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Section 1: 8-K (8-K)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
FORM 8-K
_____________________________________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 31, 2019
________________________________________________________________________________________________________________
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________________________________
 
 
 
 
 
Virginia
 
1-08940
 
13-3260245
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(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 or former address, if changed since last report.)
___________________________________________________________________________________________________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
o
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. o






Item 8.01.
Other Events.
Filed as part of this Current Report on Form 8-K are the consolidated balance sheets of Altria Group, Inc. (“Altria”) and 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 (the “Financial Statements”); report of management on internal control over financial reporting; and the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting. The Financial Statements, report of management on internal control over financial reporting and the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting will also be filed as part of Altria’s Annual Report on Form 10-K for the year ended December 31, 2018.
Item 9.01.
Financial Statements and Exhibits.
(d)
Exhibits
 
23
 
 
 
 
 
 
99.1
 
 
 
 
 
 
99.2
 
 
 
 
 
 
99.3
 
 
 
 
 

2




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
ALTRIA GROUP, INC.
 
 
 
 
 
By:
 
/s/ WILLIAM F. GIFFORD, JR.
 
Name:
 
William F. Gifford, Jr.
 
Title:
 
Vice Chairman and Chief Financial Officer

DATE: January 31, 2019


3
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Section 2: EX-23 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)

Exhibit


Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement on Form S-14 (File No. 2-96149) and in the Registration Statements on Form S-3 (File No. 333-221133) and Form S-8 (File Nos. 333-28631, 33-10218, 33-13210, 33-14561, 33-48781, 33-59109, 333-43478, 333-43484, 333-128494, 333-139523, 333-148070, 333-156188, 333-167516, 333-170185, 333-204477 and 333-209701) of Altria Group, Inc. of our report dated January 31, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 31, 2019






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Section 3: EX-99.1 (FINANCIAL STATEMENTS)

Exhibit
Exhibit 99.1








Altria Group, Inc. and Subsidiaries
Consolidated Financial Statements as of
December 31, 2018 and 2017, and for Each of the
Three Years in the Period Ended December 31, 2018







Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
 
at December 31,
2018

 
2017

Assets
 
 
 
Cash and cash equivalents
$
1,333

 
$
1,253

Receivables
142

 
142

Inventories:
 
 
 
Leaf tobacco
940

 
941

Other raw materials
186

 
170

Work in process
647

 
560

Finished product
558

 
554

 
2,331

 
2,225

Income taxes
167

 
461

Other current assets
326

 
263

Total current assets
4,299

 
4,344

 
 
 
 
Property, plant and equipment, at cost:
 
 
 
Land and land improvements
309

 
302

Buildings and building equipment
1,442

 
1,437

Machinery and equipment
2,981

 
2,975

Construction in progress
218

 
165

 
4,950

 
4,879

Less accumulated depreciation
3,012

 
2,965

 
1,938

 
1,914

 
 
 
 
Goodwill
5,196

 
5,307

Other intangible assets, net
12,279

 
12,400

Investment in AB InBev
17,696

 
17,952

Investment in JUUL
12,800

 

Other assets
1,430

 
1,285

Total Assets
$
55,638

 
$
43,202


See notes to consolidated financial statements.


2


Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
____________________________________________

at December 31,
2018

 
2017

Liabilities
 
 
 
Short-term borrowings
$
12,704

 
$

Current portion of long-term debt
1,144

 
864

Accounts payable
399

 
374

Accrued liabilities:
 
 
 
Marketing
586

 
695

Employment costs
189

 
188

Settlement charges
3,454

 
2,442

Other
1,214

 
971

Dividends payable
1,503

 
1,258

Total current liabilities
21,193

 
6,792

 
 
 
 
Long-term debt
11,898

 
13,030

Deferred income taxes
5,172

 
5,247

Accrued pension costs
544

 
445

Accrued postretirement health care costs
1,749

 
1,987

Other liabilities
254

 
283

Total liabilities
40,810

 
27,784

Contingencies (Note 19)

