UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20122013
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Virginia | 13-3260245 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 6601 West Broad Street, Richmond, Virginia | 23230 |
| (Address of principal executive offices) | (Zip Code) |
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Name of each exchange on which registered |
Common Stock, $0.33 1/3 par value | New York Stock Exchange |
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| Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes ¨ No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) þ Yes ¨ No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer þ Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller operating company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨Yes þ No |
As of June 30, 2012,2013, the aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant was approximately $70 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
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Class | Outstanding at February 15, 201314, 2014 |
Common Stock, $0.33 1/3 par value | 2,009,855,2611,992,853,529 shares |
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Portions of the registrant'sregistrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on May 16, 2013,14, 2014, to be filed with the Securities and Exchange Commission on or about April 4, 20133, 2014 are incorporated by reference into Part III hereof. |
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| | TABLE OF CONTENTS | |
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| PART I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
| PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | | |
| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
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| Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | S-1 |
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| Valuation and Qualifying Accounts | S-2 |
Part I
Item 1. Business.
General Development of Business
▪General: Altria Group, Inc. is a holding company incorporated in the Commonwealth of Virginia in 1985. At December 31, 20122013, Altria Group, Inc.'s’s direct and indirect wholly-owned subsidiaries included Philip Morris USA Inc. ("(“PM USA"USA”), which is engaged in the manufacture and sale of cigarettes and certain smokeless tobacco products in the United States; John Middleton Co. ("Middleton"(“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC ("UST"(“UST”), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC ("USSTC"(“USSTC”) and Ste. Michelle Wine Estates Ltd. ("(“Ste. Michelle"Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Nu Mark LLC (“Nu Mark”), an indirect wholly-owned subsidiary of Altria Group, Inc., is engaged in the development and marketing of innovative tobacco products for adult tobacco consumers. Philip Morris Capital Corporation ("PMCC"(“PMCC”), another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held approximately 26.9%26.8% of the economic and voting interest of SABMiller plc ("SABMiller"(“SABMiller”) at December 31, 20122013, which Altria Group, Inc. accounts for under the equity method of accounting.
On January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST. The transaction was valued at approximately $11.7 billion, which represented a purchase price of $10.4 billion and approximately $1.3 billion of UST debt, which together with acquisition-related costs and payments of approximately $0.6 billion, represented a total cash outlay of approximately $11 billion. This acquisition was financed with long-term borrowings. As a result of the acquisition, UST became an indirect wholly-owned subsidiary of Altria Group, Inc.
On March 28, 2008, Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. ("PMI") to Altria Group, Inc. stockholders in a tax-free distribution. Following the distribution of PMI, Altria Group, Inc. does not own any shares of PMI stock. Altria Group, Inc. has reflected the results of PMI prior to the distribution as discontinued operations. The PMI spin-off resulted in a net decrease to Altria Group, Inc.'s total stockholders' equity of $14.7 billion on the distribution date. Following the PMI spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and PMI shares would receive initially, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the PMI spin-off.
▪•Source of Funds: Because Altria Group, Inc. is a holding company, its access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, 20122013, Altria Group, Inc.'s’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 common stock. In addition, Altria Group, Inc. receives cash
dividends on its interest in SABMiller if and when SABMiller pays such dividends.
Financial Information About Segments
Effective January 1, 2013, Altria Group, Inc.'s chief operating decision maker has been evaluating the operating results of the former cigarettes and cigars segments as a single smokeable products segment since January 1, 2012. The combination of these two formerly separate segments is related to the restructuring associated with the cost reduction program announced in October 2011 (the "2011 Cost Reduction Program"). Also, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA. For further discussion on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K ("Item 8").
Effective with the first quarter of 2012, and at December 31, 2012, Altria Group, Inc.'s’s reportable segments wereare smokeable products, smokeless products wine and wine. The financial services. Net revenuesservices and operating companies income (together with reconciliationthe alternative products businesses have been combined in an all other category due to earnings before income taxes) attributable to each such segment for eachthe continued reduction of the last three years are set forth in Note 15. Segment Reportinglease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s alternative products
businesses to Altria Group, Inc.’s consolidated results. Prior years’ amounts have been reclassified to conform with the consolidated financial statements in Item 8 ("Note 15").current year’s presentation.
Altria Group, Inc.'s’s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.'s’s chief operating decision maker. Net revenues and operating companies income (together with a reconciliation to earnings before income taxes) attributable to each such segment for each of the last three years are set forth in Note 15. Segment Reporting to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K (“Item 8”). Information about total assets by segment is not disclosed because such information is not reported to or used by Altria Group, Inc.'s’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 3. Goodwill and Other Intangible Assets, net to the consolidated financial statements in Item 8 (“Note 3”). The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 ("(“Note 2"2”).
The relative percentages of operating companies income (loss) attributable to each reportable segment and the all other category were as follows:
| | | | 2012 | 2011 | 2010 | 2013 | 2012 | 2011 |
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| Smokeable products | 83.7 | % | 90.5 | % | 84.6 | % | 84.5 | % | 83.7 | % | 90.5 | % |
| Smokeless products | 12.5 |
| 13.6 |
| 12.1 |
| 12.2 |
| 12.5 |
| 13.6 |
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| Wine | 1.4 |
| 1.4 |
| 0.9 |
| 1.4 |
| 1.4 |
| 1.4 |
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| Financial services | 2.4 |
| (5.5 | ) | 2.4 |
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| | 100.0 | % | 100.0 | % | 100.0 | % | |
| All other | | 1.9 |
| 2.4 |
| (5.5 | ) |
| Total | | 100.0 | % | 100.0 | % | 100.0 | % |
For items affecting the comparability of the relative percentages of operating companies income attributable to each reportable segment, see Note 15.
Effective with the first quarter of 2013, Altria Group, Inc.'s reportable segments will be smokeable products, smokeless products and wine. In connection with this revision, results of the financial services business and the alternative products business will be combined in an All Other category. Altria Group, Inc. is making these changes due Segment Reporting to the continued reduction of the lease portfolio of PMCC and the relativeconsolidated financial contribution of Altria Group, Inc.'s alternative products business to its consolidated results. Altria Group, Inc. will begin reporting the All Other category and presenting comparable results for prior periods with its 2013 first-quarter results.statements in Item 8 (“Note 15”).
Narrative Description of Business
Portions of the information called for by this Item are included in Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Operating Results by Business Segment of this Annual Report on Form 10-K.
Tobacco Space
Altria Group, Inc.'s’s tobacco operating companies include PM USA, USSTC and other subsidiaries of UST, Middleton and Middleton.Nu Mark. In addition, Altria Group Distribution Company provides
centralized sales, distribution and consumer engagement services for Altria Group, Inc.'s’s tobacco operating companies.
The products of Altria Group, Inc.'s’s tobacco subsidiaries include smokeable tobacco products, comprised of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; and smokeless tobacco products manufactured and sold primarily by or on behalf of USSTCUSSTC; and PM USA.innovative tobacco products, including electronic cigarettes developed and marketed by Nu Mark. Altria Group, Inc.'s’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 30%50% of adult smokers say they are interested in spit-free smokelesstrying innovative tobacco alternatives to cigarettes.products.
▪Cigarettes: PM USA is the largest cigarette company in the United States, with total cigarette shipment volume in the United States of approximately 134.9129.3 billion units in 2012,2013, a decrease of 0.2%4.1% from 2011.2012. Marlboro, the principal cigarette brand of PM
USA, has been the largest-selling cigarette brand in the United States for over 35 years.
▪Cigars: Middleton is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco to customers, substantially all of which are located in the United States. Middleton sources the production of a portion of its cigars overseas. Total shipment volume for cigars was approximately 1.2 billion units in 2012,2013, a decrease of 0.7%3.2% from 2011.2012. Black & Mild is the principal cigar brand of Middleton.
▪Smokeless tobacco products: USSTC is the leading producer and marketer of moist smokeless tobacco (“MST”) products. The smokeless products segment includes the premium brands, Copenhagen and Skoal, value brands, Red Seal and Husky, and Marlboro Snus, a premium PM USA spit-free smokeless tobacco product. Substantially all of the smokeless tobacco products are manufactured and sold to customers in the United States. Total smokeless products shipment volume was 763.3787.5 million units in 2012,2013, an increase of 3.9%3.2% from 2011.2012.
In addition, Altria Group, Inc.’s tobacco subsidiaries have entered the e-vapor category. In 2013, Nu Mark introduced MarkTen electronic cigarettes in Indiana and Arizona. Nu Mark plans to expand MarkTen nationally beginning in the second quarter of 2014. On February 3, 2014, Altria Group, Inc. announced Nu Mark’s entry into an agreement to acquire the e-vapor business of Green Smoke, Inc. and its affiliates, which have been selling e-vapor products since 2009. Further, in December 2013, Altria entered into a series of agreements with Philip Morris International Inc. (“PMI”) pursuant to which Altria Group, Inc. subsidiaries provide an exclusive license to PMI to sell Altria Group, Inc.’s e-vapor products outside the United States and PMI subsidiaries provide an exclusive license to Altria Group, Inc. subsidiaries to sell two of PMI’s heated tobacco product technologies in the United States.
▪Distribution, Competition and Raw Materials: Altria Group, Inc.'s’s tobacco subsidiaries sell their tobacco products
principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services.
The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, taste, price, product innovation, marketing, packaging and distribution constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price promotions and other discounts, including coupons, product promotions and allowances for new products.
In June 2009, the President signed into law the Family Smoking Prevention and Tobacco Control Act ("FSPTCA"(“FSPTCA”), which provides the United States Food and Drug Administration ("FDA"(“FDA”) with broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; the authority to require disclosures of related information; and the authority to enforce the FSPTCA and related regulations. The law also grants the FDA authority to extend its application, by regulation, to all other tobacco products, including cigars.cigars, pipe tobacco and electronic cigarettes. The FSPTCA imposes significant new restrictions on the advertising, promotion, sale advertising and promotiondistribution of tobacco products.products, including at retail. The FDA has indicated that it intends to regulate cigars, electronic cigarettes and other tobacco products, but it has not indicated a timeline for the issuance of final regulations. PM USA and a subsidiary of USSTC are subject to quarterly user fees as a result of this legislation, and the cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. PM USA, USSTC and other U.S. tobacco manufacturers have agreed to other marketing restrictions in the United States as part of the settlements of state health care cost recovery actions.
In the United States, under a contract growing program, PM USA purchases burley and flue-cured leaf tobaccos of various grades and styles directly from tobacco growers. Under the terms of this program, PM USA agrees to purchase the amount of tobacco specified in the grower contracts. PM USA also purchases a portion of its United States tobacco requirements
through leaf merchants. In 2003, PM USA and certain other defendants reached an agreement with plaintiffs to settle a suit filed on behalf of a purported class of tobacco growers and quota-holders. The agreement includes a commitment by each settling manufacturer defendant, including PM USA, to purchase a certain percentage of its leaf requirements from U.S. tobacco growers over a period of at least 10 years. These quantities are subject to adjustment in accordance with the terms of the settlement agreement.
Tobacco production in the United States was historically subject to government controls, including the production control programs administered by the United States Department of Agriculture (the "USDA"“USDA”). In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA"(“FETRA”) was signed into law. PM USA, USSTC, and Middleton are all subject to obligations imposed by FETRA. FETRA eliminated the federal
tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out is approximately $9.5 billion and is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. As a result of FETRA, Altria Group, Inc.'s’s subsidiaries recorded approximately $0.4 billion of charges to cost of sales during each of the years ended December 31, 2013, 2012 2011 and 2010.2011. Obligations imposed by FETRA expire after the third quarter of 2014.
In February 2011, PM USA filed a lawsuit in federal court challenging the USDA'sUSDA’s method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above and used by the FDA to calculate the industry'sindustry’s FDA user fees. PM USA asserts in this litigation that the USDA violated FETRA and its own regulations by failing to apply the most current federal excise tax ("FET"(“FET”) rates enacted by Congress which became effective in April 2009, in calculating the class share allocations. PM USA has filed administrative appeals of its FETRA assessments beginning in fiscal year 2011 (all of which have been denied by the USDA) and has submitted a petition for rulemaking with the USDA (which petition was denied by the USDA in November 2011), in each case asserting that the USDA erroneously failed to base the FETRA class share allocations on the current FET rates. PM USA is appealing the USDA'sUSDA’s calculations methodology as well as the denial of the petition for rulemaking and the denial of its quarterly assessment challenges. The Cigar Association of America has joined the litigation as a defendant intervenor. In October 2012, the district court dismissed the case over PM USA'sUSA’s objection and PM USA appealed. On November 20, 2013, the matter is now on appeal.appellate court affirmed the district court’s decision.
The quota buy-out did not have a material impact on Altria Group, Inc.'s’s 20122013 consolidated results, and Altria Group, Inc. does not currently anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2013 and 2014, when the obligations imposed by FETRA will expire.
USSTC purchases burley, dark fire-cured and air-cured tobaccos of various grades and styles from domestic tobacco
growers under a contract growing program as well as from leaf merchants.
Middleton purchases burley and dark air-cured tobaccos of various grades and styles through leaf merchants. Middleton does not have a contract growing program.
Altria Group, Inc.'s’s tobacco subsidiaries believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipated production requirements.
Wine
Altria Group, Inc. acquired UST and its premium wine business, Ste. Michelle, in January 2009. Ste. Michelle is a producer of premium varietal and blended table wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle,Columbia Crest and Columbia Crest14 Hands , and owns wineries
in or distributes wines from several other wine regions and foreign countries. Ste. Michelle'sMichelle’s total 20122013 wine shipment volume of 7.6approximately 8.0 million cases increased 3.7%5.0% from 20112012.
Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag'sStag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon. In addition, Ste. Michelle distributesimports and markets Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States.
▪Distribution, Competition and Raw Materials: Key elements of Ste. Michelle'sMichelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.
Ste. Michelle'sMichelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle'sMichelle’s sales occur through state-licensed distributors.
Federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle'sMichelle’s wine business.
Ste. Michelle uses grapes harvested from its own vineyards or purchased from independent growers, as well as bulk wine purchased from other sources. Grape production can be adversely affected by weather and other forces that may limit production. At the present time, Ste. Michelle believes that there is a sufficient supply of grapes and bulk wine available in the market to satisfy its current and expected production requirements.
Financial Services Business
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its existing portfolio of finance assets in order to maximize gainsits operating results and generate cash flowflows from its existing lease portfolio activities and asset sales and related activities. Accordingly, PMCC's operating companies income will fluctuate over time as investments mature or are sold.
At December 31, 2012, PMCC's investments insales. For further information on PMCC’s finance leases were principally comprised of the following investment categories: aircraft (33%), rail and surface transport (24%), electric power (24%), real estate (13%) and manufacturing (6%). There were no investments located outside the United States at December 31, 2012.
Seeassets, see Note 7. Finance Assets, net, Note 14. Income Taxes and Note 18. Contingencies to the consolidated financial statements in Item 8 for a discussion of a closing agreement with the Internal Revenue Service ("IRS"(“Note 7”) that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC..
Other Matters
▪Customers: The largest customer of PM USA, USSTC and Middleton, McLane Company, Inc., accounted for approximately 27% of Altria Group, Inc.'s’s consolidated net revenues for each of the years ended December 31, 20122013, 20112012 and 20102011. These net revenues were reported in the smokeable products and smokeless products segments.
Sales to three distributors accounted for approximately 66%, 66% and 65% of net revenues for the wine segment for each of the years ended December 31, 20122013, 20112012 and 20102011, respectively..
▪Employees: At December 31, 20122013, Altria Group, Inc. and its subsidiaries employed approximately 9,1009,000 people.
▪Executive Officers of Altria Group, Inc.: The disclosure regarding executive officers is included in Item 10. Directors, Executive Officers and Corporate Governance - Executive Officers as of February 15, 201314, 2014 of this Annual Report on Form 10-K.
▪Research and Development: Research and development expense for the years ended December 31, 20122013, 20112012 and 20102011 is set forth in Note 17. Additional Information to the consolidated financial statements in Item 8.
▪Intellectual Property: Trademarks are of material importance to Altria Group, Inc. and its operating companies, and are protected by registration or otherwise. In addition, as of December 31, 20122013, the portfolio of over 500600 United States patents owned by Altria Group, Inc.'s’s businesses, as a whole, was material to Altria Group, Inc. and its tobacco businesses. However, no one patent or group of related patents was material to Altria Group, Inc.'s’s business or its tobacco businesses as of December 31, 20122013. Altria Group, Inc.'s’s businesses also have proprietary secrets, technology, know-how, processes and other intellectual property rights that are protected by appropriate confidentiality measures. Certain trade secrets are material to Altria Group, Inc. and its tobacco and wine businesses.
▪Environmental Regulation: Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund"“Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.'s’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. As discussed in Note 2, Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related
expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.'s’s consolidated results of operations, capital expenditures, financial position or cash flows.
Financial Information About Geographic Areas
Substantially all of Altria Group, Inc.'s’s net revenues are from sales generated in the United States for each of the last three fiscal years and substantially all of Altria Group, Inc.'s’s long-lived assets are located in the United States.
Available Information
Altria Group, Inc. is required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"(“SEC”). Investors may read and copy any document that Altria Group, Inc. files, including this Annual Report on Form 10-K, at the SEC'sSEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Altria Group, Inc.'s’s SEC filings.
Altria Group, Inc. makes available free of charge on or through its website (www.altria.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after Altria Group, Inc. electronically files such material with, or furnishes it to, the SEC. Investors can access Altria Group, Inc.'s’s filings with the SEC by visiting www.altria.com/secfilings.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this report or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 1A. Risk Factors.
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial conditionposition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.
We*We (1) may from time to time make written or oral forward-looking statements, including earnings guidance and other
1 This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.
statements contained in filings with the SEC, in reports to security holders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "estimates," "forecasts," "intends," "projects," "goals," "objectives," "guidance," "targets"“strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. InvestorsYou should bear this in mind as theyyou consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.'s’s securities. In connection with the "safe harbor"“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in the Business Environment “Business Environment” sections preceding our discussion of operating results of our subsidiaries'subsidiaries’ businesses in Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K ("(“Item 7"7”). You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending
or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments,contraband-related claims, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified
in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants'defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed in Note 18. Contingencies to the consolidated financial statements in Item 8 ("(“Note 18"18”), tobacco litigation plaintiffs have challenged the constitutionality of Florida'sFlorida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
*This section uses the terms "we," "our" and "us" when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.
In certain litigation, PM USA faces potentially significant non-monetary remedies. For example, in the lawsuit brought by the United States Department of Justice, discussed in Note 18, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of "corrective statements"“corrective statements” in various media.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. See Item 3. Legal Proceedings of this Annual Report on Form 10-K (“Item 3”), Note 18 and Exhibits 99.1 and 99.2 to this
Annual Report on Form 10-K for a discussion of pending tobacco-related litigation.
Tobacco Regulation and Control Action in the Public and Private Sectors
Our tobacco subsidiaries face significant governmental and private sector action, including efforts aimed at reducing the incidence of tobacco use, restricting marketing and advertising, imposing regulations on packaging, requiring warnings and disclosure of flavors or other ingredients, prohibiting the sale of tobacco products with certain characterizing flavors or other characteristics, requiring premarket authorization of certain tobacco products, limiting or prohibiting the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packingpackage sizes, and seeking to hold them responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.
PM USA, USSTC and other Altria Group, Inc. subsidiaries are subject to regulation, and may become subject to additional regulation, by the FDA, as discussed in detail inTobacco Space - Business Environment - FSPTCA and FDA RegulationinItem 7. We cannot predict how the FDA will implement and enforce its statutory authority, including by promulgating additional regulations, taking other regulatory actions and pursuing possible investigatory or enforcement actions.
Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels. Actions by the FDA, or other federal, state or local governments or agencies mayand private sector entities, such as those which impact the consumer acceptability
of tobacco products, limit adult consumer choices, delay or prevent the launch of new or modified tobacco products, restrict communications to adult consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, require the recall or removal of tobacco products from the marketplace (including without limitation as a result of product contamination), interrupt manufacturing or otherwise significantly increase the cost of doing business, all or anyrestrict the use of whichspecified tobacco products in certain locations or the sale of tobacco products by certain retail establishments, may have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.
Excise Taxes
Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the state, federal and local levels. Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our tobacco products due tosubsidiaries through lower consumption levels and to athe potential shift in adult consumer purchases from the premium to the non-premiumnon-
premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the reported share performance of tobacco products of Altria Group, Inc.'s’s tobacco subsidiaries. For further discussion, see Tobacco Space - Business Environment - Excise Taxes in Item 7.
Increased Competition in the United States Tobacco Categories
Each of Altria Group, Inc.'s’s tobacco subsidiaries operates in highly competitive tobacco categories. Settlements of certain tobacco litigation in the United States, among other factors, have resulted in substantial cigarette price increases. PM USA faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers'manufacturers’ cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and increased imports of foreign lowest priced brands. USSTC faces significant competition in the smokeless tobacco category both from existing competitors and new entrants, and has experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.
New Product Technologies
Altria Group, Inc.'s’s subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and potentially outside the United States) products that meet their taste expectations and evolving preferences. Potential solutions being researched include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. These efforts may include arrangements with, or investments in, third parties. Moreover, these effortsOur subsidiaries may not succeed. If our subsidiaries do not succeed in their efforts,efforts. If they do not succeed, but one or more of their competitors does, our subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of such products with claims of reduced risk to consumers (or otherwiseor whether consumers’ purchase decisions would be affected by such claims. Nor can we predict whether regulators will impose an unduly burdensome regulatory framework on such products) or whether consumers' purchase decisions would be affected by such claims, whichproducts. Any of these developments could adversely affect the commercial viability of any such products that might be developed.new products.
Adjacency Growth Strategy
Altria Group, Inc. and its subsidiaries have adjacency growth strategies involving moves and potential moves into complementary products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful. For a related discussion, seeNew Product Technologies above.
Tobacco Price, Availability and Quality
Any significant change in tobacco leaf prices, quality or availability could adversely affect our tobacco subsidiaries'subsidiaries’ profitability and business. For a discussion of factors that influence leaf prices, availability and quality, see Tobacco Space - Business Environment - Tobacco Price, Availability and Qualityin Item 7.
Tobacco Key Facilities; Supply Security
Altria Group, Inc.'s’s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of significant suppliers. A natural or man-made disaster or other disruption that affects the manufacturing facilitiesoperations of any of Altria Group, Inc.'s’s tobacco subsidiaries or the facilitiesoperations of any significant suppliers of any of Altria Group, Inc.'s’s tobacco subsidiaries could adversely impact the operations of the affected subsidiaries. An extended disruption in operations experienced by one or more Altria Group, Inc. subsidiaries or significant suppliers could have a material adverse effect on the business, the consolidated results of operations, cash flows and financial position of Altria Group, Inc.
Attracting and Retaining Talent
Our ability to implement our strategy of attracting and retaining
the best talent may be impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best talent.
Competition, Evolving Adult Consumer Preferences and Economic DownturnsConditions
Each of our tobacco and wine subsidiaries is subject to intense competition changes in consumer preferences and changes in economic conditions.adult consumer preferences. To be successful, they must continue to:
▪promote brand equity successfully;
▪anticipate and respond to new and evolving adult consumer preferences;
▪develop, newmanufacture, market and distribute products and markets within and potentially outside of the United States and broaden brand portfoliosthat appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, order to compete effectively with lower-priced products;third parties);
▪improve productivity; and
▪protect or enhance margins through cost savings and price increases.
See Tobacco Space - Business Environment - Summary in Item 7 for additional discussion concerning evolving adult tobacco consumer preferences, including increased consumer awareness of, and expenditures on, electronic cigarettes. Continued growth of this product category could further contribute to reductions in cigarette consumption levels and cigarette industry sales volume, and could adversely affect the growth rates of other tobacco products.
The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions.conditions, which can have a material adverse effect on the business, consolidated results of operations, cash flows and financial position of Altria Group, Inc. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products. The results of ourOur tobacco and wine subsidiaries could suffer accordingly.work to broaden their brand portfolios to compete effectively with lower-priced products.
Our finance subsidiary, PMCC,financial services business (conducted through PMCC) holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If parties to PMCC'sPMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.
Acquisitions
Altria Group, Inc. from time to time considers acquisitions. From time to time, we may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or other event could impact our credit ratings or the outlook for those ratings. Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms, that we will realize any of the anticipated benefits from an acquisition or that acquisitions will be quickly accretive to earnings.
Capital Markets
Access to the capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the capital markets and any resulting tightening of credit availability, pricing and/or credit terms may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
Exchange Rates
For purposes of financial reporting, the earnings of SABMiller are translated into U.S. dollars from various local currencies based on average exchange rates prevailing during a reporting
period. During times of a strengthening U.S. dollar against these currencies, our reported equity earnings in SABMiller will be reduced because the local currencies will translate into fewer U.S. dollars.
Asset Impairment
We periodically calculate the fair value of our goodwill and other intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. If an impairment is determined to exist, we will incur impairment losses, which will reduce our earnings. For further discussion, see Critical Accounting Policies and Estimates in Item 7.
Wine - Competition; Grape Supply; Regulation and Excise Taxes
Ste. Michelle'sMichelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. The adequacy of Ste. Michelle'sMichelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle'sMichelle’s sales. In addition, federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages, may have an adverse effect on Ste. Michelle'sMichelle’s wine business. For further discussion, see Wine Segment - Business Environmentin Item 7.
Information Systems
Altria Group, Inc. and its subsidiaries use information systems to help manage business processes, collect and interpret business data and communicate internally and externally with employees, investors, suppliers, customers and others. Many of these
information systems are managed by third-party service providers. We have backup systems and business continuity plans in place and we take care to protect our systems and data from unauthorized access. Nevertheless, failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could result in loss of revenue, assets or personal or other sensitive data, cause damage to the reputation of our companies and their brands and result in legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.
Governmental Investigations
From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. We
cannot predict whether new investigations may be commenced or the outcome of such investigations, and it is possible that our subsidiaries' businessesbusiness could be materially affected by an unfavorable outcome of future investigations.
International Business Operations
While Altria Group, Inc. and its subsidiaries are primarily engaged in business activities in the United States, they do engage (directly or indirectly) in certain international business activities that are subject to various United States and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and other laws prohibiting bribery and corruption. Although we have a Code of Conduct and a compliance system designed to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees or third parties. Violations of these laws, or allegations of such violations, could result in reputational harm, legal challenges and/or significant costs.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The property in Richmond, Virginia that serves as the headquarters facility for Altria Group, Inc., PM USA, USSTC, and Middleton, Nu Mark and certain other subsidiaries is under lease.
At December 31, 20122013, the smokeable products segment utilizedused four manufacturing and processing facilities. PM USA owns and operates two tobacco manufacturing and processing facilities located in the Richmond, Virginia area that are utilizedused in the manufacturing and processing of cigarettes. Middleton owns and operates two manufacturing and processing facilities - one in King of Prussia, Pennsylvania and one in Limerick, Pennsylvania - that are utilizedused in the manufacturing and processing of cigars and pipe tobacco. In addition, PM USA owns a research and technology center in Richmond, Virginia that is leased to an affiliate, Altria Client Services Inc.
At December 31, 20122013, the smokeless products segment utilizedused four smokeless tobacco manufacturing and processing facilities located in Franklin Park, Illinois; Hopkinsville, Kentucky; Nashville, Tennessee; and Richmond, Virginia, all of which are owned and operated by a wholly-owned subsidiary of USSTC.
At December 31, 20122013, the wine segment utilizedused 11 wine-making facilities - seven in Washington, three in California and one in Oregon. All of these facilities are owned and operated by Ste. Michelle, with the exception of a facility that is leased by Ste. Michelle in Washington. In addition, in order to support the production of its wines, the wine segment utilizedused vineyards in Washington, California and Oregon which are leased or owned by Ste. Michelle.
The plants and properties owned or leased and operated by Altria Group, Inc. and its subsidiaries are maintained in good
condition and are believed to be suitable and adequate for present needs.
Item 3. Legal Proceedings.
The information required by this Item is included in Note 18 and Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K. Altria Group, Inc.'s’s consolidated financial statements and accompanying notes for the year ended December 31, 20122013 were filed on Form 8-K on January 31, 201330, 2014 (such consolidated financial statements and accompanying notes are also included in Item 8). The following summarizes certain developments in Altria Group, Inc.'s’s litigation since the filing of such Form 8-K. Certain terms used below that are not defined in this Item have the meanings given to them in Note 18.
Recent Developments
Smoking andHealth Litigation
▪Non-Engle Progeny Trial Results:
In Schwarz, on February 10, 2014, PM USA opposed plaintiff’s motion to certify PM USA’s appeal to the Oregon Supreme Court.
▪Engle Progeny Cases: On January 31, 2013, in the Kayton (formerly Tate) case, PM USA filed a notice to invoke discretionary jurisdiction with the Florida Supreme Court. Also, on January 31, 2013, in the Hatziyannakis case, PM USA filed a motion for a citation in order to facilitate further review of the case in the Florida Supreme Court.Trial Results:
In WilderReider, on February 25, 2014, a case pendingjury in the United StatesU.S. District Court for the Middle District of Florida (Fort Myers)(Jacksonville) returned a verdict in the amount of zero damages and allocated 5% of the fault to PM USA.
In R. Cohen, on February 24, 2014, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case.
On February 20, 2014, the Florida Supreme Court scheduled oral argument of the Hess and Russo (formerly Frazier) cases for April 30, 2014 on the question of whether the statute of repose applies in Engle progeny cases.
In Goveia, an Orange County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds Tobacco Company (“R.J. Reynolds”). On February 17, 2014, the jury awarded $850,000 in compensatory damages. On February 18, 2014, the jury awarded $2.25 million in punitive damages against each defendant.
In Gonzalez, a Miami-Dade County jury returned a verdict in favor of PM USA on February 5, 2013.6, 2014.
OnIn Allen, on February 8, 2013 in14, 2014, the Naugle case, PM USA filed aFlorida Supreme Court denied plaintiff’s notice to invoke the discretionary jurisdiction of the Florida Supreme Court. Plaintiff also filed a notice
In Naugle, on February 22, 201313, 2014, the Florida Supreme Court denied each of PM USA’s and plaintiff’s notices to invoke the discretionary jurisdiction of the Florida Supreme Court.Court for review of the original verdict.
On February 13, 2013, the Florida Fourth District Court of Appeal affirmedIn per curiam Barbanellthe trial court's decision in favor of the plaintiff in the Weingart case.
With respect to the federal Engle progeny cases,, on February 13, 2013,2014, the defendants filedFlorida Supreme Court denied PM USA’s notice to invoke the discretionary jurisdiction of the Florida Supreme Court. PM USA will record a motion for reconsideration by the United States District Courtprovision of approximately $3.6 million for the Middle Districtjudgment plus interest and associated costs in the first quarter of Florida of its order directing the parties to engage in mediation to negotiate an aggregate settlement of all pending federal cases.
▪Non-Engle Progeny Case (Alaska): In the smoking and health case in Alaska in which a verdict was returned in favor of PM USA, the trial court withdrew on February 14, 2013 its prior order for a new trial upon PM USA's motion for reconsideration. On February 25, 2013, the plaintiff filed a motion for the trial court to reconsider its February 14, 2013 ruling and reinstate its prior order.2014.
Health Care Cost Recovery Litigation
▪Other Disputes Related to Master Settlement Agreement ("MSA") Payments:Possible Adjustments in MSA Payments for 2003 - 2012: On February 14, 2013, an11, 2014, the Colorado state court denied Colorado’s motion to vacate the Stipulated Award issued by the arbitration panel (which is a separate panel fromin connection with the one in the pending non-participating manufacturer adjustment disputes discussed in Note 18) issued a ruling in favorsettlement of the MSA states in2003 - 2012 NPM Adjustments with certain signatory states.
“Lights/Ultra-Lights” Cases
In the dispute over the method of converting ounces of "roll your own" tobacco into individual cigarettes for purposes of calculating PM USA's and the other participating manufacturer's downward volume adjustments. Consequently,Cabbat case, on February 3, 2014, PM USA will not receive any credit againstfiled its future MSA paymentsopposition to plaintiffs’ petition for review by the approximately $92 million in excess payments that PM USA believed it made in 2004 - 2012 as a result of this issue.
This same arbitration panel also issued a ruling in the dispute over whether the "adjusted gross" or the "net" number of cigarettes on which federal excise tax is paid is the correct methodology for calculating MSA payments due from certain subsequent participating manufacturers. It is unclear precisely which past and future MSA payments may be affected by this ruling. PM USA also does not currently have access to the data that would be necessary to determine the magnitude and the direction of such effects, if any.
▪Federal Government's Lawsuit: On February 15, 2013, the United StatesU.S. Court of Appeals for the DistrictNinth Circuit of Columbia Circuit granted defendants' motion to hold their noticethe trial court’s denial of appeal from the corrective statements order in abeyance.class certification.
"Lights/Ultra Lights" Cases
In the Aspinall case, on February 1, 2013,7, 2014, the Massachusetts Supreme JudicialSuperior Court upon agreementdenied plaintiffs’ motion for partial summary judgment on the remedies available and concluded that plaintiffs cannot obtain disgorgement of profits as an equitable remedy and their recovery is limited to actual damages or $25 per class member if they cannot prove actual damages greater than $25. On February 24, 2014, plaintiffs filed a motion asking the parties, voluntarily dismissed Altria Group, Inc. without prejudice. PM USA is nowtrial court to report the sole defendant inFebruary 7, 2014 ruling to the case.Massachusetts Appeals Court for review.
In the CarrollBrown case, on February 6, 2013,14, 2014, the trial court approved the parties' stipulation to the dismissal without prejudice of Altria Group, Inc. and PMI.awarded PM USA is now$764,553 in costs and declined to issue sanctions against PM USA for alleged discovery violations. On February 24, 2014, plaintiffs appealed the sole defendantcosts award.
The re-trial in the case.
In the PriceLarsen case is scheduled to begin on February 15, 2013, the Illinois Supreme Court denied PM USA's motion asking the Court to immediately exercise its jurisdiction over PM USA's appeal.January 12, 2015.
Item 4. Mine Safety Disclosures.
Not applicable.
Part II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal stock exchange on which Altria Group, Inc.'s’s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange. At February 15, 2013,14, 2014, there were approximately 82,00078,000 holders of record of Altria Group, Inc.'s’s common stock.
Performance Graph
The graph below compares the cumulative total shareholder return of Altria Group, Inc.'s’s common stock for the last five years with the cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group Index (1). The graph assumes the investment of $100 in common stock and each of the indices as of the market close on December 31, 20072008 and the reinvestment of all dividends on a quarterly basis. On March 28, 2008, Altria Group, Inc. spun off its entire interest in Philip Morris International Inc. ("PMI") to its shareholders. The spin-off is treated as a special dividend for the purposes of calculating total shareholder return, with the then current market value of the distributed shares being deemed to have been reinvested on the spin-off date in shares of Altria Group, Inc.
| | | Date | | Altria Group, Inc. | | Altria Group, Inc. Peer Group | | S&P 500 | | Altria Group, Inc. | | Altria Group, Inc. Peer Group | | S&P 500 |
| December 2007 | | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
| |
| December 2008 | | $ | 68.69 |
| | $ | 80.27 |
| | $ | 63.00 |
| | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
|
| December 2009 | | $ | 96.38 |
| | $ | 98.98 |
| | $ | 79.67 |
| | $ | 140.31 |
| | $ | 123.32 |
| | $ | 126.45 |
|
| December 2010 | | $ | 129.07 |
| | $ | 112.44 |
| | $ | 91.67 |
| | $ | 187.90 |
| | $ | 140.08 |
| | $ | 145.49 |
|
| December 2011 | | $ | 164.77 |
| | $ | 128.86 |
| | $ | 93.60 |
| | $ | 239.88 |
| | $ | 160.54 |
| | $ | 148.56 |
|
| December 2012 | | $ | 184.17 |
| | $ | 140.34 |
| | $ | 108.58 |
| | $ | 268.11 |
| | $ | 177.76 |
| | $ | 172.32 |
|
| December 2013 | | | $ | 344.68 |
| | $ | 222.32 |
| | $ | 228.12 |
|
Source: Bloomberg - "Total“Total Return Analysis"Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.
(1)The Altria Group, Inc. Peer Group consists of 1314 U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.'s’s tobacco operating companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., H. J. Heinz Company, The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Mondelēz International, Inc. (formerly, Kraft Foods Group, Inc.), Lorillard, Inc. ("Lorillard"), PepsiCo, Inc., and Reynolds American Inc.
Note - During the five year measuring period, certain members of the Altria Group, Inc. Peer Group issued special dividends that were also included in the calculation of total shareholder return for the Altria Group, Inc. Peer Group Index. Lorillard's performance was represented by a tracking stock, Carolina Group (CG), from December 2007 through June 9, 2008. Lorillard (LO) began trading as an independent company on June 10, 2008. On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to Mondelēz International, Inc. (MDLZ). H. J. Heinz Company’s (HNZ) performance was tracked from December 31, 2008 through June 7, 2013, when it was acquired by Berkshire Hathaway Inc. and 3G Special Situations Fund III, L.P.
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 20122013
In October 2011, Altria Group, Inc.'s’s Board of Directors (the “Board of Directors”), authorized a new $1.0 billion$300 million share repurchase program which wasin April 2013 and expanded it to $1.5$1.0 billion in October 2012 (the "October 2011August 2013 (as expanded, the “April 2013 share repurchase program"program”). Altria Group, Inc. expects to complete the October 2011 share repurchasethis program by June 30, 2013.the end of the third quarter of 2014. The timing of share repurchases under the October 2011April 2013 share repurchase program depends onupon marketplace conditions and other factors, and thefactors. The April 2013 share repurchase program remains subject to the discretion of the Board of Directors.
Altria Group, Inc.'s Board of Directors. Altria Group, Inc.'s’s share repurchase activity for each of the three months in the period ended December 31, 2012,2013, was as follows:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (3) |
| | | | | | | | | |
| October 1- October 31, 2012 | | 481,227 |
| | $ | 31.93 |
| | 31,840,000 |
| | $ | 534,813,024 |
|
| November 1- November 30, 2012 | | 8,730,000 |
| | $ | 32.13 |
| | 40,570,000 |
| | $ | 254,316,339 |
|
| December 1- December 31, 2012 | | 6,052,480 |
| | $ | 32.61 |
| | 46,620,000 |
| | $ | 57,021,354 |
|
| For the Quarter Ended December 31, 2012 | | 15,263,707 |
| | $ | 32.31 |
| | | | |
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
| | | | | | | | | |
| October 1- October 31, 2013 | | 267,431 |
| | $ | 34.66 |
| | 8,467,100 |
| | $ | 700,143,797 |
|
| November 1- November 30, 2013 | | 3,832,583 |
| | $ | 37.50 |
| | 12,297,100 |
| | $ | 556,516,997 |
|
| December 1- December 31, 2013 | | 2,688,135 |
| | $ | 37.24 |
| | 14,978,100 |
| | $ | 456,685,481 |
|
| For the Quarter Ended December 31, 2013 | | 6,788,149 |
| | $ | 37.28 |
| | | | |
| |
(1) | The total number of shares purchased include (a) shares purchased under the October 2011April 2013 share repurchase program (which totaled 480,000264,000 shares in October, 8,730,0003,830,000 shares in November and 6,050,0002,681,000 shares in December) and (b) shares withheld by Altria Group, Inc. in an amount equal to the statutory withholding for employeesholders who vested in restricted and deferred stock and used shares to pay all or a portion of the related taxes, and forfeitures of restricted stock for which consideration was paid in connection with termination of employment of certain employees (which totaled 1,2273,431 shares in October, 2,583 shares in November and 2,4807,135 shares in December). |
| |
(2) | Aggregate number of shares purchased under the October 2011April 2013 share repurchase program as of the end of the period presented. |
| |
| Reflects the expansion of the October 2011 share repurchase program from $1.0 billion to $1.5 billion, which was authorized by Altria Group, Inc.'s Board of Directors in October 2012. |
The other information called for by this Item is included in Note 20. Quarterly Financial Data (Unaudited) to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K ("Item 8").
Item 6. Selected Financial Data.
(in millions of dollars, except per share and employee data)
| | | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| Summary of Operations: | | | | | | | | | | | | | | | | | | |
| Net revenues | $ | 24,618 |
| | $ | 23,800 |
| | $ | 24,363 |
| | $ | 23,556 |
| | $ | 19,356 |
| $ | 24,466 |
| | $ | 24,618 |
| | $ | 23,800 |
| | $ | 24,363 |
| | $ | 23,556 |
|
| Cost of sales | 7,937 |
| | 7,680 |
| | 7,704 |
| | 7,990 |
| | 8,270 |
| 7,206 |
| | 7,937 |
| | 7,680 |
| | 7,704 |
| | 7,990 |
|
| Excise taxes on products | 7,118 |
| | 7,181 |
| | 7,471 |
| | 6,732 |
| | 3,399 |
| 6,803 |
| | 7,118 |
| | 7,181 |
| | 7,471 |
| | 6,732 |
|
| Operating income | 7,253 |
| | 6,068 |
| | 6,228 |
| | 5,462 |
| | 4,882 |
| 8,084 |
| | 7,253 |
| | 6,068 |
| | 6,228 |
| | 5,462 |
|
| Interest and other debt expense, net | 1,126 |
| | 1,216 |
| | 1,133 |
| | 1,185 |
| | 167 |
| 1,049 |
| | 1,126 |
| | 1,216 |
| | 1,133 |
| | 1,185 |
|
| Earnings from equity investment in SABMiller | 1,224 |
| | 730 |
| | 628 |
| | 600 |
| | 467 |
| 991 |
| | 1,224 |
| | 730 |
| | 628 |
| | 600 |
|
| Earnings from continuing operations before income taxes | 6,477 |
| | 5,582 |
| | 5,723 |
| | 4,877 |
| | 4,789 |
| |
| Pre-tax profit margin from continuing operations | 26.3 | % | | 23.5 | % | | 23.5 | % | | 20.7 | % | | 24.7 | % | |
| Earnings before income taxes | | 6,942 |
| | 6,477 |
| | 5,582 |
| | 5,723 |
| | 4,877 |
|
| Pre-tax profit margin | | 28.4 | % | | 26.3 | % | | 23.5 | % | | 23.5 | % | | 20.7 | % |
| Provision for income taxes | 2,294 |
| | 2,189 |
| | 1,816 |
| | 1,669 |
| | 1,699 |
| 2,407 |
| | 2,294 |
| | 2,189 |
| | 1,816 |
| | 1,669 |
|
| Earnings from continuing operations | 4,183 |
| | 3,393 |
| | 3,907 |
| | 3,208 |
| | 3,090 |
| |
| Earnings from discontinued operations, net of income taxes | — |
| | — |
| | — |
| | — |
| | 1,901 |
| |
| Net earnings | 4,183 |
| | 3,393 |
| | 3,907 |
| | 3,208 |
| | 4,991 |
| 4,535 |
| | 4,183 |
| | 3,393 |
| | 3,907 |
| | 3,208 |
|
| Net earnings attributable to Altria Group, Inc. | 4,180 |
| | 3,390 |
| | 3,905 |
| | 3,206 |
| | 4,930 |
| 4,535 |
| | 4,180 |
| | 3,390 |
| | 3,905 |
| | 3,206 |
|
| Basic EPS — continuing operations | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.55 |
| | 1.49 |
| |
| — discontinued operations | — |
| | — |
| | — |
| | — |
| | 0.88 |
| |
| — net earnings attributable to Altria Group, Inc. | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.55 |
| | 2.37 |
| |
| Diluted EPS — continuing operations | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.54 |
| | 1.48 |
| |
| — discontinued operations | — |
| | — |
| | — |
| | — |
| | 0.88 |
| |
| — net earnings attributable to Altria Group, Inc. | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.54 |
| | 2.36 |
| |
| Basic EPS — net earnings attributable to Altria Group, Inc. | | 2.26 |
| | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.55 |
|
| Diluted EPS — net earnings attributable to Altria Group, Inc. | | 2.26 |
| | 2.06 |
| | 1.64 |
| | 1.87 |
| | 1.54 |
|
| Dividends declared per share | 1.70 |
| | 1.58 |
| | 1.46 |
| | 1.32 |
| | 1.68 |
| 1.84 |
| | 1.70 |
| | 1.58 |
| | 1.46 |
| | 1.32 |
|
| Weighted average shares (millions) — Basic | 2,024 |
| | 2,064 |
| | 2,077 |
| | 2,066 |
| | 2,075 |
| 1,999 |
| | 2,024 |
| | 2,064 |
| | 2,077 |
| | 2,066 |
|
| Weighted average shares (millions) — Diluted | 2,024 |
| | 2,064 |
| | 2,079 |
| | 2,071 |
| | 2,084 |
| 1,999 |
| | 2,024 |
| | 2,064 |
| | 2,079 |
| | 2,071 |
|
| Capital expenditures | 124 |
| | 105 |
| | 168 |
| | 273 |
| | 241 |
| 131 |
| | 124 |
| | 105 |
| | 168 |
| | 273 |
|
| Depreciation | 205 |
| | 233 |
| | 256 |
| | 271 |
| | 208 |
| 192 |
| | 205 |
| | 233 |
| | 256 |
| | 271 |
|
| Property, plant and equipment, net (consumer products) | 2,102 |
| | 2,216 |
| | 2,380 |
| | 2,684 |
| | 2,199 |
| |
| Inventories (consumer products) | 1,746 |
| | 1,779 |
| | 1,803 |
| | 1,810 |
| | 1,069 |
| |
| Property, plant and equipment, net | | 2,028 |
| | 2,102 |
| | 2,216 |
| | 2,380 |
| | 2,684 |
|
| Inventories | | 1,879 |
| | 1,746 |
| | 1,779 |
| | 1,803 |
| | 1,810 |
|
| Total assets | 35,329 |
| | 36,751 |
| | 37,402 |
| | 36,677 |
| | 27,215 |
| 34,859 |
| | 35,329 |
| | 36,751 |
| | 37,402 |
| | 36,677 |
|
| Total long-term debt | 12,419 |
| | 13,089 |
| | 12,194 |
| | 11,185 |
| | 7,339 |
| |
| Total debt — consumer products | 13,878 |
| | 13,689 |
| | 12,194 |
| | 11,960 |
| | 6,974 |
| |
| — financial services | — |
| | — |
| | — |
| | — |
| | 500 |
| |
| Long-term debt | | 13,992 |
| | 12,419 |
| | 13,089 |
| | 12,194 |
| | 11,185 |
|
| Total debt | | 14,517 |
| | 13,878 |
| | 13,689 |
| | 12,194 |
| | 11,960 |
|
| Total stockholders’ equity | 3,170 |
| | 3,683 |
| | 5,195 |
| | 4,072 |
| | 2,828 |
| 4,118 |
| | 3,170 |
| | 3,683 |
| | 5,195 |
| | 4,072 |
|
| Common dividends declared as a % of Basic EPS | 82.5 | % | | 96.3 | % | | 78.1 | % | | 85.2 | % | | 70.9 | % | 81.4 | % | | 82.5 | % | | 96.3 | % | | 78.1 | % | | 85.2 | % |
| Common dividends declared as a % of Diluted EPS | 82.5 | % | | 96.3 | % | | 78.1 | % | | 85.7 | % | | 71.2 | % | 81.4 | % | | 82.5 | % | | 96.3 | % | | 78.1 | % | | 85.7 | % |
| Book value per common share outstanding | 1.58 |
| | 1.80 |
| | 2.49 |
| | 1.96 |
| | 1.37 |
| 2.07 |
| | 1.58 |
| | 1.80 |
| | 2.49 |
| | 1.96 |
|
| Market price per common share — high/low | 36.29-28.00 |
| | 30.40-23.20 |
| | 26.22-19.14 |
| | 20.47-14.50 |
| | 79.59-14.34 |
| 38.58-31.85 |
| | 36.29-28.00 |
| | 30.40-23.20 |
| | 26.22-19.14 |
| | 20.47-14.50 |
|
| Closing price per common share at year end | 31.44 |
| | 29.65 |
| | 24.62 |
| | 19.63 |
| | 15.06 |
| 38.39 |
| | 31.44 |
| | 29.65 |
| | 24.62 |
| | 19.63 |
|
| Price/earnings ratio at year end — Basic | 15 |
| | 18 |
| | 13 |
| | 13 |
| | 6 |
| |
| Price/earnings ratio at year end — Diluted | 15 |
| | 18 |
| | 13 |
| | 13 |
| | 6 |
| |
| Price/earnings ratio at year end — Basic and Diluted | | 17 |
| | 15 |
| | 18 |
| | 13 |
| | 13 |
|
| Number of common shares outstanding at year end (millions) | 2,010 |
| | 2,044 |
| | 2,089 |
| | 2,076 |
| | 2,061 |
| 1,993 |
| | 2,010 |
| | 2,044 |
| | 2,089 |
| | 2,076 |
|
| Approximate number of employees | 9,100 |
| | 9,900 |
| | 10,000 |
| | 10,000 |
| | 10,400 |
| 9,000 |
| | 9,100 |
| | 9,900 |
| | 10,000 |
| | 10,000 |
|
The Selected Financial Data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations7 and Item 8.
The Selected Financial Data reflect the results of Altria Group, Inc.'s former subsidiary PMI as discontinued operations prior to the spin-off of PMI on March 28, 2008.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary factors that may affect future results in Item 1A. Risk Factors of this Annual Report on Form 10-K ("(“Item 1A"1A”).
Description of the Company
At December 31, 20122013, Altria Group, Inc.'s’s direct and indirect wholly-owned subsidiaries included Philip MorrisPM USA, Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless tobacco products in the United States; John Middleton, Co. ("Middleton"), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST, LLC ("UST"), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC ("USSTC")USSTC and Ste. Michelle, Wine Estates Ltd. ("Ste. Michelle"), is engaged in the manufacture and sale of smokeless tobacco products and wine. Philip Morris Capital Corporation ("PMCC")Nu Mark, an indirect wholly-owned subsidiary of Altria Group, Inc., is engaged in the development and marketing of innovative tobacco products for adult tobacco consumers. PMCC, another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held approximately 26.9%26.8% of the economic and voting interest of SABMiller plc ("SABMiller") at December 31, 20122013, which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc.'s’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. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends. At December 31, 20122013, Altria Group, Inc.'s’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 common stock.
In addition, Altria Group, Inc.'s chief operating decision maker has been evaluating the operating results of the former cigarettes receives cash dividends on its interest in SABMiller if and cigars segments as a single smokeable products segment since January 1, 2012. The combination of these two formerly separate segments is related to the restructuring associated with the cost reduction program announced in October 2011 (the "2011 Cost Reduction Program"). Also, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA, reflecting management's goal to achieve efficiencies in the management of these businesses. Effective with the first quarter of 2012 and at December 31, 2012, Altria Group, Inc.'s reportable segments were smokeable products, smokeless products, wine and financial services. As a result of the revised reportable segments and Middleton becoming a wholly-owned subsidiary of PM USA, certain prior year amounts have been reclassified to conform with
the current year's presentation. For further discussion on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs to the consolidated financial statements in Item 8 ("Note 4").when SABMiller pays such dividends.
