Senior Director,
Codes of Conduct and Corporate Governance
Altria has adopted the Altria Code of Conduct for Compliance
98
98
99
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 98
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
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 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’s website at www.altria.com.
Any waiver granted by Altria 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’s website at www.altria.com within the time
period required by applicable rules.
Item 11. Executive Compensation.
In addition, Altria 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’s
website at www.altria.com.
The information on the respective websites of Altria 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 makes with the SEC.
Refer to “Executive Compensation,” and “Board and Governance Matters - 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’s equity compensation plans at December 31, 2018, 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)
2,486,246
$—
37,914,032
(1) The following plans have been approved by Altria 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 2,129,626 shares of restricted stock units and 356,620 shares that may be issued upon vesting of performance stock units if
(3)
maximum performance measures are achieved.
Includes 37,033,741 shares available under the 2015 Performance Incentive Plan and 880,291 shares available under the 2015 Stock
Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a).
Refer to “Ownership of Equity Securities of Altria - Directors and Executive Officers” and “Ownership of Equity Securities of
Altria - Certain Other Beneficial Owners” sections of the proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Refer to “Related Person Transactions and Code of Conduct” and “Board and Governance Matters - Altria Board of 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.
98
99
99
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 99
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting
Page
38
40
41
42
44
45
96
97
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, 2018 will
be filed by amendment within six months after AB InBev’s year ended December 31, 2018.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
2.1
2.2
2.3
2.4
3.1
3.2
4.1
Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as
Mondelēz International, Inc.), dated as of January 31, 2007. Incorporated by reference to Altria
Group, Inc.’s Current Report on Form 8-K filed on January 31, 2007 (File No. 1-08940).
Distribution Agreement by and between Altria Group, Inc. and Philip Morris International Inc.,
dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on
Form 8-K filed on January 30, 2008 (File No. 1-08940).
Class C-1 Common Stock Purchase Agreement, dated as of December 20, 2018, by and among
JUUL Labs, Inc., Altria Group, Inc. and Altria Enterprises LLC. Incorporated by reference to Altria
Group, Inc.’s Current Report on Form 8-K filed on December 20, 2018 (File No. 1-08940). †
Relationship Agreement, dated as of December 20, 2018, by and among JUUL Labs, Inc., Altria
Group, Inc. and Altria Enterprises LLC. Incorporated by reference to Altria Group, Inc.’s Current
Report on Form 8-K filed on December 20, 2018 (File No. 1-08940). †
Articles of Amendment to the Restated Articles of Incorporation of Altria Group, Inc. and Restated
Articles of Incorporation of Altria Group, Inc. Incorporated by reference to Altria Group, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).
Amended and Restated By-Laws of Altria Group, Inc., effective as of May 17, 2018. Incorporated
by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on February 1, 2018 (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).
100
100
101
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 100
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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).
5-Year Revolving Credit Agreement, dated as of August 1, 2018, among Altria Group, Inc., the
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 1, 2018 (File No. 1-08940).
Term Loan Agreement, dated as of December 20, 2018, among Altria Group, Inc., the lenders party
thereto and JPMorgan Chase Bank, N.A., as administrative agent. Incorporated by reference to
Altria Group, Inc.’s Current Report on Form 8-K filed on December 20, 2018 (File No. 1-08940).
The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-
term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the
total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.
Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care
cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).
Settlement Agreement related to settlement of Florida health care cost recovery action, dated August
25, 1997. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on
September 3, 1997 (File No. 1-08940).
Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost
recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.’s
Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940).
Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of
Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly
Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).
Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of
Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly
Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).
Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the
settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998.
Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period
ended June 30, 1998 (File No. 1-08940).
Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the
settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998
(File No. 1-08940).
101
101
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 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 Form 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).
Intellectual Property Agreement by and between Philip Morris International Inc. and PM USA,
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).
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).