 

Redeemable noncontrolling interest
39

 
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
5,961

 
5,952

Earnings reinvested in the business
43,962

 
42,251

Accumulated other comprehensive losses
(2,547
)
 
(1,897
)
Cost of repurchased stock
(931,903,722 shares at December 31, 2018 and
904,702,125 shares at December 31, 2017)
(33,524
)
 
(31,864
)
Total stockholders’ equity attributable to Altria
14,787

 
15,377

Noncontrolling interests
2

 
3

Total stockholders’ equity
14,789

 
15,380

Total Liabilities and Stockholders’ Equity
$
55,638

 
$
43,202

 
See notes to consolidated financial statements.



3


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
____________________________________
 
for the years ended December 31,
2018

 
2017

 
2016

Net revenues
$
25,364

 
$
25,576

 
$
25,744

Cost of sales
7,373

 
7,531

 
7,765

Excise taxes on products
5,737

 
6,082

 
6,407

Gross profit
12,254

 
11,963

 
11,572

Marketing, administration and research costs
2,756

 
2,338

 
2,662

Asset impairment and exit costs
383

 
32

 
149

Operating income
9,115

 
9,593

 
8,761

Interest and other debt expense, net
665

 
705

 
747

Loss on early extinguishment of debt

 

 
823

Net periodic benefit (income) cost, excluding service cost
(34
)
 
37

 
(1
)
Earnings from equity investment in AB InBev/SABMiller
(890
)
 
(532
)
 
(795
)
Loss (gain) on AB InBev/SABMiller business combination
33

 
(445
)
 
(13,865
)
Earnings before income taxes
9,341

 
9,828

 
21,852

Provision (benefit) for income taxes
2,374

 
(399
)
 
7,608

Net earnings
6,967

 
10,227

 
14,244

Net earnings attributable to noncontrolling interests
(4
)
 
(5
)
 
(5
)
Net earnings attributable to Altria
$
6,963

 
$
10,222

 
$
14,239

Per share data:
 
 
 
 
 
Basic earnings per share attributable to Altria
$
3.69

 
$
5.31

 
$
7.28

Diluted earnings per share attributable to Altria
$
3.68

 
$
5.31

 
$
7.28


See notes to consolidated financial statements.



4


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

for the years ended December 31,
 
2018

 
2017

 
2016

Net earnings
 
$
6,967

 
$
10,227

 
$
14,244

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
 
 
Benefit plans
 
68

 
209

 
(38
)
AB InBev/SABMiller
 
(309
)
 
(54
)
 
1,265

Currency translation adjustments and other
 
(1
)
 

 
1

Other comprehensive (losses) earnings, net of deferred income taxes
 
(242
)
 
155

 
1,228

 
 
 
 
 
 
 
Comprehensive earnings
 
6,725

 
10,382

 
15,472

Comprehensive earnings attributable to noncontrolling interests
 
(4
)
 
(5
)
 
(5
)
Comprehensive earnings attributable to Altria
 
$
6,721

 
$
10,377

 
$
15,467


See notes to consolidated financial statements.



5


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
 
for the years ended December 31,
2018

 
2017

 
2016

Cash Provided by (Used in) Operating Activities
 
 
 
 
 
Net earnings
$
6,967

 
$
10,227

 
$
14,244

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
 
Depreciation and amortization
227

 
209

 
204

Deferred income tax (benefit) provision
(57
)
 
(3,126
)
 
3,119

Earnings from equity investment in AB InBev/SABMiller
(890
)
 
(532
)
 
(795
)
Loss (gain) on AB InBev/SABMiller business combination
33

 
(445
)
 
(13,865
)
Dividends from AB InBev/SABMiller
657

 
806

 
739

Asset impairment and exit costs, net of cash paid
354

 
(38
)
 