Effective with the first quarter ofJanuary 1, 2013, Altria Group, Inc.'s’s reportable segments will beare smokeable products, smokeless products and wine. In connection with this revision, results of theThe financial services business and the alternative products business will bebusinesses have been combined in an All Other category. Altria Group, Inc. is making these changesall other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.'s’s alternative products businessbusinesses to itsAltria Group Inc.’s consolidated results. In addition, due to the continued reduction of the lease portfolio of PMCC, Altria Group, Inc. will begin reporting’s balance sheet accounts are no longer segregated by consumer products and financial services, and all balance sheet accounts are classified as either current or non-current. Prior years’ amounts have been reclassified to conform with the All Other category and presenting comparable results for prior periods with its 2013 first-quarter results.current year’s presentation.
Executive Summary
The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.
Consolidated Results of Operations
The changes in Altria Group, Inc.'s’s net earnings and diluted earnings per share ("EPS"(“EPS”) attributable to Altria Group, Inc. for the year ended December 31, 20122013, from the year ended December 31, 20112012, were due primarily to the following:
| | | (in millions, except per share data) | Net Earnings |
| | Diluted EPS |
| Net Earnings |
| | Diluted EPS |
|
| For the year ended December 31, 2011 | $ | 3,390 |
| | $ | 1.64 |
| |
| 2011 Asset impairment, exit, | | | | |
| implementation and integration costs | 142 |
| | 0.07 |
| |
| 2011 SABMiller special items | 54 |
| | 0.03 |
| |
| 2011 PMCC leveraged lease charge | 627 |
| | 0.30 |
| |
| 2011 Tobacco and health judgments | 102 |
| | 0.05 |
| |
| 2011 UST acquisition-related costs | 5 |
| | — |
| |
| 2011 Tax items (*) | (77 | ) | | (0.04 | ) | |
| Subtotal 2011 special items | 853 |
| | 0.41 |
| |
| For the year ended December 31, 2012 | | $ | 4,180 |
| | $ | 2.06 |
|
2012 Asset impairment, exit and implementation costs | (35 | ) | | (0.01 | ) | 35 |
| | 0.01 |
|
| 2012 Tobacco and health judgments | | 4 |
| | — |
|
| 2012 SABMiller special items | 161 |
| | 0.08 |
| (161 | ) | | (0.08 | ) |
| 2012 Loss on early extinguishment of debt | | 559 |
| | 0.28 |
|
| 2012 PMCC leveraged lease benefit | 68 |
| | 0.03 |
| (68 | ) | | (0.03 | ) |
| 2012 Tobacco and health judgments | (4 | ) | | — |
| |
| 2012 Loss on early extinguishment of debt | (559 | ) | | (0.28 | ) | |
| 2012 Tax items (*) | 66 |
| | 0.03 |
| |
2012 Tax items 1 | | (66 | ) | | (0.03 | ) |
| Subtotal 2012 special items | (303 | ) | | (0.15 | ) | 303 |
| | 0.15 |
|
2013 NPM Adjustment Items 2 | | 427 |
| | 0.21 |
|
2013 Asset impairment, exit and
implementation costs | | (7 | ) | | — |
|
| 2013 Tobacco and health judgments | | (14 | ) | | (0.01 | ) |
| 2013 SABMiller special items | | (20 | ) | | (0.01 | ) |
| 2013 Loss on early extinguishment of debt | | (678 | ) | | (0.34 | ) |
| 2013 Tax items | | 64 |
| | 0.03 |
|
| Subtotal 2013 special items | | (228 | ) | | (0.12 | ) |
| Fewer shares outstanding | — |
| | 0.04 |
| — |
| | 0.03 |
|
| Change in tax rate | (140 | ) | | (0.07 | ) | 69 |
| | 0.03 |
|
| Operations | 380 |
| | 0.19 |
| 211 |
| | 0.11 |
|
| For the year ended December 31, 2012 | $ | 4,180 |
| | $ | 2.06 |
| |
| For the year ended December 31, 2013 | | $ | 4,535 |
| | $ | 2.26 |
|
*1 Excludes the tax impact included in the PMCC leveraged lease benefit/charge.benefit.
2 Reflects the impact of the NPM Adjustment Settlement ($0.16) and the NPM Arbitration Panel Decision ($0.05).
See the discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.
| |
| ▪ | Fewer Shares Outstanding: Fewer shares outstanding during 20122013 compared with 20112012 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase programs. |
| |
| ▪ | Change in Tax Rate: The change in tax rate includes a reductionwas due primarily to an increased recognition of foreign tax credits in certain consolidated tax benefits resulting from the 2012 debt tender offer.2013, primarily associated with SABMiller dividends. |
| |
| ▪ | Operations: The increase of $380211 million in operations shown in the table above was due primarily to the following: |
▪higher income from all reportablethe smokeable products and smokeless products segments;
▪higher equity earnings from SABMiller; and13
▪lower interest and other debt expense, net.net; and
▪higher earnings from Altria Group, Inc.’s equity investment in SABMiller (excluding special items).
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
20132014 Forecasted Results
While there are signs of modest improvement in certain economic indicators, Altria Group, Inc. remains cautious about the 2013 business environment. Adult consumers remain under economic pressure as they face the end of the payroll tax holiday, as well as continuing high unemployment. With a number of states facing budget shortfalls, tobacco products will remain a target for excise tax increases.
In January 2013,2014, Altria Group, Inc. forecasted that its 20132014 full-year reported diluted EPS is expected to be in the range of $2.34$2.51 to $2.40.$2.58. This forecast includes estimated expenses of $0.01 per share as detailed in the table below, as compared with 20122013 full-year reported diluted EPS of $2.06,$2.26, which included $0.15$0.12 per share of net expenses, as detailed in the table below. Expected 20132014 full-year adjusted diluted EPS, which excludes the expenses in the table below, represents a growth rate of 6% to 9% over 20122013 full-year adjusted diluted EPS. TheEPS, which excludes the net expenses in the table below.
Altria Group, Inc.’s core tobacco businesses are positioned to deliver income growth through their leading premium brands. Altria Group, Inc. also expects its 2014 earnings to benefit from lower interest expense, a lower effective tax rate and a reduction in shares from the April 2013 full-year forecast does not reflect the potential impact of PM USA's agreementshare repurchase program. However, Altria Group, Inc. plans to resolve the Non-Participating Manufacturer ("NPM") adjustment disputes, discussedcontinue making disciplined and incremental investments to build its alternative products businesses and expects continued variability in Note 18. Contingenciesgains from asset sales at PMCC. Finally, although some economic indicators are improving, adult tobacco consumers continue to the consolidated financial statements in Item 8 ("Note 18").face challenges.
The factors described in Item 1A represent continuing risks to this forecast.
Expense (Income), Net Included in Reported Diluted EPS
|
| | | | | | | |
| | 2013 |
| | 2012 |
|
| Loss on early extinguishment of debt | $ | — |
| | $ | 0.28 |
|
| Asset impairment, exit | | | |
| and implementation costs | — |
| | 0.01 |
|
| SABMiller special items | 0.01 |
| | (0.08 | ) |
| PMCC leveraged lease benefit | — |
| | (0.03 | ) |
| Tax items* | — |
| | (0.03 | ) |
| | $ | 0.01 |
| | $ | 0.15 |
|
|
| | | | | | | |
| | 2014 |
| | 2013 |
|
NPM Adjustment Items 1 | $ | — |
| | $ | (0.21 | ) |
| Tobacco and health judgments | — |
| | 0.01 |
|
| SABMiller special items | 0.01 |
| | 0.01 |
|
| Loss on early extinguishment of debt | — |
| | 0.34 |
|
| Tax items | — |
| | (0.03 | ) |
| | $ | 0.01 |
| | $ | 0.12 |
|
* 1Excludes Reflects the tax impact included inof the PMCC leveraged lease benefit.NPM Adjustment Settlement ($0.16) and the NPM Arbitration Panel Decision ($0.05).
Adjusted diluted EPS is a financial measure that is not consistent with accounting principles generally accepted in the United States of America ("(“U.S. GAAP"GAAP”). Altria Group, Inc.'s’s management reviews diluted EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, SABMiller special items, certain PMCC leveraged lease items, certain tax items, and tobacco and health judgments.judgments, and settlements of, and determinations made in, disputes with certain states related to the Non-Participating Manufacturer (“NPM”) adjustment provision (“NPM
Adjustment”) under the 1998 Master Settlement Agreement (the “MSA”). Altria Group, Inc.'s’s management does not view any of these special items to be part of its sustainable results as they may be highly variable and difficult to predict and can distort underlying business trends and results. Altria Group, Inc.'s’s management believes it is appropriate to disclose this non-GAAP financial measure to provide useful insight into underlying business trends and results, and to provide a more meaningful comparison of year-over-year results. Adjusted measures are used by management and regularly provided to Altria Group, Inc.'s’s chief operating decision maker for planning, forecasting and evaluating the performances of Altria Group, Inc.'s businesses,business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. This information should be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 ("Note 2")2 includes a summary of the significant accounting policies and methods used in the preparation of Altria Group, Inc.'s’s consolidated financial statements. In most instances, Altria Group, Inc. must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP.
The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria Group, Inc.'s’s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.'s’s estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements.
The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods, used in the preparation of Altria Group, Inc.'s’s consolidated financial statements:
▪Consolidation: The consolidated financial statements include Altria Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria
Group, Inc. exercises significant influence are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.
▪Revenue Recognition: The consumer productsAltria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment or delivery of goods when title and risk of loss pass to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued
liabilities until revenue is recognized. Altria Group, Inc.'s consumer products’s businesses also include excise taxes billed to customers in net revenues. Shipping and handling costs are classified as part of cost of sales.
▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria Group, Inc. depreciates property, plant and equipment and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
Goodwill and indefinite-lived intangible assets recorded by Altria Group, Inc. at December 31, 20122013 relate primarily to the acquisitions of UST in 2009 and Middleton in 2007. As required by U.S. GAAP, Altria Group, Inc. conducts ana required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review.
Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value of goodwill exceeds theits fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the implied fair value. If the carrying value of goodwill,an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows. Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and carrying value of the intangible asset. If the carrying value
exceeds fair value,flows, the intangible asset is considered impaired and is reduced to fair value.
Goodwill and indefinite-lived intangible assets, by reporting unit at December 31, 20122013 were as follows:
|
| | | | | | | |
| (in millions) | Goodwill |
| | Indefinite-Lived Intangible Assets |
|
| Cigarettes | $ | — |
| | $ | 2 |
|
| Smokeless products | 5,023 |
| | 8,801 |
|
| Cigars | 77 |
| | 2,640 |
|
| Wine | 74 |
| | 258 |
|
| Total | $ | 5,174 |
| | $ | 11,701 |
|
|
| | | | | | | |
| (in millions) | Goodwill |
| | Indefinite-Lived Intangible Assets |
|
| Cigarettes | $ | — |
| | $ | 2 |
|
| Smokeless products | 5,023 |
| | 8,801 |
|
| Cigars | 77 |
| | 2,640 |
|
| Wine | 74 |
| | 258 |
|
| Total | $ | 5,174 |
| | $ | 11,701 |
|
During 20122013, 20112012 and 20102011, Altria Group, Inc. completed its quantitative annual reviewimpairment test of goodwill and indefinite-lived intangible assets, and no impairment charges resulted from these reviews.resulted.
At December 31, 2012, the estimated fair values of the smokeless products and wine reporting units, as well as the estimated fair value of the indefinite-lived intangible assets within those reporting units, except for certain smokeless products trademarks (primarily Red Seal and Husky), substantially exceeded their carrying values.
At December 31, 20122013, the estimated fair value of the cigarssmokeless products reporting unit, exceeded its carrying value by approximately 13%. In addition,as well as the carrying value and excessestimated fair value over carrying value forvalues of the indefinite-lived intangible assets of certainwithin the smokeless products and wine reporting units, substantially exceeded their carrying values. In addition, at December 31, 2013, the estimated fair values of the cigars trademarks were as follows:
|
| | | | | | |
| (in millions) | Carrying Value |
| | Excess Fair Value Over Carrying Value |
|
Certain smokeless products trademarks, primarily Red Seal and Husky | $ | 921 |
| | 8 | % |
Cigars trademarks, primarily Black & Mild | $ | 2,640 |
| | 10 | % |
In the smokeless products reporting unit, 2012 results for certain smokeless products trademarks, primarily(primarily Red SealBlack & Mild and Husky, continued to be impacted) exceeded their carrying values by lower levels of promotional support on these brands and increased competitive activity in the discount category due to growth in premium category products introduced in recent years at a lower, popular price. This specific marketplace dynamic continued to negatively impact discounted cash flows when conducting the 2012 annual review of indefinite-lived intangible assets. In the cigars reporting unit,approximately 18%. Middleton continues to observe significant competitive activity, including higher levels of imported, low-priced machine-made large cigars. As a result, management concluded after the 20122013 review that while the fair values for certain smokeless products andthe cigars trademarks exceeded their respective carrying values, (as indicated above), they dodid not substantially exceed their carrying values.
In 2012,2013, Altria Group, Inc. utilizedused an income approach to estimate the fair valuevalues of its reporting units and its indefinite-lived intangible assets. The income approach reflects the
discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. The average discount rate utilizedused in performing the valuations was 10%.
In performing the 20122013 discounted cash flow analysis, Altria Group, Inc. made various judgments, estimates and assumptions, the most significant of which were volume, income, growth rates and discount rates. The analysis incorporated assumptions used in Altria Group, Inc.'s’s long-term financial forecast and also included market participant assumptions regarding the highest and best use of Altria Group, Inc.'s’s indefinite-lived intangible assets. Assumptions are also made for perpetual growth rates for periods beyond the long-term financial forecast. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside of Altria Group, Inc.'s’s control.
Although Altria Group, Inc.'s’s discounted cash flow analysis is based on assumptions that are considered reasonable and based on the best available information at the time that the discounted cash flow analysis is developed, there is significant judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore, Altria Group, Inc.'s’s impairment conclusions: general economic conditions; federal, state and local regulatory developments; changes in category growth rates as a result of changing consumer preferences; success of planned new product introductions; competitive activity; and tobacco-related taxes.
While Altria Group, Inc.'s’s management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset are reasonable, actual performance in the short-term or long-term could be significantly different from
forecasted performance, which could result in impairment charges in future periods.
For additional information on goodwill and other intangible assets, see Note 3.Goodwill and Other Intangible Assets, net to the consolidated financial statements in Item 8.
▪Marketing Costs: Altria Group, Inc.'s consumer products’s businesses promote their products with consumer engagement programs, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives, event marketing and volume-based incentives. Consumer engagement programs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues, a portion of which is based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates. For interim reporting purposes, consumer engagement programs and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
▪Contingencies: As discussed in Note 18 and Item 3. Legal Proceedings of this Annual Report on Form 10-K ("Item 3"),3, legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. In 1998, PM USA and certain other U.S. tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA")MSA with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other U.S. tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State“State Settlement Agreements"Agreements”). PM USA'sUSA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers'manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USA'sUSA’s obligations under this trust expired on December 15, 2010 (these obligations had been offset by the obligations imposed on PM USA by the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA"),FETRA, which expires inafter the third quarter of 2014). USSTC and Middleton are also subject to obligations imposed by FETRA. In addition, in June 2009, PM USA and a subsidiary of USSTC became subject to quarterly user fees imposed by the United States Food and Drug Administration ("FDA")FDA as a result of the Family Smoking Prevention and Tobacco Control Act ("FSPTCA").FSPTCA. The State Settlement Agreements, FETRA and the FDA user fees call for payments that are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.'s’s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.'s’s subsidiaries recorded approximately $5.1$4.4 billion, $5.0$5.1 billion and $5.0 billion of charges to cost of sales for the years ended December 31, 2013, 2012 and 2011, respectively. The 2013
amount included reductions to cost of sales of $664 million related to certain NPM Adjustment items discussed further below and in Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2012, 2011 and 2010, respectively. See in Note 18 for a discussion of the potential impact of PM USA's agreement to resolve the NPM adjustment disputes.18.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except to the extent discussed in Note 18 and Item 3, at the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any
amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and are included in marketing, administration and research costs on the consolidated statements of earnings.
▪Employee Benefit Plans: As discussed in Note 16. Benefit Plans to the consolidated financial statements in Item 8 ("(“Note 16"16”), Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of tax,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.
At December 31, 20122013, Altria Group, Inc.'s’s discount rate assumptions for its pension and postretirement plans decreasedincreased to 4.9% and 4.8%, respectively, from 4.0% and 3.9%, respectively, from 5.0% and 4.9%, respectively, at December 31, 2011.2012. Altria Group, Inc. presently anticipates a decrease of approximately $18$146 million in its 20132014 pre-tax pension and postretirement expense versus 2013, not including amounts in each year related to termination, settlement and curtailment. This anticipated decrease is due primarily to higher expected return on pension plan assets due to the higher valuelower amortization of plan assets at December 31, 2012 and the impact of a $350 million voluntary pension plan contribution made in January 2013, partially offset byunrecognized losses, which includes the impact of the higher discount rate changes.and higher return on plan assets in 2013. A 50 basis point decrease (increase) in Altria Group, Inc.'s’s discount rates would increase (decrease) Altria Group, Inc.'s’s pension and postretirement expense by
approximately $39$45 million. Similarly, a 50 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Altria Group, Inc.'s’s pension expense by approximately $29$32 million. See Note 16 for a sensitivity discussion of the assumed health care cost trend rates.
▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions. Altria Group, Inc.'s’s deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant judgmentAltria Group, Inc. records a valuation allowance when it is required in determining incomemore-likely-than-not that some portion or all of a deferred tax provisions and in evaluating tax positions.asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of earnings.
As discussed in Note 14. Income Taxes to the consolidated financial statements in Item 8 ("(“Note 14"14”), Altria Group, Inc. recognized income tax benefits and charges in the consolidated statements of earnings during 20122013, 20112012 and 20102011 as a result of various tax events.
▪Leasing: Substantially all of PMCC'sPMCC’s net revenues in 20122013 related to income on leveraged leases and related gains on asset sales. Income relating to leveraged leases is recorded initially as unearned income, which is included in the line item finance assets, net, on Altria Group, Inc.'s’s consolidated balance sheets, and is subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. As discussed in Note 7. Finance Assets, net to the consolidated financial statements in Item 8 ("Note 7"),7, PMCC lessees are affected by bankruptcy filings, credit rating changes and financial market conditions.
PMCC'sPMCC’s investment in leases is included in the line item finance assets, net, on the consolidated balance sheets as of December 31, 20122013 and 20112012. At December 31, 20122013, PMCC'sPMCC’s net finance receivables of approximately $2.5$1.9 billion in
leveraged leases, which are included in finance assets, net, on
Altria Group, Inc.'s’s consolidated balance sheet, consisted of rents receivable ($6.34.2 billion) and the residual value of assets under lease ($1.1 billion), reduced by third-party nonrecourse debt ($3.92.8 billion) and unearned income ($1.00.6 billion). The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt has been offset against the related rents receivable and has been presented on a net basis within finance assets, net, on Altria Group, Inc.'s’s consolidated balance sheets. Finance assets, net, of $2.0 billion at December 31, 2012,2013 also included net finance receivables for direct finance leases ($0.2 billion) and an allowance for losses ($0.1 billion).losses.
Estimated residual values represent PMCC'sPMCC’s estimate at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC'sPMCC’s management, which includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values. Such reviews resulted in a decrease of $8 million in 2012 and $11 million in 2010 to PMCC’s net revenues and results of operations. There were no adjustments in 2013 and 2011.
PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC
stops recording income ("(“non-accrual status"status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible. There were no rents receivable on non-accrual status at December 31, 20122013.
To the extent that rents receivable due to PMCC may be uncollectible, PMCC records an allowance for losses against its finance assets. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses. For further discussion, see Note 7.
Consolidated Operating Results
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Net Revenues: | | | | | |
| Smokeable products | $ | 21,868 |
| | $ | 22,216 |
| | $ | 21,970 |
|
| Smokeless products | 1,778 |
| | 1,691 |
| | 1,627 |
|
| Wine | 609 |
| | 561 |
| | 516 |
|
| All other | 211 |
| | 150 |
| | (313 | ) |
| Net revenues | $ | 24,466 |
| | $ | 24,618 |
| | $ | 23,800 |
|
| Excise Taxes on Products: | | | | | |
| Smokeable products | $ | 6,651 |
| | $ | 6,984 |
| | $ | 7,053 |
|
| Smokeless products | 130 |
| | 113 |
| | 108 |
|
| Wine | 22 |
| | 21 |
| | 20 |
|
| Excise taxes on products | $ | 6,803 |
| | $ | 7,118 |
| | $ | 7,181 |
|
| Operating Income: | | | | | |
| Operating companies income (loss): | | | | | |
| Smokeable products | $ | 7,063 |
| | $ | 6,239 |
| | $ | 5,737 |
|
| Smokeless products | 1,023 |
| | 931 |
| | 859 |
|
| Wine | 118 |
| | 104 |
| | 91 |
|
| All other | 157 |
| | 176 |
| | (349 | ) |
| Amortization of intangibles | (20 | ) | | (20 | ) | | (20 | ) |
| General corporate expenses | (235 | ) | | (229 | ) | | (264 | ) |
Changes to Mondelēz and PMI tax-related receivables/payables | (22 | ) | | 52 |
| | 14 |
|
| Operating income | $ | 8,084 |
| | $ | 7,253 |
| | $ | 6,068 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Net Revenues: | | | | | |
| Smokeable products | $ | 22,216 |
| | $ | 21,970 |
| | $ | 22,191 |
|
| Smokeless products | 1,691 |
| | 1,627 |
| | 1,552 |
|
| Wine | 561 |
| | 516 |
| | 459 |
|
| Financial services | 150 |
| | (313 | ) | | 161 |
|
| Net revenues | $ | 24,618 |
| | $ | 23,800 |
| | $ | 24,363 |
|
| Excise Taxes on Products: | | | | | |
| Smokeable products | $ | 6,984 |
| | $ | 7,053 |
| | $ | 7,348 |
|
| Smokeless products | 113 |
| | 108 |
| | 105 |
|
| Wine | 21 |
| | 20 |
| | 18 |
|
| Excise taxes on products | $ | 7,118 |
| | $ | 7,181 |
| | $ | 7,471 |
|
| Operating Income: | | | | | |
| Operating companies income (loss): | | | | | |
| Smokeable products | $ | 6,239 |
| | $ | 5,737 |
| | $ | 5,618 |
|
| Smokeless products | 931 |
| | 859 |
| | 803 |
|
| Wine | 104 |
| | 91 |
| | 61 |
|
| Financial services | 176 |
| | (349 | ) | | 157 |
|
| Amortization of intangibles | (20 | ) | | (20 | ) | | (20 | ) |
| General corporate expenses | (228 | ) | | (256 | ) | | (216 | ) |
| Changes to Mondelēz and | | | | | |
| PMI tax-related receivables | 52 |
| | 14 |
| | (169 | ) |
| Corporate asset impairment | | | | | |
| and exit costs | (1 | ) | | (8 | ) | | (6 | ) |
| Operating income | $ | 7,253 |
| | $ | 6,068 |
| | $ | 6,228 |
|
As discussed further in Note 15. Segment Reporting to the consolidated financial statements in Item 8,15, Altria Group, Inc.'s’s chief operating decision maker reviews operating companies
income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments is defined as operating income before amortization of intangibles and general corporate expenses. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.
The following events that occurred during 20122013, 20112012 and 20102011 affected the comparability of statement of earnings amounts.
•NPM Adjustment Items:For the year ended December 31, 2013, PM USA recorded pre-tax income of $664 million, which increased operating companies income in the smokeable products segment. This recording of pre-tax income resulted from the following:
a reduction to cost of sales of $519 million for the settlement of disputes with certain states and territories related to the NPM Adjustment under the MSA for the years 2003 - 2012 (“NPM Adjustment Settlement”); and
a reduction to cost of sales of $145 million for the September 11, 2013 diligent enforcement rulings of the arbitration panel presiding over the NPM Adjustment dispute for 2003 (“NPM Arbitration Panel Decision”).
For further discussion of these items (which are referred to collectively as the “NPM Adjustment Items”), see Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2012 in Note 18.
▪Asset Impairment, Exit, Implementation and Integration Costs: Pre-taxAltria Group, Inc.’s pre-tax asset impairment, exit and implementation and integration costs for the years ended December 31, 2012, 2011 and 2010 consisted of the following:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, 2012 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation (Gain) Costs |
| | Total |
|
| Smokeable | | | | | |
| products | $ | 38 |
| | $ | (10 | ) | | $ | 28 |
|
| Smokeless | | | | | |
| products | 22 |
| | 6 |
| | 28 |
|
| General | | | | | |
| corporate | 1 |
| | (1 | ) | | — |
|
| Total | $ | 61 |
| | $ | (5 | ) | | $ | 56 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2011 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Integration Costs |
| | Total |
|
| Smokeable | | | | | | | |
| products | $ | 182 |
| | $ | 1 |
| | $ | — |
| | $ | 183 |
|
| Smokeless | | | | | | | |
| products | 32 |
| | — |
| | 3 |
| | 35 |
|
| General | | | | | | | |
| corporate | 8 |
| | — |
| | — |
| | 8 |
|
| Total | $ | 222 |
| | $ | 1 |
| | $ | 3 |
| | $ | 226 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2010 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Integration Costs |
| | Total |
|
| Smokeable | | | | | | | |
| products | $ | 24 |
| | $ | 75 |
| | $ | 2 |
| | $ | 101 |
|
| Smokeless | | | | | | | |
| products | 6 |
| | — |
| | 16 |
| | 22 |
|
| Wine | — |
| | — |
| | 2 |
| | 2 |
|
| General | | | | | | | |
| corporate | 6 |
| | — |
| | — |
| | 6 |
|
| Total | $ | 36 |
| | $ | 75 |
| | $ | 20 |
| | $ | 131 |
|
In October 2011,were primarily related to Altria Group, Inc.’s cost reduction program announced thein October 2011 (the “2011 Cost Reduction Program for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.'s objective to reduce cigarette-related infrastructure ahead of PM USA's cigarette
volume declines. Total pre-tax charges, net,Program”), which have beenwas substantially completed incurred since the inceptionas of this program were $271 million.December 31, 2012. As of December 31, 2013, Altria Group, Inc. believes that the program remains on track to deliverachieved its goal of delivering $400 million in annualized savings versus previously planned spendingspending.
For a breakdown of these costs by the end of 2013.segment, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs in Item 8.
Altria Group, Inc. had a severance liability balance of $37 million at ▪December 31, 2012Tobacco and Health Judgments: See Note 18 for pre-tax charges related to tobacco and health judgments recorded in operating companies income in the 2011 Cost Reduction Program, substantially all of which is expected to be paid out by June 30, 2013.smokeable products segment and related interest costs.
For further details on asset impairment, exit, implementation and integration costs, see Note 4.
▪SABMiller Special Items: Altria Group, Inc.'s’s earnings from its equity investment in SABMiller for 2013 included net pre-tax charges of $31 million, consisting of costs for SABMiller’s “business capability programme,” costs related to SABMiller’s economic and social development program in South Africa and asset impairment charges, partially offset by gains related to divestitures. Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2012 included net pre-tax income of $248 million, consisting of gains resulting from SABMiller'sSABMiller’s strategic alliance transactions with Anadolu Efes and Castel, partially offset by costs for SABMiller's "businessSABMiller’s “business capability programme"programme” and costs related to SABMiller'sSABMiller’s acquisition of Foster'sFoster’s Group Limited ("Foster's"(“Foster’s”). Altria Group, Inc.'s’s earnings from its equity investment in SABMiller for 2011 included net pre-tax charges of $82 million, consisting of costs for SABMiller's "businessSABMiller’s “business capability programme,"” acquisition-related costs for SABMiller'sSABMiller’s acquisition of Foster'sFoster’s and asset impairment charges, partially offset by gains resulting from SABMiller'sSABMiller’s hotel and gaming transaction and the disposal of a business in Kenya. Altria Group, Inc.'s earnings from its equity investment in SABMiller for 2010 included costs for SABMiller's "business capability programme" and costs related to SABMiller's economic and social development program in South Africa.
▪PMCC Leveraged Lease Benefit/Charge: During the second quarter of 2012, Altria Group, Inc. entered into a closing agreement (the "Closing Agreement"“Closing Agreement”) with the Internal Revenue Service ("IRS"(“IRS”) that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012 due primarily to lower than estimated interest on tax underpayments. During the second quarter of 2011, Altria Group, Inc. recorded a charge of $627 million related to the federal income tax treatment of these transactions (the "2011“2011 PMCC Leveraged Lease Charge"Charge”). Approximately 50% of the charge ($315 million) represented a reduction in cumulative lease earnings recorded as of the date of the charge that will be recaptured over the remainder of the terms of the affected leases. The remaining portion of the charge ($312 million) primarily represented a permanent charge for interest on tax underpayments.
For the years ended December 31, 2012 and 2011, the benefit/charge associated with PMCC'sPMCC’s leveraged lease transactions was recorded in Altria Group, Inc.'s’s consolidated statements of earnings as follows:
| | | | | For the Year Ended December 31, 2012 | | For the Year Ended December 31, 2011 | | | | | | | | | | | | | | | |
| (in millions) | | Net Revenues |
| | Benefit for Income Taxes |
| | Total |
| | Net Revenues |
| | (Benefit) Provision for Income Taxes |
| | Total |
| | For the Year Ended December 31, 2012 | | For the Year Ended December 31, 2011 |
| | | | Net Revenues |
| | Benefit for Income Taxes |
| | Total |
| | Net Revenues |
| | (Benefit) Provision for Income Taxes |
| | Total |
|
| Reduction to cumulative lease earnings | | $ | 7 |
| | $ | (2 | ) | | $ | 5 |
| | $ | 490 |
| | $ | (175 | ) | | $ | 315 |
| | $ | 7 |
| | $ | (2 | ) | | $ | 5 |
| | $ | 490 |
| | $ | (175 | ) | | $ | 315 |
|
| Interest on tax underpayments | | — |
| | (73 | ) | | (73 | ) | | — |
| | 312 |
| | 312 |
| | — |
| | (73 | ) | | (73 | ) | | — |
| | 312 |
| | 312 |
|
| Total | | $ | 7 |
| | $ | (75 | ) | | $ | (68 | ) | | $ | 490 |
| | $ | 137 |
| | $ | 627 |
| | $ | 7 |
| | $ | (75 | ) | | $ | (68 | ) | | $ | 490 |
| | $ | 137 |
| | $ | 627 |
|
For See Note 14 for a further discussion of the Closing Agreement and the PMCC leveraged lease benefit/charge, see Note 7, Note 14 and Note 18.Agreement.
▪PMCC Recoveries and Allowance for Losses: During 2012, PMCC recorded pre-tax income of $34 million primarily related to recoveries from the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American Airlines, Inc. ("American"), which filed for bankruptcy on November 29, 2011. In addition, during 2012, PMCC decreased its allowance for losses by $10 million, which was recorded as an increase to operating companies income. During 2011, PMCC increased its allowance for losses by $25 million, which was recorded as a decrease to operating companies income. For further discussion, see Note 7.
▪Tobacco and Health Judgments: During 2012, 2011 and 2010, pre-tax charges related to certain tobacco and health judgments were recorded in Altria Group, Inc.'s consolidated statements of earnings as follows:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Smokeable products | $ | 4 |
| | $ | 98 |
| | $ | 11 |
|
| Smokeless products | — |
| | — |
| | 5 |
|
| Interest and other debt | | | | | |
| expense, net | 1 |
| | 64 |
| | 5 |
|
| Total | $ | 5 |
| | $ | 162 |
| | $ | 21 |
|
The charges for tobacco and health judgments for the smokeable products and smokeless products segments in the table above were included in marketing, administration and research costs on Altria Group, Inc.'s consolidated statements of earnings. The pre-tax charges in 2011 related to the Williams, Bullock and Scott cases. The pre-tax charges in 2010 included a settlement of $5 million. For further discussion, see Note 18.
▪Loss on Early Extinguishment of DebtDebt:: During the fourth quarter of 2013 and the third quarter of 2012, Altria Group, Inc. completed adebt tender offeroffers to purchase for cash aggregate principal amounts of $2.1 billion and $2.0 billion, aggregate principal amountrespectively, of certain of its senior unsecured notes. As a result of thethese debt tender offer, during the third quarter of 2012,offers, Altria Group, Inc. recorded a pre-tax losslosses on early extinguishment of debt of $874 million, which included debt tender premiums and fees of $864 million and the write off of related unamortized debt discounts and debt issuance costs of $10 million. as follows:
|
| | | | | | | |
| (in millions) | 2013 | | 2012 |
| | | | |
| Debt tender premiums and fees | $ | 1,054 |
| | $ | 864 |
|
Write-off of unamortized debt discounts and debt issuance costs | 30 |
| | 10 |
|
| Total | $ | 1,084 |
| | $ | 874 |
|
For further discussion, see Note 9. Long-TermDebt to the consolidated financial statements in Item 8 ("(“Note 9"9”).
▪Tax Items: Tax items for 2013 included the reversal of tax accruals no longer required and the recognition of previously unrecognized foreign tax credits primarily associated with SABMiller dividends. Excluding the tax impact included in the PMCC leveraged lease benefit, tax items for 2012 included the reversal of tax reserves and associated interest due primarily to the closure in 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries'subsidiaries’ 2004 - 2006 tax years. Tax items for 2011, excluding the tax impact included in the 2011 PMCC Leveraged Lease Charge, included the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. Tax items for 2010 included the reversal of tax reserves and associated interest related to federal and several state audits, and the expiration of statutes of limitations. For further discussion, see Note 14.
2013 Compared With 2012
The following discussion compares consolidated operating results for the year ended December 31, 2013, with the year ended December 31, 2012.
Net revenues, which include excise taxes billed to customers, decreased $152 million (0.6%), due primarily to lower net revenues from the smokeable products segment, partially offset by higher net revenues from the smokeless products and wine segments, and higher gains on asset sales in the financial services business.
Excise taxes on products decreased $315 million (4.4%), due primarily to lower smokeable products shipment volume.
Cost of sales decreased $731 million (9.2%), due primarily to the NPM Adjustment Items and lower smokeable products shipment volume, partially offset by higher per unit settlement charges.
Marketing, administration and research costs increased $39 million (1.7%), due primarily to spending related to the alternative products businesses and a postretirement benefit plan curtailment gain in 2012 related to the 2011 Cost Reduction Program, partially offset by lower spending in the smokeable products segment as a result of cost reduction initiatives.
Operating income increased $831 million (11.5%), due primarily to higher operating results from the smokeable products segment (which includes the NPM Adjustment Items) and higher operating results from the smokeless products segment, partially offset by changes to Kraft Foods Inc. (now known as Mondelēz International, Inc. (“Mondelēz”)) and PMI tax-related receivables/payables as discussed further in Note 14.
Interest and other debt expense, net, decreased $77 million (6.8%) due primarily to lower interest costs on debt as a result
of debt refinancing activities related to the debt tender offer in 2012.
Earnings from Altria Group, Inc.’s equity investment in SABMiller decreased $233 million (19.0%), due primarily to SABMiller special items (which included gains of $342 million resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel in 2012), partially offset by higher gains resulting from issuances of common stock by SABMiller in 2013.
Altria Group, Inc.’s effective income tax rate decreased 0.7 percentage points to 34.7%, due primarily to an increased recognition of foreign tax credits in 2013 primarily associated with SABMiller dividends, and the resolution of various Mondelēz and PMI tax matters during 2013 and 2012, partially offset by the PMCC leveraged lease benefit recorded during the second quarter of 2012.
Net earnings attributable to Altria Group, Inc. of $4,535 million increased $355 million (8.5%), due primarily to higher operating income, lower interest and other debt expense, net, and a lower income tax rate, partially offset by lower earnings from Altria Group, Inc.’s equity investment in SABMiller and higher losses on early extinguishment of debt. Diluted and basic EPS attributable to Altria Group, Inc. of $2.26, each increased by 9.7% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.
2012 Compared With 2011
The following discussion compares consolidated operating results for the year ended December 31, 2012, with the year ended December 31, 2011.
Net revenues, which include excise taxes billed to customers, increased $818 million (3.4%), due to higher net revenues from the financial services business (which included the 2011 PMCC Leveraged Lease Charge), and the smokeable products, smokeless products and wine segments.
Excise taxes on products decreased $63 million (0.9%), due primarily to lower excise taxes for Middleton and lower smokeable products shipment volume.
Cost of sales increased $257 million (3.3%), due primarily
to higher per unit settlement charges and higher manufacturing costs.
Marketing, administration and research costs decreased $362 million (13.7%), primarily reflecting cost reduction initiatives, lower charges related to tobacco and health judgments, and recoveries related to the American Airlines, Inc. bankruptcy filing in November 2011 and a decrease to the allowance for losses in the financial services segment.business.
Operating income increased $1,185 million (19.5%), due primarily to: (i) higher operating results from the financial
services segment,business, which in 2011 included the 2011 PMCC Leveraged Lease Charge; (ii) higher operating results from the smokeable products and smokeless products segments, which included lower charges in 2012 related to the 2011 Cost Reduction Program and lower charges in the smokeable products segment related to tobacco and health judgments; and (iii) higher increases to Kraft Foods Inc. (now known as Mondelēz International, Inc. ("Mondelēz")) and Philip Morris International Inc. ("PMI") tax-related receivables. As discussed in Note 14, changes to Mondelēz and PMI tax-related receivables were fully offset by a corresponding provision for income taxes associated with Mondelēz and PMI.receivables/payables as discussed further in Note 14.
Interest and other debt expense, net, decreased $90 million (7.4%) due primarily to lower interest costs in 2012 related to tobacco and health judgments, and lower interest costs on debt as a result of debt refinancing activities in 2012.
Earnings from Altria Group, Inc.'s’s equity investment in SABMiller increased $494 million (67.7%), due primarily to higher net gains in 2012 for SABMiller special items (which included gains resulting from SABMiller'sSABMiller’s strategic alliance transactions with Anadolu Efes and Castel in 2012) and higher ongoing equity earnings.
Altria Group, Inc.'s’s effective income tax rate decreased 3.8 percentage points to 35.4% due primarily to a $312 million charge in 2011 that primarily represents interest on tax underpayments associated with the 2011 PMCC Leveraged Lease Charge, and a $73 million interest benefit recorded during 2012, resulting primarily from lower than estimated interest on tax underpayments related to the Closing Agreement with the IRS, partially offset by a reduction in certain consolidated tax benefits resulting from the 2012 debt tender offer and a higher tax provision in 2012 related to the Mondelēz and PMI tax matters discussed above.matters.
Net earnings attributable to Altria Group, Inc. of $4,180 million increased $790 million (23.3%), due primarily to higher operating income, higher earnings from Altria Group, Inc.'s’s equity investment in SABMiller, a lower income tax rate and lower interest and other debt expense, net, partially offset by the loss on early extinguishment of debt related to the 2012 debt tender offer. Diluted and basic EPS attributable to Altria Group, Inc. of $2.06, each increased by 25.6% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.
2011 Compared With 2010
The following discussion compares consolidated operating results for the year ended December 31, 2011, with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, decreased $563 million (2.3%), due primarily to lower net revenues from the financial services segment as a result of the 2011 PMCC Leveraged Lease Charge, and the smokeable products segment, partially offset by higher net revenues from the smokeless products and wine segments.
Excise taxes on products decreased $290 million (3.9%), due primarily to lower smokeable products shipment volume.
Cost of sales decreased $24 million (0.3%), due primarily to lower smokeable products shipment volume and 2010 implementation costs, partially offset by higher per unit settlement charges, higher FDA user fees and higher manufacturing costs.
Marketing, administration and research costs decreased $92 million (3.4%), primarily reflecting cost reduction initiatives and lower integration costs, partially offset by higher charges in 2011 related to tobacco and health judgments (See Note 18 and Item 3), higher general corporate expenses and an increase to the allowance for losses in the financial services segment.
Operating income decreased $160 million (2.6%), due primarily to lower operating results from the financial services segment (reflecting the impact to net revenues associated with the 2011 PMCC Leveraged Lease Charge) and higher general corporate expenses, partially offset by higher operating results from the smokeable products, smokeless products and wine segments (which included higher asset impairment and exit costs and higher charges related to tobacco and health judgments in the smokeable products segment, and higher asset impairment and exit costs in the smokeless products segment), and a reduction to the Mondelēz and PMI tax-related receivables in 2010. As discussed in Note 14, changes to Mondelēz and PMI tax-related receivables were fully offset by a corresponding provision/benefit for income taxes associated with Mondelēz and PMI.
Interest and other debt expense, net, increased $83 million (7.3%), as a result of higher interest costs in 2011 related to tobacco and health judgments, and the issuance of senior unsecured long-term notes in May 2011, partially offset by debt refinancing activities in 2010.
Earnings from Altria Group, Inc.'s equity investment in SABMiller increased $102 million (16.2%), due primarily to higher ongoing equity earnings and higher net charges in 2010 for SABMiller special items, partially offset by lower gains in 2011 resulting from issuances of common stock by SABMiller.
Altria Group, Inc.'s effective income tax rate increased 7.5 percentage points to 39.2%, due primarily to a $312 million charge that primarily represents a permanent charge for interest on tax underpayments associated with the 2011 PMCC Leveraged Lease Charge and higher reversals of tax reserves and associated interest in 2010 principally related to certain Mondelēz and PMI tax matters discussed above.
Net earnings attributable to Altria Group, Inc. of $3,390 million decreased $515 million (13.2%), due primarily to lower operating income, higher interest and other debt expense, net, and a higher income tax rate, partially offset by higher earnings from Altria Group, Inc.'s equity investment in SABMiller. Diluted and basic EPS attributable to Altria Group, Inc. of $1.64, each decreased by 12.3%.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The United States tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of our tobacco subsidiaries and our consolidated results of operations, cash flows and financial position. These challenges, some of which are discussed in more detail below, and in Note 18, Item 1A and Item 3, include:
▪pending and threatened litigation and bonding requirements as discussed in Note 18 and Item 3;
▪restrictions and requirements imposed by the FSPTCA enacted in June 2009, and restrictions and requirements that have been, and in the future may be, imposed by the FDA under this statute;
▪actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
▪bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;
▪other federal, state and local government actions, including:
▪restrictions on the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
▪additional restrictions on the advertising and promotion of tobacco products;
▪other actual and proposed tobacco product legislation and regulation; and
▪governmental investigations;
▪the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates and others (including employers) to further restrict tobacco use;
▪price gaps and changes in price gaps between premium and lowest price brands;
▪competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;
▪illicit trade practices, including the sale of counterfeit tobacco products by third parties; the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes; diversion into one market of products intended for sale in another; the potential assertion of claims and other issues relating to contraband shipments of tobacco products; and the
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| ▪ | pending and threatened litigation and bonding requirements; |
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| ▪ | the requirement to issue “corrective statements” in various media in connection with the Federal Government’s lawsuit; |
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| ▪ | restrictions and requirements imposed by the FSPTCA enacted in June 2009, and restrictions and requirements that have been, and in the future may be, imposed by the FDA under this statute; |
imposition of additional legislative or regulatory requirements related to illicit trade practices; and
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| ▪ | actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements; |
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| ▪ | bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers; |
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| ▪ | other federal, state and local government actions, including: |
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| ▪ | increases in the minimum age to purchase tobacco products above the current federal minimum age of 18; |
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| ▪ | restrictions on the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes; |
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| ▪ | additional restrictions on the advertising and promotion of tobacco products; |
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| ▪ | other actual and proposed tobacco product legislation and regulation; and |
▪potential adverse changes in tobacco leaf price, availability and quality.governmental investigations;
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| ▪ | the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates and others (including employers) to further restrict tobacco use; |
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| ▪ | price gaps and changes in price gaps between premium and lowest price brands; |
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| ▪ | competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation; |
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| ▪ | illicit trade practices, including the sale of counterfeit tobacco products by third parties; the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes; diversion into one market of products intended for sale in another; the potential assertion of claims and other issues relating to contraband shipments of tobacco products; and the imposition of additional legislative or regulatory requirements related to illicit trade practices; and |
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| ▪ | potential adverse changes in tobacco leaf price, availability and quality. |
In addition to and in connection with the foregoing, business and legal challenges, our tobacco subsidiaries are subject to evolving adult tobacco consumer preferences.preferences pose challenges for Altria Group, Inc.'s’s tobacco subsidiaries. Our tobacco subsidiaries believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 30%50% of adult smokers say they are interested in spit-free smokelesstrying innovative tobacco alternatives to cigarettes. Future successproducts. Altria Group, Inc.’s tobacco subsidiaries further believe that adult tobacco consumer awareness of electronic cigarettes is dependenthigh and
growing and estimate that consumer expenditures for e-vapor products reached approximately $1 billion in part on the ability ofUnited States in 2013. Altria Group, Inc. and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, over time newmanufacturing, marketing and distributing products and marketsboth within and potentially outside the United States through technological innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties). For example, Nu Mark entered the e-vapor category with the introduction of MarkTen electronic cigarettes into a lead market in Indiana in August 2013 and pursuitexpanded distribution of theirMarkTen electronic cigarettes to Arizona in December 2013. Nu Mark plans to expand MarkTen electronic cigarettes nationally beginning in the second quarter of 2014. In addition, on February 3, 2014, Altria Group, Inc. announced Nu Mark’s entry into an agreement to acquire the e-vapor business of Green Smoke, Inc. and its affiliates. See the discussions regarding new product technologies, adjacency growth strategies. Seestrategy and evolving consumer preferences in Item 1A for certain risks associated with the foregoing discussion.
We have provided additional detail on the following topics below:
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▪ | FSPTCA and FDA Regulation; |
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▪ | International Treaty on Tobacco Control; |
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▪ | State Settlement Agreements; |
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▪ | Other Federal, State and Local Regulation and Activity; |
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▪ | Tobacco Price, Availability and Quality; and |
▪FSPTCA and FDA Regulation;
▪Excise Taxes;
▪International Treaty on Tobacco Control;
▪State Settlement Agreements;
▪Other Federal, State and Local Regulation and Activity;
▪Illicit Trade;
▪Tobacco Price, Availability and Quality; and
▪Timing of Sales.
FSPTCA and FDA Regulation
▪The Regulatory Framework: The FSPTCA expressly establishes certain restrictions and prohibitions on our cigarette and smokeless tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority (1) to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; the authority(2) to require disclosures of related information; and the authority(3) to enforce the FSPTCA and related regulations. The law also grants the FDA authority to extend itsthe FSPTCA’s application, by regulation, to all other tobacco products, including cigars.cigars, pipe tobacco and electronic cigarettes. The FDA has indicated that it intends to regulate cigars, electronic cigarettes and other tobacco products, but it has not indicated a timeline for the issuance of final regulations.
Among other measures, the FSPTCA:
▪imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;
▪prohibits cigarettes with characterizing flavors other than menthol and tobacco;
▪bans descriptors such as "light," "mild"“light,” “mild” or "low"“low” or similar descriptors unless expressly authorized by the FDA;
▪requires extensive ingredient disclosure to the FDA and may require more limited public ingredient disclosure;
▪prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
▪imposes reporting obligations relating to contraband activity and grants the FDA authority to impose other recordkeeping and reportingother obligations to address counterfeit and contrabandillicit trade in tobacco products;
▪changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warnings for cigarettes, which it published in June 2011, and gives the FDA the authority to require new warnings;
▪authorizes the FDA to adopt product regulations and related actions, including:
▪to impose tobacco product standards that are appropriate for the protection of the public health through a regulatory process, including, among other possibilities, restrictions on ingredients, constituents or other properties, performance or design criteria, as well as to impose testing, measurement, reporting and disclosure requirements;
▪to subject tobacco products that are modified or first introduced into the market after March 22, 2011 to application and premarket review and authorization requirements (the "New“New Product Application Process"Process”) if the FDA does not find them to be "substantially equivalent"“substantially equivalent” to products commercially marketed as of February 15, 2007, and to deny any such new product application, thus preventing the distribution and sale of any product affected by such denial;
▪to determine that certain existing tobacco products modified or introduced into the market for the first time between February 15, 2007 and March 22, 2011 are not "substantially equivalent"“substantially equivalent” to products commercially marketed as of February 15, 2007, in which case the FDA could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products (see FDA Regulatory Actions below);
▪to restrict or otherwise regulate menthol cigarettes, as well as other tobacco products with characterizing flavors;flavors (see TPSAC below);
▪to regulate nicotine yields and to reduce or eliminate harmful constituents or harmful ingredients or other components of tobacco products; and
▪to impose manufacturing standards for tobacco products; and
▪equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities.
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| ▪ | Implementation Timing, Rulemaking and Guidance: |
▪Implementation Timing, Rulemaking and Guidance: The implementation of the FSPTCA began in 2009 and will continue over time. Some provisions took effect immediately, some provisions have taken effect since the enactment of the FSPTCA and other provisions will not take effect for some time. Those provisions that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. Altria Group, Inc.'s’s tobacco subsidiaries are participatingparticipate actively in processes established by the FDA to develop and implement itsthe FSPTCA’s regulatory framework, including submission of comments to various FDA proposals and participation in public hearings and engagement sessions.
From time to time, the FDA also issues guidance for public comment, which may be issued in draft or final form. Such guidance, when finalized, is intended to represent the FDA'sFDA’s current thinking on a particular topic and may be predictive of the FDA'sFDA’s enforcement stance on that topic. Such guidance, even when finalized, is not intended to bind the FDA or the public or establish legally enforceable responsibilities. Examples of current draft guidance include:
▪Draft Guidance for Industry and FDA Staff: Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked QuestionsQuestions;
▪Draft Guidance for Industry: Modified Risk Tobacco Product ApplicationsApplications; and
▪Draft Guidance for Industry: Applications for Premarket Review of New Tobacco ProductsProducts.
A complete set of guidance documents issued by the FDA can be found on the FDA'sFDA’s website at www.fda.gov/TobaccoProductsGuidanceComplianceRegulatoryInformation. The information on this website is not, and shall not be deemed to be, part of this report or incorporated into any other filings Altria Group, Inc. makes with the Securities and Exchange Commission ("SEC").SEC.
PM USA and USSTC submit comments to the FDA on draft or final guidance when appropriate. In some cases, PM USA and USSTC may disagree with a particular interpretation by the FDA as expressed in draft or final guidance and may communicate their position in writing to the FDA. For example, PM USA and USSTC communicated disagreement with FDA interpretations of the statute set forth in the "Draft“Draft Guidance for Industry and FDA Staff: Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked Questions" Questions”
regarding when a manufacturer must submit substantial equivalence reports. While PM USA and USSTC believe that all of their current products meet the statutory requirements of the FSPTCA, they cannot currently predict whether, when or how the FDA ultimately will apply its guidance or seek to enforce the law and regulations consistent with its guidance. As discussed below in Investigations and Enforcement, FDA enforcement actions could
have a material adverse effect on the business, financial position, cash flows and results of operations of Altria Group, Inc. and its tobacco subsidiaries.
The implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by states, territories and localities of the United States of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect our tobacco subsidiaries'subsidiaries’ ability to market and sell regulated tobacco products in those states, territories and localities.
▪Impact on Our Business; Compliance Costs: Regulations imposed and other regulatory actions taken by the FDA under the FSPTCA could have a material adverse impacteffect on the business, financial position, cash flows and sales volumeresults of operations of Altria Group, Inc.'s and its tobacco businessessubsidiaries in a number of different ways. For example, actions by the FDA could:
▪impact the consumer acceptability of tobacco products;
▪delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products;
▪limit adult consumer choices;
▪restrict communications to adult consumers;
▪create a competitive advantage or disadvantage for certain tobacco companies;
▪impose additional manufacturing, labeling or packaging requirements;
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▪ | impose restrictions at retail; |
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▪ | result in increased illicit trade activities; or |
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▪ | otherwise significantly increase the cost of doing business. |
▪impose additional restrictions at retail;
▪result in increased illicit trade activities; or
▪otherwise significantly increase the cost of doing business.
The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions could also have a material adverse effect on the business, financial position, cash flows and results of operations of Altria Group, Inc. and its tobacco subsidiaries.
The lawFSPTCA imposes fees on tobacco product manufacturers and importers to pay for the cost of regulation and other matters. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA regulation according to a process set out in the statute, which relies, in part, on the allocation methodology set forth in FETRA, and then among manufacturers and importers within each respective class category
based on their relative market shares. In May 2013, the FDA issued proposed regulations to govern the allocation of the FDA user fee after the FETRA program concludes in 2014. An Altria Group, Inc. subsidiary filed comments on behalf of PM USA and USSTC objecting to certain aspects of the proposed regulations. For a discussion of the impact of the State Settlement Agreements, the FETRA and FDA user fee payments on Altria Group, Inc., see Off-Balance Sheet ArrangementsFinancial Review - Debt and Aggregate Contractual Obligations-PaymentsLiquidity - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation below. In addition, compliance with the law'sFSPTCA’s regulatory requirements has resulted and will continue to result in additional costs for our tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter to date but could become substantial,material, either individually or in the aggregate, and will depend on the nature of the requirements imposed by the FDA.
▪Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, money penalties, product withdrawals and recalls, and product seizures. The use of any of these investigatory or enforcement tools by the FDA could result in significant costs to the tobacco businesses of Altria Group, Inc. or otherwise have a material adverse effect on the business, financial position, cash flows and results of operations of Altria Group, Inc. and its tobacco subsidiaries.
For example, in June 2010, the FDA issued a document request regarding changes to Marlboro Gold Pack cigarette packaging in connection with the FSPTCA'sFSPTCA’s ban of certain descriptors. PM USA submitted documents in response to the FDA'sFDA’s request.
▪TPSAC
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▪
| The Role of the TPSAC: As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the "TPSAC"“TPSAC”), which consists of both voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on scientific and health issues relating to tobacco products. For example, the TPSAC advises the FDA about modified risk products (products marketed with reduced risk claims), good manufacturing practices, the effects of the alteration of nicotine yields from tobacco products and nicotine dependence thresholds. The TPSAC previously made reports and recommendations to the FDA on menthol cigarettes, including the impact of the use of menthol in cigarettes on the public health, and the nature and impact of dissolvable tobacco products on the public health. The FDA may seek advice from the TPSAC about other safety, dependence or health issues relating to tobacco products, including tobacco product standards and applications to market new tobacco products. |
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| ▪ | TPSAC Membership: Beginning in March 2010, PM USA and USSTC raised with the FDA their concerns that four of |
the voting members of the TPSAC have financial and other conflicts (including services as paid experts for plaintiffs in tobacco litigation) that could hamper the full and fair consideration of issues by the TPSAC and requested that their appointments be withdrawn. The FDA declined PM USA's and USSTC's requests, stating that the FDA had satisfied itself, after inquiry, that the TPSAC members of the TPSAC have financial and other conflicts (including services as paid experts for plaintiffs in tobacco litigation) that could hamper the full and fair consideration of issues by the TPSAC and requested that their appointments be withdrawn. PM USA and USSTC raised similar concerns related to the engagement of two TPSAC subcommittee consultants. The FDA declined PM USA’s and USSTC’s requests, stating that the FDA had satisfied itself, after inquiry, that the individuals in question did not have disqualifying conflicts of interest. The FDA stated further that it would continue to screen, in accordance with relevant statutory and regulatory provisions and FDA guidance, all TPSAC members for potential conflicts of interest for matters that the TPSAC would be considering. The FDA also engaged two individuals to serve as consultants to a TPSAC subcommittee who also served as paid experts for plaintiffs in tobacco litigation. PM USA and USSTC raised similar concerns related to the engagement of these individuals and the FDA similarly declined to terminate
these engagements. In February 2011, Lorillard Tobacco Company (“Lorillard”) and R.J. Reynolds Tobacco Company filed suit in the U.S. District Court for the District of Columbia against the United States Department of Health and Human Services and individual defendants (sued in their official capacities) asserting that the composition of the TPSAC and the composition of the Constituents Subcommittee of the TPSAC violates several federal laws, including the Federal Advisory Committee Act. In August 2012, the district court denied the government'sgovernment’s motion to dismiss the plaintiffs'plaintiffs’ complaint. The government defendants filed their motion for summary judgment as to all claims in June 2013. Lorillard and R.J. Reynolds filed a cross-motion for summary judgment in July 2013.
▪TPSAC Action on Menthol: As mandated by the FSPTCA, in March 2011, the TPSAC submitted to the FDA a report on the impact of the use of menthol in cigarettes on the public health and related recommendations. The TPSAC report stated that "[“[m]enthol cigarettes have an adverse impact on public health in the United States."” The TPSAC report recommended that the "[“[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States."” The TPSAC report noted the potential that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences and suggested that the FDA consult with appropriate experts on this matter. The TPSAC report also recommended that additional research could address gaps in understanding menthol cigarettes.
In March 2011, PM USA submitted a report to the FDA outlining its position that neither science nor other evidence demonstrates that regulatory actions or restrictions related to the use of menthol cigarettes are warranted. The report noted PM USA'sUSA’s belief that significant restrictions on the use of menthol cigarettes would have unintended consequences detrimental to public health and society.
In July 2011, the TPSAC revised and approved its March 2011 report. The revisions were editorial in nature and did not change the substantive conclusions and recommendations of the TPSAC.
The FSPTCA does not set a deadline or required timeline for the FDA to act on the TPSACTPSAC’s report. The FDA has stated that the TPSACTPSAC’s report is only a recommendation and that the FDA'sFDA’s receipt of the TPSAC'sTPSAC’s report will not have an immediate effect on the availability of menthol cigarettes. In January 2012, the FDA announced that it had evaluated scientific information on menthol and had drafted a report related to the impact of menthol
in cigarettes on public health. The FDA indicated that it had sent its report to external scientists for peer review. ItIn July 2013, the FDA released its preliminary scientific evaluation, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” At the same time, the FDA also indicatedissued an advance notice of proposed rulemaking requesting comments on the FDA’s preliminary scientific evaluation and information that it will make its final draft reportmay inform potential regulatory actions regarding menthol in cigarettes or other tobacco products. On November 22, 2013, PM USA submitted comments to the FDA raising a number of concerns with the preliminary scientific evidence, including comments demonstrating that menthol cigarettes do not affect population harm differently than non-menthol cigarettes. PM USA also reiterated that significant restrictions on the use of menthol in cigarettes would have unintended consequences detrimental to public health and related information available for public comment, although it has not yet done so. Anysociety. No future action can be taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) will require formaluntil the completion of the rulemaking that includes public notice and the opportunity for public comment.process.
▪Final Tobacco Marketing Rule: As required by the FSPTCA, the FDA re-promulgated in March 2010 certain advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling) (the "Final“Final Tobacco Marketing Rule"Rule”). The Final Tobacco Marketing Rule:
▪bans the use of color and graphics in tobacco product labeling and advertising;
▪prohibits the sale of cigarettes and smokeless tobacco to underage persons;
▪restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;
▪requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions;
▪prohibits sampling of cigarettes and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities;
▪prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products;
▪prohibits the sale or distribution of items such as hats and tee shirts with tobacco brands or logos; and
▪prohibits brand name sponsorship of any athletic, musical, artistic, or other social or cultural event, or any entry or team in any event.
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| ▪ | bans the use of color and graphics in tobacco product labeling and advertising; |
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| ▪ | prohibits the sale of cigarettes and smokeless tobacco to underage persons; |
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| ▪ | restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products; |
| |
| ▪ | requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions; |
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| ▪ | prohibits sampling of cigarettes and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities; |
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| ▪ | prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products; |
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| ▪ | prohibits the sale or distribution of items such as hats and tee shirts with tobacco brands or logos; and |
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| ▪ | prohibits brand name sponsorship of any athletic, musical, artistic, or other social or cultural event, or any entry or team in any event. |
Subject to the limitations described below, the Final Tobacco Marketing Rule took effect in June 2010. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an advance notice of proposed rulemaking regarding the
so-called "1000“1000 foot rule,"” which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds. PM USA and USSTC submitted comments on this advance notice.
Since enactment, several lawsuits have been filed challenging various provisions of the FSPTCA and the Final Tobacco Marketing Rule, including their constitutionality and the scope of the FDA'sFDA’s authority thereunder. Altria Group, Inc. and its tobacco subsidiaries are not parties to any of these lawsuits. In January 2010, in one such challenge (Commonwealth Brands), the United StatesU.S. District Court for the Western District of Kentucky struck down as unconstitutional, and enjoined enforcement of, the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising and claims implying that a tobacco product is safer because of FDA regulation. The parties appealed and in March 2012, the United StatesU.S. Court of Appeals for the Sixth Circuit affirmed in part and reversed in part the district court'scourt’s decision. The Sixth Circuit affirmed the district court'scourt’s injunction against enforcement of the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising. The Sixth Circuit reversed the injunction against enforcement of the
prohibition on claims implying that a tobacco product is safer because of FDA regulation. The Sixth Circuit also held that the Final Tobacco Marketing Rule'sRule’s ban on consumer continuity programs violates the First Amendment and reversed the district court'scourt’s decision upholding the ban. The Sixth Circuit upheld the FSPTCA'sFSPTCA’s statutory requirements for enlarged textual and graphic warnings on cigarette packages and advertising, but did not rule upon the constitutionality of the nine graphic warnings actually selected by the FDA in its June 2011 final rule. In May 2012, the plaintiffs in Commonwealth Brands filed a petition for rehearing and rehearing en banc, which the Sixth Circuit denied. In October 2012, the plaintiffs filed a petition for writ of certiorari in the United States Supreme Court seeking further review of the Sixth Circuit'sCircuit’s decision upholding the FSPTCA'sFSPTCA’s new enlarged and expanded warning requirements that include graphic warnings, the FSPTCA'sFSPTCA’s restrictions on modified risk tobacco product claims and certain other provisions of the Final Tobacco Marketing Rule. The FDA did not file a petition for writ ofcertiorariwith the United States Supreme Court seeking further review of the Sixth Circuit'sCircuit’s decision. For a further discussionThe FDA filed its opposition to the plaintiffs’ petition for writ of this final rule and the challenge pendingcertiorari in March 2013. In April 2013, the United States DistrictSupreme Court denied plaintiffs’ petition for the Districtwrit of Columbia, see FDA Regulatory Actions-Graphics Warningscertiorari. below. The FDA has indicatedAs a result of this litigation, the portion of the Final Tobacco Marketing Rule that it does not intend to enforce the ban onbans the use of color and graphics in labeling and advertising foris unenforceable by the durationFDA. For a further discussion of the injunction.Final Tobacco Marketing Rule and the status of graphic warnings for cigarette packages and advertising, see FDA Regulatory Actions - Graphics Warnings below.
In a separate challenge to the Final Tobacco Marketing Rule in the United StatesU.S. District Court for the Eastern District of Virginia, Renegade Tobacco Company, Inc. and others have challenged the constitutionality of an FDA regulation that restricts tobacco
manufacturers from using the trade or brand name of a non-tobacco product on cigarettes or smokeless tobacco products. In May 2010, the Courtdistrict court issued a stay in the Renegade case pending the FDA'sFDA’s consideration of amendments to the trade or brand name rule. In November 2011, the FDA proposed an amended rule, but continues to exercise its discretion to enforce the original trade or brand name provisions of the Final Tobacco Marketing Rule according to FDA guidance issued in May 2010. It is not possible to predict the outcome of any such litigation or its effect on the extent of the FDA'sFDA’s authority to regulate tobacco products.
▪Contraband: The FSPTCA imposes on manufacturers reporting obligations relating to knowledge of suspected contraband activity involving their brands and also grants the FDA the authority to impose certain other recordkeeping and reportingother obligations to address counterfeit and contrabandillicit trade in tobacco products. The FSPTCA also empowers the FDA to assess whether additional tools should be employed to track and trace tobacco products through the distribution chain.
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| ▪ | Graphic Warnings:In June 2011, as required by the FSPTCA, the FDA issued its final rule to modify the required warnings that appear on cigarette packages and in cigarette advertisements. The FSPTCA requires the warnings to consist of nine new textual warning statements accompanied by color graphics depicting the negative health consequences of smoking. The graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50% of the front and rear panels of cigarette packages, and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. After a legal challenge to the rule initiated by R.J. Reynolds, Lorillard and several other plaintiffs, in which plaintiffs prevailed both at the trial and federal appellate levels, the FDA decided not to seek further review of the U.S. Court of Appeals’ decision and announced its plans to propose a new graphic warnings rule in the future. |
consist of nine new textual warning statements accompanied by color graphics depicting the negative health consequences of smoking. The graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50 percent of the front and rear panels of cigarette packages, and (ii) occupy 20 percent of a cigarette advertisement and be located at the top of the advertisement.
The rule requires that cigarette packaging manufactured after September 22, 2012 contain the new graphic warnings and all cigarette advertising contain the new warnings by that date. In August 2011, however, R.J. Reynolds Tobacco Company, Lorillard Tobacco Company and several other plaintiffs filed suit in the United States District Court for the District of Columbia against the FDA challenging its graphic warnings rule. In November 2011, the district court granted the plaintiffs' motion for a preliminary injunction, thereby staying enforcement of the graphic warnings rule until 15 months after a final ruling from the district court. In February 2012, the district court entered final judgment on behalf of the plaintiffs, enjoining enforcement of the graphic warnings rule. The FDA appealed this decision to the United States Court of Appeals for the District of Columbia Circuit. In August 2012, the Court of Appeals affirmed the ruling of the district court. The FDA filed a petition for panel rehearing and rehearing en banc with the Court of Appeals, which was denied on December 5, 2012.
PM USA is not a party to this lawsuit, but the FDA has confirmed that it will not enforce the graphic warnings rule against PM USA on the same terms and with the same effect as the district court injunction discussed above.
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| ▪ | New Product Marketing Authorization Processes:In January 2011, the FDA issued guidance concerning reports that manufacturers must submit for certain FDA-regulated tobacco products that the manufacturer modified or introduced for the first time into the market after February 15, 2007. These reports must be reviewed by the agency to determine if such tobacco products are "substantially equivalent"“substantially equivalent” to products commercially available as of February 15, 2007. In general, in order to continue marketing these products sold before March 22, 2011, manufacturers of FDA-regulated tobacco products were required to send to the FDA a report demonstrating substantial equivalence by March 22, 2011. PM USA and USSTC submitted timely reports. PM USA and USSTC can continue marketing these products unless the FDA makes a determination that a specific product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products. PM USA and USSTC believe all of their current products meet the statute's requirements, but cannot predict when or how the FDA will respond to their reports. |
or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products. PM USA and USSTC believe all of their current products meet the statute’s requirements, but cannot predict when or how the FDA will respond to their substantial equivalence reports.
Manufacturers intending to introduce new products and certain modified products into the market after March 22, 2011 must submit a report to the FDA and obtain a "substantial“substantial equivalence order"order” from the agency before introducing the products into the market. If the FDA declines to issue a so-called "substantial“substantial equivalence order"order” for a product or if the manufacturer itself determines that the product does not meet the substantial equivalence requirements, the product would need to undergo the New Product Application Process.
The FDA began announcing its decisions on substantial equivalence reports in the second quarter of 2013. However, there are a significant number of substantial equivalence reports for which the FDA has not announced decisions. At this time, it is not possible to predict how long agency reviews of either substantial equivalence reports or new product applications will take.
The FDA also published a final regulation in July 2011, establishing a process for requesting an exemption from the substantial equivalence requirements for certain minor modifications to tobacco additives. The final rule became effective in August 2011.
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| ▪ | Good Manufacturing Practices: In March 2013, the FDA published a notice announcing that it had established a public docket to obtain input by May 20, 2013 on the proposed Good Manufacturing Practice Regulations recommended to the FDA in January 2012 by a group of tobacco companies, including PM USA and USSTC. The FSPTCA requires that the FDA promulgate good manufacturing practice regulations for tobacco product manufacturers, but does not specify a timeframe for such regulations. |
Excise Taxes
Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.
Federal, state and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. For example, in 2009, the federal excise tax ("FET")FET on cigarettes increased from 39 cents$0.39 per pack to approximately $1.01 per pack and on July 1, 2010, the New York state excise tax increased by $1.60 to $4.35 per pack. Between the end of 1998 and February 22, 2013,21, 2014, the weighted-average state and certain local cigarette excise taxes increased from $0.36 to $1.41$1.47 per pack. During 2012, two states (Illinois2013, Massachusetts, Minnesota, Oregon and Rhode Island)Puerto Rico enacted
legislation to increase their cigarette excise tax.taxes. As of February 22, 2013,21, 2014, no state has increased its cigarette excise tax in 2013.2014. The President’s fiscal year 2014 Budget proposes significant increases in the FET for all tobacco products. The proposed budget would increase the FET on a pack of cigarettes by $0.94 per pack, raising the total FET to $1.95 per pack, and would also increase the tax on other tobacco products by a proportionate amount. It is not possible to predict whether this proposed FET increase will be enacted.
Tax increases are expected to continue to have an adverse impact on sales of the tobacco products byof our tobacco subsidiaries due tothrough lower consumption levels and to athe potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an impact on the reported share performance of tobacco products of Altria Group, Inc.'s’s tobacco subsidiaries.
A majority of states currently tax smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria Group, Inc.'s’s subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of February 22, 2013,21, 2014, the federal government, 22 states, Puerto Rico, Washington, D.C., Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco.
International Treaty on Tobacco Control
The World Health Organization'sOrganization’s Framework Convention on Tobacco Control (the "FCTC"“FCTC”) entered into force in February 2005. As of February 22, 2013, 17621, 2014, 177 countries, as well as the European Community, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things: establish specific actions to prevent youth tobacco product use; restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship; initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting; implement regulations imposing product testing, disclosure and performance standards; impose health warning requirements on packaging; and adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products, including tracking and tracing of tobacco products
through the distribution chain and restrict smoking in public places.
There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. In addition, the Protocol to Eliminate Illicit Trade in Tobacco Products (the "Protocol"“Protocol”) was approved by the Conference of Parties to the FCTC onin November 12, 2012. It includes provisions related to the tracking and tracing of tobacco products through the distribution chain and numerous other provisions regarding the regulation of the manufacture, distribution and sale of tobacco products. The Protocol has not yet entered into force, but in any event will not apply to the United States until the Senate ratifies the FCTC.FCTC and until the President signs, and the Senate ratifies, the Protocol. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either directly or as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Note 18, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims (collectively, the "StateState Settlement Agreements").Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the State Settlement Agreements, FETRA and FDA user fee payments on Altria
Group, Inc., see Off Balance Sheet ArrangementsFinancial Review - Debt and Aggregate Contractual ObligationsLiquidity - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation below. The settlementsState Settlement Agreements also place numerous requirements and restrictions on participating manufacturers'manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry'sindustry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the "STMSA"“STMSA”) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt
various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other Federal, State and Local Regulation and Activity
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| ▪ | Federal, State and Local Laws |
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| ▪ | State and Local Laws Addressing Certain Characterizing Flavors: In a growing number of states and localities, legislation has been enacted or proposed that prohibits or would prohibit the sale of certain tobacco products with certain characterizing flavors. The legislation varies in terms of the type of tobacco products subject to prohibition, the conditions under which the sale of such products is or would be prohibited, and exceptions to the prohibitions. For example, a number of proposals would prohibit characterizing flavors in smokeless tobacco products, with no exception for mint- or wintergreen-flavored products. |
To date, the following statesJurisdictions that have enacted legislation that prohibitsrestrictions on certain tobacco products with certain characterizing flavors:
Maine enacted legislation that prohibits the sale of certain flavored cigar and cigarette products. As implemented, including the application of certain statutory exemptions, this prohibition did not ban any PM USA, USSTC or Middleton product. In 2010, Maine amended the characterizing flavor prohibition. The amendment allows the continued sale of cigars that obtained favorable exemption rulings under the previous statute but does not provide for the possibility of further exemptions, such as for future products with characterizing flavors.
New Jersey enacted legislation banning the sale and marketing of cigarettes with a characterizing flavor other than menthol, mint or clove. This legislation does not ban any PM USA, USSTC or Middleton product.
In addition, such legislation has been enacted or is being considered in a number of localities. For example:
New York City adopted an ordinance that prohibits the sale of certain flavored tobacco products other than cigarettes. This legislation affects certain USSTC and Middleton products. The ordinance and related final regulations took effect in August 2010. Certain subsidiaries of USSTC have filed a lawsuit in the United States District Court for the Southern District of New York challenging theflavors include Providence, RI, New York City, legislation on the grounds that it is preempted by the FSPTCA. In March 2010, the district court denied plaintiffs' motion for preliminary injunction against enforcement of the ordinanceNY, Maine and in November 2011, the district court denied plaintiffs' motion for summary judgment, and granted New York City's cross-motion for summary judgment, on the preemption claim. Plaintiffs have appealed the denial to the United States Court of Appeals for the Second Circuit and, in the meantime, are complying with the ordinance pending resolution of the litigation. Argument was heard on November 6, 2012. On February 26, 2013, the United States Court of Appeals for the Second Circuit affirmed the judgment of the district court upholding the New York City ordinance.
Providence, Rhode Island adopted two ordinances in January 2012. One would prohibit the sale in most retail outlets of certain flavored tobacco products other than cigarettes. This legislation differs in a number of ways from the New York City ordinance, including by attempting to prohibit reference to concepts such as "spicy, arctic, ice, cool, warm, hot, mellow, fresh and breeze." The second Providence ordinance prohibits licensed retailers in the city from accepting or redeeming coupons for cigarettes and other tobacco products or from selling such products to consumers through multi-pack discounts or other discounts provided in exchange for the purchase of another tobacco product. In February 2012, Altria Group, Inc.'s tobacco subsidiaries filed a legal challenge to these ordinances in the United States District Court for the District of Rhode Island challenging the legality of both ordinances on preemption and First Amendment grounds. Plaintiffs filed motions for preliminary injunction and summary judgment in March 2012. The City of Providence filed a cross-motion for summary judgment in June 2012. On December 10, 2012, the district court struck the "concepts" language quoted above from the flavor ordinance, but otherwise granted summary judgment for the City of Providence as to both ordinances. The City of Providence commenced enforcement of the ordinances, as modified by the district court, on January 3, 2013. On January 8, 2013, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the First Circuit.
Jersey. Whether other states or localities will enact legislation in this area, and the precise nature of such legislation if enacted, cannot be predicted. See FSPTCA and FDA Regulation above for a summary of the FSPTCA'sFSPTCA’s regulation of certain tobacco products with characterizing flavors.
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| ▪ | State and Local Laws Imposing Certain Speech Requirements andor Other Restrictions: In several jurisdictions, legislation or regulations have been enacted or proposed that would require the disclosure of health information separate from or in addition to federally-mandated health warnings or that would restrict commercial speech in certain respects.respects or that would impose additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). For example, in July 2012, the United States Court of Appeals for the Second Circuit determined that an effort by New York City attempted to require retailers selling tobacco products to display a sign issued by the New York City Board of Health, depicting graphic images of the potential health consequences of smoking and urging smokers to quitquit. In litigation now concluded, a federal appeals court ruled that the ordinance was preempted by federal law. This litigation has concluded. |
As another example, the Village Board of Haverstraw,In addition, on November 19, 2013, New York City enacted an ordinance prohibiting retailers from (1) honoring or accepting any “price reduction instrument” (including coupons), (2) offering a discount off the listed sales price of a tobacco product display ban in April 2012. It would have barred tobacco retailers from displayingto a consumer or (3) offering consumers multi-pack or multi-product discounts on the sale of any tobacco product in a manner that a consumer could view the product prior to purchase. Retailers could maintain a "tobacco menu," listing the types and pricesproduct. The ordinance also bans sampling of tobacco products availablein adult-only facilities. It also imposes a minimum retail sales price for sale, but the menu could only be given tocigarettes and little cigars and a consumer, over the legal age to purchase tobacco products, who requested it. At all other times, any "tobacco menu" would have been concealed from view. In June 2012, an association of tobacco retailers,minimum pack size for certain cigars. On January 30, 2014, PM USA, Middleton and a USSTC subsidiary, along with severalother tobacco product manufacturers and distributors (including PM USA, a subsidiary of USSTC and Middleton),three trade associations representing New York City retailers, filed a lawsuit in the United StatesU.S. District Court for the Southern District of New York challenging the displaycoupon/discount ban on the
grounds that it violates the First Amendment and preemption grounds.is preempted by federal and state law.
New York City also enacted an ordinance on November 19, 2013 increasing the legal age to purchase tobacco products (including electronic cigarettes) from 18 to 21. The current federal minimum age requirement for the purchase of tobacco products is 18; four states have increased their state minimum age laws to 19 (Alabama, Alaska, New Jersey and Utah) and a number of localities have increased their minimum age laws above 18. In July 2012,addition, a number of states have recently proposed increasing the Village Board votedlegal age to approve a settlement of the lawsuit and, in August 2012, voted to repeal the ordinance. This litigation has concluded.21.
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| ▪ | Federal Tobacco Quota Buy-Out: In October 2004, FETRA was signed into law. PM USA, Middleton and USSTC are subject to the requirements of FETRA. FETRA eliminated the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the 10-year buy-out, which will end in 2014, is approximately $9.5 billion and is being paid over 10 years ending in 2014 by manufacturers and importers of each kind of tobacco product.product subject to FET. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of such tobacco product. |
In February 2011, PM USA filed a lawsuit in the United StatesU.S. District Court for the Eastern District of Virginia challenging the United States Department of Agriculture's (the "USDA")USDA’s method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above and are used by the FDA to calculate the
industry's FDA user fees.above. PM USA asserted in this litigation that the USDA violated FETRA, and imposed excessive FETRA assessments on PM USA, by failing to apply the most current FET rates enacted by Congress, which became effective in April 2009, in calculating the class share allocations. The Cigar Association of America has joined the litigation as a defendant intervenor. In October 2012, the district court denied PM USA'sUSA’s motion for summary judgment, granted the defendants'defendants’ motion for summary judgment and dismissed the case. OnIn December 5, 2012, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit. Oral argument was held on September 19, 2013. On November 20, 2013, the Fourth Circuit affirmed the district court’s decision granting summary judgment.
For a discussion of the impact of the State Settlement Agreements, FETRA and FDA user fee payments on Altria Group, Inc., see Off Balance Sheet ArrangementsFinancial Review - Debt and Aggregate Contractual ObligationsLiquidity - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation below. We do not anticipate that the quota buy-out will have a material adverse impact on our consolidated results in 2013 andor 2014.
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| ▪ | Health Effects of Tobacco Consumption and Exposure to Environmental Tobacco Smoke ("ETS"(“ETS”): It is the policy of Altria Group, Inc. and its tobacco subsidiaries to defer to the judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of tobacco consumption, addiction and exposure to ETS. Altria Group, Inc. and its tobacco subsidiaries believe that the public should be guided by the messages of the United States Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products. |
addiction and exposure to ETS. Altria Group, Inc. and its tobacco subsidiaries believe that the public should be guided by the messages of the United States Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.
Reports with respect to the health effects of smoking have been publicized for many years, including in a January 2014 United States Surgeon General report titled “The Health Consequences of Smoking - 50 Years of Progress” and in a June 2006 United States Surgeon General report on ETS entitled "Thetitled “The Health Consequences of Involuntary Exposure to Tobacco Smoke." ”
Many jurisdictions within the United States have restricted smoking in public places. The pace and scope of public smoking bans have increased significantly. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking in outdoor places, in private apartments and in cars with minors in them.transporting minors. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on regulation.
▪Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards (such as reduced cigarette ignition propensity standards); establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide
additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain packingpackage sizes; require tax stamping of moist smokeless tobaccoMST products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented in the United States that might materially adversely affect the business and volume of our tobacco subsidiaries and our consolidated results of operations and cash flows.
▪Governmental Investigations: From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. Altria Group, Inc. and its
subsidiaries cannot predict whether new investigations may be commenced.
Illicit Trade
Altria Group, Inc. and its tobacco subsidiaries support appropriate regulations and enforcement measures to prevent illicit trade in tobacco products. For example, Altria Group, Inc.'s’s tobacco subsidiaries are engaged in a number of initiatives to help prevent trade in contraband tobacco products, including: enforcement of wholesale and retail trade programs and policies on trade in contraband tobacco products; engagement with and support of law enforcement and regulatory agencies; litigation to protect their trademarks; and support for a variety of federal and state legislative initiatives. Legislative initiatives to address trade in contraband tobacco products are designed to protect the legitimate channels of distribution, impose more stringent penalties for the violation of illegal trade laws and provide additional tools for law enforcement. Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products continue to evolve as the nature of illicit tobacco products evolves. For example, in March 2010, the President signed into law the Prevent All Cigarette Trafficking ("PACT"(“PACT”) Act, which addresses illegal Internet sales by, among other things, imposing a series of restrictions and requirements on the delivery-sale of cigarettes and smokeless tobacco products and makes such products non-mailable to consumers through the United States Postal Service, subject to limited exceptions. CertainThe PACT Act has been the subject of ongoing lawsuits brought by certain Internet cigarette sellers filedsellers. In one of these lawsuits, challenging the constitutionality of various aspects of this statute and sought injunctive reliefpending in the United StatesU.S. District CourtsCourt for the District of Columbia, the Western District of New York and the Eastern District of Pennsylvania. In the Western District of New York, the district court enjoined only certain elements of the
PACT Act, including a requirement that delivery-sellers obey the laws of the jurisdiction to which they ship cigarettes. In the District of Columbia, the district court issued a preliminary injunction substantially similaris currently in effect that prevents the implementation of certain portions of the PACT Act. On June 28, 2013, the U.S. Court of Appeals for the D.C. Circuit upheld the preliminary injunction and remanded the case to the injunctive relief issued in the Western District of New York. The United States Department of Justice is challenging the District of Columbia injunction on appeal and is pursuing a final judgment on the merits in the Western District of New Yorktrial court for further proceedings.
Tobacco Price, Availability and Quality
Shifts in crops driven by economic conditions and adverse weather patterns, government mandated prices and production control programs may increase or decrease the cost or reduce the quality of tobacco and other agricultural products used to manufacture our products. As with other agriculture commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could causeimpact tobacco leaf prices to increase and could result in farmers growing less tobacco.tobacco supply. Any significant change in tobacco leaf prices, quality or availability could affect our tobacco subsidiaries'subsidiaries’ profitability and business.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Tobacco Space
Operating Results
The following table summarizes tobacco space operating results:results for the smokeable and smokeless products segments: | | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | Net Revenues | | Operating Companies Income | Net Revenues | | Operating Companies Income |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
| Smokeable products | $ | 22,216 |
| | $ | 21,970 |
| | $ | 22,191 |
| | $ | 6,239 |
| | $ | 5,737 |
| | $ | 5,618 |
| $ | 21,868 |
| | $ | 22,216 |
| | $ | 21,970 |
| | $ | 7,063 |
| | $ | 6,239 |
| | $ | 5,737 |
|
| Smokeless products | 1,691 |
| | 1,627 |
| | 1,552 |
| | 931 |
| | 859 |
| | 803 |
| 1,778 |
| | 1,691 |
| | 1,627 |
| | 1,023 |
| | 931 |
| | 859 |
|
| Total tobacco space | $ | 23,907 |
| | $ | 23,597 |
| | $ | 23,743 |
| | $ | 7,170 |
| | $ | 6,596 |
| | $ | 6,421 |
| |
| Total smokeable and smokeless products | | $ | 23,646 |
| | $ | 23,907 |
| | $ | 23,597 |
| | $ | 8,086 |
| | $ | 7,170 |
| | $ | 6,596 |
|
New Tracking Services
Effective in the first quarter of 2013, retail share results for cigarettes are based on a new tracking service, IRI/Management Science Associate Inc. (“MSAi”), and retail share results for cigars and smokeless products are based on a new tracking service, IRI InfoScan. These cost-effective new services measure retail share in stores representing trade classes selling a significant majority of the volume of the product being measured. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers reported through the Store Tracking Analytical Reporting System (“STARS”). Retail market share results reported using the new services cannot be meaningfully compared to retail market shares previously reported by Altria Group, Inc.’s tobacco companies under the previous services. Retail share results for 2012 and 2011 have been restated to reflect these new services.
Smokeable Products Segment
The smokeable products segment'ssegment’s operating companies income and operating companies income margin grew during 20122013 due primarily throughto higher
pricing and effective cost management. pricing. PM USA continued to supportUSA’s investments in the Marlboro's new brand architecture with brand-building initiatives, which contributed to Marlboro's 2012’s retail share gains.growth versus 2012.
The following table summarizes smokeable products segment shipment volume performance:
| | | | Shipment Volume | Shipment Volume |
| | For the Years Ended December 31, | For the Years Ended December 31, |
| (sticks in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Cigarettes: | | | | | | | | | | |
| Marlboro | 116,377 |
| | 117,201 |
| | 121,893 |
| 111,421 |
| | 116,377 |
| | 117,201 |
|
| Other premium | 8,629 |
| | 9,381 |
| | 10,315 |
| 7,721 |
| | 8,629 |
| | 9,381 |
|
| Discount | 9,868 |
| | 8,556 |
| | 8,630 |
| 10,170 |
| | 9,868 |
| | 8,556 |
|
| Total cigarettes | 134,874 |
| | 135,138 |
| | 140,838 |
| 129,312 |
| | 134,874 |
| | 135,138 |
|
| Cigars: | | | | | | | | | | |
| Black & Mild | 1,219 |
| | 1,226 |
| | 1,222 |
| 1,177 |
| | 1,219 |
| | 1,226 |
|
| Other | 18 |
| | 20 |
| | 24 |
| 21 |
| | 18 |
| | 20 |
|
| Total cigars | 1,237 |
| | 1,246 |
| | 1,246 |
| 1,198 |
| | 1,237 |
| | 1,246 |
|
| Total smokeable products | 136,111 |
| | 136,384 |
| | 142,084 |
| 130,510 |
| | 136,111 |
| | 136,384 |
|
Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedges; and Discount brands, which include BasicL&M and L&M.Basic. Cigarettes volume includes units sold as well as promotional units, but excludes units sold in Puerto Rico and U.S. Territories, to Overseas Military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.
The following table summarizes the smokeable products segment retail share performance:
| | | | Retail Share | Retail Share |
| | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Cigarettes: | | | | | | | | | | |
| Marlboro | 42.6 | % | | 42.0 | % | | 42.6 | % | 43.7 | % | | 43.6 | % | | 43.0 | % |
| Other premium | 3.4 |
| | 3.7 |
| | 3.9 |
| 3.1 |
| | 3.2 |
| | 3.4 |
|
| Discount | 3.8 |
| | 3.3 |
| | 3.3 |
| 3.8 |
| | 3.5 |
| | 2.9 |
|
| Total cigarettes | 49.8 | % | | 49.0 | % | | 49.8 | % | 50.6 | % | | 50.3 | % | | 49.3 | % |
| Cigars: | | | | | | | | | | |
| Black & Mild | 30.0 | % | | 29.5 | % | | 29.0 | % | 29.2 | % | | 30.5 | % | | 30.5 | % |
| Other | 0.2 |
| | 0.2 |
| | 0.4 |
| 0.2 |
| | 0.3 |
| | 0.2 |
|
| Total cigars | 30.2 | % | | 29.7 | % | | 29.4 | % | 29.4 | % | | 30.8 | % | | 30.7 | % |
CigarettesAs previously discussed, effective in the first quarter of 2013, retail share results for cigarettes are based on data from SymphonyIRI Group/Capstone, which isIRI/MSAi, a retailtracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. Retail share results for cigars are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share performanceand depict share trends. Both services track sales in the Food, Drug and Mass Merchandisers (including Wal-Mart), Convenience, Military, Dollar Store and Club trade classes. For other trade classes selling cigarettes, retail stores selling cigarettes. The panel wasshare is based on shipments from wholesalers to retailers through STARS. These services are not designed to capture
sales through other channels, including the Internet,internet, direct mail and some illicitly tax-advantaged outlets.
Cigars retail Retail share results for cigars are based on data from the SymphonyIRI Group ("SymphonyIRI") InfoScan Cigar Database for Food, Drug, Mass Merchandisers (excluding Walmart) and Convenience trade classes, which is a retail tracking service that measures machine-made large cigars market share performance.cigars. Middleton defines machine-made large cigars as cigars made by machine that weigh greater than three pounds per thousand, except cigars sold at retail in packages of 20 cigars. ThisBecause the cigars service was developed to provide a representation ofrepresents retail businessshare performance only in key trade channels.channels, it should not be considered a precise measurement of actual retail share. It is SymphonyIRI'sIRI’s standard practice to periodically refresh its InfoScan syndicated services, which could restate retail share results that were previously released.
PM USA and Middleton are transitioning to new retail tracking services to measure cigarette and cigar performance beginningreleased in the first quarter of 2013.these services.
PM USA and Middleton executed the following pricing and promotional allowance actions during 20122013, 20112012 and 20102011:
▪Effective December 1, 2013, PM USA reduced its wholesale promotional allowance on Marlboro and L&M by $0.07 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.07 per pack.
▪Effective June 10, 2013, PM USA reduced its wholesale promotional allowance on Marlboro and L&M by $0.06 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.06 per pack.
▪Effective December 3, 2012, PM USA increased the list price on all of its cigarette brands by $0.06 per pack.
▪Effective June 18, 2012, PM USA increased the list price on all of its cigarette brands by $0.06 per pack.
▪Effective March 14, 2012, Middleton reduced the list price on all of its untipped cigarillo brands by $0.39 per five-pack.
▪Effective December 12, 2011, PM USA increased the list price on all of its cigarette brands by $0.05 per pack. In addition, PM USA reduced its wholesale promotional allowance on L&M by $0.21 per pack from $0.55 to $0.34 per pack.
▪Effective December 5, 2011, Middleton executed various list price increases across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.12 per five-pack.
▪Effective July 8, 2011, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.
▪Effective December 6, 2010, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.
▪Effective November 15, 2010, Middleton executed various list price increases across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.09 per five-pack.
▪Effective May 10, 2010, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. In addition, PM USA cancelled its wholesale promotional allowance of $0.21 per pack on Basic.
▪Effective January 11, 2010, Middleton executed various list price increases across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.18 per five-pack.
The following discussion compares operating results for the smokeable products segment results for the year ended December 31, 20122013 with the year ended December 31, 20112012.
Net revenues, which include excise taxes billed to customers, increased $246decreased $348 million (1.1%(1.6%), due primarily to higher net pricinglower shipment volume ($4041,046 million), which includes higher promotional investments behind Marlboro's new brand architecture, partially offset by unfavorable mix due to L&M's volume growth in Discount and lower shipment volume.higher pricing.
Operating companies income increased $502$824 million (8.8%(13.2%), due primarily to higher net pricing ($405765 million), which includes higher promotional investments,the NPM Adjustment Items ($664 million) and lower marketing, administration and research savings reflecting cost reduction initiatives ($162 million), lower asset impairment, exit and implementation costs, net, primarily related to the 2011 Cost Reduction Program ($155 million) and lower charges related to tobacco and health judgments ($94 million), partially offset by unfavorable mix and lower
shipment volume ($127512 million), and higher per unit settlement charges ($123 million) and higher manufacturing costs.charges.
Marketing, administration and research costs for the smokeable products segment include PM USA'sUSA’s cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For further discussion on these matters, see Note 18 and Item 3. For the years ended December 31, 20122013, 20112012 and 20102011, product liability defense costs for PM USA were $247 million, $228 million $272 million and $259$272 million, respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. PM USA does not expect future product liability defense costs to be significantly different from product liability defense costs incurred in 2013.
For 2013, total smokeable products reported shipment volume decreased 4.1% versus 2012. PM USA’s 2013 reported domestic cigarettes shipment volume decreased 4.1%, due primarily to the industry’s rate of decline, changes in trade inventories and other factors, partially offset by retail share gains. When adjusted for trade inventories and other factors, PM USA estimates that its 2013 domestic cigarettes shipment volume was down approximately 4%, which is consistent with the estimated category decline.
PM USA’s shipments of premium cigarettes accounted for 92.1% of its reported domestic cigarettes shipment volume for 2013, versus 92.7% for 2012.
Middleton’s reported cigars shipment volume for 2013 decreased 3.2% due primarily to changes in wholesale inventories and retail share losses.
Marlboro’s retail share for 2013 increased 0.1 share point versus 2012 behind investments in the Marlboro architecture. PM USA expanded Marlboro Edge distribution nationally in the fourth quarter.
PM USA’s 2013 retail share increased 0.3 share points versus 2012, due to retail share gains by Marlboro, as well as L&M in Discount, partially offset by share losses on other portfolio brands. In 2013, L&M continued to gain retail share as the total discount segment was flat to declining versus 2012.
In the machine-made large cigars category,Black & Mild’s retail share for 2013 decreased 1.3 share points, driven by heightened competitive activity from low-priced cigar brands.
The following discussion compares operating results for the smokeable products segment for the year ended December 31, 2012 with the year ended December 31, 2011.
Net revenues, which include excise taxes billed to customers, increased $246 million (1.1%) due primarily to higher pricing ($404 million), which includes higher promotional investments behind Marlboro’s new brand architecture, partially offset by mix due to L&M’s volume growth in Discount and lower shipment volume.
Operating companies income increased $502 million (8.8%), due primarily to higher pricing ($405 million), which includes higher promotional investments, marketing, administration and research savings reflecting cost reduction initiatives ($162 million), lower restructuring charges ($155 million) and lower charges related to tobacco and health judgments ($94 million), partially offset by mix and lower shipment volume ($127 million), higher per unit settlement charges ($123 million) and higher manufacturing costs.
For 2012, total smokeable products reported shipment volume decreased 0.2% versus 2011. PM USA'sUSA’s reported domestic cigarettes shipment volume declined 0.2% for 2012, due primarily to the industry'sindustry’s rate of decline, partially offset by volume growth as a result of retail share gains and one extra shipping day. After adjusting for an extra shipping day and changes in trade inventories, PM USA'sUSA’s 2012 domestic cigarettes shipment volume was estimated to be essentially
unchanged. After adjusting for an extra shipping day and changes in trade inventories, PM USA estimates total cigarette category volume for 2012 to be down approximately 3%.
PM USA's total premium brands (Marlboro and Other premium brands) shipment volume decreased 1.2% in 2012. Marlboro's shipment volume decreased 0.7% versus 2011. In the Discount brands, PM USA's shipment volume for 2012 increased 15.3% versus 2011 due to L&M's volume growth, partially offset by Basic's volume decline. PM USA'sUSA’s shipments of premium cigarettes accounted for 92.7% of its reported domestic cigarettes shipment volume for 2012, down from 93.7% for 2011.
Middleton'sMiddleton’s reported cigars shipment volume for 2012 decreased 0.7% due primarily to changes in trade inventories, partially offset by volume growth as a result of retail share gains.
In the cigarette category,Marlboro's’s 2012 retail share performance continued to benefit from the brand-building initiatives supporting Marlboro's’s new architecture. Marlboro's’s retail share for 2012 increased 0.6 share points versus 2011 to 42.6%43.6%. In January 2013, PM USA expanded distribution of Marlboro Southern Cut nationally. Marlboro Southern Cut is part of the Marlboro Gold family.
PM USA'sUSA’s 2012 retail share increased 0.81.0 share pointspoint versus 2011, reflecting retail share gains by Marlboro and by L&M in Discount. These gains were partially offset by share losses on other portfolio brands.
In the machine-made large cigars category, Black & Mild's’s retail share for 2012 increased 0.5 share points. The brand benefited from new untipped cigarillo varieties that were introduced in 2011, Black & Mild seasonal offerings and the 2012 third-quarter introduction of Black & Mild Jazz untipped cigarillos into select geographies. In December 2012, Middleton announced plans to launch nationally Black & Mild Jazz cigars in both plastic tip and wood tip in the first quarter of 2013.
The following discussion compares smokeable products segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, decreased $221 million (1.0%) due to lower shipment volume ($1,051 million), partially offset by higher net pricing ($830 million), which includes higher promotional investments.
Operating companies income increased $119 million (2.1%), due primarily to higher net pricing ($831 million), which includes higher promotional investments, marketing, administration, and research savings reflecting cost reduction initiatives ($198 million) and 2010 implementation costs related to the closure of the Cabarrus, North Carolina manufacturing facility ($75 million), partially offset by lower volume ($527 million), higher asset impairment and exit costs due primarily to the 2011 Cost Reduction Program ($158 million), higher per unit settlement charges ($120 million), higher charges related to tobacco and health judgments ($87 million) and higher FDA user fees ($73 million).
For 2011, total smokeable products shipment volume decreased 4.0% versus 2010. PM USA's reported domestic cigarettes shipment volume declined 4.0% versus 2010 due primarily to retail share losses and one less shipping day, partially offset by changes in trade inventories. After adjusting for changes in trade inventories and one less shipping day, PM USA's 2011 domestic cigarette shipment volume was estimated to be down approximately 4% versus 2010. PM USA believes that total cigarette category volume for 2011 decreased approximately 3.5% versus 2010, when adjusted primarily for changes in trade inventories and one less shipping day.
PM USA's total premium brands (Marlboro and Other Premium brands) shipment volume decreased 4.3%. Marlboro's shipment volume decreased 3.8% versus 2010. In the Discount brands, PM USA's shipment volume decreased 0.9%. PM USA's shipments of premium cigarettes accounted for 93.7% of its reported domestic cigarettes shipment volume for 2011, down from 93.9% in 2010.
Middleton's 2011 reported cigars shipment volume wasremained unchanged versus 2010.
For 2011, PM USA's retail share of the cigarette category declined 0.8 share points to 49.0% due primarily to retail share losses on Marlboro. Marlboro's 2011 retail share decreased 0.6 share points. In 2010, Marlboro delivered record full-year retail share results that were achieved at lower margin levels.30.5%.
Middleton retained a leading share of the tipped cigarillo segment of the machine-made large cigars category, with a retail share of approximately 84% in 2011. For 2011, Middleton's retail share of the cigar category increased 0.3 share points to 29.7% versus 2010. Black & Mild's2011 retail share increased 0.5 share points, as the brand benefited from new product introductions. During the fourth quarter of 2011, Middleton broadened its untipped cigarillo portfolio with new Aroma Wrap™ foil pouch packaging that accompanied the national introduction of Black & Mild Wine. This new fourth-quarter packaging roll-out also included Black & Mild Sweets and Classic varieties.
During the second quarter of 2011, Middleton entered into a contract manufacturing arrangement to source the production of a portion of its cigars overseas. Middleton entered into this arrangement to access additional production capacity in an uncertain competitive environment and an excise tax environment that potentially benefits imported large cigars over those manufactured domestically.
Smokeless Products Segment
The smokeless products segment'ssegment’s operating companies income grew during 20122013 driven primarily by higher pricing,shipment volume and higher pricing. USSTC grew Copenhagen and Skoal's’s combined volume and retail share performance and effective cost management.expanded operating companies income margin versus 2012.
The following table summarizes smokeless products segment shipment volume performance:
|
| | | | | | | | |
| | Shipment Volume For the Years Ended December 31, |
| (cans and packs in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Copenhagen | 426.1 |
| | 392.5 |
| | 354.2 |
|
| Skoal | 283.8 |
| | 288.4 |
| | 286.8 |
|
Copenhagen and Skoal | 709.9 |
| | 680.9 |
| | 641.0 |
|
| Other | 77.6 |
| | 82.4 |
| | 93.6 |
|
| Total smokeless products | 787.5 |
| | 763.3 |
| | 734.6 |
|
|
| | | | | | | | |
| | Shipment Volume For the Years Ended December 31, |
| (cans and packs in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Copenhagen | 392.5 |
| | 354.2 |
| | 327.5 |
|
| Skoal | 288.4 |
| | 286.8 |
| | 274.4 |
|
| Copenhagen and Skoal | 680.9 |
| | 641.0 |
| | 601.9 |
|
| Other | 82.4 |
| | 93.6 |
| | 122.5 |
|
| Total smokeless products | 763.3 |
| | 734.6 |
| | 724.4 |
|
31
Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is not material to the smokeless products segment. Other includes certain USSTC and PM USA smokeless products. New types of smokeless products, as well as new packaging configurations
of existing smokeless products, may or may not be equivalent to existing moist smokeless tobacco ("MST")MST products on a can for cancan-for-can basis. To calculate volumes of cans and packs shipped, USSTC and PM USA have assumed that one pack of snus, irrespective of the number of pouches in the pack, is equivalent to one can of MST.
The following table summarizes smokeless products segment retail share performance (excluding international volume):
| | | | Retail Share For the Years Ended December 31, | Retail Share For the Years Ended December 31, |
| | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Copenhagen | 28.4 | % | | 26.2 | % | | 24.7 | % | 29.3 | % | | 27.9 | % | | 25.9 | % |
| Skoal | 22.2 |
| | 22.8 |
| | 23.3 |
| 21.4 |
| | 22.5 |
| | 23.0 |
|
| Copenhagen and Skoal | 50.6 |
| | 49.0 |
| | 48.0 |
| 50.7 |
| | 50.4 |
| | 48.9 |
|
| Other | 4.8 |
| | 6.1 |
| | 7.2 |
| 4.3 |
| | 4.8 |
| | 5.9 |
|
| Total smokeless products | 55.4 | % | | 55.1 | % | | 55.2 | % | 55.0 | % | | 55.2 | % | | 54.8 | % |
As previously discussed, effective in the first quarter of 2013, retail share results for smokeless products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. The service tracks sales in the Food, Drug and Mass Merchandisers (including Wal-Mart), Convenience, Military, Dollar Store and Club trade classes on the number of cans and packs sold. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. Other includes certain USSTC and PM USA smokeless products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can for cancan-for-can basis. USSTC and PM USA have assumed that one pack of snus, irrespective of the number of pouches in the pack, is equivalent to one can of MST. All other products are considered to be equivalent on a can for cancan-for-can basis.