Guarantee made by Philip Morris USA Inc. in favor of the lenders party to the 5-Year Revolving
Credit Agreement, dated as of August 1, 2018, among Altria Group, Inc., the lenders named therein
and JPMorgan Chase Bank, N.A. and Citibank, N.A., as administrative agents, dated as of August 1,
2018. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on
August 1, 2018 (File No. 1-08940)
Guarantee Agreement, dated as of December 20, 2018, by Philip Morris USA Inc. in favor of the
lenders party to the Term Loan Agreement. Incorporated by reference to Altria Group, Inc.’s Current
Report on Form 8-K filed on December 20, 2018 (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).*
Amendment to Benefit Equalization Plan, effective January 1, 2019.*
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).*
102
102
103
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 102
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 10.23
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
10.41
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).*
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 2, 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 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 Restricted Stock Unit Agreement, dated as of January 30, 2018. Incorporated by reference
to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2018 (File
No. 1-08940).*
Form of Performance Stock Unit Agreement, dated as of January 30, 2018. Incorporated by
reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31,
2018 (File No. 1-08940).*
Form of Restricted Stock Unit Agreement, dated as of May 17, 2018. Incorporated by reference
to Altria Group, Inc.’s Current Report on Form 8-K filed on May 17, 2018 (File No. 1-08940).*
Form of Performance Stock Unit Agreement, dated as of May 17, 2018. Incorporated by reference
to Altria Group, Inc.’s Current Report on Form 8-K filed on May 17, 2018 (File No. 1-08940).*
Form of Executive Confidentiality and Non-Competition Agreement (January 2011). Incorporated
by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011 (File No.
1-08940).*
Form of Executive Confidentiality and Non-Competition Agreement (October 2018).*
Time Sharing Agreement between Altria Client Services LLC and Howard A. Willard, dated
May 17, 2018. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-
Q for the period ended June 30, 2018. (File No. 1-08940).*
102
103
103
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 103
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 10.42
10.43
10.44
10.45
21
23
24
31.1
31.2
32.1
32.2
99.1
99.2
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).*
Time Sharing Termination Letter from Altria Client Services LLC to Martin J. Barrington, dated
May 17, 2018. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-
Q for the period ended June 30, 2018. (File No. 1-08940).*
Agreement and General Release between Altria Group, Inc. and Martin J. Barrington, dated May
17, 2018. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the
period ended June 30, 2018 (File No. 1-08940).*
Agreement and General Release between Altria Group, Inc. and James E. Dillard, dated June 1,
2018.*
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.
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.
† Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. Altria agrees to supplementally furnish to the SEC upon
request any omitted schedule or exhibit.
* 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.
104
104
105
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 104
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio 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/ HOWARD A. WILLARD III
(Howard A. Willard III
Chairman and Chief Executive
Officer)
Date: February 26, 2019
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
Director, Chairman and Chief
Executive Officer
February 26, 2019
Vice Chairman and Chief Financial Officer
February 26, 2019
Vice President and Controller
February 26, 2019
Directors
/s/ HOWARD A. WILLARD III
(Howard A. Willard III)
/s/ WILLIAM F. GIFFORD, JR.
(William F. Gifford, Jr.)
/s/ IVAN S. FELDMAN
(Ivan S. Feldman)
* 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
* By:
/s/ HOWARD A. WILLARD III
(HOWARD A. WILLARD III
ATTORNEY-IN-FACT)
February 26, 2019
104
105
105
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 105
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
[THIS PAGE LEFT INTENTIONALLY BLANK]
[THIS PAGE LEFT INTENTIONALLY BLANK]
106
107
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 106
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio [THIS PAGE LEFT INTENTIONALLY BLANK]
[THIS PAGE LEFT INTENTIONALLY BLANK]
106
107
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 107
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio [THIS PAGE LEFT INTENTIONALLY BLANK]
108
109
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 108
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Disclosure of Non-GAAP Financial Measures
Altria reports its financial results in accordance with U.S. GAAP. Altria’s management reviews diluted EPS, OCI, which
Disclosure of Non-GAAP Financial Measures
is defined as operating income before general corporate expenses and amortization of intangibles, and OCI margins, on
Altria reports its financial results in accordance with U.S. GAAP. Altria’s management reviews diluted EPS, OCI, which is
an adjusted basis, which exclude certain income and expense items that management believes are not part of underlying
defined as operating income before general corporate expenses and amortization of intangibles, and OCI margins, on an
operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset
adjusted basis, which exclude certain income and expense items that management believes are not part of underlying
impairment charges, loss/gain on AB InBev/SABMiller business combination, AB InBev special items, certain tax
operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, asset
items, charges associated with tobacco and health litigation items, and NPM Adjustment Items. Altria’s management
impairment charges, loss/gain on AB InBev/SABMiller business combination, AB InBev special items, certain tax items,
does not view any of these special items to be part of Altria’s underlying results as they may be highly variable, may be
charges associated with tobacco and health litigation items, and NPM Adjustment Items. Altria’s management does not view
any of these special items to be part of Altria’s underlying results as they may be highly variable, may be infrequent, are
infrequent, are difficult to predict and can distort underlying business trends and results. Altria’s management believes
difficult to predict and can distort underlying business trends and results. Altria’s management believes that adjusted financial
that adjusted financial measures provide useful additional insight into underlying business trends and results and provide
measures provide useful additional insight into underlying business trends and results and provide a more meaningful
a more meaningful comparison of year-over-year results. Altria’s management uses adjusted financial measures for
comparison of year-over-year results. Altria’s management uses adjusted financial measures for planning, forecasting and
planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating
evaluating business and financial performance, including allocating resources and evaluating results relative to employee
results relative to employee compensation targets. These adjusted financial measures are not consistent with U.S. GAAP
compensation targets. These adjusted financial measures are not consistent with U.S. GAAP and may not be calculated the
and may not be calculated the same as similarly titled measures used by other companies. These adjusted financial
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
measures should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the
accordance with U.S. GAAP. Reconciliations of historical adjusted financial measures to corresponding U.S. GAAP measures
related financial information prepared in accordance with U.S. GAAP. Reconciliations of historical adjusted financial
are provided below.
