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Section 1: 10-Q (FORM 10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-08940
Altria Group, Inc.
(Exact name of registrant as specified in its charter)
Virginia
 
13-3260245
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
6601 West Broad Street, Richmond, Virginia
 
23230
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (804) 274-2200 
 Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
  
¨
 
 
 
 
Emerging growth company
  
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No   þ
At July 16, 2018, there were 1,885,174,950 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.


Table of Contents    



ALTRIA GROUP, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
  
 
  
Page No.
PART I -
  
FINANCIAL INFORMATION
  
 
 
 
 
 
Item 1.
  
Financial Statements (Unaudited)
  
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
 
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 3.
  
  
 
 
 
 
Item 4.
  
  
 
 
 
 
PART II -
  
OTHER INFORMATION
  
 
 
 
 
 
Item 1.
  
  
 
 
 
 
Item 1A.
  
  
 
 
 
 
Item 2.
  
  
 
 
 
 
 
Item 6.
  
  
 
 
 
 
Signature
  
  


2

Table of Contents    

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,430

 
$
1,253

Receivables
 
144

 
142

Inventories:
 

 

Leaf tobacco
 
810

 
941

Other raw materials
 
191

 
170

Work in process
 
501

 
560

Finished product
 
621

 
554

 
 
2,123

 
2,225

Income taxes
 
182

 
461

Other current assets
 
252

 
263

Total current assets
 
4,131

 
4,344

Property, plant and equipment, at cost
 
4,818

 
4,879

Less accumulated depreciation
 
2,940

 
2,965

 
 
1,878

 
1,914

Goodwill
 
5,307

 
5,307

Other intangible assets, net
 
12,405

 
12,400

Investment in AB InBev
 
18,178

 
17,952

Finance assets, net
 
856

 
899

Other assets
 
422

 
386

Total Assets
 
$
43,177

 
$
43,202

 
See notes to condensed consolidated financial statements.

3

Table of Contents    


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 
 
June 30, 2018
 
December 31, 2017
Liabilities
 
 
 
 
Current portion of long-term debt
 
$
864

 
$
864

Accounts payable
 
209

 
374

Accrued liabilities:
 

 

Marketing
 
699

 
695

Employment costs
 
108

 
188

Settlement charges
 
2,105

 
2,442

Other
 
1,078

 
971

Dividends payable
 
1,325

 
1,258

Total current liabilities
 
6,388

 
6,792

Long-term debt
 
13,036

 
13,030

Deferred income taxes
 
5,376

 
5,247

Accrued pension costs
 
323

 
445

Accrued postretirement health care costs
 
1,989

 
1,987

Other liabilities
 
230

 
283

Total liabilities
 
27,342

 
27,784

Contingencies (Note 9)
 

 

Redeemable noncontrolling interest
 
37

 
38

Stockholders’ Equity
 
 
 
 
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued)
 
935

 
935

Additional paid-in capital
 
5,948

 
5,952

Earnings reinvested in the business
 
43,369

 
42,251

Accumulated other comprehensive losses
 
(1,652
)
 
(1,897
)
Cost of repurchased stock
(919,703,864 shares at June 30, 2018 and
904,702,125 shares at December 31, 2017)
 
(32,804
)
 
(31,864
)
Total stockholders’ equity attributable to Altria
 
15,796

 
15,377

Noncontrolling interests
 
2

 
3

Total stockholders’ equity
 
15,798

 
15,380

Total Liabilities and Stockholders’ Equity
 
$
43,177

 
$
43,202

See notes to condensed consolidated financial statements.


4

Table of Contents    


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Net revenues
 
$
12,413

 
$
12,746

Cost of sales
 
3,472

 
3,767

Excise taxes on products
 
2,864

 
3,089

Gross profit
 
6,077

 
5,890

Marketing, administration and research costs
 
1,259

 
1,107

Asset impairment and exit costs
 
4

 
16

Operating income
 
4,814

 
4,767

Interest and other debt expense, net
 
344

 
356

Net periodic benefit income, excluding service cost
 
(16
)
 
(19
)
Earnings from equity investment in AB InBev
 
(570
)
 
(163
)
Loss (gain) on AB InBev/SABMiller business combination
 
33

 
(408
)
Earnings before income taxes
 
5,023

 
5,001

Provision for income taxes
 
1,251

 
1,609

Net earnings
 
3,772

 
3,392

Net earnings attributable to noncontrolling interests
 
(2
)
 
(2
)
Net earnings attributable to Altria
 
$
3,770

 
$
3,390

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria
 
$
1.99

 
$
1.75

Dividends declared
 
$
1.40

 
$
1.22

See notes to condensed consolidated financial statements.