Smokeless products segment Because this service represents retail share performance is based on data from the SymphonyIRI InfoScan Smokeless Tobacco Database for Food, Drug, Mass Merchandisers (excluding Walmart) and Convenienceonly in key trade classes, which tracks smokeless products market share performance based on the numberchannels, it should not be considered a precise measurement of cans and packs sold. Smokeless products is defined by SymphonyIRI as moist smokeless and spit-free tobacco products.actual retail share. It is SymphonyIRI'sIRI’s standard practice to periodically refresh its InfoScan syndicated services, which could restate retail share results that were previously released.
USSTC and PM USA are transitioning to a new retail tracking service to measure smokeless products performance beginningreleased in the first quarter of 2013.this service.
USSTC and PM USA executed the following pricing actions during 20122013, 20112012 and 20102011:
▪Effective December 8, 2013, USSTC increased the list price on all of its brands by $0.06 per can.
▪Effective December 1, 2013, PM USA increased the list price on Marlboro Snus tins and flip-top box (“FTB”) by $0.06 per tin or FTB.
▪Effective May 13, 2013, PM USA increased the list price on Marlboro Snus tins and FTB by $0.05 per tin or FTB.
▪Effective May 12, 2013, USSTC increased the list price on all of its brands by $0.05 per can.
▪Effective December 9, 2012, USSTC increased the list price on all of its brands by $0.05 per can or pouch.can.
▪Effective December 3, 2012, PM USA increased the list price on Marlboro Snus tins and flip-top box ("FTB")FTB by $0.05 per tin or FTB.
▪Effective June 18, 2012, PM USA increased the list price on Marlboro Snus tins and FTB by $0.05 per tin or FTB.
▪Effective May 25, 2012, USSTC increased the list price on all of its brands by $0.05 per can.
▪Effective May 22, 2011, USSTC increased the list price on its MST brands by $0.10 per can and Skoal Snus by $0.31 per can.
▪Effective May 18, 2011, PM USA increased the list price on Marlboro Snus tins by $0.31 per tin.
▪Effective May 28, 2010, USSTC increased the list price on substantially all of its brands by $0.10 per can.
The following discussion compares operating results for the smokeless products segment results for the year ended December 31, 20122013 with the year ended December 31, 20112012.
Net revenues, which include excise taxes billed to customers, increased $87 million (5.1%), due primarily to higher shipment volume and higher pricing, which includes higher promotional investments, partially offset by mix due to growth in popular priced products.
Operating companies income increased $92 million (9.9%), due primarily to higher shipment volume ($39 million), higher pricing ($34 million), which includes higher promotional investments, lower restructuring charges ($25 million) and effective cost management, partially offset by mix.
Calendar differences affected reported domestic smokeless products shipment volume due to one less shipping day in 2013, representing approximately one full week of volume. USSTC and PM USA’s 2013 combined reported domestic smokeless products shipment volume increased 3.2% versus 2012 due to volume growth for Copenhagen, partially offset by volume declines in Skoal and Other portfolio brands. Copenhagen and Skoal’s combined reported shipment volume increased 4.3% versus 2012.
After adjusting for calendar differences, trade inventory changes and other factors, USSTC and PM USA estimate that their combined domestic smokeless products shipment volume grew 5% for 2013, while smokeless products category volume grew approximately 5.5%.
Copenhagen and Skoal’s combined retail share increased 0.3 share points to 50.7% for 2013. Copenhagen’s retail sharegrew 1.4 share points, as the brand continued to benefit from products introduced over the past several years. Skoal’s 2013 retail share declined 1.1 share points, due primarily to competitive activity and Copenhagen’sperformance.
USSTC and PM USA’s combined retail share decreased 0.2 share points versus 2012 as retail share losses for Skoal and Other portfolio brands were mostly offset by retail share gains for Copenhagen.
The following discussion compares operating results for the smokeless products segment for the year ended December 31, 2012 with the year ended December 31, 2011.
Net revenues, which include excise taxes billed to customers, increased $64 million (3.9%) due primarily to higher pricing ($58 million) and higher shipment volume, partially offset by unfavorable mix due to growth in products introduced in recent years at a lower, popular price.
Operating companies income increased $72 million (8.4%) versus the prior-year period due primarily to higher net pricing ($46 million), which includes higher promotional investments, higher shipment volume, lower manufacturing costs ($22 million), lower asset impairment, exit, implementation and integration costs primarily related to the 2011 Cost Reduction Programrestructuring charges and marketing, administration and research savings reflecting cost reduction initiatives, partially offset by growth in products introduced in recent years at a lower, popular price.
For 2012, USSTC and PM USA'sUSA’s combined reported domestic smokeless products shipment volume grew 3.9% as volume growth on Copenhagen and Skoal was partially offset by volume declines on Other portfolio brands.
Copenhagen's’s 2012 reported shipment volume grew 10.8% as the brand continued to benefit from products introduced in recent years, including the May 2012 expansion of Copenhagen Southern Blend into select geographies. USSTC has announced that it will expand Copenhagen Southern Blend into additional states in the first quarter of 2013. Skoal's’s 2012 reported shipment volume increased 0.6%. Skoal's’s volume comparison was negatively impacted by the de-listing of seven Skoal stock-keeping units ("SKUs"(“SKUs”) in the second quarter of 2011, partially offset by the growth of Skoal X-TRA.
After adjusting for changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 2012 domestic smokeless products shipment volume grew approximately 5% versus 2011. USSTC and PM USA believe that the smokeless category'scategory’s 2012 volume grew at an estimated rate of approximately 5% versus 2011.
Copenhagen and Skoal’s combined retail share for 2012 increased 1.5 share points. Copenhagen’s 2012 retail share grew 2.0 share points as the brand continued to benefit from products introduced over the past several years. Skoal’s 2012 retail share declined 0.5 share points due primarily to the de-listing of seven SKUs in the second quarter of 2011, competitive activity and Copenhagen’s performance, partially offset by share gains on its Skoal X-TRA products.
USSTC and PM USA'sUSA’s combined 2012 retail share increased 0.30.4 share points as gains by Copenhagen were partially offset by retail share losses for Skoal and Other portfolio brands.
Copenhagen and Skoal's combined retail share for 2012 increased 1.6 share points. Copenhagen's 2012 retail share grew 2.2 share points as the brand continued to benefit from products introduced over the past several years. Skoal's 2012 retail share declined 0.6 share points due primarily to the de-listing of seven SKUs in the second quarter of 2011, competitive activity and Copenhagen's strong performance, partially offset by share gains on its Skoal X-TRA products.
The following discussion compares smokeless products segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, increased $75 million (4.8%), due primarily to higher net pricing ($68 million), which includes higher promotional investments, and higher volume.
Operating companies income increased $56 million (7.0%), due primarily to higher net pricing ($68 million), which includes higher promotional investments, and lower marketing, administration and research costs ($36 million) reflecting cost reduction initiatives, partially offset by higher manufacturing costs ($32 million) and higher asset impairment and exit costs due primarily to the 2011 Cost Reduction Program.
Copenhagen and Skoal's 2011 combined shipment volume increased 6.5%. Copenhagen's volume benefited from new product introductions, including the 2011 introduction of Copenhagen Wintergreen Pouches as well as continued strength from the introductions of Copenhagen Long Cut Wintergreen in late 2009, and Long Cut Straight and Extra Long Cut Natural in the first quarter of 2010. Skoal's volume growth benefited from the Skoal X-tra and Skoal Snus new products introduced in the first quarter of 2011, partially offset by the de-listing of seven Skoal SKUs that occurred in the second quarter of 2011. Marlboro Snus's volume was negatively impacted by significantly lower levels of promotional support when compared to activity around its national expansion in 2010, and the shift in mix from packages with six pouches to tins with fifteen pouches. USSTC and PM USA's 2011 combined reported domestic smokeless products shipment volume increased 1.4%, as shipment volume growth on Copenhagen and Skoal were partially offset by volume declines in its Other portfolio brands, including Marlboro Snus.
After adjusting for changes in trade inventories, USSTC and PM USA's 2011 combined domestic smokeless products shipment volume was estimated to be up approximately 4%. USSTC and PM USA believe that the smokeless category's 2011 volume grew at an estimated rate of approximately 5%.
Copenhagen and Skoal's 2011 combined retail share grew 1.0 share point for the full year of 2011. Copenhagen's 2011 retail share increased 1.5 share points. The brand's retail share results benefited from new product introductions over the past several years. Skoal's 2011 retail share decreased 0.5 share points, as share losses, which include the impact of the 2011 second-quarter de-listing of seven SKUs, were partially offset by share gains on new products that were introduced in 2011. For 2011, USSTC and PM USA's combined retail share decreased 0.1 share point due to share losses on Skoal and Other portfolio brands, including Marlboro Snus, mostly offset by share gains on Copenhagen.
Wine Segment
Business Environment
Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest and Columbia Crest14 Hands, and owns wineries in or distributes wines from several other wine regions.regions and foreign countries. As discussed in Note 18, Ste. Michelle holds an 85% ownership
interest in Michelle-Antinori, LLC, which owns Stag'sStag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and
Erath in Oregon. In addition, Ste. Michelle distributesimports and markets Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. Key elements of Ste. Michelle'sMichelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.
Ste. Michelle'sMichelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle'sMichelle’s sales occur through state-licensed distributors.
Federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle'sMichelle’s wine business.
Operating Results
Ste. Michelle delivered higher financial resultsoperating companies income in 20122013 through higher pricing improvedand its focus on increasing distribution of premium mix and higher shipment volume.brands.
The following table summarizes operating results for the wine segment:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Net revenues | $ | 561 |
| | $ | 516 |
| | $ | 459 |
| $ | 609 |
| | $ | 561 |
| | $ | 516 |
|
| Operating companies income | $ | 104 |
| | $ | 91 |
| | $ | 61 |
| $ | 118 |
| | $ | 104 |
| | $ | 91 |
|
The following table summarizes wine segment case shipment volume performance:
| | | | Shipment Volume For the Years Ended December 31, | Shipment Volume For the Years Ended December 31, |
| (cases in thousands) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Chateau Ste. Michelle | 2,780 |
| | 2,522 |
| | 2,338 |
| 2,753 |
| | 2,780 |
| | 2,522 |
|
| Columbia Crest | 1,716 |
| | 2,055 |
| | 2,054 |
| 1,785 |
| | 1,716 |
| | 2,055 |
|
| 14 Hands | | 1,374 |
| | 1,024 |
| | 774 |
|
| Other | 3,093 |
| | 2,744 |
| | 2,289 |
| 2,060 |
| | 2,069 |
| | 1,970 |
|
| Total wine | 7,589 |
| | 7,321 |
| | 6,681 |
| 7,972 |
| | 7,589 |
| | 7,321 |
|
The following discussion compares operating results for the wine segment for the year ended December 31, 2013 with the year ended December 31, 2012.
Net revenues, which include excise taxes billed to customers, increased $48 million (8.6%), due to higher shipment volume, improved premium mix and higher pricing.
Operating companies income increased $14 million (13.5%), due to higher shipment volume, higher pricing and improved premium mix, partially offset by higher selling,
general and administrative costs and higher manufacturing costs.
For 2013, Ste. Michelle’s wine shipment volume increased 5.0% due primarily to increased distribution of 14 Hands.
The following discussion compares operating results for the wine segment for the year ended December 31, 2012 with the year ended December 31, 2011.
Net revenues, which include excise taxes billed to customers, increased $45 million (8.7%), due primarily to higher shipment volume, higher pricing and improved premium mix.
Operating companies income increased $13 million (14.3%), due primarily to higher pricing, improved premium mix, higher shipment volume and UST acquisition-related costs incurred in 2011, partially offset by costs related to Ste. Michelle'sMichelle’s sales force expansion and higher costs for select vintages incurred in 2012.
Ste. Michelle'sMichelle’s 2012 wine shipment volume increased 3.7% due primarily to the national expansion of select wines into off-premise channels.
The following discussion compares wine segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, increased $57 million (12.4%), due primarily to higher premium shipment volume.
Operating companies income increased $30 million (49.2%), due primarily to higher premium shipment volume ($26 million) and lower UST acquisition-related costs, partially offset by higher manufacturing costs.
Ste. Michelle's 2011 reported wine shipment volume increased 9.6% versus 2010 due primarily to the national expansion of select wines into off-premise channels and growth in its Chateau Ste. Michelle brand.
Financial Services Segment
Business Environment
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its existing portfolio of finance assets in order to maximize gains and generate cash flow from asset sales and related activities. Accordingly, PMCC's operating companies income will fluctuate over time as investments mature or are sold. During 2012, 2011 and 2010, proceeds from asset management activities and recoveries on the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American totaled $1,049 million, $490 million and $312 million, respectively. Gains, net included in operating companies income during 2012, 2011 and 2010 totaled $131 million, $107 million and $72 million, respectively.
As previously discussed, during the second quarter of 2012, Altria Group, Inc. entered into the Closing Agreement with the IRS that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012, which included a pre-tax charge of $7 million that was recorded as a decrease to PMCC's net revenues and operating companies income. During the second quarter of 2011, Altria Group, Inc. recorded the 2011 PMCC Leveraged Lease Charge, which included a pre-tax charge of $490 million that was recorded as a decrease to PMCC's net revenues and operating companies income. For further discussion, see Note 7, Note 14 and Note 18.
PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing
basis. During 2012, PMCC determined that its allowance for losses exceeded the amount required based on management's assessment of the credit quality and size of PMCC's leasing portfolio. As a result, PMCC reduced its allowance for losses by $10 million, which was recorded as income in 2012.
During 2011, PMCC recorded a net increase to its allowance for losses of $25 million which was comprised of (i) an increase of $60 million related to American's bankruptcy filing; and (ii) a $35 million reduction to the allowance for losses recorded during the third quarter of 2011 when PMCC determined that its allowance for losses exceeded the amount required based on management's assessment of the credit quality of the leasing portfolio at that time, including reductions in exposure to below investment grade lessees.
PMCC believes that, as of December 31, 2012, the allowance for losses of $99 million is adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may have to increase its allowance for losses if such conditions worsen. All PMCC lessees, including American under its restructured leases, were current on their lease payment obligations as of December 31, 2012. For further discussion of finance assets, see Note 7.
Operating Results
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Net revenues | $ | 150 |
| | $ | (313 | ) | | $ | 161 |
|
| Operating companies income | $ | 176 |
| | $ | (349 | ) | | $ | 157 |
|
PMCC's net revenues for 2012 increased $463 million (100+%) from 2011, due primarily to lower leveraged lease charges, partially offset by lower lease revenues. PMCC's operating companies income for 2012 increased $525 million (100+%) from 2011 due primarily to lower leveraged lease charges, the changes to the allowance for losses discussed above and recoveries related to the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American, partially offset by lower lease revenues.
PMCC's net revenues for 2011 decreased $474 million (100+%) from 2010, due primarily to the 2011 PMCC Leveraged Lease Charge, partially offset by higher lease revenues, which included gains on asset sales. PMCC's operating companies income for 2011 decreased $506 million (100+%) from 2010, due primarily to the 2011 PMCC Leveraged Lease Charge and a net increase of $25 million to the allowance for losses, partially offset by higher lease revenues, which included gains on asset sales.
Financial Review
Net Cash Provided by Operating Activities
During 20122013, net cash provided by operating activities was $3.94.4 billion compared with $3.63.9 billion during 20112012. This increase was due primarily to the following:
| |
| ▪ | lower settlement payments, which include the $483 million credit that PM USA received against its April 2013 MSA payment as a result of the NPM Adjustment Settlement; |
| |
| ▪ | lower income tax payments, which include the Closing Agreement with the IRS that resulted in a payment for federal income tax and estimated interest of $456 million in 2012; and |
| |
| ▪ | a lower voluntary contribution to Altria Group, Inc.’s pension plans in 2013 ($350 million in 2013 versus $500 million in 2012); |
partially offset by:
| |
| ▪ | timing of spending related to inventory purchases and other working capital requirements. |
During 2012, net cash provided by operating activities was $3.9 billion compared with $3.6 billion during 2011. This increase was due primarily to higher earnings in 2012 and higher income tax payments in 2011 associated with PMCC leveraged lease transactions, partially offset by the Closing Agreement with the IRS whichthat resulted in a payment for federal income tax and estimated interest of $456 million in 2012, and a higher voluntary contribution to Altria Group, Inc.'s’s pension plans during 2012 ($500 million in 2012 versus $200 million in 2011).
During 2011, net cash provided by operating activities was $3.6 billion compared with $2.8 billion during 2010. This increase was due primarily to a payment to the IRS of approximately $945 million for taxes and associated interest in July 2010 for certain leveraged lease transactions entered into by PMCC and lower payments in 2011 related to exit and integration costs and State Settlement Agreements, partially offset by a voluntary $200 million contribution made to Altria Group, Inc.'s pension plan during the first quarter of 2011, and higher income tax payments in 2011 related to the decision not to claim tax benefits for certain PMCC leveraged lease transactions beginning in 2010. For further discussion of certain PMCC leveraged lease transactions, see Note 7, Note 14 and Note 18.
Altria Group, Inc. had a working capital deficit at December 31, 20122013 and 20112012. Altria Group, Inc.'s’s management believes that it has the ability to fund these working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program as discussed in the Debt and Liquidity section below.
Net Cash Provided by Investing Activities
During 20122013, net cash provided by investing activities was $920602 million compared with $387920 million during 20112012. This decrease was due primarily to lower proceeds from asset sales in the financial services business in 2013.
During 2012, net cash provided by investing activities was $920 million compared with $387 million during 2011. This increase was due primarily to higher proceeds from finance asset sales in 2012.
During 2011, net cash provided by investing activities was $387 million compared with $259 million during 2010. This increase was due primarily to higher proceeds from finance asset salesthe financial services business in 2011.2012.
Capital expenditures for 20122013 increased 18.1%5.6% to $124131 million. Capital expenditures for 20132014 are expected to be in the range of $125$150 million to $150$200 million, and are expected to be funded from operating cash flows.
Net Cash Used in Financing Activities
During 2013, net cash used in financing activities was $4.7 billion compared with $5.2 billion during 2012. This decrease was due primarily to the following:
▪debt issuances of $1.0 billion in May 2013; and
▪lower share repurchases during 2013;
partially offset by:
| |
| ▪ | higher repayments of debt at scheduled maturities in 2013; and |
▪higher dividends paid during 2013.
During 2012, net cash used in financing activities was $5.2$5.2 billion compared with $3.0$3.0 billion during 2011.2011. This increase was due primarily to the following:
▪debt tender offer completed during 2012, which resulted in the repurchase of $2.0 billion of long-term debt as well as an $864 million payment of tender premiums and fees related to the early extinguishment of debt;
▪$600 million repayment of UST senior unsecured notes during 2012; and
| |
| ▪ | debt issuances of $1.5 billion during 2011; |
| |
| ▪ | $600 million repayment of UST senior unsecured notes at scheduled maturity during 2012; and |
| |
| ▪ | higher dividends paid during 2012; |
partially offset by:
| |
▪ | higher debt issuances during 2012; and |
| |
▪ | ▪lower share repurchases during 2012. |
During 2011, net cash used in financing activities was $3.0 billion compared with $2.6 billion during 2010. This increase was due primarily to Altria Group, Inc.'s repurchases of its common stock during 2011 and a higher dividend rate in 2011, partially offset by higher net issuances of debt during 2011.2012.
Debt and Liquidity
Credit Ratings - Altria Group, Inc.'s’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. Under the terms of certain of Altria Group, Inc.'s’s existing debt instruments, a change in a credit rating could result in an increase or a decrease of the cost of borrowings. For instance, as discussed further in Note 9, the interest rate payable on certain of Altria Group, Inc.'s’s outstanding notes is subject to adjustment from time to time if the rating
assigned to the notes of such series by Moody'sMoody’s Investors Service, Inc. ("Moody's"(“Moody’s”) or Standard & Poor'sPoor’s Ratings Services ("(“Standard & Poor's"Poor’s”) is downgraded (or subsequently upgraded) as and to the extent set forth in the notes. The impact of credit ratings on the cost of borrowings under Altria Group, Inc.'s’s credit agreements is discussed below.
At December 31, 20122013, the credit ratings and outlook for Altria Group, Inc.'s’s indebtedness by major credit rating agencies were:
|
| | | | | |
| Short-term Debt | | Long-term Debt | | Outlook |
| Moody’s | P-2 | | Baa1 | | Stable |
| Standard & Poor’s | A-2 | | BBB | | Stable |
| Fitch | F2 | | BBB+ | | Stable |
Credit Lines - From time to time, Altria Group, Inc. has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. At December 31, 20122013, 20112012 and 20102011, Altria Group, Inc. had no short-term borrowings outstanding.borrowings.
For the years ended December 31, 2012, 2011 and 2010, Altria Group, Inc.'s’s average daily short-term borrowings, peak short-term borrowings outstanding and weighted-average interest rate on short-term borrowings were as follows:
| | | | | | | | | | | | | For the Years Ended December 31, | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Average daily short-term borrowings | $ | 8 |
| | $ | 68 |
| | $ | 186 |
| $ | 37 |
| | $ | 8 |
| | $ | 68 |
|
| Peak short-term borrowings outstanding | $ | 190 |
| | $ | 865 |
| | $ | 1,419 |
| $ | 650 |
| | $ | 190 |
| | $ | 865 |
|
| Weighted-average interest rate on short-term borrowings | 0.42 | % | | 0.40 | % | | 0.39 | % | 0.34 | % | | 0.42 | % | | 0.40 | % |
Short-term borrowings for 2012, 2011 and 2010 were repaid with cash provided by operating activities. Peak borrowings for 2012, 2011 and 2010were due primarily to
payments related to State Settlement Agreements as further discussed in Tobacco Space - Business Environment, Off Balance Sheet Arrangements and Aggregate Contractual Obligations - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation, and Note 18.
At December 31, 2012,During the third quarter of 2013, Altria Group, Inc. had in place aamended and restated its $3.0 billion senior unsecured 5-year revolving credit agreement (the "Credit Agreement"to extend the expiration date to August 19, 2018, with an option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for two additional one-year periods (as amended and restated, the “Credit Agreement”). All other terms of the Credit Agreement remain substantially the same.
The Credit Agreement provides for borrowings up to an aggregate principal amount of $3.0$3.0 billion and expires on June 30, 2016.. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria Group, Inc.'s’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate ("LIBOR"(“LIBOR”) plus a percentage equal to Altria Group, Inc.'s credit default swap spread subject to certain minimum rates and maximum rates based on the higher of the ratingratings of Altria Group, Inc.'s’s long-term senior unsecured debt from Standard & Poor'sPoor’s and Moody's.Moody’s. The applicable minimum and maximum ratespercentage based on Altria Group, Inc.'s’s long-term senior
unsecured debt ratings at December 31, 20122013 for borrowings under the Credit Agreement was 0.75% and 1.75%, respectively.1.25%. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral. At December 31, 2012,2013, the credit line available to Altria Group, Inc. under the Credit Agreement was $3.0 billion.
The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.'s’s commercial paper issuances. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated EBITDAearnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, 2012,2013, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.81.7 to 1.0 and 7.08.4 to 1.0, respectively.
Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms "consolidated“consolidated EBITDA," "debt"” “debt” and "consolidated“consolidated interest
expense,"” as defined in the Credit Agreement, include certain adjustments. Exhibit 99.3 to Altria Group, Inc.'s Annual’s Quarterly Report on Form 10-K10-Q for the yearperiod ended December 31, 2011September 30, 2013 sets forth the definitions of these terms as they appear in the Credit Agreement and is incorporated herein by reference.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 19. Condensed Consolidating Financial Informationto the consolidated financial statements in Item 8 ("(“Note 19"19”).
Financial Market Environment - Altria Group, Inc. believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria Group, Inc. continues to monitor the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group. Altria Group, Inc. believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations.
Debt - At December 31, 20122013 and 20112012, Altria Group, Inc.'s’s total debt all of which is consumer products debt, was $13.9$14.5 billion and $13.7$13.9 billion, respectively.
As discussed in Note 9, on August 9, 2012,October 31, 2013, Altria Group, Inc. issued $1.9$1.4 billion aggregate principal amount of 2.85%4.0% senior unsecured long-term notes due 20222024 and $0.9$1.8 billion aggregate principal amount of 4.25%5.375% senior unsecured long-term notes due 2042.2044. Interest on these notes is payable semi-annually. The net proceeds from the issuancesissuance of these senior unsecured notes were added to Altria Group, Inc.'s’s general funds and were used to repurchase certain of its senior unsecured notes in connection with the 20122013 debt tender offer and for other general corporate purposes.
In addition, on May 2, 2013, Altria Group, Inc. issued $350 million aggregate principal amount of 2.95% senior unsecured
long-term notes due 2023 and $650 million aggregate principal amount of 4.50% senior unsecured long-term notes due 2043. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used for general corporate purposes.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA. For further discussion, see Note 19.
During the thirdfourth quarter of 2012,2013, senior unsecured notes issued by USTAltria Group, Inc. in the aggregate principal amount of $600$1,459 million matured and were repaid in full.
All of Altria Group, Inc.'s’s debt was fixed-rate debt at December 31, 20122013 and 20112012. The weighted-average coupon
interest rate on total debt was approximately 7.2%5.9% and 8.3%7.2% at December 31, 20122013 and 20112012, respectively. For further details on long-term debt, see Note 9.
In October 2011, Altria Group, Inc. filed a registration statement on Form S-3 with the SEC, under which Altria Group, Inc. may offer debt securities or warrants to purchase debt securities from time to time over a three-year period
from the date of filing.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.
Guarantees and Other Similar Matters - As discussed in Note 18, Altria Group, Inc. had guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at December 31, 20122013. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated entities. In addition, as discussed in Note 19, PM USA has issued guarantees relatedrelating to Altria Group, Inc.'s indebtedness.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.'s’s liquidity.
Aggregate Contractual Obligations - The following table summarizes Altria Group, Inc.'s’s contractual obligations at December 31, 20122013:
| | | | Payments Due | Payments Due |
| (in millions) | Total |
| | 2013 |
| | 2014 - 2015 |
| | 2016 - 2017 |
| | 2018 and Thereafter |
| Total |
| | 2014 |
| | 2015 - 2016 |
| | 2017 - 2018 |
| | 2019 and Thereafter |
|
Long-term debt (1) | $ | 13,926 |
| | $ | 1,459 |
| | $ | 1,525 |
| | $ | — |
| | $ | 10,942 |
| $ | 14,567 |
| | $ | 525 |
| | $ | 1,000 |
| | $ | 1,956 |
| | $ | 11,086 |
|
Interest on borrowings (2) | 12,689 |
| | 1,006 |
| | 1,704 |
| | 1,601 |
| | 8,378 |
| 11,824 |
| | 808 |
| | 1,609 |
| | 1,560 |
| | 7,847 |
|
Operating leases (3) | 318 |
| | 55 |
| | 91 |
| | 58 |
| | 114 |
| 282 |
| | 54 |
| | 84 |
| | 54 |
| | 90 |
|
Purchase obligations: (4) |
| |
| |
| |
| |
|
| |
| |
| |
| |
|
| Inventory and production costs | 1,940 |
| | 773 |
| | 618 |
| | 283 |
| | 266 |
| 3,122 |
| | 976 |
| | 1,030 |
| | 722 |
| | 394 |
|
| Other | 836 |
| | 482 |
| | 269 |
| | 74 |
| | 11 |
| 734 |
| | 565 |
| | 137 |
| | 32 |
| | — |
|
| | 2,776 |
| | 1,255 |
| | 887 |
| | 357 |
| | 277 |
| 3,856 |
| | 1,541 |
| | 1,167 |
| | 754 |
| | 394 |
|
Other long-term liabilities (5) | 3,158 |
| | 510 |
| | 370 |
| | 470 |
| | 1,808 |
| 2,339 |
| | 162 |
| | 350 |
| | 351 |
| | 1,476 |
|
| | $ | 32,867 |
| | $ | 4,285 |
| | $ | 4,577 |
| | $ | 2,486 |
| | $ | 21,519 |
| $ | 32,868 |
| | $ | 3,090 |
| | $ | 4,210 |
| | $ | 4,675 |
| | $ | 20,893 |
|
(1) Amounts represent the expected cash payments of Altria Group, Inc.'s’s long-term debt, all of which is consumer products debt.
(2) Amounts represent the expected cash payments of Altria Group, Inc.'s’s interest expense on its long-term debt. Interest on Altria Group, Inc.'s’s debt, which was all fixed-rate debt at December 31, 20122013, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and premiums, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net on the consolidated statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, storage and distribution) are commitments for projected needs to be utilizedused in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of a voluntary $350 million contribution made on January 2, 2013 as well as the actuarially determined anticipated minimum funding requirements for each year from 2014 through 2017.2018. Contributions beyond 20172018 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee payments, payments for tobacco growers and FDA user fees, as discussed below and in Note 18 and Item 3, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 18, are also excluded from the table above since these deposits will be returned to PM USA should it prevail on appeal.
Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation - As discussed previously and in Note 18 and Item 3, PM USA has entered into State Settlement Agreements with the states and territories of the United States. PM USA also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USA'sUSA’s obligations under this trust expired on December 15, 2010 (these obligations had been offset by the obligations imposed on PM USA by FETRA, which expires inafter the third quarter of 2014). USSTC and Middleton are also subject to
obligations imposed by FETRA. In addition, in June 2009, PM USA and a subsidiary of USSTC became subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. The State Settlement Agreements, FETRA and the FDA user fees call for payments that are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.'s’s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.'s’s subsidiaries recorded approximately $5.1$4.4 billion, $5.0$5.1 billion and $5.0 billion of charges to cost of sales for the years ended December 31, 20122013, 20112012 and 20102011, respectively. The 2013 amount included reductions to cost of sales of $664 million related to the NPM Adjustment Items discussed below and under Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2012 in Note 18.
Effective December 17, 2012, PM USA and the other tobacco product manufacturers that are original signatories (the “OPMs”) to the MSA, as well as certain other participating manufacturers, entered into a term sheet with 17 states, the District of Columbia and Puerto Rico for settlement of the 2003 - 2012 NPM Adjustments with those states and territories. In March 2013, the arbitration panel in the NPM Adjustment arbitration issued a stipulated partial settlement and award (the “Stipulated Award”) permitting the term sheet to proceed. An additional MSA state joined the term sheet in April 2013 (prior to the date of PM USA’s April 2013 MSA payment). Based on the identity of the signatory states that had joined the term sheet prior to the date of the April 2013 MSA payment, the reduction in PM USA’s MSA payment obligation was approximately $483 million, all of which PM USA received as a credit against its April 2013 MSA payment. Two additional MSA states joined the term sheet in May 2013 (after the date of PM USA’s April 2013 MSA payment), and as a result, PM USA expects to receive an additional credit of $36 million against its April 2014 MSA payment. All states and territories that have joined the term sheet are referred to collectively as the “signatory
states.” The term sheet also provides that the NPM Adjustment provision will be revised and streamlined as to the signatory states for years after 2012. In connection with the settlement, the formula for allocating among the OPMs the revised NPM Adjustments applicable in the future to the signatory states will be modified in a manner favorable to PM USA, although the extent to which it is favorable to PM USA will depend upon certain future events, including the future relative market shares of the OPMs.
In September 2013, the arbitration panel presiding over the 2003 NPM Adjustment dispute ruled that six of 15 states whose 2003 diligent enforcement claims were contested by the participating manufacturers and that had not joined the term sheet, did not diligently enforce laws during 2003 that require escrow payments from the cigarette manufacturers that have not signed the MSA. As a result of this ruling, PM USA is entitled to an NPM Adjustment for 2003, likely in the form of a credit against its April 2014 MSA payment, in the amount of $145 million, plus applicable interest on that amount.
As a result of these NPM Adjustment Items, PM USA recorded a reduction to cost of sales of $664 million in 2013.
As discussed under Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2012 in Note 18, a number of non-signatory states have taken action in state court to vacate or modify the Stipulated Award or the diligent enforcement rulings of the arbitration panel. No assurance can be given that this litigation will be resolved in a manner favorable to PM USA.
Based on current agreements, 20122013 market share and historical annual industry volume decline rates, and excluding the potential impact of the NPM adjustment discussed further below and in Note 18, the estimated amounts that Altria Group, Inc.'s’s subsidiaries may charge to cost of sales for these
payments related to State Settlement Agreements, FETRA and FDA user fees approximate $5 billion in 20132014 and approximately $4.6 billion each year thereafter subjectthereafter. These amounts reflect the expiration of obligations imposed by FETRA after the third quarter of 2014, which will result in a decrease of approximately $100 million in 2014 and approximately $400 million starting in 2015. These amounts exclude the potential impact of the revised and streamlined NPM Adjustment provision applicable to signatory states for years after 2012 discussed above and also exclude the adjustments noteddescribed below.
The estimated amounts due under the State Settlement Agreements and FETRA charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for the FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements, FETRA and FDA user fees are subject to adjustment for several factors, including volume, inflation and certain contingent events and, in general, are allocated based on each manufacturer'smanufacturer’s market share. FutureThe future payment amounts above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.
Effective December 17, 2012, PM USA and the other tobacco product manufacturers that are original signatories to the MSA (the "Original Participating Manufacturers"), as well as certain other participating manufacturers, entered into a term sheet with 17 states, the District of Columbia and Puerto Rico for settlement of the 2003 - 2012 NPM Adjustments with those states and territories (the "signatory states"). The term sheet provides for a release to the signatory states of their portion of more than $4 billion from the MSA disputed payments account. The signatory participating manufacturers will receive reductions in future MSA payments. Based on the current signatory states and an estimate of the 2012 NPM adjustment, PM USA estimates its reductions to be approximately $450 million, all of which PM USA expects, subject to certain conditions, to receive as a credit against its April 2013 MSA payment. This estimate is subject to change depending on various factors related to the calculation of the credit.
The term sheet is subject to the approval of the arbitration panel in the NPM adjustment arbitration that is currently underway, which approval could come in the form of a stipulated award. In addition, states that have not joined the term sheet ("non-signatory states") have raised objections concerning the term sheet with the arbitration panel, and a number of non-signatory states have indicated that they may attempt to take action in state court to prevent the settlement from proceeding or to seek other relief with respect to the settlement. No assurance can be given that the arbitration panel will issue the order necessary for the term sheet to proceed or that the objections or any other such actions by non-signatory states will be resolved in a manner favorable to PM USA. If the term sheet proceeds, PM USA expects to record a corresponding increase in its reported pre-tax earnings. The term sheet also provides that the NPM adjustment provision will be revised and streamlined as to the signatory states for years after 2012. In connection with the settlement, the formula for allocating among the Original Participating Manufacturers the revised NPM adjustments applicable in the future to the signatory states will be modified in a manner favorable to PM USA, although the extent to which it is favorable to PM USA will be dependent upon certain future events, including the
future relative market shares of the Original Participating Manufacturers. For further discussion see Note 18.
Litigation Escrow Deposits - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of December 31, 20122013, PM USA hashad posted various forms of security totaling
approximately $36$27 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals.deposits. These cash deposits are included in other assets on the consolidated balance sheet.
Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could result inhave a material adverse consequences foreffect on the financial position, cash flows or results of operations of PM USA, UST or Altria Group, Inc. in a particular fiscal quarter or fiscal year as more fully disclosed in Note 18, Item 3 and Item 1A, management expects cash flow from operations, together with Altria Group, Inc.'s’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 11. Stock Plans to the consolidated financial statements in Item 8, during 20122013 Altria Group, Inc. granted 1.8an aggregate of 1.4 million shares of restricted and deferred stock to eligible employees.
At December 31, 20122013, the number of shares to be issued upon vesting of deferred stock was not significant. In addition, there were no stock options outstanding at December 31, 20122013.
Dividends paid in 20122013 and 20112012 were approximately $3.43.6 billion and $3.2$3.4 billion, respectively, an increase of 5.5%6.2%, primarily reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria Group, Inc. under its share repurchase programs.programs discussed below.
During the third quarter of 2012, Altria Group, Inc.'s2013, the Board of Directors approved a 7.3%9.1% increase in the quarterly dividend rate to $0.440.48 per common share versus the previous rate of $0.410.44 per common share. Altria Group, Inc. expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is $1.761.92 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of Altria Group, Inc.'sthe Board of Directors.
In JanuaryDuring 2013, 2012 and 2011 Altria Group, Inc.'sthe Board of Directors authorized a $1.0 billion one-year share repurchase program (the "January 2011 share repurchase program"). Altria Group, Inc. completed the January 2011 shareto repurchase program during the third quarter of 2011. Under the January 2011 share repurchase program, Altria Group, Inc. repurchased a total of 37.6 million shares of its common stock at an average price of $26.62 per share.
In October 2011, Altria Group, Inc.'s Board of Directors authorized a new $1.0 billion share repurchase program, which was expanded to $1.5 billion in October 2012 (the "October 2011 share repurchase program"). During 2011 and 2012, Altria Group, Inc. repurchased 11.7 million shares (aggregate cost of approximately $327 million, and $27.84 average price per share) and 34.9 million shares (aggregate cost of approximately $1.1
billion, and $32.00 average price per share), respectively, under the October 2011 share repurchase program.
During 2011, Altria Group, Inc. repurchased a total of 49.3 million shares (aggregate cost of approximately $1.3 billion, and $26.91 average price per share) under the January 2011 and October 2011 share repurchase programs described above.
As of December 31, 2012, Altria Group, Inc. had repurchased a total of 46.6 million shares of itsoutstanding common stock under the October 2011various share repurchase program at an aggregate cost of approximately $1.4 billion, and an average price of $30.95 per share. programs.
Altria Group, Inc.’s total share repurchase activity was as follows:
|
| | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2013 | 2012 | 2011 |
| | | (in millions, except per share data) |
| Total number of shares repurchased | 16.7 |
| 34.9 |
| 49.3 |
|
| Aggregate cost of shares repurchased | $ | 600 |
| $ | 1,116 |
| $ | 1,327 |
|
| Average price per share of shares repurchased | $ | 36.05 |
| $ | 32.00 |
| $ | 26.91 |
|
At December 31, 2012,2013, Altria Group, Inc. had approximately $57$457 million remaining in the October 2011April 2013 share repurchase program, which Altria Group, Inc.it expects to complete by June 30, 2013.the end of the third quarter of 2014. The timing of share repurchases under the October 2011April 2013 share repurchase program depends upon marketplace conditions and other factors and the October 2011 share repurchase program remains subject to the discretion of the Board of Directors.
For further discussion of Altria Group, Inc.'s Board’s share repurchase programs, see Note 1. Background and Basis of Directors.Presentation
New Accounting Standards
In February 2013, the Financial Accounting Standards Board issued authoritative guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The guidance requires an entity to provide additional information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective prospectively for years beginning after December 15, 2012 and for interim periods in those years; however, early adoption is permitted. Altria Group, Inc. will comply with the authoritative guidance upon adoption in the first quarter of 2013.
See Note 2 for a discussion of new accounting standards issuedconsolidated financial statements in 2012.Item 8.
Contingencies
See Note 18 and Item 3 for a discussion of contingencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 20122013 and 20112012, the fair value of Altria Group, Inc.'s’s total debt was $17.616.1 billion and $17.717.6 billion, respectively. The fair value of Altria Group, Inc.'s’s debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at December 31, 20122013 and 20112012 would decrease the fair value of Altria Group, Inc.'s’s total debt by approximately $1.2 billion and $1.1 billion, respectively.billion. A 1% decrease in market interest rates at December 31, 20122013 and 20112012 would increase the fair value of Altria Group, Inc.'s’s total debt by approximately $1.4 billion and $1.2 billion, respectively.billion.
Interest rates on borrowings under Altria Group, Inc.'s senior unsecured 5-year revolving credit agreement (the "Credit Agreement")the Credit Agreement are expected to be based on LIBOR plus a percentage equal to Altria Group, Inc.'s credit default swap spread subject to certain minimum rates and maximum rates based on the higher of the ratingratings of Altria Group, Inc.'s’s long-term senior unsecured debt from Standard & Poor's Rating ServicesPoor’s and Moody's Investor Service, Inc.Moody’s. The applicable minimum and maximum ratespercentage based on Altria Group, Inc.'s’s long-term senior unsecured debt ratings at December 31, 20122013 for borrowings under the Credit Agreement are 0.75% and 1.75%, respectively.was 1.25%. At December 31, 20122013, Altria Group, Inc. had no borrowings under the Credit Agreement.