106

Loss on early extinguishment of debt

 

 
823

Cash effects of changes:
 
 
 
 
 
Receivables

 
10

 
(27
)
Inventories
(129
)
 
(171
)
 
(34
)
Accounts payable
27

 
(55
)
 
24

Income taxes
218

 
(294
)
 
(231
)
Accrued liabilities and other current assets
(21
)
 
(85
)
 
(113
)
Accrued settlement charges
980

 
(1,259
)
 
111

Pension and postretirement plans contributions
(41
)
 
(294
)
 
(531
)
Pension provisions and postretirement, net
(13
)
 
(11
)
 
(73
)
Other, net
79

 
(41
)
 
125

Net cash provided by operating activities
8,391

 
4,901

 
3,826

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
Capital expenditures
(238
)
 
(199
)
 
(189
)
Acquisitions of businesses and assets
(15
)
 
(415
)
 
(45
)
Investment in JUUL
(12,800
)
 

 

Proceeds from finance assets
37

 
133

 
231

Proceeds from AB InBev/SABMiller business combination

 

 
4,773

Purchase of AB InBev ordinary shares

 

 
(1,578
)
Proceeds from derivative financial instruments
35

 

 
510

Other, net
(7
)
 
14

 
6

Net cash (used in) provided by investing activities
(12,988
)
 
(467
)
 
3,708




6


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

for the years ended December 31,
2018

 
2017

 
2016

Cash Provided by (Used in) Financing Activities
 
 
 
 
 
Proceeds from short-term borrowings
$
12,800

 
$

 
$

Long-term debt issued

 

 
1,976

Long-term debt repaid
(864
)
 

 
(933
)
Repurchases of common stock
(1,673
)
 
(2,917
)
 
(1,030
)
Dividends paid on common stock
(5,415
)
 
(4,807
)
 
(4,512
)
Premiums and fees related to early extinguishment of debt

 

 
(809
)
Other, net
(132
)
 
(47
)
 
(21
)
Net cash provided by (used in) financing activities
4,716

 
(7,771
)
 
(5,329
)
Cash, cash equivalents and restricted cash:
 
 
 
 
 
Increase (decrease)
119

 
(3,337
)
 
2,205

Balance at beginning of year
1,314

 
4,651

 
2,446

Balance at end of year
$
1,433

 
$
1,314

 
$
4,651

Cash paid:   Interest
 
                                                  
$
704

 
$
696

 
$
775

  Income taxes
                                                     
$
2,307

 
$
3,036

 
$
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:
 
 
 
 
at December 31,
 
 
2018

 
2017

 
2016

Cash and cash equivalents
$
1,333

 
$
1,253

 
$
4,569

Restricted cash included in other current assets (1)
57

 
25

 

Restricted cash included in other assets (1)
43

 
36

 
82

Cash, cash equivalents and restricted cash
$
1,433

 
$
1,314

 
$
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.

See notes to consolidated financial statements.



7


Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
____________________________________
 
 
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, 2015
$
935

 
$
5,813

 
$
27,257

 
$
(3,280
)
 
$
(27,845
)
 
$
(7
)
 
$
2,873

Net earnings (1)

 

 
14,239

 

 

 

 
14,239

Other comprehensive earnings, net
of deferred income taxes

 

 

 
1,228

 

 

 
1,228

Stock award activity

 
90

 

 

 
(37
)
 

 
53

Cash dividends declared ($2.35 per share)

 

 
(4,590
)
 

 

 

 
(4,590
)
Repurchases of common stock

 

 

 

 
(1,030
)
 

 
(1,030
)
Other

 
(10
)
 

 

 

 
10

 

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

Reclassification due to adoption of ASU 2018-02 (2)

 

 
408

 
(408
)
 

 

 

Net earnings (1)

 

 
6,963

 

 

 

 
6,963

Other comprehensive losses, net of deferred
income taxes

 

 

 
(242
)
 