5

Table of Contents    


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Three Months Ended June 30,
 
 
2018
 
2017
Net revenues
 
$
6,305

 
$
6,663

Cost of sales
 
1,738

 
1,954

Excise taxes on products
 
1,426

 
1,595

Gross profit
 
3,141

 
3,114

Marketing, administration and research costs
 
641

 
574

Asset impairment and exit costs
 
2

 
12

Operating income
 
2,498

 
2,528

Interest and other debt expense, net
 
178

 
177

Net periodic benefit income, excluding service cost
 
(9
)
 
(11
)
Earnings from equity investment in AB InBev
 
(228
)
 
(140
)
Gain on AB InBev/SABMiller business combination
 

 
(408
)
Earnings before income taxes
 
2,557

 
2,910

Provision for income taxes
 
680

 
920

Net earnings
 
1,877

 
1,990

Net earnings attributable to noncontrolling interests
 
(1
)
 
(1
)
Net earnings attributable to Altria
 
$
1,876

 
$
1,989

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria
 
$
0.99

 
$
1.03

Dividends declared
 
$
0.70

 
$
0.61

See notes to condensed consolidated financial statements.


6

Table of Contents    


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

 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Net earnings
 
$
3,772

 
$
3,392

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments and other
 
(2
)
 
1

Benefit plans
 
87

 
65

AB InBev
 
160

 
148

Other comprehensive earnings, net of deferred income taxes
 
245

 
214

 
 
 
 
 
Comprehensive earnings
 
4,017

 
3,606

Comprehensive earnings attributable to noncontrolling interests
 
(2
)
 
(2
)
Comprehensive earnings attributable to Altria
 
$
4,015

 
$
3,604

See notes to condensed consolidated financial statements.


7

Table of Contents    


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

 
 
For the Three Months Ended June 30,
 
 
2018
 
2017
Net earnings
 
$
1,877

 
$
1,990

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments and other
 
(2
)
 
1

Benefit plans
 
42

 
33

AB InBev
 
235

 
340

Other comprehensive earnings, net of deferred income taxes
 
275

 
374

 
 
 
 
 
Comprehensive earnings
 
2,152

 
2,364

Comprehensive earnings attributable to noncontrolling interests
 
(1
)
 
(1
)
Comprehensive earnings attributable to Altria
 
$
2,151

 
$
2,363


See notes to condensed consolidated financial statements.



8

Table of Contents    


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Year Ended December 31, 2017 and
the Six Months Ended June 30, 2018
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
Attributable to Altria
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Earnings
Reinvested
in the
Business
 
Accumulated
Other
Comprehensive
Losses
 
Cost of
Repurchased
Stock
 
Non-controlling
Interests
 
Total
Stockholders’
Equity
Balances, December 31, 2016
 
$
935

 
$
5,893

 
$
36,906

 
$
(2,052
)
 
$
(28,912
)
 
$
3

 
$
12,773

Net earnings (1)
 

 

 
10,222

 

 

 

 
10,222

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
155

 

 

 
155

Stock award activity
 

 
59

 

 

 
(35
)
 

 
24

Cash dividends declared ($2.54 per share)
 

 

 
(4,877
)
 

 

 

 
(4,877
)
Repurchases of common stock
 

 

 

 

 
(2,917
)
 

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

 
5,952

 
42,251

 
(1,897
)
 
(31,864
)
 
3

 
15,380

Net earnings (1)
 

 

 
3,770

 

 

 

 
3,770

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
245

 

 

 
245

Stock award activity
 

 
(4
)
 

 

 
10

 

 
6

Cash dividends declared ($1.40 per share)
 

 

 
(2,652
)
 

 

 

 
(2,652
)
Repurchases of common stock
 

 

 

 

 
(950
)
 

 
(950
)
Other
 

 

 

 

 

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

 
$
5,948

 
$
43,369

 
$
(1,652
)
 
$
(32,804
)
 
$
2

 
$
15,798


(1) 
Amounts attributable to noncontrolling interests for the six months ended June 30, 2018 and for the year ended December 31, 2017 exclude net earnings of $2 million and $5 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the condensed consolidated balance sheets at June 30, 2018 and December 31, 2017.