Item 8. Financial Statements and Supplementary Data.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
| | | at December 31, | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Assets | | | | | | |
| Consumer products | | | | |
| Cash and cash equivalents | $ | 2,900 |
| | $ | 3,270 |
| $ | 3,175 |
| | $ | 2,900 |
|
| Receivables | 193 |
| | 268 |
| 115 |
| | 193 |
|
| Inventories: | | | | | | |
| Leaf tobacco | 876 |
| | 934 |
| 933 |
| | 876 |
|
| Other raw materials | 173 |
| | 170 |
| 180 |
| | 173 |
|
| Work in process | 349 |
| | 316 |
| 394 |
| | 349 |
|
| Finished product | 348 |
| | 359 |
| 372 |
| | 348 |
|
| | 1,746 |
| | 1,779 |
| 1,879 |
| | 1,746 |
|
| Deferred income taxes | 1,216 |
| | 1,207 |
| 1,100 |
| | 1,216 |
|
| Other current assets | 260 |
| | 396 |
| 321 |
| | 260 |
|
| Total current assets | 6,315 |
| | 6,920 |
| 6,590 |
| | 6,315 |
|
| | | | | | | |
| Property, plant and equipment, at cost: | | | | | | |
| Land and land improvements | 292 |
| | 290 |
| 291 |
| | 292 |
|
| Buildings and building equipment | 1,276 |
| | 1,271 |
| 1,308 |
| | 1,276 |
|
| Machinery and equipment | 3,068 |
| | 3,097 |
| 3,111 |
| | 3,068 |
|
| Construction in progress | 114 |
| | 70 |
| 107 |
| | 114 |
|
| | 4,750 |
| | 4,728 |
| 4,817 |
| | 4,750 |
|
| Less accumulated depreciation | 2,648 |
| | 2,512 |
| 2,789 |
| | 2,648 |
|
| | 2,102 |
| | 2,216 |
| 2,028 |
| | 2,102 |
|
| | | | | | | |
| Goodwill | 5,174 |
| | 5,174 |
| 5,174 |
| | 5,174 |
|
| Other intangible assets, net | 12,078 |
| | 12,098 |
| 12,058 |
| | 12,078 |
|
| Investment in SABMiller | 6,637 |
| | 5,509 |
| 6,455 |
| | 6,637 |
|
| Other assets | 425 |
| | 1,257 |
| |
| Total consumer products assets | 32,731 |
| | 33,174 |
| |
| Financial services | | | | |
| Finance assets, net | 2,581 |
| | 3,559 |
| 1,997 |
| | 2,581 |
|
| Other assets | 17 |
| | 18 |
| 557 |
| | 442 |
|
| Total financial services assets | 2,598 |
| | 3,577 |
| |
| Total Assets | $ | 35,329 |
| | $ | 36,751 |
| $ | 34,859 |
| | $ | 35,329 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
| | | at December 31, | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Liabilities | | | | | | |
| Consumer products | | | | |
| Current portion of long-term debt | $ | 1,459 |
| | $ | 600 |
| $ | 525 |
| | $ | 1,459 |
|
| Accounts payable | 451 |
| | 503 |
| 409 |
| | 451 |
|
| Accrued liabilities: | | | | | | |
| Marketing | 568 |
| | 430 |
| 512 |
| | 568 |
|
| Employment costs | 184 |
| | 225 |
| 255 |
| | 184 |
|
| Settlement charges | 3,616 |
| | 3,513 |
| 3,391 |
| | 3,616 |
|
| Other | 1,085 |
| | 1,320 |
| 1,007 |
| | 1,093 |
|
| Dividends payable | 888 |
| | 841 |
| 959 |
| | 888 |
|
| Total current liabilities | 8,251 |
| | 7,432 |
| 7,058 |
| | 8,259 |
|
| | | | | | | |
| Long-term debt | 12,419 |
| | 13,089 |
| 13,992 |
| | 12,419 |
|
| Deferred income taxes | 4,953 |
| | 4,751 |
| 6,854 |
| | 6,652 |
|
| Accrued pension costs | 1,735 |
| | 1,662 |
| 212 |
| | 1,735 |
|
| Accrued postretirement health care costs | 2,504 |
| | 2,359 |
| 2,155 |
| | 2,504 |
|
| Other liabilities | 556 |
| | 602 |
| 435 |
| | 556 |
|
| Total consumer products liabilities | 30,418 |
| | 29,895 |
| |
| | | | | |
| Financial services | | | | |
| Deferred income taxes | 1,699 |
| | 2,811 |
| |
| Other liabilities | 8 |
| | 330 |
| |
| Total financial services liabilities | 1,707 |
| | 3,141 |
| |
| Total liabilities | 32,125 |
| | 33,036 |
| 30,706 |
| | 32,125 |
|
| Contingencies (Note 18) | | | |
| |
|
| Redeemable noncontrolling interest | 34 |
| | 32 |
| 35 |
| | 34 |
|
| Stockholders' Equity | | | | |
| Stockholders’ Equity | | | | |
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) | 935 |
| | 935 |
| 935 |
| | 935 |
|
| Additional paid-in capital | 5,688 |
| | 5,674 |
| 5,714 |
| | 5,688 |
|
| Earnings reinvested in the business | 24,316 |
| | 23,583 |
| 25,168 |
| | 24,316 |
|
| Accumulated other comprehensive losses | (2,040 | ) | | (1,887 | ) | (1,378 | ) | | (2,040 | ) |
Cost of repurchased stock (796,221,021 shares in 2012 and 761,542,032 shares in 2011) | (25,731 | ) | | (24,625 | ) | |
| Total stockholders' equity attributable to Altria Group, Inc. | 3,168 |
| | 3,680 |
| |
Cost of repurchased stock (812,482,035 shares in 2013 and 796,221,021 shares in 2012) | | (26,320 | ) | | (25,731 | ) |
| Total stockholders’ equity attributable to Altria Group, Inc. | | 4,119 |
| | 3,168 |
|
| Noncontrolling interests | 2 |
| | 3 |
| (1 | ) | | 2 |
|
| Total stockholders' equity | 3,170 |
| | 3,683 |
| |
| Total Liabilities and Stockholders' Equity | $ | 35,329 |
| | $ | 36,751 |
| |
| Total stockholders’ equity | | 4,118 |
| | 3,170 |
|
| Total Liabilities and Stockholders’ Equity | | $ | 34,859 |
| | $ | 35,329 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
| | | for the years ended December 31, | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Net revenues | $ | 24,618 |
| | $ | 23,800 |
| | $ | 24,363 |
| $ | 24,466 |
| | $ | 24,618 |
| | $ | 23,800 |
|
| Cost of sales | 7,937 |
| | 7,680 |
| | 7,704 |
| 7,206 |
| | 7,937 |
| | 7,680 |
|
| Excise taxes on products | 7,118 |
| | 7,181 |
| | 7,471 |
| 6,803 |
| | 7,118 |
| | 7,181 |
|
| Gross profit | 9,563 |
| | 8,939 |
| | 9,188 |
| 10,457 |
| | 9,563 |
| | 8,939 |
|
| Marketing, administration and research costs | 2,281 |
| | 2,643 |
| | 2,735 |
| 2,320 |
| | 2,281 |
| | 2,643 |
|
| Changes to Mondelēz and PMI tax-related receivables | (52 | ) | | (14 | ) | | 169 |
| |
| Changes to Mondelēz and PMI tax-related receivables/payables | | 22 |
| | (52 | ) | | (14 | ) |
| Asset impairment and exit costs | 61 |
| | 222 |
| | 36 |
| 11 |
| | 61 |
| | 222 |
|
| Amortization of intangibles | 20 |
| | 20 |
| | 20 |
| 20 |
| | 20 |
| | 20 |
|
| Operating income | 7,253 |
| | 6,068 |
| | 6,228 |
| 8,084 |
| | 7,253 |
| | 6,068 |
|
| Interest and other debt expense, net | 1,126 |
| | 1,216 |
| | 1,133 |
| 1,049 |
| | 1,126 |
| | 1,216 |
|
| Loss on early extinguishment of debt | 874 |
| | — |
| | — |
| 1,084 |
| | 874 |
| | — |
|
| Earnings from equity investment in SABMiller | (1,224 | ) | | (730 | ) | | (628 | ) | (991 | ) | | (1,224 | ) | | (730 | ) |
| Earnings before income taxes | 6,477 |
| | 5,582 |
| | 5,723 |
| 6,942 |
| | 6,477 |
| | 5,582 |
|
| Provision for income taxes | 2,294 |
| | 2,189 |
| | 1,816 |
| 2,407 |
| | 2,294 |
| | 2,189 |
|
| Net earnings | 4,183 |
| | 3,393 |
| | 3,907 |
| 4,535 |
| | 4,183 |
| | 3,393 |
|
| Net earnings attributable to noncontrolling interests | (3 | ) | | (3 | ) | | (2 | ) | — |
| | (3 | ) | | (3 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 4,180 |
| | $ | 3,390 |
| | $ | 3,905 |
| $ | 4,535 |
| | $ | 4,180 |
| | $ | 3,390 |
|
| Per share data: | | | | | | | | | | |
| Basic earnings per share attributable to Altria Group, Inc. | $ | 2.06 |
| | $ | 1.64 |
| | $ | 1.87 |
| |
| Diluted earnings per share attributable to Altria Group, Inc. | $ | 2.06 |
| | $ | 1.64 |
| | $ | 1.87 |
| |
| Basic and diluted earnings per share attributable to Altria Group, Inc. | | $ | 2.26 |
| | $ | 2.06 |
| | $ | 1.64 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
_______________________
|
| | | | | | | | | | | | |
| | | | | | | |
| for the years ended December 31, | | 2012 | | 2011 | | 2010 |
| Net earnings | | $ | 4,183 |
| | $ | 3,393 |
| | $ | 3,907 |
|
| Other comprehensive (losses) earnings, net of deferred income taxes: | | | | | | |
| Currency translation adjustments | | — |
| | (2 | ) | | 1 |
|
| Benefit plans: | | | | | | |
| Actuarial losses and prior service cost/credit before reclassifications to net earnings | | (500 | ) | | (385 | ) | | (64 | ) |
| Amounts reclassified to net earnings | | 148 |
| | 134 |
| | 99 |
|
| | | (352 | ) | | (251 | ) | | 35 |
|
| SABMiller: | | | | | | |
| Ownership share of SABMiller's other comprehensive earnings (losses) before reclassifications to net earnings | | 197 |
| | (162 | ) | | 32 |
|
| Amounts reclassified to net earnings | | 2 |
| | 12 |
| | 9 |
|
| | | 199 |
| | (150 | ) | | 41 |
|
| Other comprehensive (losses) earnings, net of deferred income taxes | | (153 | ) | | (403 | ) | | 77 |
|
| | | | | | | |
| Comprehensive earnings | | 4,030 |
| | 2,990 |
| | 3,984 |
|
| Comprehensive earnings attributable to noncontrolling interests | | (3 | ) | | (3 | ) | | (2 | ) |
| Comprehensive earnings attributable to Altria Group, Inc. | | $ | 4,027 |
| | $ | 2,987 |
| | $ | 3,982 |
|
|
| | | | | | | | | | | | |
| | | | | | | |
| for the years ended December 31, | | 2013 |
| | 2012 |
| | 2011 |
|
| Net earnings | | $ | 4,535 |
| | $ | 4,183 |
| | $ | 3,393 |
|
| Other comprehensive earnings (losses), net of deferred income taxes: | | | | | | |
| Currency translation adjustments | | (2 | ) | | — |
| | (2 | ) |
| Benefit plans | | 1,141 |
| | (352 | ) | | (251 | ) |
| SABMiller | | (477 | ) | | 199 |
| | (150 | ) |
| Other comprehensive earnings (losses), net of deferred income taxes | | 662 |
| | (153 | ) | | (403 | ) |
| | | | | | | |
| Comprehensive earnings | | 5,197 |
| | 4,030 |
| | 2,990 |
|
| Comprehensive earnings attributable to noncontrolling interests | | — |
| | (3 | ) | | (3 | ) |
| Comprehensive earnings attributable to Altria Group, Inc. | | $ | 5,197 |
| | $ | 4,027 |
| | $ | 2,987 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
| | | for the years ended December 31, | for the years ended December 31, | 2012 |
| | 2011 |
| | 2010 |
| for the years ended December 31, | 2013 |
| | 2012 |
| | 2011 |
|
| Cash Provided by (Used in) Operating Activities | Cash Provided by (Used in) Operating Activities | | | | | | Cash Provided by (Used in) Operating Activities | | | | | |
| Net earnings (loss) | | — Consumer products | $ | 4,006 |
| | $ | 3,905 |
| | $ | 3,819 |
| |
| | | — Financial services | 177 |
| | (512 | ) | | 88 |
| |
| Net earnings | Net earnings | 4,183 |
| | 3,393 |
| | 3,907 |
| Net earnings | $ | 4,535 |
| | $ | 4,183 |
| | $ | 3,393 |
|
| Adjustments to reconcile net earnings to operating cash flows: | Adjustments to reconcile net earnings to operating cash flows: | | | | | | Adjustments to reconcile net earnings to operating cash flows: | | | | | |
| Consumer products | | | | | | |
| Depreciation and amortization | Depreciation and amortization | 225 |
| | 253 |
| | 276 |
| Depreciation and amortization | 212 |
| | 225 |
| | 253 |
|
| Deferred income tax provision | 406 |
| | 382 |
| | 408 |
| |
| Deferred income tax benefit | | Deferred income tax benefit | (86 | ) | | (929 | ) | | (443 | ) |
| Earnings from equity investment in SABMiller | Earnings from equity investment in SABMiller | (1,224 | ) | | (730 | ) | | (628 | ) | Earnings from equity investment in SABMiller | (991 | ) | | (1,224 | ) | | (730 | ) |
| Dividends from SABMiller | Dividends from SABMiller | 402 |
| | 357 |
| | 303 |
| Dividends from SABMiller | 439 |
| | 402 |
| | 357 |
|
| PMCC leveraged lease charges | | PMCC leveraged lease charges | — |
| | 7 |
| | 490 |
|
| Asset impairment and exit costs, net of cash paid | Asset impairment and exit costs, net of cash paid | (73 | ) | | 179 |
| | (188 | ) | Asset impairment and exit costs, net of cash paid | (35 | ) | | (73 | ) | | 178 |
|
| IRS payment related to LILO and SILO transactions | (456 | ) | | — |
| | (945 | ) | |
| IRS payment related to the Closing Agreement | | IRS payment related to the Closing Agreement | — |
| | (456 | ) | | — |
|
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | 874 |
| | — |
| | — |
| Loss on early extinguishment of debt | 1,084 |
| | 874 |
| | — |
|
| Cash effects of changes: | Cash effects of changes: | | | | | | Cash effects of changes: | | | | | |
| Receivables, net | Receivables, net | 202 |
| | (19 | ) | | 15 |
| Receivables, net | 78 |
| | 202 |
| | (19 | ) |
| Inventories | Inventories | 33 |
| | 24 |
| | 7 |
| Inventories | (133 | ) | | 33 |
| | 24 |
|
| Accounts payable | Accounts payable | 5 |
| | (60 | ) | | 48 |
| Accounts payable | (76 | ) | | (13 | ) | | (92 | ) |
| Income taxes | Income taxes | (449 | ) | | (151 | ) | | (53 | ) | Income taxes | (95 | ) | | 883 |
| | 147 |
|
| Accrued liabilities and other current assets | Accrued liabilities and other current assets | (14 | ) | | 21 |
| | (221 | ) | Accrued liabilities and other current assets | (107 | ) | | (14 | ) | | 21 |
|
| Accrued settlement charges | Accrued settlement charges | 103 |
| | (22 | ) | | (100 | ) | Accrued settlement charges | (225 | ) | | 103 |
| | (22 | ) |
| Pension plan contributions | Pension plan contributions | (557 | ) | | (240 | ) | | (30 | ) | Pension plan contributions | (393 | ) | | (557 | ) | | (240 | ) |
| Pension provisions and postretirement, net | Pension provisions and postretirement, net | 192 |
| | 243 |
| | 185 |
| Pension provisions and postretirement, net | 177 |
| | 192 |
| | 243 |
|
| Other | Other | 126 |
| | 47 |
| | 96 |
| Other | (9 | ) | | 47 |
| | 21 |
|
| Financial services | | | | | | |
| Deferred income tax benefit | (1,335 | ) | | (825 | ) | | (284 | ) | |
| PMCC leveraged lease charges | 7 |
| | 490 |
| | — |
| |
| Net (decrease) increase to allowance for losses | (10 | ) | | 25 |
| | — |
| |
| Other liabilities - income taxes | 1,332 |
| | 298 |
| | (5 | ) | |
| Other | (69 | ) | | (52 | ) | | (24 | ) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 3,903 |
| | 3,613 |
| | 2,767 |
| Net cash provided by operating activities | 4,375 |
| | 3,885 |
| | 3,581 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
__________________
| | | for the years ended December 31, | for the years ended December 31, | 2012 |
| | 2011 |
| | 2010 |
| for the years ended December 31, | 2013 |
| | 2012 |
| | 2011 |
|
| Cash Provided by (Used in) Investing Activities | Cash Provided by (Used in) Investing Activities | | | | | | Cash Provided by (Used in) Investing Activities | | | | | |
| Consumer products | | | | | | |
| Capital expenditures | Capital expenditures | $ | (124 | ) | | $ | (105 | ) | | $ | (168 | ) | Capital expenditures | $ | (131 | ) | | $ | (124 | ) | | $ | (105 | ) |
| Proceeds from finance assets | | Proceeds from finance assets | 716 |
| | 1,049 |
| | 490 |
|
| Other | Other | (5 | ) | | 2 |
| | 115 |
| Other | 17 |
| | (5 | ) | | 2 |
|
| Financial services | | | | | | |
| Proceeds from finance assets | 1,049 |
| | 490 |
| | 312 |
| |
| Net cash provided by investing activities | Net cash provided by investing activities | 920 |
| | 387 |
| | 259 |
| Net cash provided by investing activities | 602 |
| | 920 |
| | 387 |
|
| Cash Provided by (Used in) Financing Activities | Cash Provided by (Used in) Financing Activities | | | | | | Cash Provided by (Used in) Financing Activities | | | | | |
| Consumer products | | | | | | |
| Long-term debt issued | Long-term debt issued | 2,787 |
| | 1,494 |
| | 1,007 |
| Long-term debt issued | 4,179 |
| | 2,787 |
| | 1,494 |
|
| Long-term debt repaid | Long-term debt repaid | (2,600 | ) | | — |
| | (775 | ) | Long-term debt repaid | (3,559 | ) | | (2,600 | ) | | — |
|
| Repurchases of common stock | Repurchases of common stock | (1,082 | ) | | (1,327 | ) | | — |
| Repurchases of common stock | (634 | ) | | (1,082 | ) | | (1,327 | ) |
| Dividends paid on common stock | Dividends paid on common stock | (3,400 | ) | | (3,222 | ) | | (2,958 | ) | Dividends paid on common stock | (3,612 | ) | | (3,400 | ) | | (3,222 | ) |
| Issuances of common stock | Issuances of common stock | — |
| | 29 |
| | 104 |
| Issuances of common stock | — |
| | — |
| | 29 |
|
| Financing fees and debt issuance costs | Financing fees and debt issuance costs | (22 | ) | | (24 | ) | | (6 | ) | Financing fees and debt issuance costs | (39 | ) | | (22 | ) | | (24 | ) |
| Tender premiums and fees related to early extinguishment of debt | Tender premiums and fees related to early extinguishment of debt | (864 | ) | | — |
| | — |
| Tender premiums and fees related to early extinguishment of debt | (1,054 | ) | | (864 | ) | | — |
|
| Other | Other | (12 | ) | | 6 |
| | 45 |
| Other | 17 |
| | 6 |
| | 38 |
|
| Net cash used in financing activities | Net cash used in financing activities | (5,193 | ) | | (3,044 | ) | | (2,583 | ) | Net cash used in financing activities | (4,702 | ) | | (5,175 | ) | | (3,012 | ) |
| Cash and cash equivalents: | Cash and cash equivalents: | | | | | | Cash and cash equivalents: | | | | | |
| (Decrease) Increase | (370 | ) | | 956 |
| | 443 |
| |
| Increase (decrease) | | Increase (decrease) | 275 |
| | (370 | ) | | 956 |
|
| Balance at beginning of year | Balance at beginning of year | 3,270 |
| | 2,314 |
| | 1,871 |
| Balance at beginning of year | 2,900 |
| | 3,270 |
| | 2,314 |
|
| Balance at end of year | Balance at end of year | $ | 2,900 |
| | $ | 3,270 |
| | $ | 2,314 |
| Balance at end of year | $ | 3,175 |
| | $ | 2,900 |
| | $ | 3,270 |
|
| Cash paid: Interest | | | $ | 1,219 |
| | $ | 1,154 |
| | $ | 1,084 |
| | | $ | 1,099 |
| | $ | 1,219 |
| | $ | 1,154 |
|
| Income taxes | Income taxes | | $ | 3,338 |
| | $ | 2,865 |
| | $ | 1,884 |
| Income taxes | | $ | 2,448 |
| | $ | 3,338 |
| | $ | 2,865 |
|
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions of dollars, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to Altria Group, Inc. | | | |
| | Common Stock |
| | Additional Paid-in Capital |
| | Earnings Reinvested in the Business |
| | Accumulated Other Comprehensive Losses |
| | Cost of Repurchased Stock |
| | Non- controlling Interests |
| | Total Stockholders’ Equity |
|
| Balances, December 31, 2009 | $ | 935 |
| | $ | 5,997 |
| | $ | 22,599 |
| | $ | (1,561 | ) | | $ | (23,901 | ) | | $ | 3 |
| | $ | 4,072 |
|
Net earnings (a) | — |
| | — |
| | 3,905 |
| | — |
| | — |
| | 1 |
| | 3,906 |
|
| Other comprehensive earnings, net | | | | | | | | | | | | | |
| of deferred income taxes | — |
| | — |
| | — |
| | 77 |
| | — |
| | — |
| | 77 |
|
| Exercise of stock options and other | | | | | | | | | | | | | |
| stock award activity | — |
| | (246 | ) | | — |
| | — |
| | 432 |
| | — |
| | 186 |
|
| Cash dividends declared ($1.46 per share) | — |
| | — |
| | (3,045 | ) | | — |
| | — |
| | — |
| | (3,045 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2010 | 935 |
| | 5,751 |
| | 23,459 |
| | (1,484 | ) | | (23,469 | ) | | 3 |
| | 5,195 |
|
Net earnings (a) | — |
| | — |
| | 3,390 |
| | — |
| | — |
| | 1 |
| | 3,391 |
|
| Other comprehensive losses, net | | | | | | | | | | | | | |
| of deferred income tax benefit | — |
| | — |
| | — |
| | (403 | ) | | — |
| | — |
| | (403 | ) |
| Exercise of stock options and other | | | | | | | | | | | | | |
| stock award activity | — |
| | (77 | ) | | — |
| | — |
| | 171 |
| | — |
| | 94 |
|
| Cash dividends declared ($1.58 per share) | — |
| | — |
| | (3,266 | ) | | — |
| | — |
| | — |
| | (3,266 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (1,327 | ) | | — |
| | (1,327 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2011 | 935 |
| | 5,674 |
| | 23,583 |
| | (1,887 | ) | | (24,625 | ) | | 3 |
| | 3,683 |
|
Net earnings (a) | — |
| | — |
| | 4,180 |
| | — |
| | — |
| | — |
| | 4,180 |
|
| Other comprehensive losses, net | | | | | | | | | | | | | |
| of deferred income tax benefit | — |
| | — |
| | — |
| | (153 | ) | | — |
| | — |
| | (153 | ) |
| Exercise of stock options and other | | | | | | | | | | | | | |
| stock award activity | — |
| | 14 |
| | — |
| | — |
| | 10 |
| | — |
| | 24 |
|
| Cash dividends declared ($1.70 per share) | — |
| | — |
| | (3,447 | ) | | — |
| | — |
| | — |
| | (3,447 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (1,116 | ) | | — |
| | (1,116 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2012 | $ | 935 |
| | $ | 5,688 |
| | $ | 24,316 |
| | $ | (2,040 | ) | | $ | (25,731 | ) | | $ | 2 |
| | $ | 3,170 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to Altria Group, Inc. | | | |
| | Common Stock |
| | Additional Paid-in Capital |
| | Earnings Reinvested in the Business |
| | Accumulated Other Comprehensive Losses |
| | Cost of Repurchased Stock |
| | Non- controlling Interests |
| | Total Stockholders’ Equity |
|
| Balances, December 31, 2010 | $ | 935 |
| | $ | 5,751 |
| | $ | 23,459 |
| | $ | (1,484 | ) | | $ | (23,469 | ) | | $ | 3 |
| | $ | 5,195 |
|
Net earnings (a) | — |
| | — |
| | 3,390 |
| | — |
| | — |
| | 1 |
| | 3,391 |
|
Other comprehensive losses, net of deferred income taxes | — |
| | — |
| | — |
| | (403 | ) | | — |
| | — |
| | (403 | ) |
| Stock award activity | — |
| | (77 | ) | | — |
| | — |
| | 171 |
| | — |
| | 94 |
|
| Cash dividends declared ($1.58 per share) | — |
| | — |
| | (3,266 | ) | | — |
| | — |
| | — |
| | (3,266 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (1,327 | ) | | — |
| | (1,327 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2011 | 935 |
| | 5,674 |
| | 23,583 |
| | (1,887 | ) | | (24,625 | ) | | 3 |
| | 3,683 |
|
Net earnings (a) | — |
| | — |
| | 4,180 |
| | — |
| | — |
| | — |
| | 4,180 |
|
Other comprehensive losses, net of deferred income taxes | — |
| | — |
| | — |
| | (153 | ) | | — |
| | — |
| | (153 | ) |
| Stock award activity | — |
| | 14 |
| | — |
| | — |
| | 10 |
| | — |
| | 24 |
|
| Cash dividends declared ($1.70 per share) | — |
| | — |
| | (3,447 | ) | | — |
| | — |
| | — |
| | (3,447 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (1,116 | ) | | — |
| | (1,116 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balances, December 31, 2012 | 935 |
| | 5,688 |
| | 24,316 |
| | (2,040 | ) | | (25,731 | ) | | 2 |
| | 3,170 |
|
Net earnings (losses) (a) | — |
| | — |
| | 4,535 |
| | — |
| | — |
| | (3 | ) | | 4,532 |
|
Other comprehensive earnings, net of deferred income taxes | — |
| | — |
| | — |
| | 662 |
| | — |
| | — |
| | 662 |
|
| Stock award activity | — |
| | 26 |
| | — |
| | — |
| | 11 |
| | — |
| | 37 |
|
| Cash dividends declared ($1.84 per share) | — |
| | — |
| | (3,683 | ) | | — |
| | — |
| | — |
| | (3,683 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (600 | ) | | — |
| | (600 | ) |
| Balances, December 31, 2013 | $ | 935 |
| | $ | 5,714 |
| | $ | 25,168 |
| | $ | (1,378 | ) | | $ | (26,320 | ) | | $ | (1 | ) | | $ | 4,118 |
|
(a) Net earningsearnings/losses attributable to noncontrolling interests for the years ended December 31, 20122013, 20112012 and 20102011 exclude net earnings of $3 million, $2$3 million
and $1$2 million, respectively, due to the redeemable noncontrolling interest related to Stag'sStag’s Leap Wine Cellars, which is reported in the mezzanine equity section in
the consolidated balance sheets at December 31, 20122013, 20112012 and 20102011, respectively. See Note 18.
See notes to consolidated financial statements.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 1. Background and Basis of Presentation
▪Background: At December 31, 20122013, Altria Group, Inc.'s’s direct and indirect wholly-owned subsidiaries included Philip Morris USA Inc. ("(“PM USA"USA”), which is engaged in the manufacture and sale of cigarettes and certain smokeless tobacco products in the United States; John Middleton Co. ("Middleton"(“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC ("UST"(“UST”), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC ("USSTC"(“USSTC”) and Ste. Michelle Wine Estates Ltd. ("(“Ste. Michelle"Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Nu Mark LLC (“Nu Mark”), an indirect wholly-owned subsidiary of Altria Group, Inc., is engaged in the development and marketing of innovative tobacco products for adult tobacco consumers. Philip Morris Capital Corporation ("PMCC"(“PMCC”), another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held approximately 26.9%26.8% of the economic and voting interest of SABMiller plc ("SABMiller"(“SABMiller”) at December 31, 20122013, which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc.'s’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. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends. At December 31, 20122013, Altria Group, Inc.'s’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 common stock. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.
| |
| ▪ | Dividends and Share Repurchases: During the third quarter of 2012,2013, Altria Group, Inc.'s’s Board of Directors (the “Board of Directors”) approved a 7.3%9.1% increase in the quarterly dividend rate to $0.440.48 per common share versus the previous rate of $0.410.44 per common share. The current annualized dividend rate is $1.761.92 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of Altria Group, Inc.'sthe Board of Directors. |
In January 2011, Altria Group, Inc.'sthe Board of Directors authorized a $1.0 billion one-year share repurchase program (the "January“January 2011 share repurchase program"program”). Altria Group, Inc. completed the January 2011 share repurchase program during the third quarter of 2011. Under the January 2011 share repurchase program, Altria Group, Inc. repurchased a total of 37.6 million shares of its common stock at an average price of $26.62 per share.
In October 2011, Altria Group, Inc.'sThe Board of Directors authorized a new $1.0 billion share repurchase program which wasin October 2011 and expanded it to $1.5 billion in October 2012 (the "October(as expanded, the “October 2011 share repurchase program"program”). During 2011 and 2012,the first quarter of 2013, Altria Group, Inc. repurchased 11.7 million shares (aggregate cost of approximately $327 million, and $27.84 average price per share) and 34.9 million shares (aggregate cost of approximately $1.1 billion, and $32.00 average pricecompleted the October 2011 share
per share), respectively, underrepurchase program. Under the October 2011 share repurchase program.
During 2011,program, Altria Group, Inc. repurchased a total of 49.348.3 million shares (aggregate cost of approximately $1.3 billion, and $26.91 average price per share) under the January 2011 and October 2011 share repurchase programs described above.
As of December 31, 2012, Altria Group, Inc. had repurchased a total of 46.6 million shares of its common stock under the October 2011at an average price of $31.06 per share.
The Board of Directors authorized a $300 million share repurchase program atin April 2013 and expanded it to $1.0 billion in August 2013 (as expanded, the “April 2013 share repurchase program”). Altria Group, Inc. expects to complete the April 2013 share repurchase program by the end of the third quarter of 2014. During 2013, Altria Group, Inc. repurchased 15.0 million shares of its common stock (at an aggregate cost of approximately $1.4 billion,$543 million, and at an average price of $30.95$36.27 per share.share) under the April 2013 share repurchase program. At December 31, 20122013, Altria Group, Inc. had approximately $57$457 million remaining in the October 2011April 2013 share repurchase program, which Altria Group, Inc. expects to complete by June 30, 2013.program. The timing of share repurchases under the October 2011April 2013 share repurchase program depends upon marketplace conditions and other factors, and the October 2011factors. The April 2013 share repurchase program remains subject to the discretion of Altria Group, Inc.'sthe Board of Directors.
For the years ended December 31, 2013, 2012 and 2011, Altria Group, Inc.’s total share repurchase activity was as follows:
|
| | | | | | | | | | |
| | | 2013 |
| 2012 |
| 2011 |
|
| | | (in millions, except per share data) |
Total number of shares repurchased | 16.7 |
| 34.9 |
| 49.3 |
|
Aggregate cost of shares repurchased | $ | 600 |
| $ | 1,116 |
| $ | 1,327 |
|
| Average price per share of shares repurchased | $ | 36.05 |
| $ | 32.00 |
| $ | 26.91 |
|
▪Basis of Presentation: The consolidated financial statements include Altria Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc. exercises significant influence are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("(“U.S. GAAP"GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, lives and valuation assumptions for goodwill and other intangible assets, marketing programs, income taxes, and the allowance for losses and estimated residual values of finance leases. Actual results could differ from those estimates.
Balance sheet accountsEffective January 1, 2013, Altria Group, Inc.’s reportable segments are segregated by two broad types of businesses. Consumersmokeable products, assetssmokeless products and liabilities are classified as either current or non-current, whereaswine. The financial services assets and liabilities are unclassified,the alternative products businesses have been combined in accordance with respective industry practices.
Altria Group, Inc.'s chief operating decision maker has been evaluating the operating results of the former cigarettes and cigars segments as a single smokeable products segment since January 1, 2012. The combination of these two formerly separate segments is relatedan all other category due to the restructuring associated with the cost reduction program announced in October 2011 (the "2011 Cost Reduction Program"). Also, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA, reflecting management's goal to achieve efficiencies in the management of these businesses. Effective with the first quarter of 2012 and at December 31, 2012, Altria Group, Inc.'s
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
reportable segments were smokeablethe continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s alternative products smokelessbusinesses to Altria Group, Inc.’s consolidated results. In addition, due to the continued reduction of the lease portfolio of PMCC, Altria Group, Inc.’s balance sheet accounts are no longer segregated by consumer products wine and financial services. For further discussion on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementationservices, and Integration Costs.all balance sheet accounts are classified as either current or non-current.
Certain prior yearyears’ amounts have been reclassified to conform with the current year'syear’s presentation due primarily to Altria Group, Inc.'s’s revised reportable segments and Middleton becoming a wholly-owned subsidiary of PM USA.segments.
Effective January 1, 2012,2013, Altria Group, Inc. adopted new authoritative guidance that eliminatedrequires an entity to provide additional information by component concerning the optionamounts reclassified out of presenting components ofaccumulated other comprehensive earnings as part of the statement of stockholders' equity. With the adoption of this guidance,earnings/losses. Altria Group, Inc. is reporting other comprehensive earningshas included the additional disclosures in separate statements immediately following the statements of earnings.Note 13. Other Comprehensive Earnings/Losses.
Note 2. Summary of Significant Accounting Policies
▪Cash and Cash Equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Property, plant and equipment are stated at historical costs and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value of goodwill exceeds theits fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value. If the carrying value of goodwill,an indefinite-lived intangible asset exceeds its fair value, which is
determined using discounted cash flows. Impairment testing for indefinite-lived
intangible assets requires a comparison between the fair value and carrying value of the intangible asset. If the carrying value exceeds fair value,flows, the intangible asset is considered impaired and is reduced to fair value. During 20122013, 20112012 and 20102011, Altria Group, Inc. completed its quantitative annual reviewimpairment test of goodwill and indefinite-lived intangible assets, and no impairment charges resulted fromresulted.
▪Employee Benefit Plans: Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these reviews.plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost.
▪Environmental Costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment. Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change.
Compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.'s’s consolidated financial position, results of operations, capital expenditures, financial position or cash flows (see Note 18. Contingencies — - Environmental Regulation)Regulation).
▪Fair Value Measurements: Altria Group, Inc. measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Altria Group, Inc. uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (level(Level 1 measurements) and the lowest priority to unobservable inputs (level(Level 3 measurements). The three levels of inputs used to measure fair value are:
| |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
| |
| 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. |
The fair value of substantially all of Altria Group, Inc.'s’s pension assets is based on observable inputs, including readily available quoted market prices, which meet the definition of a Level 1 or Level 2 input. For the fair value disclosure of the pension plan assets, see Note 16. Benefit Plans.
▪Finance Leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
balances. Investments in leveraged leases are stated net of related nonrecourse debt obligations.
Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant pre-tax rates of return on the net investment balances.
Finance leases include unguaranteed residual values that represent PMCC'sPMCC’s estimates at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC'sPMCC’s management. This review includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values. Such reviews resulted in a decrease of $8$8 million in 2012 and $11 million in 2010 to PMCC'sPMCC’s net revenues and results of operations. There were no adjustments in 2013 and 2011.
PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC stops recording income ("(“non-accrual status"status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible.
▪Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 18. Contingencies for a further discussion of guarantees.
▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant judgmentAltria Group, Inc. records a valuation allowance when it is required in determining incomemore-likely-than-not that some portion or all of a deferred tax provisions and in evaluating tax positions.asset will not be realized.
Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a
tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent50% likely of being realized upon ultimate settlement.
Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of earnings.
▪Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO"(“LIFO”) method is used to determine the cost of substantially all tobacco inventories. The cost of the remaining inventories is determined using the first-in, first-out and average cost methods. It is a generally recognized industry practice to classify leaf tobacco and wine inventories as current assets although part of such inventory, because of the duration of the curing and aging process, ordinarily would not be utilizedused within one year.
▪Litigation Contingencies and Costs: Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs on the consolidated statements of earnings.
▪Marketing Costs: The consumer productsAltria Group, Inc.’s businesses promote their products with consumer engagement programs, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives, event marketing and volume-based incentives. Consumer engagement programs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues, a portion of which is based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates. For interim reporting purposes, consumer engagement programs and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.
▪Revenue Recognition: The consumer productsAltria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment or delivery of goods when title and risk of loss pass to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued liabilities until revenue is recognized. Altria Group, Inc.'s consumer products’s businesses also include excise taxes billed to customers in net revenues. Shipping and handling costs are classified as part of cost of sales.
▪Stock-Based Compensation: Altria Group, Inc. measures compensation cost for all stock-based awards at fair value on date of grant and recognizes compensation expense over the service periods for awards expected to vest. The fair value of restricted stock and deferred stock is determined based on the number of shares granted and the market value at date of grant.
▪New Accounting Standards: In July 2012, the Financial Accounting Standards Board ("FASB") issued authoritative guidance with an option that simplifies how entities test indefinite-lived intangible assets for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative impairment test. The new guidance is effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012; however, early adoption is permitted. Altria Group, Inc. performed the quantitative impairment test under existing guidance for its 2012 annual indefinite-lived intangible asset impairment test and will evaluate the impact of performing a qualitative assessment under the new guidance in 2013.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 3. Goodwill and Other Intangible Assets, net
Goodwill and other intangible assets, net, by segment were as follows: | | | | Goodwill | | Other Intangible Assets, net | Goodwill | | Other Intangible Assets, net |
| (in millions) | December 31, 2012 |
| | December 31, 2011 |
| | December 31, 2012 |
| | December 31, 2011 |
| December 31, 2013 |
| | December 31, 2012 |
| | December 31, 2013 |
| | December 31, 2012 |
|
| Smokeable products | $ | 77 |
| | $ | 77 |
| | $ | 2,971 |
| | $ | 2,988 |
| $ | 77 |
| | $ | 77 |
| | $ | 2,954 |
| | $ | 2,971 |
|
| Smokeless products | 5,023 |
| | 5,023 |
| | 8,839 |
| | 8,841 |
| 5,023 |
| | 5,023 |
| | 8,836 |
| | 8,839 |
|
| Wine | 74 |
| | 74 |
| | 268 |
| | 269 |
| 74 |
| | 74 |
| | 268 |
| | 268 |
|
| Total | $ | 5,174 |
| | $ | 5,174 |
| | $ | 12,078 |
| | $ | 12,098 |
| $ | 5,174 |
| | $ | 5,174 |
| | $ | 12,058 |
| | $ | 12,078 |
|
Goodwill relates to Altria Group, Inc.'s’s 2009 acquisition of UST and 2007 acquisition of Middleton.
Other intangible assets consisted of the following:
| | | | December 31, 2012 | | December 31, 2011 | December 31, 2013 | | December 31, 2012 |
| (in millions) | Gross Carrying Amount |
| | Accumulated Amortization |
| | Gross Carrying Amount |
| | Accumulated Amortization |
| Gross Carrying Amount |
| | Accumulated Amortization |
| | Gross Carrying Amount |
| | Accumulated Amortization |
|
| Indefinite-lived intangible assets | $ | 11,701 |
| | $ | — |
| | $ | 11,701 |
| | $ | — |
| $ | 11,701 |
| | $ | — |
| | $ | 11,701 |
| | $ | — |
|
| Definite-lived intangible assets | 464 |
| | 87 |
| | 464 |
| | 67 |
| 464 |
| | 107 |
| | 464 |
| | 87 |
|
Total other intangible assets | $ | 12,165 |
| | $ | 87 |
| | $ | 12,165 |
| | $ | 67 |
| $ | 12,165 |
| | $ | 107 |
| | $ | 12,165 |
| | $ | 87 |
|
Indefinite-lived intangible assets consist substantially of trademarks from Altria Group, Inc.'s’s 2009 acquisition of UST ($9.1 billion) and 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets, which consist primarily of customer relationships and certain cigarette trademarks, are amortized over periods up to 25 years. Pre-tax amortization expense for definite-lived intangible assets during each of the
years ended December 31, 20122013, 20112012 and 20102011, was $20 million. Annual amortization expense for each of the next five years is estimated to be approximately $20 million, assuming no additional transactions occur that require the amortization of intangible assets.
There werehave been no changes in goodwill and the gross carrying amount of other intangible assets forsince the years ended December 31, 2012acquisitions of UST and Middleton.2011.
Note 4. Asset Impairment, Exit, Implementation and Integration Costs
Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2013, 2012, and 2011 and 2010 consisted of the following: |
| | | | | | | | | | | |
| | For the Year Ended December 31, 2013 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Total |
|
| Smokeable products | $ | 3 |
| | $ | 1 |
| | $ | 4 |
|
| Smokeless products | 3 |
| | — |
| | 3 |
|
| All other | 5 |
| | — |
| | 5 |
|
| Total | $ | 11 |
| | $ | 1 |
| | $ | 12 |
|
|
| | | | | | | | | | | |
| | For the Year Ended December 31, 2012 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation (Gain) Costs |
| | Total |
|
| Smokeable products | $ | 38 |
| | $ | (10 | ) | | $ | 28 |
|
| Smokeless products | 22 |
| | 6 |
| | 28 |
|
| General corporate | 1 |
| | (1 | ) | | — |
|
| Total | $ | 61 |
| | $ | (5 | ) | | $ | 56 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2011 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Integration Costs |
| | Total |
|
| Smokeable products | $ | 182 |
| | $ | 1 |
| | $ | — |
| | $ | 183 |
|
| Smokeless products | 32 |
| | — |
| | 3 |
| | 35 |
|
| General corporate | 8 |
| | — |
| | — |
| | 8 |
|
| Total | $ | 222 |
| | $ | 1 |
| | $ | 3 |
| | $ | 226 |
|
|
| | | | | | | | | | | |
| | For the Year Ended December 31, 2012 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation (Gain) Costs |
| | Total |
|
| Smokeable products | $ | 38 |
| | $ | (10 | ) | | $ | 28 |
|
| Smokeless products | 22 |
| | 6 |
| | 28 |
|
| General corporate | 1 |
| | (1 | ) | | — |
|
| Total | $ | 61 |
| | $ | (5 | ) | | $ | 56 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2011 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Integration Costs |
| | Total |
|
| Smokeable products | $ | 182 |
| | $ | 1 |
| | $ | — |
| | $ | 183 |
|
| Smokeless products | 32 |
| | — |
| | 3 |
| | 35 |
|
| General corporate | 8 |
| | — |
| | — |
| | 8 |
|
| Total | $ | 222 |
| | $ | 1 |
| | $ | 3 |
| | $ | 226 |
|
| | | | | | | | |
| | For the Year Ended December 31, 2010 |
| (in millions) | Asset Impairment and Exit Costs |
| | Implementation Costs |
| | Integration Costs |
| | Total |
|
| Smokeable products | $ | 24 |
| | $ | 75 |
| | $ | 2 |
| | $ | 101 |
|
| Smokeless products | 6 |
| | — |
| | 16 |
| | 22 |
|
| Wine | — |
| | — |
| | 2 |
| | 2 |
|
| General corporate | 6 |
| | — |
| | — |
| | 6 |
|
| Total | $ | 36 |
| | $ | 75 |
| | $ | 20 |
| | $ | 131 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The change in the severance liability and details of asset impairment and exit costs for Altria Group, Inc. for the years ended December 31, 2012 and 2011 was as follows:
|
| | | | | | | | | | | |
| (in millions) | Severance |
| | Other |
| | Total |
|
Severance liability balance, December 31, 2010 | $ | 26 |
| | $ | — |
| | $ | 26 |
|
| Charges, net | 154 |
| | 68 |
| | 222 |
|
| Cash spent | (24 | ) | | (20 | ) | | (44 | ) |
| Other | — |
| | (48 | ) | | (48 | ) |
Severance liability balance, December 31, 2011 | 156 |
| | — |
| | 156 |
|
| Charges, net | (7 | ) | | 68 |
| | 61 |
|
| Cash spent | (112 | ) | | (22 | ) | | (134 | ) |
| Other | — |
| | (46 | ) | | (46 | ) |
Severance liability balance, December 31, 2012 | $ | 37 |
| | $ | — |
| | $ | 37 |
|
Other charges in the table above primarily include other employee termination benefits, including pension and postretirement, and asset impairments. Charges, net in the table above include the reversal in 2012 of severance costs ($8 million) associated with the 2011 Cost Reduction Program and the reversal in 2011 of lease exit costs ($4 million) associated with the UST integration.
The pre-tax asset impairment, exit, implementation and integration costs for 2012 and 2011 shown above are primarily related to the 2011 Cost Reduction Program discussed below.
▪2011 Cost Reduction Program: In October 2011, Altria Group, Inc. announced the 2011a cost reduction program (the “2011 Cost Reduction ProgramProgram”) for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.'s’s objective to reduce cigarette-related infrastructure ahead of PM USA’s cigarettes volume declines. For this program,Since the inception of the 2011 Cost Reduction Program, Altria Group, Inc. incurred total net pre-tax charges of $271275 million as of December 31, 20122013. related to this program. The net pre-tax charges included employee separation costs, primarily severance, of $209212 million and other net charges of $6263 million. These other net charges included lease termination and asset impairments, partially offset by a curtailment gain related to amendments made to an Altria Group, Inc. postretirement benefit plan. Substantially all of these charges will result in cash expenditures. Total pre-tax charges, net, incurred related to this programthe 2011 Cost Reduction Program are complete. Substantially all of these charges have been substantially completed.
For the year ended December 31, 2012, total pre-tax asset impairment and exit costs of $52 million were recorded for this programresulted or will result in the smokeable products segment ($29 million), smokeless products segment ($22 million), and general corporate ($1 million).In addition, pre-tax implementation (gain) costs of $(5) million shown in the table above were recorded on Altria Group, Inc.'s consolidated statement of earnings for the year ended December 31, 2012, as follows: a net gain of $14 million, which included a $26 million curtailment gain related to amendments made to an Altria Group, Inc. postretirement benefit plan, was included in marketing, administration and research costs; and other costs of $9 million were included in cost of sales.
For the year ended December 31, 2011, total pre-tax asset impairment and exit costs of $223 million were recorded for this program in the smokeable products segment ($179 million), smokeless products segment ($36 million), and general corporate ($8 million). In addition, pre-tax implementation costs of $1 million, which were recorded in marketing, administration and research costs on Altria Group, Inc.'s consolidated statement of earnings, were recorded in the smokeable products segment.cash expenditures.
Cash payments related to this programthe 2011 Cost Reduction Program of $41 million, $135 million and $9$9 million were made during the years ended December 31, 2013, 2012 and 2011, respectively, for total cash payments of $144185 million since inception.
In connection withThe severance liability related to the 2011 Cost Reduction Program, Altria Group, Inc. reorganized two of its tobacco operating companies and revised its reportable segments (see Note 1. Background and Basis of Presentation and Note 15. Segment Reporting).
▪Other Programs: The pre-tax asset impairment, exit, implementation and integration costs incurred during 2010 shown in the table above related primarily to the previously completed manufacturing optimization program associated with PM USA's closure of its Cabarrus, North Carolina manufacturing facility in 2009, and Altria Group, Inc.'s integration and restructuring program in 2008 associated with the integration of UST.
Pre-tax implementation costs of $75was $37 million were associated with the manufacturing optimization program and were primarily related to accelerated depreciation and were included in cost of sales on the consolidated statement of earnings for the year endedat December 31, 2010. Pre-tax integration costs2012, substantially all of $20 million related primarily to the integration and restructuring program were included in marketing, administration and research costs on the consolidated statementwhich was paid as of earnings for the year ended December 31, 2010.2013.
Note 5. Inventories
The cost of approximately 68% and 70%of inventories at December 31, 20122013 and 20112012, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.60.7 billion and $0.6 billion lower than the current cost of inventories at December 31, 20122013 and 20112012., respectively.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 6. Investment in SABMiller
At December 31, 20122013, Altria Group, Inc. held approximately 26.9%26.8% of the economic and voting interest of SABMiller. Altria Group, Inc. accounts for its investment in SABMiller under the equity method of accounting.
Pre-tax earnings from Altria Group, Inc.'s’s equity investment in SABMiller consisted of the following:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Equity earnings | $ | 1,181 |
| | $ | 703 |
| | $ | 578 |
|
| Gains resulting from issuances | | | | | |
| of common stock | | | | | |
| by SABMiller | 43 |
| | 27 |
| | 50 |
|
| | $ | 1,224 |
| | $ | 730 |
| | $ | 628 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Equity earnings | $ | 906 |
| | $ | 1,181 |
| | $ | 703 |
|
| Gains resulting from issuances of common stock by SABMiller | 85 |
| | 43 |
| | 27 |
|
| | $ | 991 |
| | $ | 1,224 |
| | $ | 730 |
|
Altria Group, Inc.'s’s equity earnings for the year ended December 31, 2012 included its share of pre-tax non-cash gains of $342 million resulting from SABMiller'sSABMiller’s strategic alliance transactions with Anadolu Efes and Castel.
Summary financial data of SABMiller is as follows:
| | | | At December 31, | At December 31, |
| (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Current assets | $ | 5,742 |
| | $ | 5,967 |
| $ | 5,833 |
| | $ | 5,742 |
|
| Long-term assets | $ | 51,733 |
| | $ | 46,438 |
| $ | 48,460 |
| | $ | 51,733 |
|
| Current liabilities | $ | 8,944 |
| | $ | 7,591 |
| $ | 8,177 |
| | $ | 8,944 |
|
| Long-term liabilities | $ | 22,000 |
| | $ | 22,521 |
| $ | 20,315 |
| | $ | 22,000 |
|
| Non-controlling interests | $ | 1,105 |
| | $ | 1,013 |
| |
| Noncontrolling interests | | $ | 1,202 |
| | $ | 1,105 |
|
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Net revenues | $ | 23,449 |
| | $ | 20,780 |
| | $ | 18,981 |
| $ | 22,684 |
| | $ | 23,449 |
| | $ | 20,780 |
|
| Operating profit | $ | 5,243 |
| | $ | 3,603 |
| | $ | 2,821 |
| $ | 4,201 |
| | $ | 5,243 |
| | $ | 3,603 |
|
| Net earnings | $ | 4,362 |
| | $ | 2,596 |
| | $ | 2,133 |
| $ | 3,375 |
| | $ | 4,362 |
| | $ | 2,596 |
|
The fair value of Altria Group, Inc.'s’s equity investment in SABMiller is based on unadjusted quoted prices in active markets and is classified in levelLevel 1 of the fair value hierarchy. The fair value of Altria Group, Inc.'s’s equity investment in SABMiller at December 31, 20122013 and 20112012, was $19.822.1 billion and $15.219.8 billion, respectively, as compared with its carrying value of $6.66.5 billion and $5.56.6 billion, respectively.
At December 31, 2013, Altria Group, Inc.’s earnings reinvested in the business on its consolidated balance sheet included approximately $2.7 billion of undistributed earnings from its equity investment in SABMiller.
Note 7. Finance Assets, net
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its existing portfolio of finance assets in order to maximize gainsits operating results and generate cash flowflows from its existing lease portfolio activities and asset sales and related activities.sales. Accordingly, PMCC'sPMCC’s operating companies income will fluctuate over time as investments mature or are sold. During
At 2012December 31, 2013, 2011 and 2010, proceeds from asset management activities and recoveries onfinance assets, net, of $1,997 million were comprised of investments in finance leases of $2,049 million, reduced by the saleallowance for losses of bankruptcy claims on, as well as the sale of aircraft under, its leases to American Airlines, Inc. ("American"), which filed for bankruptcy on November 29, 2011, totaled $1,049 million, $490 million and $312 million, respectively. Gains, net included in operating companies income during 2012, 2011 and 2010 totaled $131 million, $107 million and $72 million, respectively.
$52 million. At December 31, 2012, finance assets, net, of $2,581 million were comprised of investments in finance leases of $2,680 million, reduced by the allowance for losses of $99 million. At December 31, 2011, finance assets, net, of $3,559 million were comprised of investments in finance leases of $3,786 million, reduced by the allowance for losses of $227 million.
During the second quarter of 2012,, Altria Group, Inc. entered into a closing agreement (the "Closing Agreement"“Closing Agreement”) with the Internal Revenue Service ("IRS"(the “IRS”) that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68$68 million during the second quarter of 2012 due primarily to lower than estimated interest on tax underpayments. During the second quarter of 2011,, Altria Group, Inc. recorded a charge of $627$627 million related to the federal income tax treatment of these transactions (the "2011“2011 PMCC Leveraged Lease Charge"Charge”). Approximately 50% of the charge ($($315 million)million) represented a reduction in cumulative lease earnings recorded as of the date of the
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
charge that will be recaptured over the remainder of the terms of the affected leases. The remaining portion of the charge
($312 million)million) primarily represented a permanent charge for interest on tax underpayments.
For the years ended December 31, 2012 and 2011,, the benefit/charge associated with PMCC'sPMCC’s leveraged lease transactions was recorded in Altria Group, Inc.'s’s consolidated statements of earnings as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | For the Year Ended December 31, 2012 | | For the Year Ended December 31, 2011 |
| | | Net Revenues |
| | Benefit for Income Taxes |
| | Total |
| | Net Revenues |
| | (Benefit) Provision for Income Taxes |
| | Total |
|
| Reduction to cumulative lease earnings | | $ | 7 |
| | $ | (2 | ) | | $ | 5 |
| | $ | 490 |
| | $ | (175 | ) | | $ | 315 |
|
| Interest on tax underpayments | | — |
| | (73 | ) | | (73 | ) | | — |
| | 312 |
| | 312 |
|
| Total | | $ | 7 |
| | $ | (75 | ) | | $ | (68 | ) | | $ | 490 |
| | $ | 137 |
| | $ | 627 |
|
See Note 14. Income Taxes and Note 18. Contingenciesfor a further discussion of the Closing Agreement and the PMCCAgreement.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
leveraged lease benefit/charge.
A summary of the net investments in finance leases at December 31, 20122013 and 20112012 before allowance for losses was as follows: | | | | Leveraged Leases | | Direct Finance Leases | | Total | Leveraged Leases | | Direct Finance Leases | | Total |
| (in millions) | 2012 |
| | 2011 |
| | 2012 |
| | 2011 |
| | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
| Rents receivable, net | $ | 2,378 |
| | $ | 3,926 |
| | $ | 116 |
| | $ | 162 |
| | $ | 2,494 |
| | $ | 4,088 |
| $ | 1,423 |
| | $ | 2,378 |
| | $ | 72 |
| | $ | 116 |
| | $ | 1,495 |
| | $ | 2,494 |
|
| Unguaranteed residual values | 1,068 |
| | 1,306 |
| | 87 |
| | 86 |
| | 1,155 |
| | 1,392 |
| 1,040 |
| | 1,068 |
| | 87 |
| | 87 |
| | 1,127 |
| | 1,155 |
|
| Unearned income | (968 | ) | | (1,692 | ) | | (1 | ) | | (2 | ) | | (969 | ) | | (1,694 | ) | (572 | ) | | (968 | ) | | (1 | ) | | (1 | ) | | (573 | ) | | (969 | ) |
| Investments in finance leases | 2,478 |
| | 3,540 |
| | 202 |
| | 246 |
| | 2,680 |
| | 3,786 |
| 1,891 |
| | 2,478 |
| | 158 |
| | 202 |
| | 2,049 |
| | 2,680 |
|
| Deferred income taxes | (1,654 | ) | | (2,793 | ) | | (89 | ) | | (107 | ) | | (1,743 | ) | | (2,900 | ) | (1,376 | ) | | (1,654 | ) | | (64 | ) | | (89 | ) | | (1,440 | ) | | (1,743 | ) |
| Net investments in finance leases | $ | 824 |
| | $ | 747 |
| | $ | 113 |
| | $ | 139 |
| | $ | 937 |
| | $ | 886 |
| $ | 515 |
| | $ | 824 |
| | $ | 94 |
| | $ | 113 |
| | $ | 609 |
| | $ | 937 |
|
For leveraged leases, rents receivable, net, represent unpaid rents, net of principal and interest payments on third-party nonrecourse debt. PMCC'sPMCC’s rights to rents receivable are subordinate to the third-party nonrecourse debtholders and the leased equipment is pledged as collateral to the debtholders. The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt of $3.92.8 billion and $6.83.9 billion at December 31, 20122013 and 20112012, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 20122013 and 20112012.
At December 31, 20122013, PMCC'sPMCC’s investments in finance leases were principally comprised of the following investment categories: aircraft (33%39%), rail and surface transport (24%23%), electric power (24%19%), real estate (13%15%) and manufacturing (6%4%). There were no investments located outside the United States at December 31, 2013 and 2012. Investments located outside the United States, which were all U.S. dollar-denominated, represented 13% of PMCC's investments in finance leases at December 31, 2011.
Rents receivable in excess of debt service requirements on third-party nonrecourse debt related to leveraged leases and rents receivable from direct finance leases at December 31, 20122013 were as follows:
|
| | | | | | | | | | | |
| (in millions) | Leveraged Leases |
| | Direct Finance Leases |
| | Total |
|
| 2014 | $ | 92 |
| | $ | 45 |
| | $ | 137 |
|
| 2015 | 229 |
| | — |
| | 229 |
|
| 2016 | 53 |
| | — |
| | 53 |
|
| 2017 | 81 |
| | — |
| | 81 |
|
| 2018 | 170 |
| | — |
| | 170 |
|
| Thereafter | 798 |
| | 27 |
| | 825 |
|
| Total | $ | 1,423 |
| | $ | 72 |
| | $ | 1,495 |
|
|
| | | | | | | | | | | |
| (in millions) | Leveraged Leases |
| | Direct Finance Leases |
| | Total |
|
| 2013 | $ | 92 |
| | $ | 45 |
| | $ | 137 |
|
| 2014 | 136 |
| | 45 |
| | 181 |
|
| 2015 | 275 |
| | — |
| | 275 |
|
| 2016 | 99 |
| | — |
| | 99 |
|
| 2017 | 151 |
| | — |
| | 151 |
|
| Thereafter | 1,625 |
| | 26 |
| | 1,651 |
|
| Total | $ | 2,378 |
| | $ | 116 |
| | $ | 2,494 |
|
51
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Included in net revenues for the years ended December 31, 20122013, 20112012 and 20102011, were leveraged lease revenues of $209 million, $149 million, and $(314) million, which includes a reduction to cumulative lease earnings of $490$490 million as a result of the 2011 PMCC Leveraged Lease Charge, and $160 million, respectively, and
direct finance lease revenues of $1$1 million for each of the years ended December 31, 2013, 2012 2011 and 2010.2011. Income tax expense (benefit), excluding interest on tax underpayments, on leveraged lease revenues for the years ended December 31, 20122013, 20112012 and 20102011, was $80 million, $54 million, and $(112) million and $58 million, respectively.
Income from investment tax credits on leveraged leases, and initial direct and executory costs on direct finance leases, were not significant during 20122013, 20112012 and 20102011.
PMCC maintains an allowance for losses whichthat provides for estimated losses on its investments in finance leases. PMCC'sPMCC’s portfolio consists of leveraged and direct finance leases to a diverse base of lessees participating in a wide variety of industries. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses.
Quantitative factors that indicate potential default are tied most directly to public debt ratings. PMCC monitors all publicly available information on its obligors, including financial statements and credit rating agency reports. Qualitative factors that indicate the likelihood of recovery if default were to occur include, but are not limited to, underlying collateral value, other forms of credit support, and legal/structural considerations impacting each lease. Using all available information, PMCC calculates potential losses for each lease in its portfolio based on its default and recovery assumption for each lease. The aggregate of these potential losses forms a range of potential losses which is used as a guideline to determine the adequacy of PMCC'sPMCC’s allowance for losses.
PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. PMCC believes that, as of December 31, 20122013, the allowance for losses of $99$52 million is was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may have to increase or decrease its allowance for losses if such conditions worsen.change in the future.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The activity in the allowance for losses on finance assets for the years ended December 31, 20122013, 20112012 and 20102011 was as follows:
|
| | | | | | | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Balance at beginning of year | $ | 227 |
| | $ | 202 |
| | $ | 266 |
|
| (Decrease) increase to allowance | (10 | ) | | 25 |
| | — |
|
| Amounts written-off | (118 | ) | | — |
| | (64 | ) |
| Balance at end of year | $ | 99 |
| | $ | 227 |
| | $ | 202 |
|
PMCC had 28 aircraft on lease to American on November 29, 2011 when American filed for bankruptcy. As of the date of the bankruptcy filing, PMCC stopped recording income on its $140 million investment in finance leases from American. After assessing its allowance for losses, including the impact of the American bankruptcy filing, PMCC increased its allowance for losses by $60 million during the fourth quarter of 2011. During 2012, various developments in the bankruptcy of American, including the rejection and foreclosure of certain leases, the purchase by American of certain aircraft and the restructuring of leases at reduced rent levels, resulted in a $118 million aggregate write-off of the related investment in finance lease balance against PMCC's allowance for losses. In addition, as a result of these developments, deferred taxes of $22 million were accelerated and PMCC recorded $34 million of pre-tax income primarily related to recoveries from the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American. At December 31, 2012, PMCC's remaining investment in finance leases from American was $6 million. |
| | | | | | | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Balance at beginning of year | $ | 99 |
| | $ | 227 |
| | $ | 202 |
|
| (Decrease) increase to allowance | (47 | ) | | (10 | ) | | 25 |
|
| Amounts written-off | — |
| | (118 | ) | | — |
|
| Balance at end of year | $ | 52 |
| | $ | 99 |
| | $ | 227 |
|
During 20122013, and 2012, PMCC determined that its allowance for losses exceeded the amount required based on management'smanagement’s assessment of the credit quality and size of PMCC'sPMCC’s leasing portfolio. As a result, for the years ended December 31, 2013 and 2012, PMCC reduced its allowance for losses by $10$47 million, which was and $10 million, respectively. These decreases to the allowance for losses were recorded as income in 2012.a reduction to marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings.
The net increase to PMCC'sPMCC’s allowance for losses of $25$25 million in 2011 was comprised of the $60a $60 million increase to the allowance for losses during the fourth quarter of 2011 related to American as discussed above,Airlines, Inc.’s (“American”) bankruptcy filing in November 2011. This increase to the allowance for losses was partially offset by a $35$35 million reduction to the allowance for losses recorded during the third quarter of 2011, when PMCC determined that its allowance for losses exceeded the amount required based on management'smanagement’s assessment of the credit quality of thePMCC’s leasing portfolio at that time, including reductions in exposure to below investment grade lessees.
PMCC leased various types of automotive manufacturing equipment to General Motors Corporation ("GM"), which filed for bankruptcy on June 1, 2009. In 2010, as part of the GM bankruptcy reorganization, General Motors LLC ("New GM"), which is the successor of GM's North American automobile business, was involved in various actions with PMCC relating The net increase to the allowance for losses was recorded as an increase to marketing, administration and research costs on Altria Group, Inc.’s consolidated statement of earnings.
In addition, as a result of developments related to the American bankruptcy, of GM, including a rebate of a portion of its future rents, which resulted in a $64PMCC wrote off $118 million write-off of the related investment in finance lease balance against PMCC'sits allowance for losses during 2012. Also during 2012, PMCC recorded $34 million of pre-tax income primarily related to recoveries from the sale of bankruptcy claims on, as well as the accelerationsale of deferred taxesaircraft under, its leases to American. During the first quarter of $34 million2013, PMCC sold its remaining interest in 2010. At December 31, 2012 and 2011, PMCC's investment in finance leases from New GM was $93 million and $101 million, respectively.the American aircraft leases.
All PMCC lessees including American under its restructured leases and GM, were current on their lease payment obligations as of December 31, 20122013.
The credit quality of PMCC'sPMCC’s investments in finance leases as assigned by Standard & Poor's RatingPoor’s Ratings Services ("(“Standard & Poor's"Poor’s”) and Moody’s InvestorInvestors Service, Inc. ("Moody's"(“Moody’s”) at December 31, 20122013 and 20112012 was as follows:
|
| | | | | | | |
| (in millions) | 2013 |
| | 2012 |
|
| Credit Rating by Standard & Poor’s/Moody’s: | | | |
| “AAA/Aaa” to “A-/A3” | $ | 464 |
| | $ | 961 |
|
| “BBB+/Baa1” to “BBB-/Baa3” | 927 |
| | 938 |
|
| “BB+/Ba1” and Lower | 658 |
| | 781 |
|
| Total | $ | 2,049 |
| | $ | 2,680 |
|
|
| | | | | | | |
| (in millions) | 2012 |
| | 2011 |
|
| Credit Rating by Standard & Poor’s/Moody’s: | | | |
| “AAA/Aaa” to “A-/A3” | $ | 961 |
| | $ | 1,570 |
|
| “BBB+/Baa1” to “BBB-/Baa3” | 938 |
| | 1,080 |
|
| “BB+/Ba1” and Lower | 781 |
| | 1,136 |
|
| Total | $ | 2,680 |
| | $ | 3,786 |
|
52
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 8. Short-Term Borrowings and Borrowing Arrangements
At December 31, 20122013 and December 31, 20112012, Altria Group, Inc. had no short-term borrowings. The credit line available to Altria Group, Inc. at December 31, 20122013 under the Credit Agreement (as defined below) was $3.0 billion.
At December 31, 2012,During the third quarter of 2013, Altria Group, Inc. had in place aamended and restated its $3.0 billion senior unsecured 5-year5-year revolving credit agreement (the "Credit Agreement"to extend the expiration date to August 19, 2018, with an option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for two additional one-year periods (as amended and restated, the “Credit Agreement”). All other terms of the Credit Agreement remain substantially the same.
The Credit Agreement provides for borrowings up to an aggregate principal amount of $3.0 billion and expires on June 30, 2016. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria Group, Inc.'s’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate ("LIBOR"(“LIBOR”) plus a percentage equal to Altria Group, Inc.'s credit default swap spread subject to certain minimum rates and maximum rates based on the higher of the ratingratings of Altria Group, Inc.'s’s long-term senior unsecured debt from Standard & Poor'sPoor’s and Moody's.Moody’s. The applicable minimum and maximum ratespercentage based on Altria Group, Inc.'s’s long-term senior unsecured debt ratings at December 31, 20122013 for borrowings under the Credit Agreement are 0.75% and 1.75%, respectively.was 1.25%. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral.
The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.'s’s commercial paper issuances. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated EBITDAearnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, 20122013, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.81.7 to 1.0 and 7.08.4 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms "consolidated“consolidated EBITDA," "debt"” “debt” and "consolidated“consolidated interest expense,"” as defined in the Credit Agreement, include certain adjustments.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA (seeas further discussed in Note 19. Condensed Consolidating Financial InformationInformation.).
Note 9. Long-Term Debt
At December 31, 20122013 and 2011,2012, Altria Group, Inc.'s’s long-term debt, all of which was consumer products debt consisted of the following:
| | | (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Notes, 2.85% to 10.20%, interest payable semi-annually (average coupon interest rate 7.2%), due through 2042 | $ | 13,836 |
| | $ | 13,647 |
| |
| Debenture, 7.75% due 2027, interest payable semi-annually | 42 |
| | 42 |
| |
Notes, 2.85% to 10.20%, interest payable semi-annually, due through 2044 (a) | | $ | 14,475 |
| | $ | 13,836 |
|
| Debenture, 7.75%, interest payable semi-annually, due 2027 | | 42 |
| | 42 |
|
| | 13,878 |
| | 13,689 |
| 14,517 |
| | 13,878 |
|
| Less current portion of long-term debt | 1,459 |
| | 600 |
| 525 |
| | 1,459 |
|
| | $ | 12,419 |
| | $ | 13,089 |
| $ | 13,992 |
| | $ | 12,419 |
|
(a) Weighted-average coupon interest rate of 5.9% and 7.2% at December 31, 2013 and 2012, respectively.
Aggregate maturities of long-term debt are as follows:
| | | (in millions) | Altria Group, Inc. |
| | UST |
| | Total Long-Term Debt |
| Altria Group, Inc. |
| | UST |
| | Total Long-Term Debt |
|
| 2013 | $ | 1,459 |
| | $ | — |
| | $ | 1,459 |
| |
| 2014 | 525 |
| | — |
| | 525 |
| $ | 525 |
| | $ | — |
| | $ | 525 |
|
| 2015 | 1,000 |
| | — |
| | 1,000 |
| 1,000 |
| | — |
| | 1,000 |
|
| 2018 | 1,949 |
| | 300 |
| | 2,249 |
| 1,656 |
| | 300 |
| | 1,956 |
|
| 2019 | 1,351 |
| | — |
| | 1,351 |
| 1,144 |
| | — |
| | 1,144 |
|
| 2021 | | 1,500 |
| | — |
| | 1,500 |
|
| Thereafter | 7,342 |
| | — |
| | 7,342 |
| 8,442 |
| | — |
| | 8,442 |
|
Altria Group, Inc.'s’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 levelLevel 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.'s’s total long-term debt at December 31, 20122013 and 20112012, was $17.616.1 billion and $17.717.6 billion, respectively, as compared with its carrying value of $13.914.5 billion and $13.713.9 billion, respectively.
▪Altria Group, Inc. Senior Notes:On August 9, 2012,October 31, 2013, Altria Group, Inc. issued $1.9$1.4 billion aggregate principal amount of 2.85%4.0% senior unsecured long-term notes due 20222024 and $0.9$1.8 billion aggregate principal amount of 4.25%5.375% senior unsecured long-term notes due 2042.2044. Interest on these notes is payable semi-annually. The net proceeds from the issuancesissuance of these senior unsecured notes were added to Altria Group, Inc.'s’s general
funds and were used to repurchase certain of its senior unsecured notes in connection with the 2013 debt tender offer described below and for other general corporate purposes.
On May 2, 2013, Altria Group, Inc. issued $350 million aggregate principal amount of 2.95% senior unsecured long-term notes due 2023 and $650 million aggregate principal amount of 4.50% senior unsecured long-term notes due 2043. Interest on
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used for general corporate purposes.
The notes of Altria Group, Inc. are senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.'s’s existing and future senior unsecured indebtedness. With respect to substantially all of Altria Group, Inc.'s senior unsecured long-term notes, uponUpon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody's,Moody’s, Standard & Poor'sPoor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.
With respect to $8,2254,725 million aggregate principal amount of Altria Group, Inc.'s’s senior unsecured long-term notes issued in 20082009 and 2009,2008, the interest rate payable on each series of notes is subject to adjustment from time to time if the rating assigned to the notes of such series by Moody'sMoody’s or Standard & Poor'sPoor’s is downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes.
During the fourth quarter of 2013, senior unsecured notes issued by Altria Group, Inc. in the aggregate principal amount of $1,459 million matured and were repaid in full.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA (seeas further discussed in Note 19. Condensed Consolidating Financial Information).
| |
| ▪ | Debt Tender OfferOffers for Altria Group, Inc. Senior Notes:During the third quarter of 2012, Altria Group, Inc. completed a tender offer to purchase for cash $2.0 billion aggregate principal amount of certain of its senior unsecured notes. Altria Group, Inc. repurchased $1,151 million aggregate principal amount of its 9.70% notes due 2018, and $849 million aggregate principal amount of its 9.25% notes due 2019. As a result of the tender offer, during the third quarter of 2012, Altria Group, Inc. recorded a pre-tax loss on early extinguishment of debt of $874 million, which included debt tender premiums and fees of $864 million and the write-off of related unamortized debt discounts and debt issuance costs of $10 million. |
▪UST Senior Notes:During the fourth quarter of 2013 and the third quarter of 2012, senior unsecured notes issued by UST in the aggregate principal amount of $600 million matured and were repaid in full.
Altria Group, Inc. completed debt tender offers to purchase for cash aggregate principal amounts of $2.1 billion and Subsidiaries$2.0 billion, respectively, of certain of its senior unsecured notes. Details of these debt tender offers and the associated pre-tax losses on early extinguishment of debt recorded by Altria Group, Inc. were as follows:
Notes to Consolidated Financial Statements |
| | | | | | | |
| (in millions) | 2013 |
| | 2012 |
|
| | | | |
| Notes Purchased | | | |
| 9.95% Notes due 2038 | $ | 818 |
| | $ | — |
|
| 10.20% Notes due 2039 | 782 |
| | — |
|
| 9.70% Notes due 2018 | 293 |
| | 1,151 |
|
| 9.25% Notes due 2019 | 207 |
| | 849 |
|
| Total | $ | 2,100 |
| | $ | 2,000 |
|
| | | | |
| Pre-tax Loss On Early Extinguishment of Debt |
| Debt tender premiums and fees | $ | 1,054 |
| | $ | 864 |
|
| Write-off of unamortized debt discounts and debt issuance costs | 30 |
| | 10 |
|
| Total | $ | 1,084 |
| | $ | 874 |
|
_________________________
Note 10. Capital Stock
SharesAt December 31, 2013, Altria Group, Inc.’s shares of authorized common stock arewere 12 billion; issued, repurchased and outstanding shares of common stock were as follows:
| | | | Shares Issued |
| | Shares Repurchased |
| | Shares Outstanding |
| Shares Issued |
| | Shares Repurchased |
| | Shares Outstanding |
|
| Balances, December 31, 2009 | 2,805,961,317 |
| | (729,932,673 | ) | | 2,076,028,644 |
| |
Exercise of stock options and issuance of other stock-based awards | — |
| | 12,711,022 |
| | 12,711,022 |
| |
| Balances, December 31, 2010 | 2,805,961,317 |
| | (717,221,651 | ) | | 2,088,739,666 |
| 2,805,961,317 |
| | (717,221,651 | ) | | 2,088,739,666 |
|
Exercise of stock options and issuance of other stock-based awards | — |
| | 5,004,502 |
| | 5,004,502 |
| |
| Stock award activity | | — |
| | 5,004,502 |
| | 5,004,502 |
|
Repurchases of common stock | — |
| | (49,324,883 | ) | | (49,324,883 | ) | — |
| | (49,324,883 | ) | | (49,324,883 | ) |
| Balances, December 31, 2011 | 2,805,961,317 |
| | (761,542,032 | ) | | 2,044,419,285 |
| 2,805,961,317 |
| | (761,542,032 | ) | | 2,044,419,285 |
|
Exercise of stock options and issuance of other stock-based awards | — |
| | 181,011 |
| | 181,011 |
| |
| Stock award activity | | — |
| | 181,011 |
| | 181,011 |
|
Repurchases of common stock | — |
| | (34,860,000 | ) | | (34,860,000 | ) | — |
| | (34,860,000 | ) | | (34,860,000 | ) |
| Balances, December 31, 2012 | 2,805,961,317 |
| | (796,221,021 | ) | | 2,009,740,296 |
| 2,805,961,317 |
| | (796,221,021 | ) | | 2,009,740,296 |
|
| Stock award activity | | — |
| | 391,899 |
| | 391,899 |
|
Repurchases of common stock | | — |
| | (16,652,913 | ) | | (16,652,913 | ) |
| Balances, December 31, 2013 | | 2,805,961,317 |
| | (812,482,035 | ) | | 1,993,479,282 |
|
At December 31, 20122013, 47,221,91145,843,751 shares of common stock were reserved for stock-based awards under Altria Group, Inc.'s’s stock plans, and 10 million shares of Serial Preferred Stock,serial preferred stock, $1.00 par value, were authorized. No shares of Serial Preferred Stockserial preferred stock have been issued.
Note 11. Stock Plans
Under the Altria Group, Inc. 2010 Performance Incentive Plan (the "2010 Plan"“2010 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 50 million shares of common stock may be issued under the 2010 Plan. In addition, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. under the Stock Compensation Plan for Non-Employee Directors (the "Directors Plan"“Directors Plan”). Shares available to be granted under the 2010 Plan and the Directors Plan at December 31, 20122013, were 46,574,32745,254,733 and 592,681534,576, respectively.
▪Restricted and Deferred Stock: Altria Group, Inc. may grant shares of restricted stock and deferred stock to eligible
employees. TheseDuring the vesting period, these shares include nonforfeitable rights to dividends or dividend equivalents during the vesting period, butand may not be sold, assigned, pledged or otherwise encumbered. Such shares are subject to forfeiture if certain employment
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
conditions are not met. RestrictedShares ofrestricted stock and deferred stock generally vests on the third anniversary ofvest three years after the grant date.
The fair value of the shares of restricted stock and deferred stock at the date of grant is amortized to expense ratably over the restriction period, which is generally three years years.. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and deferred stock granted to employees for the years ended December 31, 20122013, 20112012 and 20102011 of $4649 million, $4746 million and $4447 million, respectively. The deferred tax benefit recorded related to this compensation expense was $1819 million, $18 million and $1618 million for the years ended December 31, 20122013, 20112012 and 20102011, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $6358 million at December 31, 20122013 and is expected to be recognized over a weighted-average period of approximately two years years..
Altria Group, Inc.'s’s restricted stock and deferred stock activity was as follows for the year ended December 31, 20122013:
| | | | Number of Shares |
| | Weighted-Average Grant Date Fair Value Per Share |
| Number of Shares |
| | Weighted-Average Grant Date Fair Value Per Share |
|
| Balance at December 31, 2011 | 8,410,416 |
| | $ | 20.17 |
| |
| Balance at December 31, 2012 | | 6,581,983 |
| | $ | 23.55 |
|
| Granted | 1,841,740 |
| | 28.77 |
| 1,443,460 |
| | 33.76 |
|
| Vested | (2,747,426 | ) | | 16.97 |
| (2,573,491 | ) | | 20.35 |
|
| Forfeited | (922,747 | ) | | 22.73 |
| (119,090 | ) | | 27.61 |
|
| Balance at December 31, 2012 | 6,581,983 |
| | 23.55 |
| |
| Balance at December 31, 2013 | | 5,332,862 |
| | 27.77 |
|
The weighted-average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, 20122013, 20112012 and 20102011 was $5349 million, $5453 million and $5354 million, respectively, or $28.7733.76, $24.3428.77 and
$19.9024.34 per restricted or deferred share, respectively. The total fair value of Altria Group, Inc. restricted stock and deferred stock vested during the years ended December 31, 20122013, 20112012 and 20102011 was $8189 million, $5681 million and $3356 million, respectively.
▪Stock Options: Altria Group, Inc. has not granted stock options to employees since 2002.
Altria Group, Inc.2002, and there have been no stock option activity was as follows for the year ended December 31, 2012:
|
| | | | | | |
| | Shares Subject to Options |
| | Weighted- Average Exercise Price |
|
| Balance at December 31, 2011 | 4,590 |
| | $ | 12.48 |
|
| Options exercised | (4,590 | ) | | 12.48 |
|
| Balance at December 31, 2012 | — |
| | — |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
options outstanding since February 29, 2012. The total intrinsic value of options exercised during the year ended December 31, 2012 was insignificant. The total intrinsic value of options exercised during the yearsyear ended December 31, 2011 and 2010 was $37 million and $110 million, respectively..
Note 12. Earnings per Share
Basic and diluted earnings per share ("EPS"(“EPS”) were calculated using the following:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Net earnings attributable to Altria Group, Inc. | $ | 4,180 |
| | $ | 3,390 |
| | $ | 3,905 |
| $ | 4,535 |
| | $ | 4,180 |
| | $ | 3,390 |
|
| Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares | (13 | ) | | (13 | ) | | (15 | ) | (12 | ) | | (13 | ) | | (13 | ) |
| Earnings for basic and diluted EPS | $ | 4,167 |
| | $ | 3,377 |
| | $ | 3,890 |
| $ | 4,523 |
| | $ | 4,167 |
| | $ | 3,377 |
|
| Weighted-average shares for basic EPS | 2,024 |
| | 2,064 |
| | 2,077 |
| |
| Add: Incremental shares from stock options | — |
| | — |
| | 2 |
| |
| Weighted-average shares for diluted EPS | 2,024 |
| | 2,064 |
| | 2,079 |
| |
| Weighted-average shares for basic and diluted EPS | | 1,999 |
| | 2,024 |
| | 2,064 |
|
Since February 29, 2012, there have been no stock options outstanding. For the 2012, and 2011 and 2010 computations, there were no antidilutive stock options.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 13. Accumulated Other Comprehensive Earnings/Losses
The following table setstables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:
| | | (in millions) | Currency Translation Adjustments |
| | Benefit Plans |
| | SABMiller |
| | Accumulated Other Comprehensive Losses |
| | Currency Translation Adjustments |
| | Benefit Plans |
| | SABMiller |
| | Accumulated Other Comprehensive Losses |
|
| Balances, December 31, 2009 | $ | 3 |
| | $ | (1,846 | ) | | $ | 282 |
| | $ | (1,561 | ) | |
| Period change, before deferred income taxes | 1 |
| | 58 |
| | 63 |
| | 122 |
| |
| Balances, December 31, 2010 | | | $ | 4 |
| | $ | (1,811 | ) | | $ | 323 |
| | $ | (1,484 | ) |
| Other comprehensive losses before reclassifications | | | (2 | ) | | (634 | ) | | (249 | ) | | (885 | ) |
| Deferred income taxes | — |
| | (23 | ) | | (22 | ) | | (45 | ) | | — |
| | 249 |
| | 87 |
| | 336 |
|
| Balances, December 31, 2010 | 4 |
| | (1,811 | ) | | 323 |
| | (1,484 | ) | |
| Period change, before deferred income taxes | (2 | ) | | (415 | ) | | (231 | ) | | (648 | ) | |
| Other comprehensive losses before reclassifications, net of deferred income taxes | | | (2 | ) | | (385 | ) | | (162 | ) | | (549 | ) |
| | | | | | | | | | |
| Amounts reclassified to net earnings | | | — |
| | 219 |
| | 18 |
| | 237 |
|
| Deferred income taxes | — |
| | 164 |
| | 81 |
| | 245 |
| | — |
| | (85 | ) | | (6 | ) | | (91 | ) |
| Amounts reclassified to net earnings, net of deferred income taxes | | | — |
| | 134 |
| | 12 |
| | 146 |
|
| | | | | | | | | | |
| Other comprehensive losses, net of deferred income taxes | | | (2 | ) | | (251 | ) | | (150 | ) | | (403 | ) |
| Balances, December 31, 2011 | 2 |
| | (2,062 | ) | | 173 |
| | (1,887 | ) | | 2 |
| | (2,062 | ) | | 173 |
| | (1,887 | ) |
| Period change, before deferred income taxes | — |
| | (574 | ) | | 306 |
| | (268 | ) | |
| Other comprehensive (losses) earnings before reclassifications | | | — |
| | (815 | ) | | 303 |
| | (512 | ) |
| Deferred income taxes | — |
| | 222 |
| | (107 | ) | | 115 |
| | — |
| | 315 |
| | (106 | ) | | 209 |
|
| Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes | | | — |
| | (500 | ) | | 197 |
| | (303 | ) |
| | | | | | | | | | |
| Amounts reclassified to net earnings | | | — |
| | 241 |
| | 3 |
| | 244 |
|
| Deferred income taxes | | | — |
| | (93 | ) | | (1 | ) | | (94 | ) |
| Amounts reclassified to net earnings, net of deferred income taxes | | | — |
| | 148 |
| | 2 |
| | 150 |
|
| Other comprehensive (losses) earnings, net of deferred income taxes | | | — |
| | (352 | ) | | 199 |
| | (153 | ) |
| | | | | | | | | | |
| Balances, December 31, 2012 | $ | 2 |
| | $ | (2,414 | ) | | $ | 372 |
| | $ | (2,040 | ) | | 2 |
| | (2,414 | ) | | 372 |
| | (2,040 | ) |
| Other comprehensive (losses) earnings before reclassifications | | | (2 | ) | | 1,559 |
| | (740 | ) | | 817 |
|
| Deferred income taxes | | | — |
| | (609 | ) | | 259 |
| | (350 | ) |
| Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes | | | (2 | ) | | 950 |
| | (481 | ) | | 467 |
|
| | | | | | | | | | |
| Amounts reclassified to net earnings | | | — |
| | 311 |
| | 6 |
| | 317 |
|
| Deferred income taxes | | | — |
| | (120 | ) | | (2 | ) | | (122 | ) |
| Amounts reclassified to net earnings, net of deferred income taxes | | | — |
| | 191 |
| | 4 |
| | 195 |
|
| | | | | | | | | | |
| Other comprehensive (losses) earnings, net of deferred income taxes | | | (2 | ) | | 1,141 |
| | (477 | ) | | 662 |
|
| Balances, December 31, 2013 | | | $ | — |
| | $ | (1,273 | ) | | $ | (105 | ) | | $ | (1,378 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
|
| | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (in millions) | | 2013 |
| | 2012 |
| | 2011 |
|
Benefit Plans: (a) | | | | | | |
| Net loss | | $ | 346 |
| | $ | 302 |
| | $ | 226 |
|
| Prior service cost/credit | | (35 | ) | | (61 | ) | | (7 | ) |
| | | 311 |
| | 241 |
| | 219 |
|
SABMiller (b) | | 6 |
| | 3 |
| | 18 |
|
| Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings | | $ | 317 |
| | $ | 244 |
| | $ | 237 |
|
(a) Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.
(b) Amounts are included in earnings from equity investment in SABMiller. For further information on Altria Group, Inc.’s equity investment in SABMiller, see Note 6. Investment in SABMiller.
Note 14. Income Taxes
Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 20122013, 20112012 and 20102011:
| | | (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Earnings before income taxes: | | | | | | | | | | |
| United States | $ | 6,461 |
| | $ | 5,568 |
| | $ | 5,709 |
| $ | 6,929 |
| | $ | 6,461 |
| | $ | 5,568 |
|
| Outside United States | 16 |
| | 14 |
| | 14 |
| 13 |
| | 16 |
| | 14 |
|
| Total | $ | 6,477 |
| | $ | 5,582 |
| | $ | 5,723 |
| $ | 6,942 |
| | $ | 6,477 |
| | $ | 5,582 |
|
| Provision for income taxes: | | | | | | | | | | |
| Current: | | | | | | | | | | |
| Federal | $ | 2,870 |
| | $ | 2,353 |
| | $ | 1,430 |
| $ | 2,066 |
| | $ | 2,870 |
| | $ | 2,353 |
|
| State and local | 348 |
| | 275 |
| | 258 |
| 423 |
| | 348 |
| | 275 |
|
| Outside United States | 5 |
| | 4 |
| | 4 |
| 4 |
| | 5 |
| | 4 |
|
| | 3,223 |
| | 2,632 |
| | 1,692 |
| 2,493 |
| | 3,223 |
| | 2,632 |
|
| Deferred: | | | | | | | | | | |
| Federal | (920 | ) | | (458 | ) | | 120 |
| (77 | ) | | (920 | ) | | (458 | ) |
| State and local | (9 | ) | | 15 |
| | 4 |
| (9 | ) | | (9 | ) | | 15 |
|
| | (929 | ) | | (443 | ) | | 124 |
| (86 | ) | | (929 | ) | | (443 | ) |
| Total provision for income taxes | $ | 2,294 |
| | $ | 2,189 |
| | $ | 1,816 |
| $ | 2,407 |
| | $ | 2,294 |
| | $ | 2,189 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Altria Group, Inc.'s’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2007 and forward, with years 2007 to 2009 currently under examination by the IRS as part of a routine audit conducted in the ordinary course of business. State jurisdictions have statutes of limitations generally ranging from three to four years. Certain of Altria Group, Inc.'s’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 20122013, 20112012 and 20102011 was as follows:
|
| | | | | | | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Balance at beginning of year | $ | 381 |
| | $ | 399 |
| | $ | 601 |
|
| Additions based on tax positions | | | | | |
| related to the current year | 15 |
| | 22 |
| | 21 |
|
| Additions for tax positions of | | | | | |
| prior years | 170 |
| | 71 |
| | 30 |
|
| Reductions for tax positions due to | | | | | |
| lapse of statutes of limitations | (16 | ) | | (39 | ) | | (58 | ) |
| Reductions for tax positions of | | | | | |
| prior years | (102 | ) | | (67 | ) | | (164 | ) |
| Settlements | (186 | ) | | (5 | ) | | (31 | ) |
| Balance at end of year | $ | 262 |
| | $ | 381 |
| | $ | 399 |
|
|
| | | | | | | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Balance at beginning of year | $ | 262 |
| | $ | 381 |
| | $ | 399 |
|
Additions based on tax positions related to the current year | 15 |
| | 15 |
| | 22 |
|
Additions for tax positions of prior years | 35 |
| | 170 |
| | 71 |
|
Reductions for tax positions due to lapse of statutes of limitations | (1 | ) | | (16 | ) | | (39 | ) |
Reductions for tax positions of prior years | — |
| | (102 | ) | | (67 | ) |
| Settlements | (84 | ) | | (186 | ) | | (5 | ) |
| Balance at end of year | $ | 227 |
| | $ | 262 |
| | $ | 381 |
|
Unrecognized tax benefits and Altria Group, Inc.'s’s consolidated liability for tax contingencies at December 31, 20122013 and 20112012, were as follows: |
| | | | | | | |
| (in millions) | 2013 |
| | 2012 |
|
| Unrecognized tax benefits — Altria Group, Inc. | $ | 188 |
| | $ | 156 |
|
| Unrecognized tax benefits — Mondelēz | 9 |
| | 9 |
|
| Unrecognized tax benefits — PMI | 30 |
| | 97 |
|
| Unrecognized tax benefits | 227 |
| | 262 |
|
| Accrued interest and penalties | 48 |
| | 66 |
|
| Tax credits and other indirect benefits | (14 | ) | | (20 | ) |
| Liability for tax contingencies | $ | 261 |
| | $ | 308 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
|
| | | | | | | |
| (in millions) | 2012 |
| | 2011 |
|
| Unrecognized tax benefits — Altria Group, Inc. | $ | 156 |
| | $ | 191 |
|
| Unrecognized tax benefits — Mondelēz | 9 |
| | 112 |
|
| Unrecognized tax benefits — PMI | 97 |
| | 78 |
|
| Unrecognized tax benefits | 262 |
| | 381 |
|
| Accrued interest and penalties | 66 |
| | 618 |
|
| Tax credits and other indirect benefits | (20 | ) | | (211 | ) |
| Liability for tax contingencies | $ | 308 |
| | $ | 788 |
|
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20122013 was $242212 million, along with $2015 million affecting deferred taxes. However, the impact on net earnings at December 31, 20122013 would be $136173 million, as a result of net receivables from Altria Group, Inc.'s’s former subsidiaries Kraft Foods Inc. (now known as Mondelēz International, Inc. ("(“Mondelēz"z”)) and Philip Morris International Inc. ("PMI"(“PMI”) of $9 million and $9730 million, respectively, discussed below. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 20112012 was $350242 million, along with $3120 million affecting deferred taxes. However, the impact on net earnings at December 31, 20112012 would be $160136 million, as a result of
receivables from Mondelēz and PMI of $1129 million and $7897 million, respectively, discussed below.
Under tax sharing agreements entered into in connection with the 2007 and 2008 spin-offs of Kraft Foodsbetween Altria Group, Inc. (now known asand its former subsidiaries Mondelēz)z and PMI, respectively, Mondelēz and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Mondelēz'sz’s and PMI'sPMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns. As a result, Altria Group, Inc.returns, and continues to include the pre-spin-off federal income tax reserves of Mondelēz and PMI of $9 million and $9730 million, respectively, in its liability for uncertain tax positions, andpositions. Altria Group, Inc. also includes corresponding receivables fromreceivables/payables from/to Mondelēz and PMI of $9 million and $97 million, respectively, in its assets.other assets and other liabilities on Altria Group, Inc.’s consolidated balance sheet at December 31, 2013.
During 2013, Altria Group, Inc. recorded a net tax benefit of $22 million for Mondelēz tax matters, primarily relating to the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years.
During 2012, Altria Group, Inc. recorded an additional income tax provision of $52$52 million for Mondelēz and PMI tax matters, primarily as a result of the closure in August 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries' (including Mondelēz and PMI)subsidiaries’ 2004-2006 tax years ("(“IRS 2004-2006 Audit"Audit”). In addition, as a result of the Closing Agreement with the IRS that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC, Altria Group, Inc. paid, in June 2012, $456 million in federal income taxes and related estimated interest on tax underpayments. In addition, Altria Group, Inc. expects to pay approximately $50 million in state taxes and related estimated interest, of which $28 million was paid in 2012, with the balance expected to be paid in 2013. The tax component of these payments represents an acceleration of federal and state income taxes that Altria Group, Inc. would have otherwise paid over the lease terms of these transactions. See Note 7. Finance Assets, net and Note 18. Contingencies for further discussion of the Closing Agreement and the PMCC leveraged lease benefit/charge.
During 2011, the IRS, Mondelēz and Altria Group, Inc. executed a closing agreement that resolved certain Mondelēz tax matters arising out of the IRS'sIRS’s examination of Altria Group, Inc.'s’s consolidated federal income tax returns for the years ended 2004-2006. As a result of this closing agreement and the resolution of various other Mondelēz tax matters, during 2011, Altria Group, Inc. recorded an additional income tax provision and associated interest of $14 million.
Altria Group, Inc. and the IRS executed a closing agreement during the second quarter of 2010 in connection with the IRS’s examination of Altria Group, Inc.'s consolidated federal income tax returns for the years 2000-2003, which resolved various tax matters for Altria Group, Inc. and its subsidiaries, including its former subsidiaries, Mondelēz and PMI. As a result of this closing agreement, Altria Group, Inc. paid the IRS approximately $945 million of tax and associated interest during the third quarter of 2010 with respect to certain PMCC leveraged lease transactions referred to by the IRS as lease-in/lease-out ("LILO") and sale-in/lease-out ("SILO") transactions, entered into during the 1996-2003 years. See Note 18. Contingencies for further
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
discussion of IRS challenges to PMCC leases. In addition, as a result of this closing agreement, in the second quarter of 2010, Altria Group, Inc. recorded (i) a $47 million income tax benefit primarily attributable to the reversal of tax reserves and associated interest related to AltriaGroup, Inc. and its current subsidiaries; and (ii) an incomeThe net tax benefit of $169$22 million attributable for the year ended December 31, 2013 was offset by the recording of a corresponding net payable to the reversal of federal income tax reserves and associated interest related to the resolution of certain Mondelēz, and PMI tax matters.
which was recorded as a decrease to operating income on Altria Group, Inc.’s consolidated statement of earnings for the year ended December 31, 2013. The additional income tax provisions of $52 million and $14 million for the years ended December 31, 2012 and 2011,, respectively, were offset by increases to the corresponding receivables from Mondelēz and PMI, which were recorded as increases to
operating income on Altria Group, Inc.'s’s consolidated statements of earnings for the years ended December 31, 2012 and 2011,, respectively. The income tax benefit of $169 million forDue to these offsets, the year ended December 31, 2010 was offset by a reduction to the corresponding receivables from Mondelēz and PMI which was recorded as a reduction to operating incometax matters had no impact on Altria Group, Inc.'s consolidated statement of’s net earnings for the year ended December 31, 2010. For the years ended December 31, 20122013, 20112012 and 20102011, there was no impact on Altria Group, Inc.'s net earnings associated with the Mondelēz and PMI tax matters discussed above..
Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. At December 31, 2013, Altria Group, Inc. had $48 million of accrued interest and penalties, of which approximately $2 million and $6 million related to Mondelēz and PMI, respectively, for which Mondelēz and PMI are responsible under their respective tax sharing agreements. At December 31, 2012, Altria Group, Inc. had $66 million of accrued interest and penalties, of which approximately $2 million and $18 million related to Mondelēz and PMI, respectively, for which Mondelēz and PMI are responsible under their respective tax sharing agreements. At December 31, 2011, Altria Group, Inc. had $618 million of accrued interest and penalties, of which approximately $39 million and $21 million related to Mondelēz and PMI, respectively. The corresponding receivables fromreceivables/payables from/to Mondelēz and PMI are included in assets and liabilities on Altria Group, Inc.'s’s consolidated balance sheets at December 31, 20122013 and 20112012.
For the years ended December 31, 20122013, 20112012 and 20102011, Altria Group, Inc. recognized in its consolidated statements of earnings $(88)5 million, $496(88) million and $(69)496 million, respectively, of gross interest expense (income) expense associated with uncertain tax positions, which in 2011 primarily relates to the 2011 PMCC Leveraged Lease Charge.
Altria Group, Inc. is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, sinceand such timing is not entirely within the control of Altria Group, Inc. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $90120 million, the majoritya portion of which would relate to the unrecognized tax benefits of Mondelēz and PMI, for which Altria Group, Inc. is indemnified
by Mondelēz and PMI under their respective tax sharing agreements.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 20122013, 20112012 and 20102011:
| | | | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| U.S. federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | |
| State and local income taxes, net | | | | | | |
| of federal tax benefit | 3.5 |
| | 3.8 |
| | 3.7 |
| |
State and local income taxes, net of federal tax benefit | | 3.8 |
| | 3.5 |
| | 3.8 |
|
| Uncertain tax positions | (0.7 | ) | | 5.5 |
| | (2.3 | ) | 0.7 |
| | (0.7 | ) | | 5.5 |
|
| SABMiller dividend benefit | (0.1 | ) | | (2.0 | ) | | (2.3 | ) | (2.0 | ) | | (0.1 | ) | | (2.0 | ) |
| Domestic manufacturing deduction | (2.0 | ) | | (2.4 | ) | | (2.4 | ) | (2.7 | ) | | (2.0 | ) | | (2.4 | ) |
| Other | (0.3 | ) | | (0.7 | ) | | — |
| (0.1 | ) | | (0.3 | ) | | (0.7 | ) |
| Effective tax rate | 35.4 | % | | 39.2 | % | | 31.7 | % | 34.7 | % | | 35.4 | % | | 39.2 | % |
The tax provision in 2013 included net tax benefits of (i) $39 million from the reversal of tax accruals no longer required that
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
was recorded during the third quarter of 2013 ($25 million) and fourth quarter of 2013 ($14 million); (ii) $25 million related to the recognition of previously unrecognized foreign tax credits primarily associated with SABMiller dividends that were recorded during the fourth quarter of 2013; and (iii) $22 million for Mondelēz tax matters discussed above. The tax provision in 2013 also included a reduction in certain consolidated tax benefits resulting from the 2013 debt tender offer that is discussed further in Note 9. Long-Term Debt.
The tax provision in 2012 includesincluded (i) a (i) $73$73 million interest benefit resulting primarily from lower than estimated interest on tax underpayments related to the Closing Agreement with the IRS;Agreement; (ii) the reversal of tax reserves and associated interest of $53$53 million due primarily to the closure of the IRS 2004-2006 Audit;Audit that was recorded during the third quarter of 2012; and (iii) an additional tax provision of $52$52 million related to the resolution of various Mondelēz and PMI tax matters. These amounts are primarily reflected in uncertain tax positions shown in the table above. The 2012 reductions in SABMiller dividend benefit and domestic manufacturing deduction shown in the table above includes a reduction in consolidated tax benefits resulting from the 2012 debt tender offer. Seeoffer that is discussed further in Note 9. Long-Term Debtfor further discussion.
In addition, as a result of the Closing Agreement, Altria Group, Inc. paid, in June 2012, debt tender offer. $456 million in federal income taxes and related estimated interest on tax underpayments. The tax component of these payments represents an acceleration of federal income taxes that Altria Group, Inc. would have otherwise paid over the lease terms of the subject lease transactions. Altria Group, Inc. previously paid a total of approximately $1.1 billion ($945 million in 2010) in federal income taxes and interest with respect to these transactions. Altria Group, Inc. treated the $1.1 billion paid to the IRS as deposits for financial reporting purposes pending the ultimate outcomes of the litigation and did not include such amounts in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows in the years paid. During the years ended December 31, 2012 and 2011, Altria Group, Inc. relinquished its right to seek refunds of the deposits and included approximately $750 million and $362 million, respectively, in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows.
The tax provision in 2011 includesincluded a $312$312 million charge that primarily represents a permanent charge for interest, net of income tax benefit, on tax underpayments, associated with the 2011 PMCC Leveraged Lease Charge, which was recorded during the second quarter of 2011 and is reflected in uncertain tax positions above.Charge. The tax provision in 2011 also includesincluded tax benefits of $77$77 million primarily attributable to the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. TheThese amounts are primarily reflected in uncertain tax provisionpositions shown in 2010 includes tax benefits of $216 million from the reversal of tax reserves and associated interest resulting from the executiontable above.
For further discussion of the 2010 closing agreement with the IRS discussed above. The tax provision in 2010 also includes tax benefits of $64 million from the reversal of tax reserves and associated interest following the resolution of several state auditsClosing Agreement and the expiration of statutes of limitations.2011 PMCC Leveraged Lease Charge, see Note 7. Finance Assets, net.
The tax effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 20122013 and 20112012:
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
|
| | | | | | | |
| (in millions) | 2012 |
| | 2011 |
|
| Deferred income tax assets: | | | |
| Accrued postretirement and | | | |
| postemployment benefits | $ | 1,101 |
| | $ | 1,087 |
|
| Settlement charges | 1,419 |
| | 1,382 |
|
| Accrued pension costs | 549 |
| | 458 |
|
| Net operating losses and tax credit | | | |
| carryforwards | 208 |
| | 96 |
|
| Total deferred income tax assets | 3,277 |
| | 3,023 |
|
| Deferred income tax liabilities: | | | |
| Property, plant and equipment | (475 | ) | | (511 | ) |
| Intangible assets | (3,787 | ) | | (3,721 | ) |
| Investment in SABMiller | (2,198 | ) | | (1,803 | ) |
| Other | (166 | ) | | (251 | ) |
| Total deferred income tax liabilities | (6,626 | ) | | (6,286 | ) |
| Valuation allowances | (184 | ) | | (82 | ) |
| Net deferred income tax liabilities | $ | (3,533 | ) | | $ | (3,345 | ) |
Financial services deferred income tax liabilities of $1,699 million and $2,811 million at December 31, 2012 and 2011, respectively, are not included in the table above. These amounts, which are primarily attributable to temporary differences relating to net investments in finance leases, are included in total financial services liabilities on Altria Group, Inc.'s consolidated balance sheets at December 31, 2012 and 2011. |
| | | | | | | |
| (in millions) | 2013 |
| | 2012 |
|
| Deferred income tax assets: | | | |
| Accrued postretirement and postemployment benefits | $ | 934 |
| | $ | 1,109 |
|
| Settlement charges | 1,338 |
| | 1,419 |
|
| Accrued pension costs | 33 |
| | 549 |
|
| Net operating losses and tax credit carryforwards | 331 |
| | 208 |
|
| Total deferred income tax assets | 2,636 |
| | 3,285 |
|
| Deferred income tax liabilities: | | | |
| Property, plant and equipment | (462 | ) | | (475 | ) |
| Intangible assets | (3,848 | ) | | (3,787 | ) |
| Investment in SABMiller | (2,135 | ) | | (2,198 | ) |
| Finance assets, net | (1,424 | ) | | (1,706 | ) |
| Other | (190 | ) | | (167 | ) |
| Total deferred income tax liabilities | (8,059 | ) | | (8,333 | ) |
| Valuation allowances | (195 | ) | | (184 | ) |
| Net deferred income tax liabilities | $ | (5,618 | ) | | $ | (5,232 | ) |
At December 31, 20122013, Altria Group, Inc. had estimated gross state tax net operating losses of $706553 million that, if unutilized,unused, will expire in 20132014 through 20322033, state tax credit carryforwards of $7468 million that, if unutilized,unused, will expire in 2014 through 2017, and foreign tax credit carryforwards of $132261 million that, if unutilized,unused, will expire in 2020 through 20222023. Realization of these benefits is dependent upon various factors such as generating sufficient taxable income in the applicable states and receiving sufficient amounts of lower-taxed foreign dividends from SABMiller. A valuation allowance is recorded against certain state net operating losses and tax credit carryforwards due to uncertainty regarding their utilization.of $195 million has been established for these benefits that more-likely-than-not will not be realized.
Note 15. Segment Reporting
The products of Altria Group, Inc.'s consumer products’s subsidiaries include smokeable products comprised of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; smokeless products manufactured and sold by or on behalf of USSTC and PM USA; and wine produced and/or distributed by Ste. Michelle. Another subsidiary of Altria Group, Inc., PMCC, maintains a portfolio of leveraged and direct finance leases. The products and services of these subsidiaries constitute Altria Group, Inc.'s 2012’s reportable segments of smokeable products, smokeless products wine and wine. The financial services.services and the alternative products businesses are included in all other.
As discussed in Note 1. Background and Basis of Presentation, beginning with the first quarter of 2012,2013, Altria Group, Inc. revised its reportable segments. Prior-periodPrior years’ segment data have been recast to conform with the current-periodcurrent year’s segment presentation.
Altria Group, Inc.'s’s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.'s’s chief operating decision maker. Information about total assets by segment is not disclosed because such information is not reported to or used by Altria Group, Inc.'s’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 3. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.
Segment data were as follows:
| | | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Net revenues: | | | | | | | | | | |
| Smokeable products | $ | 22,216 |
| | $ | 21,970 |
| | $ | 22,191 |
| $ | 21,868 |
| | $ | 22,216 |
| | $ | 21,970 |
|
| Smokeless products | 1,691 |
| | 1,627 |
| | 1,552 |
| 1,778 |
| | 1,691 |
| | 1,627 |
|
| Wine | 561 |
| | 516 |
| | 459 |
| 609 |
| | 561 |
| | 516 |
|
| Financial services | 150 |
| | (313 | ) | | 161 |
| |
| All other | | 211 |
| | 150 |
| | (313 | ) |
| Net revenues | $ | 24,618 |
| | $ | 23,800 |
| | $ | 24,363 |
| $ | 24,466 |
| | $ | 24,618 |
| | $ | 23,800 |
|
| Earnings before income taxes: | | | | | | | | | | |
Operating companies income (loss): | | | | | | | | | | |
| Smokeable products | $ | 6,239 |
| | $ | 5,737 |
| | $ | 5,618 |
| $ | 7,063 |
| | $ | 6,239 |
| | $ | 5,737 |
|
| Smokeless products | 931 |
| | 859 |
| | 803 |
| 1,023 |
| | 931 |
| | 859 |
|
| Wine | 104 |
| | 91 |
| | 61 |
| 118 |
| | 104 |
| | 91 |
|
| Financial services | 176 |
| | (349 | ) | | 157 |
| |
| All other | | 157 |
| | 176 |
| | (349 | ) |
| Amortization of intangibles | (20 | ) | | (20 | ) | | (20 | ) | (20 | ) | | (20 | ) | | (20 | ) |
| General corporate expenses | (228 | ) | | (256 | ) | | (216 | ) | (235 | ) | | (229 | ) | | (264 | ) |
| Changes to Mondelēz and | | | | | | |
| PMI tax-related receivables | 52 |
| | 14 |
| | (169 | ) | |
| Corporate asset impairment | | | | | | |
| and exit costs | (1 | ) | | (8 | ) | | (6 | ) | |
| Changes to Mondelēz and PMI tax-related receivables/payables | | (22 | ) | | 52 |
| | 14 |
|
| Operating income | 7,253 |
| | 6,068 |
| | 6,228 |
| 8,084 |
| | 7,253 |
| | 6,068 |
|
| Interest and other debt | | | | | | |
| expense, net | (1,126 | ) | | (1,216 | ) | | (1,133 | ) | |
| Loss on early | | | | | | |
| extinguishment of debt | (874 | ) | | — |
| | — |
| |
| Earnings from equity | | | | | | |
| investment in SABMiller | 1,224 |
| | 730 |
| | 628 |
| |
| Interest and other debt expense, net | | (1,049 | ) | | (1,126 | ) | | (1,216 | ) |
| Loss on early extinguishment of debt | | (1,084 | ) | | (874 | ) | | — |
|
| Earnings from equity investment in SABMiller | | 991 |
| | 1,224 |
| | 730 |
|
| Earnings before income taxes | $ | 6,477 |
| | $ | 5,582 |
| | $ | 5,723 |
| $ | 6,942 |
| | $ | 6,477 |
| | $ | 5,582 |
|
The smokeable products segment included net revenues of $21,61521,308 million, $21,40321,615 million and $21,63121,403 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively, related to cigarettes and net revenues of $601560 million, $567601 million and $560567 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively, related to cigars.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
PM USA, USSTC and Middleton'sMiddleton’s largest customer, McLane Company, Inc., accounted for approximately 27% of Altria Group, Inc.'s’s consolidated net revenues for each of the years
ended December 31, 20122013, 20112012 and 20102011. These net revenues were reported in the smokeable products and smokeless products segments. Sales to three distributors accounted for approximately 66%, 66% and 65% of net revenues for the wine segment for each of the years ended December 31, 20122013, 20112012 and 20102011, respectively..
Details of Altria Group, Inc.’s depreciation expense and capital expenditures were as follows: |
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Depreciation expense: | | | | | |
| Smokeable products | $ | 113 |
| | $ | 125 |
| | $ | 145 |
|
| Smokeless products | 25 |
| | 26 |
| | 31 |
|
| Wine | 30 |
| | 27 |
| | 25 |
|
| Corporate and other | 24 |
| | 27 |
| | 32 |
|
| Total depreciation expense | $ | 192 |
| | $ | 205 |
| | $ | 233 |
|
| Capital expenditures: | | | | | |
| Smokeable products | $ | 39 |
| | $ | 48 |
| | $ | 46 |
|
| Smokeless products | 32 |
| | 36 |
| | 24 |
|
| Wine | 42 |
| | 30 |
| | 25 |
|
| Corporate and other | 18 |
| | 10 |
| | 10 |
|
| Total capital expenditures | $ | 131 |
| | $ | 124 |
| | $ | 105 |
|
Items affecting the comparability of net revenues and/or operating companies income (loss) for the reportable segments were as follows:
▪PMCC Leveraged Lease Benefit/Charge:Non-Participating Manufacturer (“NPM”) Adjustment Items: During 2012, Altria Group, Inc. entered intoFor the Closing Agreement with the IRS, which included a pre-tax charge of $7 million that was recorded as a decrease to PMCC's net revenues and operating companies income. During 2011, Altria Group, Inc. recorded the 2011 PMCC Leveraged Lease Charge, which included a pre-tax charge of $490 million that was recorded as a decrease to PMCC's net revenues and operating companies income. See Note 7. Finance Assets, net, Note 14. Income Taxes and Note 18. Contingencies for further discussion of this matter.
▪PMCC Recoveries and Allowance for Losses: During 2012, PMCCyear ended December 31, 2013, PM USA recorded pre-tax income of $34 million primarily related to recoveries from the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American. In addition, during 2012, PMCC decreased its allowance for losses by $10664 million, which was recorded as an increase toincreased operating companies income. During 2011, PMCC increased its allowanceincome in the smokeable products segment. This recording of pre-tax income resulted from the following:
| |
| ▪ | a reduction to cost of sales of $519 million for the settlement of disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (the “MSA”) for the years 2003 - 2012; and |
| |
| ▪ | a reduction to cost of sales of $145 million for the September 11, 2013 diligent enforcement rulings of the arbitration panel presiding over the NPM adjustment dispute for 2003. |
For further discussion of these items (which are referred to collectively as the “NPM Adjustment Items”), see Possible Adjustments in MSA Payments for losses by $25 million2003 - 2012, which was recorded as a decrease to operating companies income. Seein Note 7.18. Finance Assets, net.Contingencies.