measures to corresponding U.S. GAAP measures are provided below.
[THIS PAGE LEFT INTENTIONALLY BLANK]
Reconciliations of Adjusted EPS Results
($ in millions, except per share data)
For the year ended December 31, 2018
2018 Reported
NPM Adjustment Items
Tobacco and health litigation items
AB InBev special items
Asset impairment, exit, implementation and
acquisition-related costs
Loss on AB InBev/SABMiller
business combination
Tax items
2018 Adjusted for Special Items
For the year ended December 31, 2017
2017 Reported
NPM Adjustment Items
Tobacco and health litigation items
AB InBev special items
Asset impairment, exit, implementation and
acquisition-related costs
Settlement charge for lump sum pension payments
Gain on AB InBev/SABMiller business
combination
Tax items
2017 Adjusted for Special Items
$
Adjusted diluted EPS growth 2017-2018
Earnings
before
Income
Taxes
Provision
(Benefit) for
Income
Taxes
Net
Earnings
Attributable
to Altria
Net
Earnings
Diluted
EPS
2,374 $
(36 )
33
(17 )
106
7
(197 )
2,270 $
6,967 $
(109 )
98
(68 )
6,963 $
(109 )
98
(68 )
3.68
(0.06 )
0.05
(0.03 )
432
432
26
197
7,543 $
26
197
7,539 $
$
$
$
9,341 $
(145 )
131
(85 )
538
33
—
9,813 $
9,828 $
4
80
160
(399 ) $
2
30
55
10,227 $
2
50
105
10,222 $
2
50
105
89
81
34
32
55
49
55
49
(445 )
—
9,797 $
(156 )
3,674
3,272 $
(289 )
(3,674 )
6,525 $
(289 )
(3,674 )
6,520 $
0.23
0.01
0.11
3.99
5.31
—
0.03
0.05
0.03
0.03
(0.15 )
(1.91 )
3.39
17.7 %
108
109
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 109
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio
Disclosure of Non-GAAP Financial Measures (continued)
Disclosure of Non-GAAP Financial Measures (continued)
Reconciliations of Adjusted OCI
Reconciliations of Adjusted OCI
($ in millions)
($ in millions)
For the years ended December 31,
For the years ended December 31,
Net revenues
Net revenues
Excise taxes
Excise taxes
Revenues net of excise taxes
Revenues net of excise taxes
2018
2018
2,262
2,262
(131 )
(131 )