See notes to condensed consolidated financial statements.




9

Table of Contents    

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

 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
3,772

 
$
3,392

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
104

 
104

Deferred income tax provision
 
64

 
30

Earnings from equity investment in AB InBev
 
(570
)
 
(163
)
Dividends from AB InBev
 
477

 
434

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

 
(408
)
Asset impairment and exit costs, net of cash paid
 
(16
)
 
(25
)
Cash effects of changes:
 
 
 
 
Receivables
 
(2
)
 
33

Inventories
 
105

 
55

Accounts payable
 
(158
)
 
(233
)
Income taxes
 
225

 
379

Accrued liabilities and other current assets
 
121

 
(63
)
Accrued settlement charges
 
(369
)
 
(1,478
)
Pension plan contributions
 
(11
)
 
(10
)
Pension provisions and postretirement, net
 
(2
)
 
(36
)
Other
 
77

 
(66
)
Net cash provided by operating activities
 
3,850

 
1,945

Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
(72
)
 
(91
)
Proceeds from finance assets
 

 
45

Other
 
(9
)
 
(200
)
Net cash used in investing activities
 
$
(81
)
 
$
(246
)

10

Table of Contents    

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Cash Used in Financing Activities
 
 
 
 
Repurchases of common stock
 
$
(950
)
 
$
(1,600
)
Dividends paid on common stock
 
(2,585
)
 
(2,369
)
Other
 
(25
)
 
(47
)
Cash used in financing activities
 
(3,560
)
 
(4,016
)
Cash, cash equivalents and restricted cash:
 
 
 
 
Increase (decrease)
 
209

 
(2,317
)
Balance at beginning of period
 
1,314

 
4,651

Balance at end of period
 
$
1,523

 
$
2,334

 
 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on Altria’s condensed consolidated balance sheets:
 
 
At
 June 30,
 2018
 
At
 December 31,
2017
Cash and cash equivalents
 
$
1,430

 
$
1,253

Restricted cash included in other current assets (1)
 
57

 
25

Restricted cash included in other assets (1)
 
36

 
36

Cash, cash equivalents and restricted cash
 
$
1,523

 
$
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 9. Contingencies.

See notes to condensed consolidated financial statements.

11

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

Note 1. Background and Basis of Presentation:

Background

At June 30, 2018, Altria Group, Inc.’s (“Altria”) wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; and UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products, and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary that maintains a portfolio of finance assets, substantially all of which are leveraged leases. Other Altria wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales and distribution services to certain Altria operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, finance, human resources and external affairs to Altria and its subsidiaries. Altria’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At June 30, 2018, Altria’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.

At June 30, 2018, Altria had an approximate 10.1% ownership of Anheuser-Busch InBev SA/NV (“AB InBev”), which Altria accounts for under the equity method of accounting using a one-quarter lag. Altria receives cash dividends on its interest in AB InBev if and when AB InBev pays such dividends.

Dividends and Share Repurchases

During the first quarter of 2018, Altria’s Board of Directors (the “Board of Directors”) approved a 6.1% increase in the quarterly dividend rate to $0.70 per share of Altria common stock versus the previous rate of $0.66 per share. The current annualized dividend rate is $2.80 per share. Future dividend payments remain subject to the discretion of the Board of Directors.

In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). In January 2018, Altria completed the July 2015 share repurchase program. Under this program, Altria repurchased a total of 58.7 million shares of its common stock at an average price of $68.15 per share (including 0.3 million shares at an average price of $71.68 in January 2018).

Following the completion of the July 2015 share repurchase program, the Board of Directors authorized a new $1.0 billion share repurchase program in January 2018 that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”). During the six and three months ended June 30, 2018, Altria repurchased 15.3 million shares and 7.6 million shares, respectively, of its common stock (at an aggregate cost of approximately $932 million and $437 million, respectively, and at an average price of $60.89 per share and $57.65 per share, respectively) under the January 2018 share repurchase program. At June 30, 2018, Altria had approximately $1,068 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.