▪Tobacco and Health Judgments: During 2012, 2011 and 2010, pre-tax charges, excluding accrued interest of $1 million, $64 million and $5 million, respectively, related to certain tobacco and health judgments, were recorded in operating companies income as follows:
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Smokeable products | $ | 4 |
| | $ | 98 |
| | $ | 11 |
|
| Smokeless products | — |
| | — |
| | 5 |
|
| Total | $ | 4 |
| | $ | 98 |
| | $ | 16 |
|
The pre-tax charges in 2011 related to the Williams, Bullock and Scott cases. The pre-tax charges in 2010 included a settlement of $5 million. See Note 18. Contingencies for further discussion.pre-tax charges related to tobacco and health judgments recorded in operating companies income in the smokeable products segment.
▪Asset Impairment, Exit, Implementation and Integration Costs: See Note 4. Asset Impairment, Exit, Implementation and Integration Costs for a breakdown of these costs by segment.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Depreciation expense: | | | | | |
| Smokeable products | $ | 125 |
| | $ | 145 |
| | $ | 167 |
|
| Smokeless products | 26 |
| | 31 |
| | 32 |
|
| Wine | 27 |
| | 25 |
| | 23 |
|
| Corporate | 27 |
| | 32 |
| | 34 |
|
| Total depreciation expense | $ | 205 |
| | $ | 233 |
| | $ | 256 |
|
| Capital expenditures: | | | | | |
| Smokeable products | $ | 48 |
| | $ | 46 |
| | $ | 70 |
|
| Smokeless products | 36 |
| | 24 |
| | 19 |
|
| Wine | 30 |
| | 25 |
| | 22 |
|
| Corporate | 10 |
| | 10 |
| | 57 |
|
| Total capital expenditures | $ | 124 |
| | $ | 105 |
| | $ | 168 |
|
Effective with the first quarter of 2013, Altria Group, Inc.'s reportable segments will be smokeable products, smokeless products and wine. In connection with this revision, results of the financial services business and the alternative products business will be combined in an All Other category. Altria Group, Inc. is making these changes dueand Subsidiaries
Notes to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc's alternative products business to its consolidated results. Altria Group, Inc. will begin reporting the All Other category and presenting comparable results for prior periods with its 2013 first-quarter results.Consolidated Financial Statements
_________________________
Note 16. Benefit Plans
Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.
The plan assets and benefit obligations of Altria Group, Inc.'s’s pension plans and the benefit obligations of Altria Group, Inc.'s’s postretirement plans are measured at December 31 of each year.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Pension Plans
▪Obligations and Funded Status: The projected benefit obligations, plan assets and funded status of Altria Group, Inc.'s’s pension plans at December 31, 20122013 and 20112012, were as follows:
| | | (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
Projected benefit obligation at beginning of year | $ | 6,965 |
| | $ | 6,439 |
| $ | 7,924 |
| | $ | 6,965 |
|
| Service cost | 79 |
| | 74 |
| 86 |
| | 79 |
|
| Interest cost | 344 |
| | 351 |
| 314 |
| | 344 |
|
| Benefits paid | (420 | ) | | (371 | ) | (410 | ) | | (420 | ) |
| Actuarial losses | 956 |
| | 460 |
| |
| Termination and curtailment | — |
| | 17 |
| |
| Actuarial (gains) losses | | (784 | ) | | 956 |
|
| Other | — |
| | (5 | ) | 7 |
| | — |
|
| Projected benefit obligation at end of year | 7,924 |
| | 6,965 |
| 7,137 |
| | 7,924 |
|
Fair value of plan assets at beginning of year | 5,275 |
| | 5,218 |
| 6,167 |
| | 5,275 |
|
| Actual return on plan assets | 755 |
| | 188 |
| 927 |
| | 755 |
|
| Employer contributions | 557 |
| | 240 |
| 393 |
| | 557 |
|
| Benefits paid | (420 | ) | | (371 | ) | (410 | ) | | (420 | ) |
| Fair value of plan assets at end of year | 6,167 |
| | 5,275 |
| 7,077 |
| | 6,167 |
|
| Net pension liability recognized at December 31 | $ | (1,757 | ) | | $ | (1,690 | ) | |
| Funded status at December 31 | | $ | (60 | ) | | $ | (1,757 | ) |
The net pension liabilityAmounts recognized in Altria Group, Inc.'s’s consolidated balance sheets at December 31, 20122013 and 20112012, waswere as follows:
| | | (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Other assets | | $ | 173 |
| | $ | — |
|
| Other accrued liabilities | $ | (22 | ) | | $ | (28 | ) | (21 | ) | | (22 | ) |
| Accrued pension costs | (1,735 | ) | | (1,662 | ) | (212 | ) | | (1,735 | ) |
| | $ | (1,757 | ) | | $ | (1,690 | ) | $ | (60 | ) | | $ | (1,757 | ) |
The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $7.56.8 billion and $6.67.5 billion at December 31, 20122013 and 20112012, respectively.
For plans with accumulated benefit obligations in excess of plan assets at December 31, 2013, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $299 million, $261 million and $66 million, respectively. These amounts were primarily related to plans for salaried employees that cannot be funded under IRS regulations. At December 31, 2012, and 2011, the accumulated benefit obligations were in excess of plan assets for all pension plans.
The following assumptions were used to determine Altria Group, Inc.'s’s benefit obligations under the plans at December 31:
| | | | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Discount rate | 4.0 | % | | 5.0 | % | 4.9 | % | | 4.0 | % |
| Rate of compensation increase | 4.0 |
| | 4.0 |
| 4.0 |
| | 4.0 |
|
The discount rates for Altria Group, Inc.'s’s plans were developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the benefit obligations.
▪Components of Net Periodic Benefit Cost: Net periodic pension cost consisted of the following for the years ended December 31, 20122013,2011 and 2010: |
| | | | | | | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Service cost | $ | 79 |
| | $ | 74 |
| | $ | 80 |
|
| Interest cost | 344 |
| | 351 |
| | 356 |
|
| Expected return on plan assets | (442 | ) | | (422 | ) | | (421 | ) |
| Amortization: | | | | | |
| Net loss | 224 |
| | 171 |
| | 126 |
|
| Prior service cost | 10 |
| | 14 |
| | 13 |
|
| Termination, settlement and curtailment | 21 |
| | 41 |
| | — |
|
| Net periodic pension cost | $ | 236 |
| | $ | 229 |
| | $ | 154 |
|
During 2012 and 2011, termination,: |
| | | | | | | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Service cost | $ | 86 |
| | $ | 79 |
| | $ | 74 |
|
| Interest cost | 314 |
| | 344 |
| | 351 |
|
| Expected return on plan assets | (493 | ) | | (442 | ) | | (422 | ) |
| Amortization: | | | | | |
| Net loss | 271 |
| | 224 |
| | 171 |
|
| Prior service cost | 10 |
| | 10 |
| | 14 |
|
| Termination, settlement and curtailment | 7 |
| | 21 |
| | 41 |
|
| Net periodic pension cost | $ | 195 |
| | $ | 236 |
| | $ | 229 |
|
Termination, settlement and curtailment shown in the table above primarily include charges related to Altria Group, Inc.'sthe 2011 Cost Reduction Program. For more information on Altria Group, Inc.'sthe 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.
The amounts included in termination, settlement and curtailment in the table above for the years ended December 31, 2012 and 2011were comprised of the following changes:
| | | (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Benefit obligation | $ | — |
| | $ | 39 |
| $ | 1 |
| | $ | — |
| | $ | 39 |
|
| Other comprehensive earnings/losses: | | | | | | | | |
| Net losses | 21 |
| | — |
| |
| Net loss | | 6 |
| | 21 |
| | — |
|
| Prior service cost | — |
| | 2 |
| — |
| | — |
| | 2 |
|
| | $ | 21 |
| | $ | 41 |
| $ | 7 |
| | $ | 21 |
| | $ | 41 |
|
For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 20132014 are $276153 million and $10 million, respectively.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The following weighted-average assumptions were used to determine Altria Group, Inc.'s’s net pension cost for the years ended December 31:
| | | | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Discount rate | 5.0 | % | | 5.5 | % | | 5.9 | % | 4.0 | % | | 5.0 | % | | 5.5 | % |
| Expected rate of return on plan assets | 8.0 |
| | 8.0 |
| | 8.0 |
| 8.0 |
| | 8.0 |
| | 8.0 |
|
| Rate of compensation increase | 4.0 |
| | 4.0 |
| | 4.5 |
| 4.0 |
| | 4.0 |
| | 4.0 |
|
Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $8180 million, $10681 million and $108106 million in 20122013, 20112012 and 20102011, respectively.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Plan Assets: Altria Group, Inc.'s’s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. Accordingly, theThe composition of Altria Group, Inc.'s’s plan assets at December 31, 20122013 was broadly characterized as an allocation between equity securities (54%60%), corporate bonds (23%26%), U.S. Treasury and Foreign Governmentforeign government securities (17%7%) and all other types of investments (6%7%). Virtually all pension assets can be used to make monthly benefit payments.
Altria Group, Inc.'s’s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard & Poor'sPoor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index ("RAFI"(“RAFI”) Low Volatility USU.S. Index, and Morgan Stanley Capital International ("MSCI"(“MSCI”) Europe, Australasia, and the Far East ("EAFE"(“EAFE”) Index. Altria Group, Inc.'s’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include investment grade corporate bonds of companies from diversified industries, U.S. Treasuries and Treasury Inflation Protected Securities.industries. The allocation to below investment grade securities represented 14%18% of the fixed income holdings or 6%7% of total plan assets at December 31, 20122013. The allocation to emerging markets represented 5%4% of the equity holdings or 3% of total plan assets at December 31, 20122013. The allocation to real estate and private equity investments was immaterial at December 31, 2012.2013.
Altria Group, Inc.'s’s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and investment managers'managers’ compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.
Altria Group, Inc.'s’s expected rate of return on pension plan assets is determined by the plan assets'assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.
The fair values of Altria Group, Inc.'s’s pension plan assets by asset category were as follows:
Investments at Fair Value as ofDecember 31, 20122013 | | | (in millions) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Common/collective trusts: | | | | | | | | | | | | | | |
| U.S. large cap | $ | — |
| | $ | 1,566 |
| | $ | — |
| | $ | 1,566 |
| $ | — |
| | $ | 1,971 |
| | $ | — |
| | $ | 1,971 |
|
| U.S. small cap | — |
| | 499 |
| | — |
| | 499 |
| — |
| | 546 |
| | — |
| | 546 |
|
| International developed markets | — |
| | 179 |
| | — |
| | 179 |
| — |
| | 159 |
| | — |
| | 159 |
|
| Long duration fixed income | — |
| | 494 |
| | — |
| | 494 |
| |
| U.S. and foreign government securities or their agencies: | | | | | | | | | | | | | | |
| U.S. government and agencies | — |
| | 625 |
| | — |
| | 625 |
| — |
| | 226 |
| | — |
| | 226 |
|
| U.S. municipal bonds | — |
| | 71 |
| | — |
| | 71 |
| — |
| | 127 |
| | — |
| | 127 |
|
| Foreign government and agencies | — |
| | 311 |
| | — |
| | 311 |
| — |
| | 275 |
| | — |
| | 275 |
|
| Corporate debt instruments: | | | | | | | | | | | | | | |
| Above investment grade | — |
| | 714 |
| | — |
| | 714 |
| — |
| | 1,371 |
| | 1 |
| | 1,372 |
|
| Below investment grade and no rating | — |
| | 391 |
| | — |
| | 391 |
| — |
| | 380 |
| | — |
| | 380 |
|
| Common stock: | | | | | | | | | | | | | | |
| International equities | 759 |
| | — |
| | — |
| | 759 |
| 1,050 |
| | — |
| | 1 |
| | 1,051 |
|
| U.S. equities | 300 |
| | — |
| | — |
| | 300 |
| 506 |
| | — |
| | — |
| | 506 |
|
| Registered investment companies | 128 |
| | 50 |
| | — |
| | 178 |
| 159 |
| | 137 |
| | — |
| | 296 |
|
| U.S. and foreign cash and cash equivalents | 16 |
| | 4 |
| | — |
| | 20 |
| |
| Asset backed securities | — |
| | 35 |
| | — |
| | 35 |
| |
| Other, net | 9 |
| | 2 |
| | 14 |
| | 25 |
| 108 |
| | 47 |
| | 13 |
| | 168 |
|
| Total investments at fair value, net | $ | 1,212 |
| | $ | 4,941 |
| | $ | 14 |
| | $ | 6,167 |
| $ | 1,823 |
| | $ | 5,239 |
| | $ | 15 |
| | $ | 7,077 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Investments at Fair Value as ofDecember 31, 20112012 | | | (in millions) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Common/collective trusts: | | | | | | | | | | | | | | |
| U.S. large cap | $ | — |
| | $ | 1,482 |
| | $ | — |
| | $ | 1,482 |
| $ | — |
| | $ | 1,566 |
| | $ | — |
| | $ | 1,566 |
|
| U.S. small cap | — |
| | 441 |
| | — |
| | 441 |
| — |
| | 499 |
| | — |
| | 499 |
|
| International developed markets | — |
| | 152 |
| | — |
| | 152 |
| — |
| | 179 |
| | — |
| | 179 |
|
| International emerging markets | — |
| | 100 |
| | — |
| | 100 |
| |
| Long duration fixed income | — |
| | 585 |
| | — |
| | 585 |
| — |
| | 494 |
| | — |
| | 494 |
|
| U.S. and foreign government securities or their agencies: | | | | | | | | | | | | | | |
| U.S. government and agencies | — |
| | 510 |
| | — |
| | 510 |
| — |
| | 625 |
| | — |
| | 625 |
|
| U.S. municipal bonds | — |
| | 44 |
| | — |
| | 44 |
| — |
| | 71 |
| | — |
| | 71 |
|
| Foreign government and agencies | — |
| | 204 |
| | — |
| | 204 |
| — |
| | 311 |
| | — |
| | 311 |
|
| Corporate debt instruments: | | | | | | | | | | | | | | |
| Above investment grade | — |
| | 618 |
| | — |
| | 618 |
| — |
| | 714 |
| | — |
| | 714 |
|
| Below investment grade and no rating | — |
| | 255 |
| | — |
| | 255 |
| — |
| | 391 |
| | — |
| | 391 |
|
| Common stock: | | | | | | | | | | | | | | |
| International equities | 550 |
| | — |
| | — |
| | 550 |
| 759 |
| | — |
| | — |
| | 759 |
|
| U.S. equities | 21 |
| | — |
| | — |
| | 21 |
| 300 |
| | — |
| | — |
| | 300 |
|
| Registered investment companies | 124 |
| | 63 |
| | — |
| | 187 |
| 128 |
| | 50 |
| | — |
| | 178 |
|
| U.S. and foreign cash and cash equivalents | 42 |
| | 4 |
| | — |
| | 46 |
| |
| Asset backed securities | — |
| | 49 |
| | — |
| | 49 |
| |
| Other, net | 16 |
| | 2 |
| | 13 |
| | 31 |
| 25 |
| | 41 |
| | 14 |
| | 80 |
|
| Total investments at fair value, net | $ | 753 |
| | $ | 4,509 |
| | $ | 13 |
| | $ | 5,275 |
| $ | 1,212 |
| | $ | 4,941 |
| | $ | 14 |
| | $ | 6,167 |
|
Level 3 holdings and transactions were immaterial to total plan assets at December 31, 20122013 and 20112012.
For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.
Following is a description of the valuation methodologies used for investments measured at fair value, including the general classification of such investments pursuant to the fair value hierarchy.value.
| |
| ▪ | Common/Collective Trusts: Common/collective trusts consist of pools of investments used by institutional investors to obtain exposure to equity and fixed income markets by investing in equity index funds that are intended to mirror indices such as Standard & Poor'sPoor’s 500 Index, Russell Small Cap Completeness Index, State Street Global Advisor'sAdvisor’s Fundamental Index and MSCI EAFE Index and an actively managed long duration fixed income fund.Index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value ("NAV") as provided by the investment account manager and are classified in level 2 of the fair value hierarchy. These common/collective trusts have defined redemption terms that vary from a two-day prior notice to semi-monthly openings for redemption. There were no other restrictions on redemption at December 31, 2012 and 2011. |
assets are valued based on the net asset value (“NAV”) as provided by the investment account manager.
| |
| ▪ | U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities, investment grade municipal securities and unrated or non-investment grade municipal securities. Government securities that are traded in a non-active over-the-counter market, are valued at a price that is based on a compilation of primarily observable market information, such as broker quote,quotes. In addition, matrix pricing, yield curves and indices are classified in level 2 of the fair value hierarchy.used when broker quotes are not available. |
| |
| ▪ | Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, or asuch as broker quote in a non-active over-the-counter market,quotes. In addition, matrix pricing, yield curves and indices are classified in level 2 of the fair value hierarchy.used when broker quotes are not available. |
| |
| ▪ | Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date, and are classified in level 1 of the fair value hierarchy.date. |
| |
| ▪ | Registered Investment Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in level 1 of the fair value hierarchy.Level 1. Registered investment company funds whichthat are designed specifically to meet Altria Group, Inc.'s’s pension plans investment strategies, but are not traded on an active market, are valued based on the NAV of the underlying securities as provided by the investment account manager on the last business day of the period and are classified in level 2 of the fair value hierarchy. The registered investment company funds measured at NAV have daily liquidity and were not subject to any redemption restrictions at December 31, 2012 and 2011. |
| |
▪ | U.S. and Foreign Cash & Cash Equivalents: Cash and cash equivalents are valued at cost that approximates fair value, and are classified in level 1 of the fair value hierarchy. Cash collateral for forward contracts on U.S. Treasury notes, which approximates fair value, is classified in level 2 of the fair value hierarchy.
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
| |
▪ | Asset Backed Securities: Asset backed securities are fixed income securities such as mortgage backed securities and auto loans that are collateralized by pools of underlying assets that are unable to be sold individually. They are valued at a price which is based on a compilation of primarily observable market information or a broker quote in a non-active over-the-counter market, and are classified in level 2 of the fair value hierarchy.Level 2.
|
▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that theythe contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. On January 2, 2013, Altria Group, Inc. made a voluntary $350 million contribution to its pension plans. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans of approximately $2520 million to $50 million in 20132014 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.
The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, 20122013, arewere as follows: | | | (in millions) | | |
| 2013 | $ | 400 |
| |
| 2014 | 412 |
| $ | 414 |
|
| 2015 | 414 |
| 416 |
|
| 2016 | 420 |
| 421 |
|
| 2017 | 427 |
| 429 |
|
| 2018-2022 | 2,227 |
| |
| 2018 | | 434 |
|
| 2019-2023 | | 2,257 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Postretirement Benefit Plans
Net postretirement health care costs consisted of the following for the years ended December 31, 20122013,2011 and 2010:
|
| | | | | | | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
|
| Service cost | $ | 18 |
| | $ | 34 |
| | $ | 29 |
|
| Interest cost | 115 |
| | 139 |
| | 135 |
|
| Amortization: | | | | | |
| Net loss | 40 |
| | 39 |
| | 32 |
|
| Prior service credit | (45 | ) | | (21 | ) | | (21 | ) |
| Termination and curtailment | (26 | ) | | (4 | ) | | — |
|
| Net postretirement health care costs | $ | 102 |
| | $ | 187 |
| | $ | 175 |
|
During 2012 and 2011:
|
| | | | | | | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | 2011 |
|
| Service cost | $ | 18 |
| | $ | 18 |
| | $ | 34 |
|
| Interest cost | 99 |
| | 115 |
| | 139 |
|
| Amortization: | | | | | |
| Net loss | 51 |
| | 40 |
| | 39 |
|
| Prior service credit | (45 | ) | | (45 | ) | | (21 | ) |
| Termination and curtailment | — |
| | (26 | ) | | (4 | ) |
Net postretirement health care costs | $ | 123 |
| | $ | 102 |
| | $ | 187 |
|
2011, terminationTermination and curtailment shown in the table above are related to Altria Group, Inc.'sthe 2011 Cost Reduction Program. For further information on Altria Group, Inc.'sthe 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.
The amounts included in termination and curtailment shown in the table above for the years ended December 31, 2012 and 2011were comprised of the following changes: |
| | | | | | | | |
| (in millions) | | 2012 |
| | 2011 |
|
| Accrued postretirement health care costs | | $ | — |
| | $ | 11 |
|
| Other comprehensive earnings/losses: | | | | |
| Prior service credit | | (26 | ) | | (15 | ) |
| | | $ | (26 | ) | | $ | (4 | ) |
For the postretirement benefit plans, the estimated net loss and prior service credit that are expected to be amortized from accumulated other comprehensive losses into net postretirement health care costs during 20132014 are $5729 million and $(45)(43) million, respectively.
The following assumptions were used to determine Altria Group, Inc.'s’s net postretirement cost for the years ended December 31:
| | | | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Discount rate | 4.9 | % | | 5.5 | % | | 5.8 | % | 3.9 | % | | 4.9 | % | | 5.5 | % |
| Health care cost trend rate | 8.0 |
| | 8.0 |
| | 7.5 |
| 7.5 |
| | 8.0 |
| | 8.0 |
|
Altria Group, Inc.'s’s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, 20122013 and 20112012, were as follows:
| | | (in millions) | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Accrued postretirement health care costs at beginning of year | $ | 2,505 |
| | $ | 2,548 |
| $ | 2,663 |
| | $ | 2,505 |
|
| Service cost | 18 |
| | 34 |
| 18 |
| | 18 |
|
| Interest cost | 115 |
| | 139 |
| 99 |
| | 115 |
|
| Benefits paid | (135 | ) | | (136 | ) | (138 | ) | | (135 | ) |
| Plan amendments | — |
| | (282 | ) | |
| Actuarial losses | 160 |
| | 191 |
| |
| Termination and curtailment | — |
| | 11 |
| |
| Actuarial (gains) losses | | (327 | ) | | 160 |
|
| Other | | 2 |
| | — |
|
| Accrued postretirement health care costs at end of year | $ | 2,663 |
| | $ | 2,505 |
| $ | 2,317 |
| | $ | 2,663 |
|
The current portion of Altria Group, Inc.'s’s accrued postretirement health care costs of $159162 million and $146159 million
at December 31, 20122013 and 20112012, respectively, is included in other accrued liabilities on the consolidated balance sheets.
The Patient Protection and Affordable Care Act ("PPACA"(“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2018, including the imposition of an excise tax on high cost health care plans effective in 2018. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.'s’s accumulated postretirement benefit obligation at December 31, 20122013 and 20112012. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, furtherfuture adjustments to Altria Group, Inc.'s’s accumulated postretirement benefit obligation may be necessary in the future.necessary.
The following assumptions were used to determine Altria Group, Inc.'s’s postretirement benefit obligations at December 31:
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
| | | | 2012 |
| | 2011 |
| 2013 |
| | 2012 |
|
| Discount rate | 3.9 | % | | 4.9 | % | 4.8 | % | | 3.9 | % |
| Health care cost trend rate assumed for next year | 7.5 |
| | 8.0 |
| 7.0 |
| | 7.5 |
|
| Ultimate trend rate | 5.0 |
| | 5.0 |
| 5.0 |
| | 5.0 |
|
| Year that the rate reaches the ultimate trend rate | 2018 |
| | 2018 |
| 2018 |
| | 2018 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 20122013:
| | | | One-Percentage-Point Increase |
| | One-Percentage-Point Decrease |
| One-Percentage-Point Increase |
| | One-Percentage-Point Decrease |
|
| Effect on total of service and interest cost | 7.1 | % | | (6.0 | )% | 6.8 | % | | (6.0 | )% |
| Effect on postretirement benefit obligation | 6.8 |
| | (5.8 | ) | 6.7 |
| | (5.8 | ) |
Altria Group, Inc.'s’s estimated future benefit payments for its postretirement health care plans at December 31, 20122013, arewere as follows:
| | | (in millions) | | |
| 2013 | $ | 159 |
| |
| 2014 | 168 |
| $ | 162 |
|
| 2015 | 174 |
| 168 |
|
| 2016 | 177 |
| 171 |
|
| 2017 | 177 |
| 171 |
|
| 2018-2022 | 825 |
| |
| 2018 | | 169 |
|
| 2019-2023 | | 774 |
|
Postemployment Benefit Plans
Altria Group, Inc. sponsors postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
consisted of the following for the years ended December 31, 20122013, 20112012 and 2010:2011:
| | | (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Service cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | 1 |
| | 2 |
| | 1 |
| 1 |
| | 1 |
| | 2 |
|
| Amortization of net loss | 17 |
| | 16 |
| | 12 |
| 18 |
| | 17 |
| | 16 |
|
| Other | (7 | ) | | 121 |
| | 5 |
| (17 | ) | | (7 | ) | | 121 |
|
| Net postemployment costs | $ | 12 |
| | $ | 140 |
| | $ | 19 |
| $ | 3 |
| | $ | 12 |
| | $ | 140 |
|
"Other"For the year ended December 31, 2011, “other” postemployment cost shown in the table above primarily reflects incremental severance costs related to the 2011 Cost Reduction Program. For further information on the 2011 Cost Reduction Program, (seesee Note 4. Asset Impairment, Exit, Implementation and Integration Costs).
For the postemployment benefit plans, the estimated net loss that is expected to be amortized from accumulated other comprehensive losses into net postemployment costs during 20132014 is approximately $1816 million.
Altria Group, Inc.'s’s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at December 31, 20122013 and 20112012, were as follows: |
| | | | | | | |
| (in millions) | 2012 |
| | 2011 |
|
| Accrued postemployment costs at beginning of year | $ | 270 |
| | $ | 151 |
|
| Service cost | 1 |
| | 1 |
|
| Interest cost | 1 |
| | 2 |
|
| Benefits paid | (143 | ) | | (48 | ) |
| Actuarial losses and assumption changes | 27 |
| | 43 |
|
| Other | (7 | ) | | 121 |
|
| Accrued postemployment costs at end of year | $ | 149 |
| | $ | 270 |
|
|
| | | | | | | |
| (in millions) | 2013 |
| | 2012 |
|
| Accrued postemployment costs at beginning of year | $ | 149 |
| | $ | 270 |
|
| Service cost | 1 |
| | 1 |
|
| Interest cost | 1 |
| | 1 |
|
| Benefits paid | (65 | ) | | (143 | ) |
Actuarial (gains) losses and assumption changes | (4 | ) | | 27 |
|
| Other | (17 | ) | | (7 | ) |
Accrued postemployment costs at end of year | $ | 65 |
| | $ | 149 |
|
The accrued postemployment costs were determined using a weighted-average discount rate of 2.4%3.7% and 2.8%2.4% in 20122013 and 20112012, respectively, an assumed weighted-average ultimate annual turnover rate of 0.5% in 20122013 and 1.0% in 20112012, assumed compensation cost increases of 4.0% in 20122013 and 20112012, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 20122013 consisted of the following:
| | | (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
| Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net losses | $ | (3,186 | ) | | $ | (917 | ) | | $ | (169 | ) | | $ | (4,272 | ) | |
| Net loss | | $ | (1,691 | ) | | $ | (539 | ) | | $ | (128 | ) | | $ | (2,358 | ) |
| Prior service (cost) credit | (36 | ) | | 354 |
| | — |
| | 318 |
| (33 | ) | | 307 |
| | — |
| | 274 |
|
| Deferred income taxes | 1,254 |
| | 221 |
| | 65 |
| | 1,540 |
| 673 |
| | 90 |
| | 48 |
| | 811 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,968 | ) | | $ | (342 | ) | | $ | (104 | ) | | $ | (2,414 | ) | $ | (1,051 | ) | | $ | (142 | ) | | $ | (80 | ) | | $ | (1,273 | ) |
The amounts recorded in accumulated other comprehensive losses at December 31, 2012 consisted of the following:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net loss | $ | (3,186 | ) | | $ | (917 | ) | | $ | (169 | ) | | $ | (4,272 | ) |
| Prior service (cost) credit | (36 | ) | | 354 |
| | — |
| | 318 |
|
| Deferred income taxes | 1,254 |
| | 221 |
| | 65 |
| | 1,540 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,968 | ) | | $ | (342 | ) | | $ | (104 | ) | | $ | (2,414 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows: |
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 271 |
| | $ | 51 |
| | $ | 18 |
| | $ | 340 |
|
| Prior service cost/credit | 10 |
| | (45 | ) | | — |
| | (35 | ) |
| Other expense: | | | | | | | |
| Net loss | 6 |
| | — |
| | — |
| | 6 |
|
| Deferred income taxes | (111 | ) | | (2 | ) | | (7 | ) | | (120 | ) |
| | 176 |
| | 4 |
| | 11 |
| | 191 |
|
| Other movements during the year: | | | | | | | |
| Net loss | 1,218 |
| | 327 |
| | 23 |
| | 1,568 |
|
| Prior service cost/credit | (7 | ) | | (2 | ) | | — |
| | (9 | ) |
| Deferred income taxes | (470 | ) | | (129 | ) | | (10 | ) | | (609 | ) |
| | 741 |
| | 196 |
| | 13 |
| | 950 |
|
| Total movements in other comprehensive earnings/losses | $ | 917 |
| | $ | 200 |
| | $ | 24 |
| | $ | 1,141 |
|
The movements in other comprehensive earnings/losses during the year ended December 31, 2012 were as follows: |
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 224 |
| | $ | 40 |
| | $ | 17 |
| | $ | 281 |
|
| Prior service cost/credit | 10 |
| | (45 | ) | | — |
| | (35 | ) |
| Other expense (income): | | | | | | | |
| Net loss | 21 |
| | — |
| | — |
| | 21 |
|
| Prior service cost/credit | — |
| | (26 | ) | | — |
| | (26 | ) |
| Deferred income taxes | (99 | ) | | 12 |
| | (6 | ) | | (93 | ) |
| | 156 |
| | (19 | ) | | 11 |
| | 148 |
|
| Other movements during the year: | | | | | | | |
| Net loss | (643 | ) | | (161 | ) | | (11 | ) | | (815 | ) |
| Deferred income taxes | 249 |
| | 63 |
| | 3 |
| | 315 |
|
| | (394 | ) | | (98 | ) | | (8 | ) | | (500 | ) |
| Total movements in other comprehensive earnings/losses | $ | (238 | ) | | $ | (117 | ) | | $ | 3 |
| | $ | (352 | ) |
The movements in other comprehensive earnings/losses during the year ended December 31, 2011 consisted of the following:were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Net losses | $ | (2,788 | ) | | $ | (796 | ) | | $ | (175 | ) | | $ | (3,759 | ) |
| Prior service (cost) credit | (46 | ) | | 425 |
| | — |
| | 379 |
|
| Deferred income taxes | 1,104 |
| | 146 |
| | 68 |
| | 1,318 |
|
| Amounts recorded in accumulated other comprehensive losses | $ | (1,730 | ) | | $ | (225 | ) | | $ | (107 | ) | | $ | (2,062 | ) |
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts reclassified to net earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net loss | $ | 171 |
| | $ | 39 |
| | $ | 16 |
| | $ | 226 |
|
| Prior service cost/credit | 14 |
| | (21 | ) | | — |
| | (7 | ) |
| Deferred income taxes | (72 | ) | | (7 | ) | | (6 | ) | | (85 | ) |
| | 113 |
| | 11 |
| | 10 |
| | 134 |
|
| Other movements during the year: | | | | | | | |
| Net loss | (672 | ) | | (188 | ) | | (40 | ) | | (900 | ) |
| Prior service cost/credit | 2 |
| | 264 |
| | — |
| | 266 |
|
| Deferred income taxes | 262 |
| | (27 | ) | | 14 |
| | 249 |
|
| | (408 | ) | | 49 |
| | (26 | ) | | (385 | ) |
| Total movements in other comprehensive earnings/losses | $ | (295 | ) | | $ | 60 |
| | $ | (16 | ) | | $ | (251 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts transferred to earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net losses | $ | 224 |
| | $ | 40 |
| | $ | 17 |
| | $ | 281 |
|
| Prior service cost/credit | 10 |
| | (45 | ) | | — |
| | (35 | ) |
| Other expense (income): | | | | | | | |
| Net losses | 21 |
| | — |
| | — |
| | 21 |
|
| Prior service cost/credit | — |
| | (26 | ) | | — |
| | (26 | ) |
| Deferred income taxes | (99 | ) | | 12 |
| | (6 | ) | | (93 | ) |
| | 156 |
| | (19 | ) | | 11 |
| | 148 |
|
| Other movements during the year: | | | | | | | |
| Net losses | (643 | ) | | (161 | ) | | (11 | ) | | (815 | ) |
| Deferred income taxes | 249 |
| | 63 |
| | 3 |
| | 315 |
|
| | (394 | ) | | (98 | ) | | (8 | ) | | (500 | ) |
| Total movements in other comprehensive earnings/losses | $ | (238 | ) | | $ | (117 | ) | | $ | 3 |
| | $ | (352 | ) |
The movements in other comprehensive earnings/losses during the year ended December 31, 2011 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts transferred to earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net losses | $ | 171 |
| | $ | 39 |
| | $ | 16 |
| | $ | 226 |
|
| Prior service cost/credit | 14 |
| | (21 | ) | | — |
| | (7 | ) |
| Deferred income taxes | (72 | ) | | (7 | ) | | (6 | ) | | (85 | ) |
| | 113 |
| | 11 |
| | 10 |
| | 134 |
|
| Other movements during the year: | | | | | | | |
| Net losses | (672 | ) | | (188 | ) | | (40 | ) | | (900 | ) |
Prior service cost/credit | 2 |
| | 264 |
| | — |
| | 266 |
|
| Deferred income taxes | 262 |
| | (27 | ) | | 14 |
| | 249 |
|
| | (408 | ) | | 49 |
| | (26 | ) | | (385 | ) |
| Total movements in other comprehensive earnings/losses | $ | (295 | ) | | $ | 60 |
| | $ | (16 | ) | | $ | (251 | ) |
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
The movements in other comprehensive earnings/losses during the year ended December 31, 2010 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Pensions |
| | Post- retirement |
| | Post- employment |
| | Total |
|
| Amounts transferred to earnings as components of net periodic benefit cost: | | | | | | | |
| Amortization: | | | | | | | |
| Net losses | $ | 126 |
| | $ | 32 |
| | $ | 12 |
| | $ | 170 |
|
| Prior service cost/credit | 13 |
| | (21 | ) | | — |
| | (8 | ) |
| Deferred income taxes | (55 | ) | | (4 | ) | | (4 | ) | | (63 | ) |
| | 84 |
| | 7 |
| | 8 |
| | 99 |
|
| Other movements during the year: | | | | | | | |
| Net losses | (41 | ) | | (95 | ) | | (10 | ) | | (146 | ) |
Prior service cost/credit | (16 | ) | | 58 |
| | — |
| | 42 |
|
| Deferred income taxes | 21 |
| | 15 |
| | 4 |
| | 40 |
|
| | (36 | ) | | (22 | ) | | (6 | ) | | (64 | ) |
| Total movements in other comprehensive earnings/losses | $ | 48 |
| | $ | (15 | ) | | $ | 2 |
| | $ | 35 |
|
Note 17. Additional Information
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| (in millions) | 2012 |
| | 2011 |
| | 2010 |
| 2013 |
| | 2012 |
| | 2011 |
|
| Research and development expense | $ | 136 |
| | $ | 128 |
| | $ | 144 |
| $ | 153 |
| | $ | 136 |
| | $ | 128 |
|
| Advertising expense | $ | 6 |
| | $ | 5 |
| | $ | 5 |
| $ | 7 |
| | $ | 6 |
| | $ | 5 |
|
| Interest and other debt expense, net: | | | | | | | | | | |
| Interest expense | $ | 1,128 |
| | $ | 1,220 |
| | $ | 1,136 |
| $ | 1,053 |
| | $ | 1,128 |
| | $ | 1,220 |
|
| Interest income | (2 | ) | | (4 | ) | | (3 | ) | (4 | ) | | (2 | ) | | (4 | ) |
| | $ | 1,126 |
| | $ | 1,216 |
| | $ | 1,133 |
| $ | 1,049 |
| | $ | 1,126 |
| | $ | 1,216 |
|
| Rent expense | $ | 49 |
| | $ | 63 |
| | $ | 58 |
| $ | 49 |
| | $ | 49 |
| | $ | 63 |
|
Minimum rental commitments and sublease income under non-cancelable operating leases including amounts associated with closed facilities primarily from the integration of UST, in effect at December 31, 20122013, were as follows:
|
| | | | | | | |
| (in millions) | Rental Commitments |
| | Sublease Income |
|
| 2013 | $ | 55 |
| | $ | 3 |
|
| 2014 | 50 |
| | 3 |
|
| 2015 | 41 |
| | 5 |
|
| 2016 | 32 |
| | 5 |
|
| 2017 | 26 |
| | 4 |
|
| Thereafter | 114 |
| | 28 |
|
| | $ | 318 |
| | $ | 48 |
|
|
| | | | | | | |
| (in millions) | Rental Commitments |
| | Sublease Income |
|
| 2014 | $ | 54 |
| | $ | 3 |
|
| 2015 | 45 |
| | 5 |
|
| 2016 | 39 |
| | 5 |
|
| 2017 | 29 |
| | 4 |
|
| 2018 | 25 |
| | 5 |
|
| Thereafter | 90 |
| | 23 |
|
| | $ | 282 |
| | $ | 45 |
|
Note 18. Contingencies
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants'defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related
amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida'sFlorida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although weAltria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 18. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
(i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially
affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.
Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation
▪Types and Number of Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits alleging that the uses of the terms "Lights"“Lights” and "Ultra Lights"“Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"(“RICO”); and (v) other tobacco-related litigation described below. Plaintiffs'Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and "Lights/“Lights/Ultra Lights"Lights” cases are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of December 31, 2013, December 31, 2012 and December 31, 2011 and December 31, 2010..
| | | Type of Case | Number of Cases Pending as of December 31, 2012 | Number of Cases Pending as of December 31, 2011 | Number of Cases Pending as of December 31, 2010 | Number of Cases
Pending as of
December 31, 2013 | Number of Cases
Pending as of
December 31, 2012 | Number of Cases
Pending as of
December 31, 2011 |
Individual Smoking and Health Cases (1) | 77 | 82 | 92 | 67 | 77 | 82 |
Smoking and Health Class Actions and Aggregated Claims Litigation (2) | 7 | 11 | 6 | 7 |
Health Care Cost Recovery Actions (3) | 1 | 4 | 1 |
| "Lights/Ultra Lights" Class Actions | 14 | 17 | 27 | |
| “Lights/Ultra Lights” Class Actions | | 15 | 14 | 17 |
| Tobacco Price Cases | 1 | 1 |
((1)1)Does not include 2,5742,572 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke ("ETS"(“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Also, does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (discussed below in Smoking and Health Litigation - Engle Class Action)Action).
(2) Includes as one case the 600 civil actions (of which 346 arewere actions against PM USA) that arewere to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals has ruled that the United States Constitution doesdid not preclude a trial in two phases in this case. Under the current trial plan, issuesIssues related to defendants'defendants’ conduct and whether punitive damages are permissible will bewere tried in the first phase. Trial in the first phase of this case began in April 2013. In May 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase, wouldif any, will consist of individual trials to determine liability if any,and compensatory damages on that claim only. In July 2013, plaintiffs filed a renewed motion for judgment as well as compensatorya matter of law and punitive damages, if any. Triala motion for a new trial. Also in July 2013, defendants filed a motion for judgment notwithstanding the case began inverdict. In August 2013, the trial court denied all post-trial motions. The trial court entered final judgment on October 2011, but ended in a mistrial in28, 2013. On November 2011. The court has scheduled trial for April 15, 2013.26, 2013, plaintiffs filed their notice of appeal to the West Virginia Supreme Court of Appeals.
| |
(3)
| See Health Care Cost Recovery Litigation - Federal Government's Lawsuit below.
|
(3)See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪International Tobacco-Related Cases: As of December 31, 2012,January 27, 2014, PM USA is a named defendant in Israel in one "Lights"“Lights” class action. PM USA is a named defendant in nine health care cost recovery actions in Canada, seven of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven
smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
▪Pending and Upcoming Tobacco-Related Trials:Cases Set for Trial: As of December 31, 2012,January 27, 2014, 51 40Engle progeny cases and sixfour individual smoking and health cases against PM USA are set for trial in 2013.2014. Cases against other companies in the tobacco industry are also scheduled for trial in 2013.2014. Trial dates are subject to change.
▪Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 5256 smoking and health, "Lights/“Lights/Ultra Lights"Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 3538 of the 5256 cases. These 3538 cases were tried in Alaska (1), California (5)(6), Florida (9)(10), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (1)(2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska.In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. Plaintiff’s notice of appeal of this ruling remains pending. See Types and
Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).
Of the 1718 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 1514 have reached final resolution. A verdict against defendants in one health care cost recovery case (Blue Cross/Blue Shield) was reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported "Lights"“Lights” class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December 2006. The plaintiff in Price is seeking to reopen the judgment dismissing this case (see and to reinstate the original verdict. See “Lights/Ultra Lights” Cases - The Price Case below for a discussion of developments in Price).
As of December 31, 2012, 34January 27, 2014, 50 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court'sCourt’s Engle decision. SeventeenTwenty-five verdicts were returned in favor of plaintiffs and 1725 verdicts were returned in favor of PM USA. See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of these verdicts.
▪Judgments Paid and Provisions for Litigation:Tobacco and Health Litigation (Including Engle Progeny Litigation):
After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments (and related costs and fees) totaling approximately $245261 million and interest totaling approximately $139142 million as of December 31, 2012.2013. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $7.8 million and interest totaling approximately $900,000.
During 2012, 2011 and 2010,The changes in Altria Group, Inc. recorded pre-tax charges of $4 million, $98 million and $16 million, respectively, related to certain’s accrued liability for tobacco and health judgments. judgments, including related interest costs, for the periods specified below were as follows: |
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Accrued liability for tobacco and health judgments at beginning of period | $ | — |
| | $ | 122 |
| | $ | 30 |
|
| Pre-tax charges for tobacco and health judgments | 18 |
| | 4 |
| | 98 |
|
| Pre-tax charges for related interest costs | 4 |
| | 1 |
| | 64 |
|
| Payments | (19 | ) | | (127 | ) | | (70 | ) |
| Accrued liability for tobacco and health judgments at end of period | $ | 3 |
| | $ | — |
| | $ | 122 |
|
The pre-taxaccrued liability for tobacco and health judgments, including related interest costs, was included in other accrued liabilities on Altria Group, Inc.’s consolidated balance sheets. Pre-tax charges in 2010 include a settlement of $5 million. These chargesfor tobacco and health judgments were included in marketing, administration and research costs on Altria Group, Inc.'s’s consolidated statements of earnings. In addition, during 2012, 2011 and 2010, Altria Group, Inc. recordedPre-tax charges for related interest costs related to these judgments of $1 million, $64 million and $5 million, respectively. These costs were included in interest and other debt expense, net on Altria Group, Inc.'s’s consolidated statements of earnings. During 2012,
Altria Group, Inc. made payments of $127 million for tobacco and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
health judgments and related interest costs. As of December 31, 2012, there were no provisions for tobacco and health judgments or related interest costs on Altria Group, Inc.'s consolidated balance sheet. At December 31, 2011, Altria Group, Inc. had provisions recorded on its consolidated balance sheet in other accrued liabilities for tobacco and health judgments, including related interest costs, in the amount of $122 million.
▪Security for Judgments: To obtain stays of judgments pending current appeals, as of December 31, 2012,2013, PM USA has posted various forms of security totaling approximately $3627 million, the majority of which has been collateralized with cash deposits that are included in other assets on the consolidated balance sheet.
Smoking and Health Litigation
▪Overview: Plaintiffs'Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health actionscases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
▪Non-EngleNon-Engle Progeny Trial Results: Summarized below are the non-Engle progeny smoking and health cases that were pending during 20122013 or 2014 in which verdicts were returned in favor of plaintiffs and against PM USA. A chartCharts listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.
| |
| ▪ | Mulholland: In July 2013, a jury in the U.S. District Court for the Southern District of New York returned a verdict in favor of plaintiff and awarded $5.5 million in compensatory damages against PM USA. In August 2013, after taking into account a prior recovery by the plaintiff against third parties, the court entered final judgment in the amount of $4.9 million. In September 2013, PM USA filed a renewed motion for judgment as a matter of law and plaintiff moved to modify the amount of the judgment. On December 9, 2013, the trial court denied the parties’ post-trial motions. On January 7, 2014, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit and on January 21, 2014, plaintiff cross appealed. On January 24, 2014, PM USA posted a bond in the amount of $5.5 million. |
| |
| ▪ | D. Boeken: This litigation has concluded. In August 2011, a California jury returned a verdict in favor of plaintiff, awarding $12.8 million in compensatory damages against PM USA. PM USA'sUSA’s motions for judgment notwithstanding the verdict and for a new trial were denied in October 2011. PM USA appealed and posted a bond in the amount of $12.8 million in November 2011. |
| |
▪ | Bullock2011: This litigation has concluded.. In July 2013, the California Court of Appeal affirmed the judgment. PM USA sought a petition for rehearing, which the California Court of Appeal denied in July 2013. In the fourththird quarter of 2011,2013, PM USA recorded a pre-tax provision of $14$12.8 million related to damages and costs and $32.8 million related to interest and ininterest. In March 2012,September 2013, PM USA paid an amount of approximately $19.115.6 million in satisfaction of the judgment and associated costs and interest.
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
| |
| ▪ | Schwarz: In March 2002, an Oregon jury awarded against PM USA $168,500 in compensatory damages and $150 million in punitive damages.damages against PM USA. In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals'appeals’ decision reversing and remanding the case for a new trial on punitive damages. In June 2010, the Oregon Supreme Court affirmed the court of appeals'appeals’ decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. In December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately $500,000 in costs. In March 2011, PM USA filed a claim against the plaintiff for its costs and disbursements on appeal, plus interest. Trial on the amount of punitive damages began in January 2012. In February 2012, the jury awarded plaintiff $25 million in punitive damages. In March 2012, PM USA filed motions to set aside the verdict, for a new trial or, in the alternative, for a remittitur. The trial court denied these motions in May 2012. In September 2012, PM USA filed a notice of appeal from the trial court'scourt’s judgment with the Oregon Court of Appeals. |
| |
▪ | Williams: This litigation has concluded. In On January 27, 2014, plaintiff filed a motion to certify the fourth quarter of 2011, PM USA recorded a provision of approximately $48 million relatedappeal to damages and costs and $54 million related to interest and in January 2012 paid an amount of approximately $102 million in satisfaction of the judgment and associated costs and interest.Oregon Supreme Court.
|
See Scott Class Action below for a discussion of the verdict and post-trial developments in the Scott class action and Federal GovernmentGovernment’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America healthcare cost recovery case.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Engle Class Action
In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account
that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants'defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff'splaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court'sCourt’s order.
In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury
findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class.
In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants'defendants’ motion. In May 2007, defendants'defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. In October 2007, the United States Supreme Court denied defendants'defendants’ petition. In November 2007, the United States Supreme Court denied defendants'defendants’ petition for rehearing from the denial of their petition for writ of certiorari.
In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court'sCourt’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and willwould receive no credit at thisthat time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.
In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs'plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.
The deadline for filing Engle progeny cases, as required by the Florida Supreme Court'sCourt’s decision, expired in January 2008. As of December 31, 2012,2013, approximately 3,3003,200 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 4,400 state court plaintiffs. Furthermore, as of
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December 31, 2012,2013, approximately 2,0001,200 federal court cases were pending against PM USA in federal district court asserting individual claims by or on behalf of a similar number of federal court plaintiffs. On January 22, 2013, the United States District Court for the Middle District of Florida (Jacksonville) dismissed 521Engle progeny cases with prejudice bringing the total number of federal court cases to approximately 1,500. Because of a number of factors, including, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates.The U.S. District Court for the Middle District of Florida (Jacksonville) dismissed 521 and 306 Engle progeny cases with prejudice in January 2013 and in June 2013, respectively. In February 2013, plaintiffs appealed the January dismissal to the U.S Court of Appeals for the Eleventh Circuit.
▪Federal Engle Progeny Cases: Three federal district courts (in the Merlob, B. Brown and Burr cases) ruled in 2008 that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs'plaintiffs’ claims, and
two of those rulings (B. Brown and Burr) were certified by the trial court for interlocutory review. The certification in both cases was granted by the United StatesU.S. Court of Appeals for the Eleventh Circuit and the appeals were consolidated. In February 2009, the appeal in Burr was dismissed for lack of prosecution, and, in September 2012, the district court dismissed the case on statute of limitations grounds. Plaintiff is appealing the dismissal. In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates the defendants'defendants’ due process rights. Rather, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made.
After the remand of B. Brown, the Eleventh Circuit'sCircuit’s ruling on Florida state law was superseded by state appellate rulings (discussed below)below and in Appeals of Engle Progeny Verdicts), which includeinitially included Martin, an Engle progeny case against R.J. Reynolds Tobacco Company ("(“R.J. Reynolds"Reynolds”) in Escambia County, and J. Brown,,an Engle progeny case against R.J. Reynolds in Broward County. Martin and J. Brown are discussed in more detailMore recently, the Eleventh Circuit’s ruling on Florida state law has been superseded by the Florida Supreme Court’s decision in Appeals of Engle Progeny VerdictsDouglas, discussed below.
Following Martin and J. Brown, in the Waggoner case, the United StatesU.S. District Court for the Middle District of Florida (Jacksonville) ruled in December 2011 that application of the Engle findings to establish the wrongful conduct elements of plaintiffs'plaintiffs’ claims consistent with Martin or J. Brown did not violate defendants'defendants’ due process rights. The court ruled, however, that plaintiffs must establish legal causation to establish liability. PM USA and the other defendants sought appellate review of the due process ruling. In February 2012, the district court denied the motion for
interlocutory appeal, but did apply the ruling to all active pending federal Engle progeny cases. As a result, the ruling can be appealed after an adverse verdict or in a cross-appeal. The ruling has been appealed by R.J. Reynolds appealed the rulings in the Walker and Duke cases pending beforeto the Eleventh Circuit.Circuit, which, in September 2013, rejected the due process defense and affirmed the underlying judgments. In October 2013, R.J. Reynolds filed a petition for rehearing or rehearing en banc. Thereafter, the Eleventh Circuit vacated its decision and substituted a new opinion on October 31, 2013. On November 7, 2013, the Eleventh Circuit denied R.J. Reynolds’ initial petition for rehearing and, on November 13, 2013, R.J. Reynolds filed a petition for rehearing en banc or panel rehearing of the substituted decision, which was denied on January 6, 2014.
Most of the Engle progeny cases pending against PM USA in the federal district courts inU.S. District Court for the Middle District of Florida (Jacksonville) asserting individual claims by or on behalf of approximately 1,5001,200 plaintiffs remain stayed. There are currently approximately 41750 active cases pending in federal court. Oncourt, including cases that became active in August 2013 and in January 30,2014. In January 2013, the Federal District Courtdistrict court ordered the parties to engage in globalnegotiate an aggregate settlement mediation of all pending cases. In April 2013, the mediators reported to the district court that the cases have not been resolved and that the parties have not agreed to a mechanism for settlement. In July 2013, the district court issued an order transferring, for case management purposes, all the Middle District of Florida Engle progeny cases to a judge presiding in the District of Massachusetts. The district court directed that the cases will remain in the Middle District of Florida and that such judge will be designated a judge of that district for purposes of managing the cases.