 

 
(242
)
Stock award activity

 
9

 

 

 
13

 

 
22

Cash dividends declared ($3.00 per share)

 

 
(5,660
)
 

 

 

 
(5,660
)
Repurchases of common stock

 

 

 

 
(1,673
)
 

 
(1,673
)
Other

 

 

 

 

 
(1
)
 
(1
)
Balances, December 31, 2018
$
935

 
$
5,961

 
$
43,962

 
$
(2,547
)
 
$
(33,524
)
 
$
2

 
$
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 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.
(2) For further discussion, see Note 15. Income Taxes.

See notes to consolidated financial statements.



8


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


9


$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


10


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:


11


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


12


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
Description
Effective Date for Public Entity
Effect on Financial Statements
ASU Nos. 2016-02; 2018-01; 2018-10; 2018-11; 2018-20
Leases (Topic 842)

The guidance requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.

The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted.

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.

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.
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.





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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
 
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.

Note 4. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows:
 
Goodwill
 
Other Intangible Assets, net
(in millions)
December 31, 2018

 
December 31, 2017

 
December 31, 2018

 
December 31, 2017

Smokeable products
$
99

 
$
99

 
$
3,037

 
$
3,054

Smokeless products
5,023

 
5,023

 
8,825

 
8,827

Wine
74

 
74

 
239

 
294

Other

 
111

 
178

 
225

Total
$
5,196

 
$
5,307

 
$
12,279

 
$
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.


14


Other intangible assets consisted of the following: 
 
December 31, 2018
 
December 31, 2017
(in millions)
Gross Carrying Amount

 
Accumulated Amortization

 
Gross Carrying Amount

 
Accumulated Amortization

Indefinite-lived intangible assets
$
11,846

 
$

 
$
12,125

 
$

Definite-lived intangible assets
654

 
221

 
465

 
190

Total other intangible assets
$
12,500

 
$
221

 
$
12,590

 
$
190

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
(in millions)
Goodwill
 
Other Intangible Assets, net
 
Goodwill
 
Other Intangible Assets, net
Balance at January 1
$
5,307

 
$
12,400

 
$
5,285

 
$
12,036

Changes due to:
 
 
 
 
 
 
 
   Acquisitions (1)

 
15

 
22

 
385

   Asset impairment (2) 
(111
)
 
(98
)
 

 

   Amortization

 
(38
)
 

 
(21
)
Balance at December 31
$
5,196

 
$
12,279

 
$
5,307

 
$
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.
 
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.



15


Note 5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs consisted of the following:
(in millions)
Asset Impairment
and Exit Costs
 
Implementation Costs
 
Total
For the year ended December 31,
2018

 
2017

 
2016

 
2018 (1)

 
2017 (1)

 
2016 (2)

 
2018

 
2017

 
2016

Smokeable products
$
82

 
$
5

 
$
125

 
$
1

 
$
17

 
$
9

 
$
83

 
$
22

 
$
134

Smokeless products
20

 
28

 
42

 
3

 
28

 
15

 
23

 
56

 
57

Wine (3)
54

 

 

 

 

 

 
54

 

 

All other
227

 

 
7

 
63

 

 

 
290

 

 
7

General corporate
3

 

 
5

 

 

 

 
3

 

 
5

Total
386

 
33

 
179

 
67

 
45

 
24

 
453

 
78

 
203

Less amounts included in net periodic benefit (income) cost, excluding service cost
3

 
1

 
30

 

 

 

 
3

 
1

 
30

Total
$
383

 
$
32

 
$
149

 
$
67

 
$
45

 
$
24

 
$
450

 
$
77

 
$
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
$
79

Charges
25

Cash spent
(71
)
Balances at December 31, 2017
33

Charges
154

Cash spent
(32
)
Balances at December 31, 2018
$
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


16


million, respectively. The total charges related primarily to accelerated depreciation and asset impairment ($55 million), 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:
 