2,131
2,131
$
$
$
$
Reported OCI
Reported OCI
Asset impairment, exit and implementation costs
Asset impairment, exit and implementation costs
Tobacco and health litigation items
Tobacco and health litigation items
Adjusted OCI
Adjusted OCI
Adjusted OCI margin1
Adjusted OCI margin1
1 Adjusted OCI margin is calculated as adjusted OCI divided by revenues net of excise taxes.
1 Adjusted OCI margin is calculated as adjusted OCI divided by revenues net of excise taxes.
1,431
1,431
23
23
10
10
1,464
1,464
$
$
$
$
68.7 %
68.7 %
Smokeless Products
Smokeless Products
2017
2017
Change
Change
$
$
$
$
$
$
$
$
2,155
2,155
(132 )
(132 )
2,023
2,023
1,306
1,306
56
56
—
—
1,362
1,362
7.5 %
7.5 %
110
10K MASTER 2018 ALTRIA FINAL 022719 3pm.indd 110
2/27/19 3:35 PM
Wednesday, February 27, 2019 3:00pm | Andra Design Studio Dear Fellow Shareholders
PM USA successfully balanced brand momentum
this opportunity for adults. Altria is taking
with profitability. PM USA invested in Marlboro’s
decisive steps to address this alarming trend,
equity, resulting in stabilization of Marlboro
including investing an additional $100 million
full-year retail share at 43.1% and setting the
over two years to help reduce youth vaping. We
business up for long-term success. The Marlboro
also are advocating for raising the minimum age
Points West limited-time rewards program
to purchase all tobacco products to 21 at both
in Texas proved to be a successful test of
the federal and state levels, a policy that the
our proprietary pack-coding technology and
U.S. Surgeon General supports but that requires
advanced PM USA’s goals to increase its digital
legislative action.
leadership, brand engagement and loyalty.
PM USA expanded Marlboro Ice and Marlboro
Smooth with a reseal packaging innovation that
resonated with adult smokers.
We continue to focus on the three most
promising non-combustible product platforms
for harm reduction: e-vapor; heat-not-burn;
and smokeless tobacco products. And we
The smokeless products segment grew
believe we have access to the leading portfolio
adjusted operating companies income (OCI)
of non-combustible alternatives for adults.
7.5%. Copenhagen, the leading moist smokeless
First, through JUUL, we have found a unique
tobacco brand, grew its 2018 retail share by four
opportunity to participate in the e-vapor
tenths to 34.4%. In total, our highly profitable
category, with a truly satisfying product that
smokeless business represented a 54% share of
has demonstrated its ability to convert adult
the smokeless category and delivered superior
smokers. Second, we remain fully committed to
Howard A. Willard III
Chairman of the Board and CEO
Altria closed out 2018 with excellent growth
in adjusted diluted earnings per share (EPS)
and a transformed business platform. We
strengthened our core businesses and built
strategic positions that we believe enhance our
growth prospects and better position Altria to
reward the loyalty of our shareholders through
earnings growth and dividends over the long
term. We remain committed to our long-term
adjusted OCI margins of 68.7%.
Pursuing Global Growth
and Diversification
the success of IQOS in the U.S. and are excited
to deploy our robust commercialization plans
once authorized by the FDA. Lastly, we filed and
the FDA continues to review a modified risk
tobacco application for Copenhagen Snuff Fine
Cut. We believe this application is a meaningful
step towards providing adult smokers accurate
information about switching to smokeless
goals of delivering 7% to 9% adjusted diluted
In 2018, Altria announced two strategic invest-
EPS growth and maintaining a dividend payout
ments in companies that we believe have great
ratio target of approximately 80% of adjusted
potential for global growth, while also further
diversifying our future income streams.
diluted EPS.
2018 Highlights:
Grew adjusted diluted EPS by 17.7%, primarily
driven by benefits from U.S. federal income
tax reform;
Paid shareholders approximately $5.4 billion
in dividends, while increasing our dividend twice
resulting in a combined increase of 21.2% since
the beginning of the year — the 52nd and 53rd
increases in 49 years;
Repurchased approximately $1.7 billion in
Altria shares under an expanded $2 billion share
repurchase program; and
First, we acquired a 35% equity stake in JUUL,
tobacco products.
the U.S. e-vapor category leader. We expect
JUUL’s superior product, talented management
In Summary
team, growing brand equity and adult consumer
We continue to pursue our long-term EPS
loyalty, and a promising pipeline of products to
growth and dividend objectives. We believe
continue driving its global growth. We believe
the best way to achieve those is by establishing
our investment in JUUL is a key part of the
a diverse business platform with access to
portfolio approach to tobacco harm reduction
the leading brands in each major tobacco
that we’ve been following for many years.
profit pool.
Second, we further diversified our business
We believe our actions have positioned us to
with an adjacent investment in the emerging
succeed across multiple scenarios in global
global cannabis category. Altria agreed to
markets by relentlessly and responsibly
acquire a 45% stake in Cronos, with a warrant
expanding choices for adult consumers with
Announced strategic investments in JUUL
to achieve majority ownership. Our investment
satisfying, premium-branded products.
and Cronos in fast growing categories with
in Cronos creates a new growth opportunity
promising global opportunity.
in an adjacent category poised for rapid growth,
Growth through Our
Core Tobacco Businesses
Our category-leading core tobacco brands,
including Marlboro, Black & Mild and
while expanding our income opportunity
beyond the U.S.