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

Altria’s share repurchase activity was as follows:
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions, except per share data)
Total number of shares repurchased
 
15.6

 
22.1

 
7.6

 
14.4

Aggregate cost of shares repurchased
 
$
950

 
$
1,600

 
$
437

 
$
1,049

Average price per share of shares repurchased
 
$
61.07

 
$
72.47

 
$
57.65

 
$
72.85


Basis of Presentation

The interim condensed consolidated financial statements of Altria are unaudited. It is the opinion of Altria’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

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

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

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

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

ASU No. 2016-18, which Altria adopted retrospectively, requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. As a result of the adoption, restricted cash of $93 million, $79 million, $61 million and $82 million at June 30, 2018, June 30, 2017, December 31, 2017 and December 31, 2016, respectively, was included in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows.


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

ASU No. 2017-07 requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the statement of earnings separately from the service cost component and outside the subtotal of operating income. Additionally, only the service cost component is eligible for capitalization. Altria retrospectively adopted the guidance for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of earnings, and prospectively adopted the capitalization of service cost. Altria used the practical expedient provided in ASU No. 2017-07 that permits Altria to use the amounts disclosed in its benefit plans note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. For the six months ended June 30, 2017, the adoption of ASU No. 2017-07 resulted in a reclassification of net periodic benefit income of $8 million and $11 million from cost of sales and marketing, administration and research costs, respectively, to net periodic benefit income, excluding service cost in Altria’s condensed consolidated statement of earnings. For the three months ended June 30, 2017, the adoption of ASU No. 2017-07 resulted in a reclassification of net periodic benefit income of $5 million and $6 million from cost of sales and marketing, administration and research costs, respectively, to net periodic benefit income, excluding service cost in Altria’s condensed consolidated statement of earnings. In addition, certain prior-period segment data has been reclassified to conform with the current period’s presentation. For further discussion, see Note 6. Segment Reporting.

For a description of recently issued accounting guidance applicable to, but not yet adopted by, Altria, see Note 11. Recent Accounting Guidance Not Yet Adopted.

Note 2. Revenues from Contracts with Customers:

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

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

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

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

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

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

receives substantially all payments from customers within 45 days of the customer obtaining control of the product. Amounts due from customers are included in receivables on Altria’s condensed consolidated balance sheets.

Altria’s businesses promote their products with consumer incentives, trade promotions and consumer engagement programs. These consumer incentive and trade promotion activities, which include discounts, coupons, rebates, in-store display incentives and volume-based incentives, do not create a distinct deliverable and are, therefore, recorded as a reduction of revenues. Consumer engagement program payments are made to third parties. Altria’s businesses expense these consumer engagement programs, which include event marketing, as incurred and such expenses are included in marketing, administration and research costs on Altria’s condensed consolidated statements of earnings. For interim reporting purposes, Altria’s businesses charge consumer engagement programs and certain consumer incentive expenses to operations as a percentage of sales, based on estimated sales and related expenses for the full year.

Altria disaggregates net revenues based on product type. For further discussion, see Note 6. Segment Reporting.

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

Altria’s businesses that receive payments in advance of product shipment record such payments as deferred revenue. These payments are included in other accrued liabilities on Altria’s condensed consolidated balance sheets until control of such products is obtained by the customer. Deferred revenue was $390 million and $267 million at June 30, 2018 and December 31, 2017, respectively. When cash is received in advance of product shipment, Altria’s businesses satisfy their performance obligations within three days of receiving payment. At June 30, 2018 and December 31, 2017, there were no differences between amounts recorded as deferred revenue and amounts subsequently recognized as revenue.

Receivables, which primarily reflect sales of wine produced and/or distributed by Ste. Michelle, were $144 million and $142 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 and December 31, 2017, there were no expected differences between amounts recorded and subsequently received, and Altria’s businesses did not record an allowance for doubtful accounts against these receivables.

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

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

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

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

These estimates primarily include estimated wholesale to retail sales volume and historical acceptance rates. Actual payments will differ from estimated payments to the extent actual results differ from estimated assumptions. Differences between actual

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

and estimated payments are reflected in the period such information becomes available. These differences, if any, have not had a significant impact on Altria’s condensed consolidated financial statements.