For Altria’s Year Ended
December 31,
(in millions)
2018 (1)
2017 (1)
Net revenues
$
55,500

$
56,004

Gross profit
$
34,986

$
34,376

Earnings from
continuing operations
$
9,020

$
6,769

Net earnings
$
9,020

$
6,845

Net earnings attributable
to AB InBev
$
7,641

$
5,473

 
At September 30,
(in millions)
2018 (1)
 
2017 (1)
Current assets
$
20,289

 
$
30,920

Long-term assets
$
207,921

 
$
213,696

Current liabilities
$
32,019

 
$
37,765

Long-term liabilities
$
130,812

 
$
134,236

Noncontrolling interests
$
7,251

 
$
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,


17


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.
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)
 
For the Year Ended
December 31, 2016 (1)

Net revenues
 
$
14,543

Operating profit
 
$
2,099

Net earnings attributable to SABMiller
 
$
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.
 
The Restricted Shares:
are unlisted and not admitted to trading on any stock exchange;
are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;
are convertible into ordinary shares of AB InBev on a one-for-one basis after the end of this five-year lock-up period;
rank equally with ordinary shares of AB InBev with regards to dividends and voting rights; and
have director nomination rights with respect to AB InBev.
As a result of the 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


18


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


19


$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)
2018

 
2017

Notes, 2.625% to 10.20%, interest payable semi-annually, due through 2046 (1)
$
13,000

 
$
13,852

Debenture, 7.75%, interest payable semi-annually, due 2027
42

 
42

 
13,042

 
13,894

Less current portion of long-term debt
1,144

 
864

 
$
11,898

 
$
13,030

(1) Weighted-average coupon interest rate of 4.6% and 4.9% at December 31, 2018 and 2017, respectively.
At December 31, 2018, aggregate maturities of Altria’s long-term debt were as follows:
(in millions)
 
 
2019
$
1,144

 
2020
1,000

 
2021
1,500

 
2022
1,900

 
2023
350

 
Thereafter
7,259

 
 
13,153

 
Less: debt issuance costs
60

 
debt discounts
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.


20


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)
2016

Notes Purchased
 
9.95% Notes due 2038
$
441

10.20% Notes due 2039
492

Total
$
933

Pre-tax Loss on Early Extinguishment of Debt
Premiums and fees
$
809

Write-off of unamortized debt discounts and debt
issuance costs
14

Total
$
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:
 
Shares Issued

 
Shares
Repurchased

 
Shares
Outstanding

Balances, December 31, 2015
2,805,961,317

 
(845,901,836
)
 
1,960,059,481

Stock award activity

 
(566,256
)
 
(566,256
)
Repurchases of
common stock

 
(16,221,001
)
 
(16,221,001
)
Balances, December 31, 2016
2,805,961,317

 
(862,689,093
)
 
1,943,272,224

Stock award activity

 
(408,891
)
 
(408,891
)
Repurchases of
common stock

 
(41,604,141
)
 
(41,604,141
)
Balances, December 31, 2017
2,805,961,317

 
(904,702,125
)
 
1,901,259,192

Stock award activity

 
676,727

 
676,727

Repurchases of
common stock

 
(27,878,324
)
 
(27,878,324
)
Balances, December 31, 2018
2,805,961,317

 
(931,903,722
)
 
1,874,057,595

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
 
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
27.9

41.6

16.2

Aggregate cost of shares
repurchased
$
1,673

$
2,917

$
1,030

Average price per share of shares repurchased
$
60.00

$
70.10

$
63.48


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,


21


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:
 
Number of
Shares

 
Weighted-Average
Grant Date Fair 
Value Per Share

Balance at December 31, 2017
2,384,501

 
$
60.40

Granted
896,962

 
$
67.17

Vested
(998,145
)
 
$
56.44

Forfeited
(153,692
)
 