Growth through Responsibility
and Harm Reduction
Copenhagen, generated strong performance
For more than 20 years, Altria has pursued a
Thank you for your ongoing commitment to
Altria and for your support as we continue our
track record of success.
in 2018, and we believe they will continue to be
goal of tobacco harm reduction and advocated
Howard A. Willard III
key drivers of our earnings growth and ability to
for regulation in support of this goal. Today,
Chairman of the Board and CEO
deliver cash returns to shareholders.
however, the rise in youth e-vapor use threatens
March 1, 2019
Board of Directors
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-Ennis1,5,6
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 1,2,3,6
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. Newman1,4
Senior Vice President and
Chief Financial Officer,
The Chemours Company
Director since 2018
Nabil Y. Sakkab 3,4,5,6
Retired Senior Vice President,
Corporate Research and
Development, The Procter
& Gamble Company
Director since 2008
Virginia E. Shanks1,2,5
Strategic Advisor,
Penn National Gaming, Inc.
Director since 2017
Howard A. Willard III 3
Chairman and
Chief Executive Officer,
Altria Group, Inc.
Director since 2018
Presiding Director
Thomas F. Farrell II
Committees
1 Member of Audit Committee,
George Muñoz, Chair
2 Member of Compensation Committee,
W. Leo Kiely III, Chair
3 Member of Executive Committee,
Howard A. Willard III, 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,
Kathryn B. McQuade, Chair
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.
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.
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).
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 Com-
mission (SEC), 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
The 2018 annual report was printed on FSC® certified
paper. The FSC® is an independent, non-governmental,
not-for-profit global organization established to promote
the responsible management of the world’s forests.
Internet Access Helps
Reduce Costs:
As a convenience to shareholders
and an important cost-reduction
and environmentally friendly
measure, you can register to
receive future shareholder
materials (i.e., Annual Report and
proxy statement) electronically.
Shareholders also can vote their
proxies electronically. For more
information, please visit our website
at: www.altria.com/investors
2019 Annual Meeting:
The Altria Annual Meeting of
Shareholders will be held at
9:00 a.m. (Eastern Time) on
Thursday, May 16, 2019 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 respective
websites of Altria and its subsidiar-
ies is not, and shall not be deemed
to be, a part of this report or incor-
porated 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.
Investor App
Stay up-to-date with
the latest investor
information on our app.
Download at the
Apple Store and
at Google Play.
Stock Exchange Listing:
The principal stock
exchange on which
Altria’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, 2019, there were
approximately 61,000 holders of
record of Altria’s common stock.
Independent Auditors:
PricewaterhouseCoopers LLP
1021 E. Cary Street, Suite 1250
Richmond, VA 23219
Transfer Agent and Registrar:
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
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.
Terms used but not defined herein are defined in the enclosed Annual Report on Form 10-K.
Design: Andra Design andradesignstudio.com | Photography: Casey Templeton, Rhudy & Co. | Printer: Stephenson Printing Inc. © Copyright 2019 Altria
43821 AR.indd 2
3/4/19 11:17 AM
2018
Altria Group, Inc.
Annual Report
A
l
t
r
i
a
G
r
o
u
p
,
I
n
c
.
2
0
1
8
A
n
n
u
a
l
R
e
p
o
r
t
Altria Group, Inc.
6601 W. Broad Street
Richmond, VA 23230-1723
an Altria Company
Philip Morris USA Inc.
P.O. Box 26603
Richmond, VA 23261-6603
philipmorrisusa.com
an Altria Company
U.S. Smokeless Tobacco Company LLC
P.O. Box 85107
Richmond, VA 23285-5107
ussmokeless.com
an Altria Company
John Middleton Co.
6601 W. Broad Street
Richmond, VA 23230-1723
johnmiddletonco.com
an Altria Company
Nat Sherman
10 Sterling Boulevard
Englewood, NJ 07631
shermangroupholdings.com
an Altria Company
Ste. Michelle Wine Estates Ltd.
P.O. Box 1976
Woodinville, WA 98072-1976
smwe.com
an Altria Company
Philip Morris Capital Corporation
225 High Ridge Road
Suite 300 West
Stamford, CT 06905-3000
philipmorriscapitalcorp.com
altria.com
43821 AR.indd 1
3/1/19 2:13 PM
Altria 2018 AR/10K Wrap | Andra Design Studio | Thursday, February 28, 2019 | 2:15pmAltria 2018 AR/10K Wrap | Andra Design Studio | Thursday, February 28, 2019 | 2:15pm