Note 3. Benefit Plans:

Components of Net Periodic Benefit Cost (Income)

Net periodic benefit cost (income) consisted of the following: 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
Pension
 
Postretirement
 
Pension
 
Postretirement
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service cost
$
41

 
$
38

 
$
9

 
$
9

 
$
20

 
$
19

 
$
5

 
$
5

Interest cost
138

 
144

 
37

 
40

 
70

 
72

 
18

 
20

Expected return on
plan assets
(292
)
 
(300
)
 
(9
)
 

 
(146
)
 
(150
)
 
(4
)
 

Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
112

 
98

 
17

 
16

 
55

 
48

 
8

 
8

Prior service
cost (credit)
2

 
2

 
(21
)
 
(19
)
 
1

 
1

 
(11
)
 
(10
)
Net periodic benefit
cost (income)
$
1

 
$
(18
)
 
$
33

 
$
46

 
$

 
$
(10
)
 
$
16

 
$
23


Employer Contributions

Altria makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service (“IRS”) regulations. Employer contributions of $11 million were made to Altria’s pension plans during the six months ended June 30, 2018. Currently, Altria anticipates making additional employer contributions to its pension plans during the remainder of 2018 of up to approximately $30 million, based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, changes in interest rates or other considerations. 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. Altria did not make any employer contributions to its postretirement plans during the six months ended June 30, 2018. Currently, Altria anticipates making employer contributions to its postretirement plans of up to approximately $70 million in 2018. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on postretirement assets or other considerations.

Note 4. Earnings Per Share:

Basic and diluted earnings per share (“EPS”) were calculated using the following:
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Net earnings attributable to Altria
 
$
3,770

 
$
3,390

 
$
1,876

 
$
1,989

Less: Distributed and undistributed earnings attributable to share-based awards
 
(5
)
 
(5
)
 
(3
)
 
(3
)
Earnings for basic and diluted EPS
 
$
3,765

 
$
3,385

 
$
1,873

 
$
1,986

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
1,895

 
1,933

 
1,891

 
1,928



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

Note 5. Other Comprehensive Earnings/Losses:

The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria:
 
 
For the Six Months Ended June 30, 2018
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2017
 
$
(1,839
)
 
$
(54
)
 
$
(4
)
 
$
(1,897
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses) before reclassifications
 

 
225

 
(2
)
 
223

Deferred income taxes
 

 
(50
)
 

 
(50
)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 

 
175

 
(2
)
 
173

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
118

 
(20
)
 

 
98

Deferred income taxes
 
(31
)
 
5

 

 
(26
)
Amounts reclassified to net earnings, net of deferred income taxes
 
87

 
(15
)
 

 
72

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
87

 
160

(1 
) 
(2
)
 
245

 
 
 
 
 
 
 
 
 
Balances, June 30, 2018
 
$
(1,752
)
 
$
106

 
$
(6
)
 
$
(1,652
)

 
 
For the Three Months Ended June 30, 2018
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, March 31, 2018
 
$
(1,794
)
 
$
(129
)
 
$
(4
)
 
$
(1,927
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses) before reclassifications
 

 
306

 
(2
)
 
304

Deferred income taxes
 

 
(66
)
 

 
(66
)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 

 
240

 
(2
)
 
238

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
57

 
(7
)
 

 
50

Deferred income taxes
 
(15
)
 
2

 

 
(13
)
Amounts reclassified to net earnings, net of deferred income taxes
 
42

 
(5
)
 

 
37

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
42

 
235

(1 
) 
(2
)
 
275

 
 
 
 
 
 
 
 
 
Balances, June 30, 2018
 
$
(1,752
)
 
$
106

 
$
(6
)
 
$
(1,652
)


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

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

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

 
225

 
1

 
226

Deferred income taxes
 

 
(78
)
 

 
(78
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 
147

 
1

 
148

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
106

 
2

 

 
108

Deferred income taxes
 
(41
)
 
(1
)
 

 
(42
)
Amounts reclassified to net earnings, net of deferred income taxes
 
65

 
1

 

 
66

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred
 income taxes
 
65

 
148

(1 
) 
1

 
214

 
 
 
 
 
 
 
 
 
Balances, June 30, 2017
 
$
(1,983
)
 
$
148

 
$
(3
)
 
$
(1,838
)

 
 
For the Three Months Ended June 30, 2017
 
 
Benefit Plans
 
AB InBev
 
Currency
Translation
Adjustments and Other
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, March 31, 2017
 
$
(2,016
)
 
$
(192
)
 
$
(4
)
 
$
(2,212
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 
521

 
1

 
522

Deferred income taxes
 

 
(182
)
 

 
(182
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 
339

 
1

 
340

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
52

 
2

 

 
54

Deferred income taxes
 
(19
)
 
(1
)
 

 
(20
)
Amounts reclassified to net earnings, net of deferred income taxes
 
33

 
1

 

 
34

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 
33

 
340

(1 
) 
1

 
374

 
 
 
 
 
 
 
 
 
Balances, June 30, 2017
 
$
(1,983
)
 
$
148

 
$
(3
)
 
$
(1,838
)
(1) Primarily reflects currency translation adjustments.