$
62.56

Balance at December 31, 2018
2,129,626

 
$
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:
 
For the Years Ended December 31,
(in millions)
2018

 
2017

 
2016

Net earnings attributable
to Altria
$
6,963

 
$
10,222

 
$
14,239

Less: Distributed and undistributed earnings attributable to
share-based awards
(8
)
 
(14
)
 
(24
)
Earnings for basic and
diluted EPS
$
6,955

 
$
10,208

 
$
14,215

Weighted-average shares for basic EPS
1,887

 
1,921

 
1,952

Plus: contingently issuable PSUs
1

 

 

Weighted-average shares for diluted EPS
1,888

 
1,921

 
1,952





22


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)
 
Benefit Plans

 
AB InBev/SABMiller

 
Currency
Translation
Adjustments and Other

 
Accumulated
Other
Comprehensive
Losses

Balances, December 31, 2015
 
$
(2,010
)
 
$
(1,265
)
 
$
(5
)
 
$
(3,280
)
Other comprehensive (losses) earnings before reclassifications
 
(247
)
 
787

 
1

 
541

Deferred income taxes
 
96

 
(276
)
 

 
(180
)
Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes
 
(151
)
 
511

(1) 
1

 
361

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
178

 
1,160

 

 
1,338

Deferred income taxes
 
(65
)
 
(406
)
 

 
(471
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
113

 
754

(2) 

 
867

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(38
)
 
1,265

 
1

 
1,228

Balances, December 31, 2016
 
(2,048
)
 

 
(4
)
 
(2,052
)
Other comprehensive earnings (losses) before reclassifications
 
52

 
(91
)
 

 
(39
)
Deferred income taxes
 
(21
)
 
32

 

 
11

Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 
31

 
(59
)
 

 
(28
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
291

 
8

 

 
299

Deferred income taxes
 
(113
)
 
(3
)
 

 
(116
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
178

 
5

 

 
183

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
209

 
(54
)
(3) 

 
155

Balances, December 31, 2017
 
(1,839
)
 
(54
)
 
(4
)
 
(1,897
)
Adoption of ASU No. 2018-02 (4)
 
(397
)
 
(11
)
 

 
(408
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(151
)
 
(323
)
 
(1
)
 
(475
)
Deferred income taxes
 
39

 
64

 

 
103

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(112
)
 
(259
)

(1
)

(372
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
241

 
(64
)
 

 
177

Deferred income taxes
 
(61
)
 
14

 

 
(47
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
180


(50
)



130

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
68

 
(309
)
(3) 
(1
)
 
(242
)
Balances, December 31, 2018
 
$
(2,168
)
 
$
(374
)
 
$
(5
)
 
$
(2,547
)
(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.


23


The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
 
 
For the Years Ended December 31,
(in millions)
 
2018

 
2017

 
2016

Benefit Plans: (1)
 
 
 
 
 
 
Net loss
 
$
276

 
$
325

 
$
223

Prior service cost/credit
 
(35
)
 
(34
)
 
(45
)
 
 
241

 
291

 
178

AB InBev/SABMiller (2)
 
(64
)
 
8

 
1,160

Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
177

 
$
299

 
$
1,338

(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.

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)
2018

 
2017

 
2016

Earnings (loss) before income taxes:
 
 
 
 
 
United States
$
9,441

 
$
9,809

 
$
21,867

Outside United States
(100
)
 
19

 
(15
)
Total
$
9,341

 
$
9,828

 
$
21,852

Provision (benefit) for
income taxes:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
1,911

 
$
2,346

 
$
4,093

State and local
519

 
366

 
390

Outside United States
1

 
15

 
6

 
2,431

 
2,727

 
4,489

Deferred:
 
 
 
 
 
Federal
(18
)
 
(3,213
)
 
3,102

State and local
(42
)
 
86

 
20

Outside United States
3

 
1

 
(3
)
 
(57
)
 
(3,126
)
 
3,119

Total pro