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

The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Benefit Plans: (1)
 
 
 
 
 
 
 
 
Net loss
 
$
137

 
$
123

 
$
67

 
$
61

Prior service cost/credit
 
(19
)
 
(17
)
 
(10
)
 
(9
)
 
 
118

 
106

 
57

 
52

 
 
 
 
 
 
 
 
 
AB InBev (2)
 
(20
)
 
2

 
(7
)
 
2

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
98

 
$
108

 
$
50

 
$
54

(1) Amounts are included in net defined benefit plan costs. For further details, see Note 3. Benefit Plans.
(2) Amounts are primarily included in earnings from equity investment in AB InBev.

Note 6. Segment Reporting:

The products of Altria’s subsidiaries include smokeable tobacco products, consisting of combustible cigarettes manufactured and sold by PM USA and Nat Sherman, machine-made large cigars and pipe tobacco manufactured and sold by Middleton and premium cigars sold by Nat Sherman; smokeless tobacco products, consisting of moist smokeless tobacco and snus products manufactured and sold by USSTC; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria’s reportable segments of smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in all other.

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

Altria’s chief operating decision maker (the “CODM”) reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, net periodic benefit cost/income, excluding service cost, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM.

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

Segment data were as follows: 
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
10,960

 
$
11,380

 
$
5,546

 
$
5,922

Smokeless products
 
1,104

 
1,030

 
579

 
564

Wine
 
308

 
290

 
166

 
150

All other
 
41

 
46

 
14

 
27

Net revenues
 
$
12,413

 
$
12,746

 
$
6,305

 
$
6,663

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
4,239

 
$
4,260

 
$
2,201

 
$
2,224

Smokeless products
 
715

 
593

 
377

 
347

Wine
 
44

 
46

 
27

 
25

All other
 
(83
)
 
(21
)
 
(57
)
 
(8
)
Amortization of intangibles
 
(10
)
 
(10
)
 
(5
)
 
(5
)
General corporate expenses
 
(91
)
 
(101
)
 
(45
)
 
(55
)
Operating income
 
4,814

 
4,767

 
2,498

 
2,528

Interest and other debt expense, net
 
(344
)
 
(356
)
 
(178
)
 
(177
)
Net periodic benefit income, excluding service cost
 
16

 
19

 
9

 
11

Earnings from equity investment in AB InBev
 
570

 
163

 
228

 
140

(Loss) gain on AB InBev/SABMiller business combination
 
(33
)
 
408

 

 
408

Earnings before income taxes
 
$
5,023

 
$
5,001

 
$
2,557

 
$
2,910


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

Non-Participating Manufacturer (“NPM”) Adjustment Items - Pre-tax (income) expense for NPM adjustment items was recorded in Altria’s condensed consolidated statements of earnings as follows:
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Smokeable products segment
 
$
(145
)
 
$
(8
)
 
$
(77
)
 
$

Interest and other debt expense, net
 

 
7

 

 

Total
 
$
(145
)
 
$
(1
)
 
$
(77
)
 
$


NPM adjustment items result from the resolutions of certain disputes with states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such dispute resolutions are referred to as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 9. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as reductions to cost of sales, which increased operating companies income in the smokeable products segment.


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

Tobacco and Health Litigation Items - Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria’s condensed consolidated statements of earnings as follows:
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Smokeable products segment
 
$
84

 
$
16

 
$
60

 
$
15

Interest and other debt expense, net
 
14

 
2

 
10

 
2

Total
 
$
98

 
$
18

 
$
70

 
$
17


During the six and three months ended June 30, 2018, PM USA recorded pre-tax charges of $84 million and $60 million, respectively, in marketing, administration and research costs, all of which related to Engle progeny cases. In addition, during the six and three months ended June 30, 2018, PM USA recorded $14 million and $10 million, respectively, in interest costs, all of which related to these cases. For further discussion, see Note 9. Contingencies.

During the second quarter of 2017, PM USA recorded pre-tax charges of $15 million in marketing, administration and research costs and $2 million in interest costs, all of which related to Engle progeny cases. For further discussion, see Note 9. Contingencies.

Smokeless Products Recall - During the first quarter of 2017, USSTC voluntarily recalled certain smokeless tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC estimated that the Recall reduced smokeless products segment operating companies income by approximately $60 million in the first quarter of 2017.

Asset Impairment, Exit and Implementation Costs - In October 2016, Altria announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. In the first quarter of 2018, Middleton completed the transfer of its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”), and USSTC completed the transfer of its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. The pre-tax charges related to the consolidation are substantially complete.

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

 
$
2

 
$
3

 
$
2

 
$
12

 
$
14

Smokeless products
3

 
3

 
6

 
14

 
28

 
42

Total
$
4

 
$
5

 
$
9

 
$
16

 
$
40

 
$
56

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

 
$
1

 
$
2

 
$
1

 
$
7

 
$
8

Smokeless products
1

 
3

 
4

 
11

 
10

 
21

Total
$
2

 
$
4

 
$
6

 
$
12

 
$
17

 
$
29

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

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7. Debt:

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

Long-term Debt

Altria’s estimate of the fair value of its debt is based on observable market information derived from a third-party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria’s total long-term debt at June 30, 2018 and December 31, 2017, was $14.3 billion and $15.3 billion, respectively, as compared with its carrying value of $13.9 billion for each period.

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

Note 8. Income Taxes:

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

The income tax rate of 24.9% for the six months ended June 30, 2018 decreased 7.3 percentage points from the six months ended June 30, 2017. The income tax rate of 26.6% for the three months ended June 30, 2018 decreased 5.0 percentage points from the three months ended June 30, 2017. These decreases were due primarily to the following:
a reduction in tax expense in 2018 from the decrease in the U.S. federal statutory corporate income tax rate as a result of the Tax Reform Act;
partially offset by:
tax benefits of $152 million in 2017 related primarily to the effective settlement in June 2017 of the IRS audit of Altria and its consolidated subsidiaries’ 2010-2013 tax years, of which $110 million was recorded in the second quarter of 2017;
tax expense of $82 million in 2018, resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax, of which $41 million was recorded in the second quarter of 2018; and
tax expense of $34 million in the second quarter of 2018 for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017 for the Tax Reform Act.
During the six and three months ended June 30, 2018, Altria recorded net tax expense of $2 million and $13 million, respectively, as adjustments to the provisional estimates recorded in 2017 for the tax basis adjustment and the deemed repatriation tax attributable to the Tax Reform Act. Altria may be required to adjust these provisional estimates based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information to be received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. This additional guidance and information could result in increases or decreases to the provisional estimates, which may be significant in relation to these estimates. Altria will record any such adjustments in 2018.

Altria is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria. At June 30, 2018, Altria’s total unrecognized tax benefits were $68 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at June 30, 2018 was $43 million, along with $25 million

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affecting deferred taxes. 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 $39 million. At December 31, 2017, Altria’s total unrecognized tax benefits were $66 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2017 was $43 million, along with $23 million affecting deferred taxes.

Note 9. 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 or distributors.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria or its subsidiaries may also be required to pay interest and attorneys’ fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. Although Altria cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

Altria and its subsidiaries record provisions in the condensed consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 9. 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 condensed consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.

Altria and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria, or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria to do so.


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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 July 23, 2018, July 24, 2017 and July 22, 2016:
 
July 23, 2018
 
July 24, 2017
 
July 22, 2016
Individual Smoking and Health Cases (1)
97
 
90
 
62
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
3
 
4
 
5
Health Care Cost Recovery Actions (3)
1
 
1
 
1
“Lights/Ultra Lights” Class Actions
3
 
4
 
9
(1) Includes 27 cases filed in Massachusetts and 38 non-Engle cases filed in Florida. Does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (these Engle progeny cases are discussed below in Smoking and Health Litigation - Engle Class Action). Also does not include 1,491 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. In March 2018, 923 of these cases were voluntarily dismissed without prejudice.
(2) The 2016 and 2017 pending cases include as one case the 30 civil actions that were to be tried in six consolidated trials in West Virginia (In re: Tobacco Litigation). PM USA was a defendant in nine of the 30 cases. The parties agreed to resolve the 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 July 23, 2018, PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria as a defendant. PM USA and Altria are also named defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria and Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.

Tobacco-Related Cases Set for Trial

As of July 23, 2018, 10 Engle progeny cases are set for trial through September 30, 2018. In addition, there is one individual smoking and health case against PM USA set for trial during this period. Cases against other companies in the tobacco industry may also be scheduled for trial during this period. Trial dates are subject to change.

Trial Results

Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 63 smoking and health, “Lights/Ultra Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 42 of the 63 cases. These 42 cases were tried in Alaska (1), California (7), Connecticut (1), Florida (10), Louisiana (1), Massachusetts (2), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). A motion for a

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new trial was granted in one of the cases in Florida and in the case in Alaska. In the Alaska case (Hunter), the jury returned a verdict in favor of PM USA in April 2018 in the third trial of this case. In May 2018, plaintiff filed a motion for a new trial, which the court denied.

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

As of July 23, 2018, 121 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision as follows: 66 verdicts were returned in favor of plaintiffs; 45 verdicts were returned in favor of PM USA. Eight verdicts that were initially returned in favor of plaintiff were reversed post-trial or on appeal and remain pending and two verdicts in favor of PM USA were reversed for a new trial. See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of these verdicts.

Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation)

After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments and settlements (including related costs and fees) totaling approximately $571 million and interest totaling approximately $194 million as of June 30, 2018. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $179 million, interest totaling approximately $32 million and payment of approximately $43 million in connection with the Federal Engle Agreement, discussed below.

The changes in Altria’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Accrued liability for tobacco and health litigation items at beginning of period (1)
$
106

 
$
47

 
$
111

 
$
47

Pre-tax charges for:
 
 
 
 
 
 
 
Tobacco and health judgments
84

 
16

 
60

 
15

Related interest costs
14

 
2

 
10

 
2

Payments (1)
(97
)
 
(18
)
 
(74
)
 
(17
)
Accrued liability for tobacco and health litigation items at end of period (1)
$
107

 
$
47

 
$
107

 
$
47

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

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

Security for Judgments

To obtain stays of judgments pending appeal, PM USA has posted various forms of security. As of June 30, 2018, PM USA has posted appeal bonds totaling approximately $93 million, which have been collateralized with cash deposits that are included in assets on the condensed consolidated balance sheet.


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Smoking and Health Litigation

Overview

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

Non-Engle Progeny Litigation

Summarized below are the non-Engle progeny smoking and health cases pending during 2018 in which a verdict was returned in favor of plaintiff and against PM USA. Charts listing certain verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.

Gentile: In October 2017, a jury in a Florida state court returned a verdict in favor of plaintiff, awarding approximately $7.1 million in compensatory damages and allocating 75% of the fault to PM USA (an amount of approximately $5.3 million). Subsequently, in October 2017, PM USA filed various post-trial motions. In April 2018, the trial court denied defendant’s post-trial motions and entered final judgment in favor of plaintiff. Also in April 2018, 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 verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.

In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants

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agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court’s order.

In August 2006, PM USA 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, as required by the Florida Supreme Court’s Engle decision, expired in January 2008. As of July 23, 2018, approximately 2,300 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, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of July 23, 2018, approximately 8 cases were pending against PM USA in federal court representing the cases excluded from that agreement.

Agreement to Resolve Federal Engle Progeny Cases

In 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and Lorillard Tobacco Company (“Lorillard”) resolved approximately 415 pending federal Engle progeny cases (the “Federal Engle Agreement”). Under the terms of the Federal Engle Agreement, PM USA paid approximately $43 million. Federal cases that were in trial and those that previously reached final verdict were not included in the Federal Engle Agreement.

Engle Progeny Trial Results

As of July 23, 2018, 121 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Sixty-six verdicts were returned in favor of plaintiffs and eight verdicts (Skolnick, Calloway, Pollari, 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; Pollari and McCoy were reversed and remanded for a new trial on an appellate finding that the trial court erred in admitting certain materials into evidence that deprived defendants of a fair trial; Duignan was reversed and remanded for a new trial on an appellate finding that the trial judge erred in responding to a question from the jury during deliberations; Caprio was reversed post-trial after defendants agreed to voluntarily dismiss their appeal in exchange for a full retrial; Oshinsky-Blacker was reversed post-trial based on plaintiff’s counsel’s improper arguments at trial; and McCall was reversed based on an appellate finding that the trial judge erred in instructing the jury on the warning labels on cigarette packs.

Forty-five verdicts were returned in favor of PM USA, of which 36 were state cases. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of July 23, 2018. Two verdicts (D. Cohen and Collar) that were returned in favor of PM USA were subsequently reversed for new trials. The juries in the Reider and Banks cases returned zero damages verdicts in favor of PM USA. The juries in the