▪Florida Bond Cap Statute: In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary
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depending on the number of judgments in effect at a given time. Plaintiffs in three state Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.
Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs'plaintiffs’ bond cap statute challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and Alexander. The Florida Supreme Court granted review of the Hall decision, but, in September 2012, the court dismissed the appeal as moot. OnIn October 12, 2012, the
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Florida Supreme Court denied the plaintiffs'plaintiffs’ rehearing petition. In August 2013, in
Calloway, discussed further below, plaintiff filed a motion in the trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional, which was denied. No federal court has yet to addressaddressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court. However, in April 2013, PM USA, R.J. Reynolds and Lorillard Tobacco Company (“Lorillard”) filed a motion in the U.S. District Court for the Middle District of Florida (Jacksonville) to have the court apply the Florida bond cap statute to all federal Engle progeny cases. In August 2013, the court denied the motion without prejudice on the grounds that it was premature to adjudicate such issue.
▪Engle Progeny Trial Results: As of December 31, 2012,January 27, 2014, 3450 federal and state Engle progeny cases involving PM
USA have resulted in verdicts since the Florida Supreme Court Engle decision. SeventeenTwenty-five verdicts were returned in favor of plaintiffs. For a further discussion of these cases, see the verdict chart below.
SeventeenTwenty-five verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier),C. Campbell, Rohr,Espinosa,Oliva, Weingart, Junious, Szymanski, Gollihue, McCray, Denton, Hancock, Wilder, D. Cohen, LaMotte, J. Campbell, Dombey, Haldeman, Jacobson and HancockBlasco). While the juries in the Weingart and Hancock cases returned verdicts against PM
USA awarding no damages, the trial court in each case granted an additur. In the Russo case (formerly Frazier), the Florida Third District Court of Appeal reversed the judgment in defendants'defendants’ favor in April 2012 and remanded the case for a new trial. Defendants are seekingsought review of the case in the Florida Supreme Court, which was granted in September 2013. Oral argument is scheduled for April 10, 2014 in the Florida Supreme Court. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of December 31, 2012.January 27, 2014.
In Lukacs, a case that was tried to verdict before the Florida Supreme Court Engle decision, the Florida Third District Court of Appeal in March 2010 affirmed per curiam the trial court decision without issuing an opinion. Under Florida procedure, further review of a per curiam affirmance without opinion by the Florida Supreme Court is generally prohibited. Subsequently in 2010, after defendants'defendants’ petition for rehearing with the Court of Appeal was denied, defendants paid the judgment.
The chartcharts below listslist the verdicts and post-trial developments in the Engleprogeny cases that were pending during 2012 and 2013 or 2014 in which verdicts were returned in favor of plaintiffs.plaintiffs (including Weingart and Hancock, where the verdicts originally were returned in favor of PM USA). The first chart lists such cases that are currently pending; the second chart lists such cases that are concluded.
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Date | Plaintiff | Verdict | Post-Trial Developments |
December 2012 | Buchanan | On December 7, 2012, a Leon County jury returned a verdict in favor of the plaintiff and against PM USA and Liggett Group LLC ("Liggett Group"). The jury awarded $5.5 million in compensatory damages and allocated 37% of the fault to each of the defendants (an amount of approximately $2 million). | On December 17, 2012, the defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. Argument on these motions was heard on January 16, 2013. |
October 2012 | Lock | A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $1.15 million in compensatory damages and allocated 9% of the fault to each of the defendants (an amount of $103,500). | On November 5, 2012, the defendants filed several post-trial motions, including motions for a new trial, to set aside the verdict and to reduce the damages award by the amount of economic damages paid by third parties. On January 23, 2013, the trial court orally denied all post-trial motions. Judgment has yet to be entered. |
Currently-Pending Cases
Plaintiff: Cuculino
Date: January 17, 2014
Verdict:
On January 17, 2014, a Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded plaintiff $12,500,000 in compensatory damages and allocated 40% of the fault to PM USA (an amount of $5,000,000).
Post-Trial Developments:
On January 27, 2014, PM USA filed post-trial motions, including motions to set aside the verdict and for a new trial.
Plaintiff: Rizzuto
Date: August 2013
Verdict:
In August 2013, a Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group LLC (“Liggett Group”). The jury awarded plaintiff $12,550,000 in compensatory damages.
Post-Trial Developments:
In September 2013, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. Also in September 2013, the court granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1 million in compensatory damages. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability for the compensatory damages. The court denied all other motions except for defendants’ motion for a juror interview, which was granted. On October 24, 2013, defendants filed a notice of appeal to the Florida Fifth District Court of Appeal, which ordered resolution of the juror issue prior to appeal. On December 10, 2013,
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subsequent to the juror interview, the court entered an order that granted no relief with respect to the alleged misconduct of the juror. Plaintiff agreed to waive the bond for the appeal.
Plaintiff: Skolnick
Date: June 2013
Verdict:
In June 2013, a Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $2,555,000 in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).
Post-Trial Developments:
In June 2013, defendants and plaintiff filed post-trial motions. The court entered final judgment against defendants in July 2013. On November 15, 2013, the trial court denied plaintiff’s post-trial motion and, on December 4, 2013, denied defendants’ post-trial motions. On December 16, 2013, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and, on December 23, 2013, plaintiffs cross-appealed. On December 19, 2013, PM USA posted a bond in the amount of $766,500.
Plaintiff: Starr-Blundell
Date: June 2013
Verdict:
In June 2013, a Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $500,000 in compensatory damages and allocated 10% of the fault to each defendant (an amount of $50,000).
Post-Trial Developments:
In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict or, in the alternative, for a new trial, which was denied on October 29, 2013. On November 27, 2013, final judgment was entered in favor of plaintiff affirming the compensatory damages award. On December 12, 2013, plaintiff filed a notice of appeal to the Florida First District Court of Appeal and, on December 13, 2013, defendants cross appealed. Plaintiff agreed to waive the bond for the appeal.
Plaintiff: Ruffo
Date:May 2013
Verdict:
In May 2013, a Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and Lorillard. The jury awarded plaintiff $1,500,000 in compensatory damages and allocated 12% of the fault to PM USA (an amount of $180,000).
Post-Trial Developments:
In May 2013, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict, which the trial court denied in October 2013 and entered final judgment in favor of plaintiff. On October 24, 2013, PM USA and Lorillard appealed to the Florida Third District Court of Appeal. On October 25, 2013, PM USA posted a bond in the amount of $180,000.
Plaintiff: Graham
Date:May 2013
Verdict:
In May 2013, a jury in the U.S. District Court for the Middle District of Florida (Jacksonville) returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $2.75 million in compensatory damages and allocated 10% of the fault to PM USA (an amount of $275,000).
Post-Trial Developments:
In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which the trial court denied in September 2013. In October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. Also, in October 2013, PM USA posted a bond in the amount of $277,750.
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Date | Plaintiff | Verdict | Post-Trial Developments |
August 2012 | Hancock | Date:April 2013
Verdict: In April 2013, a jury in the U.S. District Court for the Middle District of Florida (Orlando) returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $6 million in compensatory damages and $10 million in punitive damages against each defendant.
Post-Trial Developments: In June 2013, the trial court entered final judgment declining defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault and imposing joint and several liability for the compensatory damages. In July 2013, defendants filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court denied all other post-trial motions. Plaintiffs filed a motion to reconsider the district court’s remittitur and, in the alternative, to certify the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied on October 28, 2013. On November 15, 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. On December 16, 2013, after the district court corrected a clerical error in the final judgment, defendants filed an amended notice of appeal. On December 3, 2013, PM USA posted a bond in the amount of approximately $2.2 million. Plaintiff: Buchanan Date:December 2012
Verdict: In December 2012, a Leon County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded $5.5 million in compensatory damages and allocated 37% of the fault to each of the defendants (an amount of approximately $2 million).
Post-Trial Developments: In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March 2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group refusing to reduce the compensatory damages award by plaintiff’s comparative fault and holding PM USA and Liggett Group jointly and severally liable for $5.5 million. In April 2013, defendants filed a notice of appeal to the Florida First District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. Plaintiff: Lock Date:October 2012
Verdict: A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $1.15 million in compensatory damages and allocated 9% of the fault to each of the defendants (an amount of $103,500).
Post-Trial Developments: In November 2012, defendants filed several post-trial motions, including motions for a new trial, to set aside the verdict and to reduce the damages award by the amount of economic damages paid by third parties. In January 2013, the trial court orally denied all post-trial motions. In February 2013, the trial court entered final judgment. PM USA’s portion of the damages was $103,500. In March 2013, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In March 2013, PM USA posted bonds in the amount of $103,500. Plaintiff: Hancock Date:August 2012
Verdict: A Broward County jury returned a verdict in the amount of zero damages and allocated 5%A Broward County jury returned a verdict in the amount of zero damages and allocated 5% of the fault to each of the defendants (PM USA and R.J. Reynolds). The trial court granted an additur of approximately $110,000, which is subject to the jury’s comparative faultadditur of $110,000, which is subject to the jury's comparative fault finding. | In August 2012, the defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. The defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants' motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. On October 16, 2012, the trial court entered final judgment. PM USA's portion of the damages was approximately $700. Both sides have filed notices of appeal to the Florida Fourth District Court of Appeal. |
May 2012 | Calloway | A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard Tobacco Company ("Lorillard") and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA but the trial court ruled that it will not apply the comparative fault allocations because the jury found against each defendant on the intentional tort claims. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group. | In May and June, 2012, the defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions and entered final judgment, reducing the total compensatory damages award to $16.1 million but leaving undisturbed the separate punitive damages awards. In September 2012, PM USA posted a bond in an amount of $1.5 million and the defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. |
January 2012 | Hallgren | A Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants. | The trial court entered final judgment in March 2012. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, the defendants filed a notice of appeal to the Florida Second District Court of Appeal. |
July 2011 | Weingart | A Palm Beach County jury returned a verdict in the amount of zero damages and allocated 3% of the fault to each of the defendants (PM USA, R.J. Reynolds and Lorillard). | In September 2011, the trial court granted plaintiff's motion for additur or a new trial, concluding that an additur of $150,000 is required for plaintiff's pain and suffering. The trial court entered final judgment and, since PM USA was allocated 3% of the fault, its portion of the damages was $4,500. In October 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and, in November 2011, posted bonds in an aggregate amount of $48,000.
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April 2011 | Allen | A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of $6 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of $900,000). The jury also awarded $17 million in punitive damages against each of the defendants. | In May 2011, the trial court entered final judgment. In October 2011, the trial court granted the defendants' motion for remittitur, reducing the punitive damages award against PM USA to $2.7 million, and denied defendants' remaining post-trial motions. PM USA filed a notice of appeal to the Florida First District Court of Appeal and posted a bond in the amount of $1.25 million in November 2011. Oral argument was heard on January 16, 2013.
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Date | Plaintiff | Verdict | Post-Trial Developments |
April 2011 | Tullo | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45% of the fault to PM USA (an amount of $2,025,000). | In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $2 million bond. |
February 2011 | Huish | An Alachua County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $750,000 in compensatory damages and allocated 25% of the fault to PM USA (an amount of $187,500). The jury also awarded $1.5 million in punitive damages against PM USA. | In March 2012, the Florida First
Post-Trial Developments: In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012, the trial court entered final judgment. PM USA’s portion of the damages was approximately $700. In November 2012, both sides filed notices of appeal to the Florida Fourth District Court of Appeal. Plaintiff: Calloway Date:May 2012
Verdict: A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA, but the trial court ruled that it will not apply the comparative fault allocations because the jury found against each defendant on the intentional tort claims. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group.
Post-Trial Developments: In May and June, 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions and entered final judgment, reducing the total compensatory damages award to $16.1 million but leaving undisturbed the separate punitive damages awards. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in the trial court on the ground that the bond cap statute is unconstitutional, which the court denied. Plaintiff: Hallgren Date:January 2012
Verdict: A Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants.
Post-Trial Developments: The trial court entered final judgment in March 2012. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In October 2013, the Second District Court of Appeal affirmed the judgment, but certified the question of availability of punitive damages on plaintiff’s negligence and strict liability claims to the Florida Supreme Court as a matter of public importance. On November 18, 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. Plaintiff: Allen Date:April 2011
Verdict: A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of $6 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of $900,000). The jury also awarded $17 million in punitive damages against each of the defendants.
Post-Trial Developments: In May 2011, the trial court entered final judgment. In October 2011, the trial court granted defendants’ motion for remittitur, reducing the punitive damages award against PM USA to $2.7 million, and denied defendants’ remaining post-trial motions. PM USA filed a notice of appeal to the Florida First District Court of Appeal and posted a bond in the amount of $1.25 million inper curiam the trial court's decision without issuing an opinion. In the second quarter of 2012, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.5 million. In July 2012, PM USA paid an amount of $2.5 million in satisfaction of the judgment and associated costs. This litigation has concluded. |
February 2011 | Hatziyannakis | A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $270,000 in compensatory damages and allocated 32% of the fault to PM USA (an amount of approximately $86,000). | In April 2011, the trial court denied PM USA's post-trial motions for a new trial and to set aside the verdict. In June 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted an $86,000 appeal bond. On January 16, 2013, the Fourth District affirmed per curiam the trial court's decision without issuing an opinion.
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August 2010 | Piendle | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $4 million in compensatory damages and allocated 27.5% of the fault to PM USA (an amount of approximately $1.1 million). The jury also awarded $90,000 in punitive damages against PM USA. | In June 2012, the Florida Fourth District Court of Appeal affirmed per curiam the trial court's decision without issuing an opinion. In the third quarter of 2012, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.7 million for the judgment plus interest and associated costs and paid such amount on November 27, 2012. This litigation has concluded.
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July 2010 | Kayton (formerly Tate)
| A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5 million appeal bond. On November 28, 2012, the Florida Fourth District Court of Appeal reversed the punitive damages award and remanded the case for a new trial on plaintiff's conspiracy claim. Upon retrial, if the jury finds in plaintiff's favor on that claim, the original $16.2 million punitive damages award will be reinstated. PM USA filed a motion for rehearing, which was denied on January 18, 2013. On January 29, 2013, plaintiffs filed a notice to invoke discretionary jurisdiction with the Florida Supreme Court. |
April 2010 | Putney | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment. PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $1.6 million appeal bond. Argument on the merits of the appeal occurred in September 2012. |
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November 2011. In May 2013, the First District Court of Appeal reversed and remanded the case for a new trial on the basis that the trial court erred in failing to submit the question of addiction causation to the jury. In June 2013, the plaintiff filed a motion for rehearing or rehearing en banc, which the First District Court of Appeal denied in July 2013. In August 2013, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In October 2013, the $1.25 million bond was returned to PM USA as a result of the First District Court of Appeal’s remand for a new trial.
Plaintiff: Tullo |
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Date | Plaintiff | Verdict | Post-Trial Developments |
March 2010 | R. Cohen | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant. | In July 2010, the trial court entered final judgment and, in August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million appeal bond. In September 2012, the Florida Fourth District Court of Appeal affirmed the compensatory damages award but reversed and remanded the punitive damages verdict. The Fourth District returned the case to the trial court for a new jury trial on the plaintiff's fraudulent concealment claim. If the jury finds in plaintiff's favor on that claim, the $10 million punitive damages award against each defendant will be reinstated. On October 8, 2012, both plaintiff and defendants filed petitions for rehearing, which the Fourth District denied on December 31, 2012. On January 14, 2013, the defendants filed a notice to invoke discretionary jurisdiction with the Florida Supreme Court. Plaintiffs filed a similar notice on January 18, 2013. |
March 2010 | Douglas | A Hillsborough County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded $5 million in compensatory damages. Punitive damages were dismissed prior to trial. The jury allocated 18% of the fault to PM USA, resulting in an award of $900,000. | Date:April 2011
Verdict: A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45%In June 2010, PM USA filed its notice of appeal and posted a $900,000 appeal bond. In March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment and upholding the use of the fault to PM USA (an amount of $2,025,000).
Post-Trial Developments: In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $2 million bond. In August 2013, the Fourth District Court of Appeal affirmed the judgment. In October 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. Plaintiff: Kayton (formerly Tate) Date:July 2010
Verdict: A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA.
Post-Trial Developments: In August 2010, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5 million bond. In November 2012, the Florida Fourth District Court of Appeal reversed the punitive damages award and remanded the case for a new trial on plaintiff’s conspiracy claim. Upon retrial, if the jury finds in plaintiff’s favor on that claim, the original $16.2 million punitive damages award will be reinstated. PM USA filed a motion for rehearing, which was denied in January 2013. In January 2013, plaintiff and defendant each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. PM USA filed a motion to stay the mandate, which was denied in March 2013. The Fourth District issued its mandate in April 2013. In June 2013, plaintiff moved to consolidate with Hess and R. Cohen, which PM USA did not oppose, but on October 30, 2013, plaintiff withdrew the motion for consolidation. Plaintiff: Putney Date:April 2010
Verdict: A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA.
Post-Trial Developments: In August 2010, the trial court entered final judgment. PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $1.6 million bond. In June 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings, holding that the trial court erred in (1) not reducing the compensatory damages award as excessive and (2) not instructing the jury on the statute-of-repose in connection with plaintiff’s conspiracy claim that resulted in the $2.5 million punitive damages award. In July 2013, plaintiff filed a motion for rehearing, which the Fourth District Court of Appeal denied in August 2013. In September 2013, both parties filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. On December 31, 2013, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case.Engle jury findings but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants' federal due process rights. In April 2012, the defendants filed a notice to invoke discretionary jurisdiction with the Florida Supreme Court. In May 2012, the Florida Supreme Court accepted jurisdiction of the case. Argument occurred in September 2012. |
November 2009 | Naugle | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA. | In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages. In April 2010, PM USA filed its notice of appeal and posted a $5 million appeal bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical error. In June 2012, the Fourth District Court of Appeal affirmed the amended final judgment. In July 2012, PM USA filed a motion for rehearing. On December 12, 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive damages and returned the case to the trial court for a new trial on the question of damages. On December 26, 2012, the plaintiff filed a motion for rehearing en banc or for certification to the Florida Supreme Court, which was denied on January 25, 2013.
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Plaintiff: R. Cohen
Date:March 2010
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant.
Post-Trial Developments:
In July 2010, the trial court entered final judgment and, in August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million bond. In September 2012, the Florida Fourth District Court of Appeal affirmed the compensatory damages award but reversed and remanded the punitive damages verdict. The Fourth District returned the case to the trial court for a new jury trial on plaintiff’s fraudulent concealment claim. If the jury finds in plaintiff’s favor on that claim, the $10 million punitive damages award against each defendant will be reinstated. In January 2013, plaintiff and defendants each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2013, the Fourth District granted defendants’ motion to stay the mandate. In March 2013, plaintiff filed a motion for review of the stay order with the Florida Supreme Court, which was denied in April 2013. In June 2013, plaintiff moved to consolidate with Hess and Kayton, which defendants did not oppose, but on October 30, 2013, plaintiff withdrew the motion for consolidation.
Plaintiff: Naugle
Date:November 2009
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.
Post-Trial Developments:
In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages. In April 2010, PM USA filed its notice of appeal and posted a $5 million bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical error. In June 2012, the Fourth District Court of Appeal affirmed the amended final judgment. In July 2012, PM USA filed a motion for rehearing. In December 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive damages and returned the case to the trial court for a new trial on the question of damages. In December 2012, plaintiff filed a motion for rehearing en banc or for certification to the Florida Supreme Court, which was denied in January 2013. In February 2013, plaintiff and PM USA each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In May 2013, the Florida Supreme Court consolidated the parties’ petitions and ordered PM USA to show cause as to why the Florida Supreme Court’s decision in Douglas is not controlling in this case. PM USA filed its response to the order in June 2013. Upon retrial on the question of damages, in October 2013, the new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. On October 28, 2013, PM USA filed post-trial motions and gave notice of the results of the retrial to the Florida Supreme Court. On January 8, 2014, the trial court granted PM USA’s post-trial motion to interview one of the jurors in the case. On January 13, 2014, the trial court granted a stay in the proceedings so that plaintiff could seek emergency appellate review of the court’s decision to grant the juror interview.
Plaintiff: Barbanell
Date:August 2009
Verdict:
A Broward County jury returned a verdict in favor of plaintiff, awarding $5.3 million in compensatory damages. The judge had previously dismissed the punitive damages claim. In September 2009, the trial court entered final judgment and awarded plaintiff $1.95 million in actual damages. The judgment reduced the jury’s $5.3 million award of compensatory damages due to the jury allocating 36.5% of the fault to PM USA.
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Date | Plaintiff | Verdict | Post-Trial Developments |
August 2009 | F. Campbell | An Escambia County jury returned a verdict in favor of the plaintiff and against R.J. Reynolds, PM USA and Liggett Group. The jury awarded $7.8 million in compensatory damages. In September 2009, the trial court entered final judgment and awarded the plaintiff $156,000 in damages against PM USA due to the jury allocating only 2% of the fault to PM USA. | In March 2011, the Florida First District Court of Appeal affirmed per curiam the trial court's decision without issuing an opinion. In May 2012, PM USA paid an amount of approximately $262,000 in satisfaction of the judgment and associated costs and interest. This litigation has concluded.
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August 2009 | Barbanell | A Broward County jury returned a verdict in favor of the plaintiff, awarding $5.3 million in compensatory damages. The judge had previously dismissed the punitive damages claim. In September 2009, the trial court entered final judgment and awarded the plaintiff $1.95 million in actual damages. The judgment reduced the jury's $5.3 million award of compensatory damages due to the jury allocating 36.5% of the fault to PM USA. | A notice of appeal was filed by PM USA in September 2009, and PM USA posted a $1.95 million appeal bond. In February 2012, the Florida Fourth District Court of Appeal reversed the judgment, holding that the statute of limitations barred the plaintiff's claims. On October 17, 2012, on motion for rehearing, the Fourth District withdrew its prior decision and affirmed the trial court's judgment. On November 16, 2012, PM USA filed a notice to invoke the jurisdiction of the Florida Supreme Court. On December 5, 2012, the Florida Supreme Court granted a partial stay pending its disposition of the J. Brown case against R.J. Reynolds.
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February 2009 | Hess | A Broward County jury found in favor of plaintiffs and against PM USA. The jury awarded $3 million in compensatory damages and $5 million in punitive damages. In June 2009, the trial court entered final judgment and awarded plaintiffs $1.26 million in actual damages and $5 million in punitive damages. The judgment reduced the jury's $3 million award of compensatory damages due to the jury allocating 42% of the fault to PM USA. | PM USA noticed an appeal to the Fourth District Court of Appeal in July 2009. In May 2012, the Fourth District reversed and vacated the punitive damages award and affirmed the judgment in all other respects, upholding the compensatory damages award of $1.26 million. In June 2012, both parties filed rehearing motions with the Fourth District, which were denied in September 2012. On October 15, 2012, PM USA and plaintiffs filed notices to invoke the Florida Supreme Court's discretionary jurisdiction. |
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Post-Trial Developments:
A notice of appeal was filed by PM USA in September 2009, and PM USA posted a $1.95 million bond. In February 2012, the Florida Fourth District Court of Appeal reversed the judgment, holding that the statute of limitations barred plaintiff’s claims. In October 2012, on motion for rehearing, the Fourth District withdrew its prior decision and affirmed the trial court’s judgment. In November 2012, PM USA filed a notice to invoke the jurisdiction of the Florida Supreme Court. In December 2012, the Florida Supreme Court granted a partial stay pending its disposition of the J. Brown case against R.J. Reynolds and the Fourth District issued its mandate. In April 2013, the Florida Supreme Court ordered PM USA to show cause as to why the Florida Supreme Court’s decision in Douglas is not controlling in this case. In May 2013, defendants submitted their response arguing that the statute of limitations is not controlled by Douglas;also in May 2013, plaintiff submitted a response arguing the appeal should be dismissed.
Plaintiff: Hess
Date:February 2009
Verdict:
A Broward County jury found in favor of plaintiff and against PM USA. The jury awarded $3 million in compensatory damages and $5 million in punitive damages. In June 2009, the trial court entered final judgment and awarded plaintiff $1.26 million in actual damages and $5 million in punitive damages. The judgment reduced the jury’s $3 million award of compensatory damages due to the jury allocating 42% of the fault to PM USA.
Post-Trial Developments:
PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal in July 2009. In May 2012, the Fourth District reversed and vacated the punitive damages award and affirmed the judgment in all other respects, upholding the compensatory damages award of $1.26 million. In June 2012, both parties filed rehearing motions with the Fourth District, which were denied in September 2012. In October 2012, PM USA and plaintiff filed notices to invoke the Florida Supreme Court’s discretionary jurisdiction. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $3.2 million for the judgment plus interest and associated costs. In June 2013, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review, but declined to accept jurisdiction of PM USA’s petition. Also in June 2013, plaintiff moved to consolidate with R. Cohen and Kayton, which PM USA did not oppose, but on October 30, 2013, plaintiff withdrew the motion for consolidation.
Concluded Cases
Plaintiff: Douglas
Date:March 2010
Verdict:
A Hillsborough County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded $5 million in compensatory damages. Punitive damages were dismissed prior to trial. The jury allocated 18% of the fault to PM USA, resulting in an award of $900,000.
Post-Trial Developments:
In June 2010, PM USA filed its notice of appeal and posted a $900,000 bond. In March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment and upholding the use of the Engle jury findings but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In April 2012, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In May 2012, the Florida Supreme Court accepted jurisdiction of the case. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of the plaintiff and issued its mandate in April 2013. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.2 million for the judgment plus interest and associated costs. PM USA filed its petition for writ of certiorari to the United States Supreme Court in August 2013, which the court denied in October 2013. PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.2 million on October 31, 2013. On December 23, 2013, PM USA paid additional associated costs of approximately $500,000.
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Plaintiff: Hatziyannakis
Date:February 2011
Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $270,000 in compensatory damages and allocated 32% of the fault to PM USA (an amount of approximately $86,000).
Post-Trial Developments:
In January 2013, the Florida Fourth District Court of Appeal affirmed per curiam the trial court’s decision without issuing an opinion. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $174,000 for the judgment plus interest and associated costs. In August 2013, PM USA paid the judgment plus interest and associated costs in the amount of $178,000.
Plaintiff:Giddens
Date:March 2013
Verdict:
In March 2013, a jury in the U.S. District Court for the Middle District of Florida (Fort Myers) returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $80,000 in compensatory damages and allocated 7% of the fault to PM USA (an amount of $5,600).
Post-Trial Developments:
In March 2013, the U.S. District Court for the Middle District of Florida (Fort Myers) entered its final judgment against PM USA in the amount of $5,600, plus post-judgment interest. In April 2013, the parties entered into an agreement not to pursue any appeal or cost claims and PM USA will not be required to pay the judgment.
Plaintiff: Weingart
Date:July 2011
Verdict:
A Palm Beach County jury returned a verdict in the amount of zero damages and allocated 3% of the fault to each of the defendants (PM USA, R.J. Reynolds and Lorillard).
Post-Trial Developments:
In September 2011, the trial court, on plaintiff’s motion, concluded that an additur of $150,000 is required for plaintiff’s pain and suffering. The trial court entered final judgment and, since PM USA was allocated 3% of the fault, its portion of the damages was $4,500. In October 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal. In February 2013, the Florida Fourth District Court of Appeal affirmed per curiam the trial court’s decision. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $50,000 for the judgment plus interest and associated costs. In June 2013, PM USA paid an amount of approximately $50,000 in satisfaction of the judgment and associated costs.
Plaintiff: Piendle
Date:August 2010
Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $4 million in compensatory damages and allocated 27.5% of the fault to PM USA (an amount of approximately $1.1 million). The jury also awarded $90,000 in punitive damages against PM USA.
Post-Trial Developments:
In June 2012, the Florida Fourth District Court of Appeal affirmed per curiam the trial court’s decision without issuing an opinion. In the third quarter of 2012, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.7 million for the judgment plus interest and associated costs and paid such amount in November 2012. In the first quarter of 2013, PM USA paid related fees in the amount of approximately $100,000.
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▪Appeals of Engle Progeny Verdicts: Plaintiffs in various Engle progeny cases have appealed adverse rulings or verdicts and, in some cases, PM USA has cross-appealed. PM USA'sUSA’s appeals of adverse verdicts are discussed in the chartcharts above.
Since the remand of B. Brown(discussed (discussed above under the heading Federal Engle Progeny Cases), several state appellate rulings have superseded the Eleventh Circuit'sCircuit’s ruling on Florida state law. These cases include Martin, an Engle progeny case against R.J. Reynolds in Escambia County, and J. Brown, an Engle progeny case against R.J. Reynolds in Broward County, Douglas, an Engle progeny case against PM USA, R.J. Reynolds and Liggett Group in Hillsborough County, and Koballa, an Engle progeny case against R.J. Reynolds in Volusia County. In Martin, the Florida First District Court of Appeal rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs'plaintiffs’ burden of proof. R.J. Reynolds had sought Florida Supreme Court review in that case but, in July 2011, the Florida Supreme Court declined to hear the appeal. In December 2011, petitions for certiorari were filed with the United States Supreme Court by R.J. Reynolds in Campbell
,Martin, Gray and Hall and by PM USA and Liggett Group in Campbell. The United States Supreme Court denied the defendants'defendants’ certiorari petitions in March 2012.
In J. Brown, the Florida Fourth District Court of Appeal also rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs'plaintiffs’ burden of proof. However, the Fourth District expressly disagreed with the First District'sDistrict’s Martin decision by ruling that Engle progeny plaintiffs must prove legal causation on their claims. In addition, the J. Brown court expressed concerns that using the Engle findings to reduce plaintiffs'plaintiffs’ burden may violate defendants'defendants’ due process rights. In October 2011, the Fourth District denied R.J. Reynolds'Reynolds’ motion to certify J. Brown to the Florida Supreme Court for review. R.J. Reynolds is seeking review of the case by the Florida Supreme Court.
In Douglas, in March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of
the Engle jury findings with respect to strict liability claims but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings
violates defendants'defendants’ federal due process rights. In April 2012,
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the defendants in Douglas filed a notice to invoke discretionary jurisdiction with the Florida Supreme Court. In May 2012,March 2013, the Florida Supreme Court accepted jurisdictionaffirmed the final judgment entered in favor of plaintiff, upholding the use of the case. Argument occurredEngle jury findings with respect to strict liability and negligence claims. PM USA filed its petition for writ of certiorari with the United States Supreme Court in September 2012.August 2013, which the court denied in October 2013.
In Koballa, in October 2012, the Florida Fifth District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings with respect to negligence, concealment and conspiracy claims but, like Douglas, certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants'defendants’ federal due process rights. OnIn November 5,
2012, R.J. Reynolds filed an appeal to the Florida Supreme Court and the court entered a stay in the case pending resolution of the Douglas case.
As noted above in Federal Engle Progeny Cases, there has been no federal appellate review of the federal due process issues raised by the use of findings from the original Engle trial in Engle progeny cases, although several appeals brought by R.J. Reynolds are pending.
Because of the substantial period of time required for the federal and state appellate processes, it is possible that PM USA may have to pay additional outstanding judgments in the Engle progeny cases before the final adjudication of these issues by the Florida Supreme Court or the United States Supreme Court.
Other Smoking and Health Class Actions
Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 59 smoking and health class actions involving PM USA in Arkansas (1), California (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).
As of December 31, 2012,January 27, 2014, PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in seven class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants'defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek
certification of classes of all individuals who smoked defendants'defendants’ cigarettes. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Scott Class Action
Following a 2004 verdict that awarded plaintiffs approximately $590 million to fund a 10-year smoking cessation program and a series of appeals and other post-trial motions, PM USA recorded in the second quarter of 2011 a provision on its condensed consolidated balance sheet of approximately $36 million related to the judgment and approximately $5 million related to interest, which was in addition to a previously recorded provision of approximately $30 million. In August 2011, PM USA paid its share of the judgment and interest in an amount of approximately $70 million.
In October 2011, plaintiffs' counsel filed a motion for an award of attorneys' fees and costs. Plaintiffs' counsel sought additional fees from defendants of up to $673 million. Additionally, plaintiffs' counsel requested an award of approximately $13 million in costs.
In May 2012, after defendants challenged plaintiffs' counsel's request that defendants pay their attorneys' fees directly, as opposed to out of the court-supervised fund, the parties reached a settlement on the amount of fees and costs to be awarded to plaintiffs' counsel. Plaintiffs agreed that any recovery of fees and costs would come from the court-supervised fund, not the defendants, and indicated they would seek approximately $114 million from the fund. In exchange, defendants agreed to waive 50% of their right to a refund of any unspent money in the fund after the 10-year program is completed. The agreement is not contingent on the trial court's granting plaintiffs' request for additional costs and fees. The trustee of the fund intervened to challenge whether the plaintiffs' lawyers should get any money from the fund or, alternatively, the amount they would recover from the fund. On December 20, 2012, the trial court awarded the plaintiffs' counsel attorneys' fees in an amount of approximately $103 million, all of which have now been paid from the fund.
Other Medical Monitoring Class Actions
In addition to the Scott class action discussed above, twoTwo purported medical monitoring class actions are pending against PM USA. These two cases were brought in New York (Caronia, filed in January 2006 in the United StatesU.S. District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in December 2006 in the United StatesU.S. District Court for the District of Massachusetts) on behalf of each state'sstate’s respective residents who: are age 50 or older; have smoked the Marlboro brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by a physician for suspected lung cancer. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a court-
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various product-based causes of action and the creation of a court-supervisedsupervised program providing members of the purported class Low Dose CT Scanning(“LDCT”) scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases do not seek punitive damages. A case brought in CaliforniaTwo other cases (California (Xavier) was dismissed in July 2011, and a case brought in Florida (Gargano) was voluntarily) were dismissed with prejudice in August 2011.
In Caronia, in February 2010, the district court granted in part PM USA'sUSA’s summary judgment motion, dismissing plaintiffs'plaintiffs’ strict liability and negligence claims and certain other claims, granted plaintiffs leave to amend their complaint to allege a medical monitoring cause of action and requested further briefing on PM USA'sUSA’s summary judgment motion as to plaintiffs'plaintiffs’ implied warranty claim and, if plaintiffs amend their complaint, their medical monitoring claim. In March 2010, plaintiffs filed their amended complaint and PM USA moved to dismiss the implied warranty and medical monitoring claims. In January 2011, the district court granted PM USA'sUSA’s motion, dismissed plaintiffs'plaintiffs’ claims and declared plaintiffs'plaintiffs’ motion for class certification moot in light of the dismissal of the case. The plaintiffs have appealed that decision to the United StatesU.S. Court of Appeals for the Second Circuit. Argument beforeIn May 2013, the U.S. Court of Appeals for the Second Circuit was heard in March 2012.affirmed the dismissal of plaintiffs’ traditional negligence, strict liability and breach-of-warranty claims on the grounds of statute of limitations and the widespread knowledge regarding the risks of cigarette smoking, but certified to the New York State Court of Appeals the following questions: (1) whether New York would recognize an independent claim for medical monitoring, (2) if so, what would be the elements of such a claim, and (3) what would be the statute of limitations applicable to such a claim and when would it be triggered. In May 2013, the New York Court of Appeals accepted the certified questions and, on December 17, 2013, answered the first question ruling that New York law does not allow for an independent cause of action for medical monitoring.
In Donovan, the Supreme Judicial Court of Massachusetts, in answering questions certified to it by the district court, held in October 2009 that under certain circumstances state law recognizes a claim by individual smokers for medical monitoring despite the absence of an actual injury. The court also ruled that whether or not the case is barred by the applicable statute of limitations is a factual issue to be determined by the trial court. The case was remanded to federal court for further proceedings. In June 2010, the district court granted in part the plaintiffs'plaintiffs’ motion for class certification, certifying the class as to plaintiffs'plaintiffs’ claims for breach of implied warranty and violation of the Massachusetts Consumer Protection Act, but denying certification as to plaintiffs'plaintiffs’ negligence claim. In July 2010, PM USA petitioned the United StatesU.S. Court of Appeals for the First Circuit for appellate review of the class certification decision. The petition was denied in September 2010. As a remedy, plaintiffs have proposed a 28-year medical monitoring program with an approximate cost of $190 million. In April 2011, plaintiffs moved to amend their class certification to extend the cut-off date for individuals to satisfy the class membership criteria from December 14, 2006 to August 1, 2011. The district court granted this motion in May 2011. In June 2011, plaintiffs filed various motions for summary judgment and to strike affirmative defenses, which the district court
denied in March 2012 without prejudice. In October 2011, PM USA filed a motion for class decertification, which motion was denied in March 2012. In February 2013, the district court amended the class definition to extend to individuals who satisfy the class membership criteria through February 26, 2013, and to exclude any individual who was not a Massachusetts resident as of February 26, 2013. On January 6, 2014, plaintiffs renewed their previously filed summary judgment motions to strike affirmative defenses. A trial date has not been set.
Evolving medical standards and practices could have an impact on the defense of medical monitoring claims. For example, the first publication of the findings of the National Cancer Institute'sInstitute’s National Lung Screening Trial (NLST) in June 2011 reported a 20% reduction in lung cancer deaths among certain long-term smokers receiving Low Dose CTLDCT Scanning for lung cancer. Since then, various public health organizations have begun to develop new lung cancer screening guidelines. Also, a number of hospitals have advertised the availability of screening programs.programs and some insurance companies now cover screening for some individuals. Other studies in this area are ongoing. On December 30, 2013, the United States Preventative Services Task Force issued a recommendation that LDCT scanning be classified as a Class B screening for certain heavy smokers. As such, the LDCT scanning would be considered an “Essential Health Benefit” for those smokers under the Affordable Care Act.
Health Care Cost Recovery Litigation
▪Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well.damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
The claims asserted include the claim that cigarette manufacturers were "unjustly enriched"“unjustly enriched” by plaintiffs'plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands"“unclean hands” (namely,
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that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statutes of limitations. In addition, defendants argue that they should be entitled to "set off"“set off” any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing“standing in the shoes"shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.
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Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs'plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs'plaintiffs’ appeals from the cases decided by five circuit courts of appeals. In 2011, in the health care cost recovery case brought against PM USA and other defendants by the City of St. Louis, Missouri and approximately 40 Missouri hospitals, a verdict was returned in favor of the defendants.
Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer ("MSP"(“MSP”) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases were brought in New York (2), Florida (2) and Massachusetts (1). All were dismissed by federal courts.
In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (dismissed), the Marshall Islands (dismissed), and Canada (9), and other entities have stated that they are considering filing such actions.
In September 2005, in the first of several health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA'sUSA’s and other defendants'defendants’ challenge to the British Columbia court'scourt’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. In December 2009, the Court of Appeals of British Columbia ruled that certain defendants
can proceed against the Federal Government of Canada as third parties on the theory that the Federal Government of Canada negligently misrepresented to defendants the efficacy of a low tar tobacco variety that the Federal Government of Canada developed and licensed to defendants. In May 2010, the Supreme Court of Canada granted leave to the Federal Government of Canada to appeal this decision and leave to defendants to cross-appeal the Court of Appeals'Appeals’ decision to dismiss claims against the Federal Government of Canada based on other theories of liability. In July 2011, the Supreme Court of Canada dismissed the third-party claims against the Federal Government of Canada.
Since the beginning of 2008, the Canadian Provinces of New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan and Prince Edward Island have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in
the British Columbia and Quebec cases, while both Altria Group, Inc. and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan and Prince Edward Island cases. The provinceProvince of Nova Scotia and the territory of Nunavut have enacted similar legislation or are in the process of enacting similar legislation. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
▪Settlements of Health Care Cost Recovery Litigation:In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA")MSA with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settledentered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State“State Settlement Agreements"Agreements”). The State Settlement Agreements require that the original participating manufacturers make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the original participating manufacturers are required to pay settling plaintiffs' attorneys'plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million. For the years ended December 31, 2013, 2012 2011 and 2010,2011, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements and the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA"(“FETRA”) was approximately $4.2 billion, $4.9 billion and $4.8 billion, respectively. The 2013 amount includes reductions to cost of sales of $4.9 billion, $4.8 billion664 million related to the NPM Adjustment Items discussed below.
Altria Group, Inc. and $4.8 billion, respectively.Subsidiaries
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The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.
▪Possible Adjustments in MSA Payments for 2003 - 2011
2012: Pursuant to the provisions of the MSA, domestic tobacco product manufacturers, including PM USA whoand the other manufacturers that are original signatories to the MSA (the "Original“Original Participating Manufacturers"Manufacturers” or "OPMs"“OPMs”) are participating in proceedings that may result inwith respect to claims for downward adjustments to the amounts paid by the OPMs and the other MSA-participating manufacturersthem to the states and territories that are parties to the MSA for each of the years 2003 - 2011.2012. The proceedings relate to an MSA payment adjustment (the "NPM Adjustment") based on the collective loss of market share for the relevant year by all participating manufacturers who are subject to the payment obligations and marketing restrictions of the MSA to non-participating manufacturers ("NPMs")NPMs who are not subject to such obligations and restrictions.restrictions (the “NPM Adjustment”).
Altria Group, Inc. and Subsidiaries
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As part of these proceedings, an independent economic consulting firm jointly selected by the MSA parties or otherwise selected pursuant to the MSA's provisions is required to determine whether the disadvantages of the MSA were a "significant factor"“significant factor” contributing to the participating manufacturers'manufacturers’ collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a "significant“significant factor,"” each state may avoid a downward adjustment to its share of the participating manufacturers'manufacturers’ annual MSA payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Any potentialSuch a state’s share of the downward adjustment would then be reallocated to any states that doare found not establishto have established such diligent enforcement. PM USA believes that the MSA's arbitration clause requires a state to submit its claim to have diligently enforced a qualifying escrow statute to binding arbitration before a panel of three former federal judges in the manner provided for in the MSA. A number of states have taken the position that this claim should be decided in state court on a state-by-state basis.
An independent economic consulting firm jointly selected by the MSA parties, determined that the disadvantages of the MSA were such a significant factor contributing to the participating manufacturers' collective loss of market share for each of the years 2003 - 2005. A different independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers' collective loss of market share for the year 2006. Following the firm'sfirm’s determination for 2006, the OPMs and the states agreed that the states would not contest that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers'manufacturers’ collective loss of market share for the years 2007 2008 and 2009. Accordingly, the OPMs and the states have agreed that no "significant factor" determination by an independent economic consulting firm will be necessary with respect to the participating manufacturers' collective loss of market share for the years 2007, 2008 and 2009- 2012 (the "significant“significant factor agreement"agreement”). This agreement becamehas become effective for 2007 2008- 2010 and 2009will become effective for 2011 and 2012 on February 1, 2010, 20112014 and 2012,2015, respectively. The OPMs and
Once a significant factor determination in favor of the states have agreed to extendparticipating manufacturers for a particular year has been made, or the significant factor agreement to apply to the participating manufacturers' collective loss of market share for 2010 and 2011, as well as to any collective loss of market share that the participating manufacturers experience for 2012. This agreement willhas become effective for a particular year, PM USA has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into a disputed payments account (the “DPA”) or withhold the amount altogether. PM USA made its full MSA payment due in each year from 2006 - 2010 on February 1,to the states (subject to a right to recoup the NPM Adjustment amount in the form of a credit against future MSA payments), even though it had the right to deduct the disputed amounts of the 2003 - 2007 NPM Adjustments from such MSA payments.
PM USA paid its share of the amount of the disputed 2008, 2009 and 2010 NPM Adjustments into the DPA in connection with its MSA payments due in 2011, 2012 and 2013, andrespectively.
An independent auditor appointed under the MSA (the “Independent Auditor”) is required to calculate the maximum amount, if any, of PM USA’s share of the NPM Adjustment for 2011 on February 1, 2014. Ifany year in respect of which such NPM Adjustment is potentially applicable. In accordance with such provisions, the MSA's Independent Auditor determineshas calculated the following approximate amounts as PM USA’s maximum potential share of the NPM Adjustments for the years 2003 - 2012 (such amounts are exclusive of interest or earnings to which PM USA believes it would be entitled):
|
| | | |
| (in millions) | PM USA Potential Adjustment |
|
| 2003 | $ | 337 |
|
| 2004 | 388 |
|
| 2005 | 181 |
|
| 2006 | 154 |
|
| 2007 | 185 |
|
| 2008 | 250 |
|
| 2009 | 205 |
|
| 2010 | 203 |
|
| 2011 | 159 |
|
| 2012 | 199 |
|
As discussed more fully below, PM USA has entered into a settlement with 22 of the 52 states and territories that are parties to the participating manufacturers collectively lost market shareMSA, resolving those states’ respective shares of the amounts set forth in the table above for each of 2003 - 2012. For that and other reasons discussed below, the amounts of the 2003 - 2012 this agreement will become effective for 2012 on February 1, 2015.NPM Adjustments that remain potentially available to PM USA from the MSA states and territories that have not joined such settlement are lower than the maximum amounts calculated by the Independent Auditor and reflected in the table above.
Following the "significant factor"2003 “significant factor” determination, with respect to 2003, 38 states filed declaratory judgment actions in their respective state courts seeking a declaration that the state diligently
enforced its escrow statute during 2003. The OPMs and other MSA-participatingparticipating manufacturers responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in 11 MSA states and territories that did not file declaratory judgment actions. Courts in all but one of the 46 MSA states, andas well as courts in the District of Columbia and Puerto Rico, have ruled that the question of whether a state had diligently enforced its escrow statute during 2003 is subject to arbitration. Several of these rulings may be subject to further review. The Montana state courts have ruled that the diligent enforcement claims of that state may be litigated in state court, rather than in arbitration. In June 2012, following the denial of the OPMs' petition to the United States Supreme Court for a writ of certiorari, the participating manufacturers and Montana entered into a consent decree
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pursuant to which Montana will not be subject to the 2003 NPM Adjustment.
PM USA, the other OPMs and approximately 25 other MSA-participating manufacturers have entered into an agreement regarding arbitration with 45 MSA states and territories concerning the 2003 NPM Adjustment, including the states' claims of diligent enforcement for 2003.Adjustment. The agreement further provides for a partial liability reduction of 20% for the 2003 NPM Adjustment for states that entered into the agreement by January 30, 2009 and are determined in the arbitration not to have diligently enforced a qualifying escrow statute during 2003. Based on the number of states that entered into the agreement by January 30, 2009 (45), the partial liability reduction for those states is 20%. The partial liability reduction wouldwill reduce the amount of PM USA'sUSA’s 2003 NPM Adjustment by up to a correspondingthat percentage.
The selection of the arbitration panel for the 2003 NPM Adjustment was completed in July 2010, and the arbitration is currently ongoing.2010. Following the completion of discovery, the participating manufacturers determined to continue to contest the 2003 diligent enforcement claims of 33 states, the District of Columbia and Puerto Rico (the “contested states”) and to no longer contest such claims by 12 states and four U.S. territories (the "non-contested states"“non-contested states”). As a result, theThe non-contested states will not be subject to the 2003 NPM Adjustment, and theirstates’ share of any such NPM Adjustment, along with the shares of any states found by the arbitration panel to have diligently enforced during 2003, will be reallocated in accordance with the MSA to those states if any, found by the panel not to have diligently enforced during 2003. Proceedings to determine state diligent enforcement claims for the years 2004 through 2011 have not yet been scheduled.
Once a significant factor determination in favor of the participating manufacturers for a particular year has been made by an economic consulting firm, or the states' agreement not to contest significant factor for a particular year has become effective, PM USA has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into a disputed payments account ("DPA") or withhold it altogether. PM USA has made its full MSA payment due in
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each year from 2006 - 2010Effective December 17, 2012, prior to the states (subject to a right to recoup the NPM Adjustment amount in the form of a credit against future MSA payments), even though it had the right to deduct the disputed amountscompletion of the 2003 - 2007 NPM Adjustments, as described above, from such MSA payments. PM USA paid its share of the amount of the disputed 2008 and 2009 NPM Adjustments shown below into the DPA in connection with its MSA payments due in 2011 and 2012, respectively. The approximate maximum principal amounts
of PM USA's share of the disputed NPM Adjustment for the years 2003 through 2011, as currently calculated by the MSA's Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which PM USA believes it would be entitled in the manner provided in the MSA and do not reflect the partial liability reduction for the 2003 NPM Adjustment pursuant to the arbitration, agreement described above):
|
| | | | | | | | | |
| Year for which NPM Adjustment calculated | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| | | | | | | | | | |
| Year in which deduction for NPM Adjustment may be taken | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| | | | | | | | | | |
| PM USA's Approximate Share of Disputed NPM Adjustment (in millions) | $337 | $388 | $181 | $154 | $185 | $252 | $206 | $208 | $137 |
Effective December 17, 2012, PM USA, the other OPMs and certain other participating manufacturers entered into a Term Sheetterm sheet (the “Term Sheet”) with 17 MSA states, the District of Columbia and Puerto Rico for settlement of the 2003 - 2012 NPM Adjustments with those states and territories (the "signatory States"). The Term Sheet is subject to approval by the arbitration panel in the pending NPM Adjustment arbitration, which could come in the form of a stipulated award. While it is possible thatterritories. An additional MSA states may subsequently joinstate joined the Term Sheet in April 2013 (prior to the date of PM USA’s April 2013 MSA payment), and two more MSA states joined the Term Sheet in May 2013 (after the date of PM USA’s April 2013 MSA payment). (These 20 states, the District of Columbia and Puerto Rico are collectively referred to as the “signatory states,” and the states and territories that have not joined the Term Sheet are collectively referred to as the “non-signatory states.”)
In March 2013, the arbitration panel in the NPM Adjustment arbitration issued a stipulated partial settlement and award (the "non-signatory States"“Stipulated Award”) have raised potential objections concerningpermitting the Term Sheet withto proceed. As a result, the number of contested states in the 2003 arbitration was reduced from 35 to the 15 contested states that did not join the Term Sheet. As part of the Stipulated Award, the arbitration panel. Also,panel ruled that the total 2003 NPM Adjustment claim is to be reduced pro rata by the aggregate allocable share of the signatory states (currently approximately 46%) to determine the maximum amount of the 2003 NPM Adjustment potentially available from the 15 remaining contested states, although any of those states may seek a numbermore favorable reduction method as to it for the 2003 NPM Adjustment through review in its state court. Following the issuance of the Stipulated Award, 14 of the non-signatory States have indicated that theystates, including 12 of the 15 remaining contested states
described above, filed motions in their state MSA courts to vacate and/or modify portions or all of the Stipulated Award. In October 2013, the Idaho state court denied Idaho’s motion to vacate the Stipulated Award, although Idaho has appealed this ruling. On November 1, 2013, Massachusetts dismissed its motion to vacate the Stipulated Award. Many of the remaining motions seek a more favorable reduction method than the pro rata reduction ordered by the arbitration panel in the Stipulated Award. Additional non-signatory states may attempt toalso take action in state court to preventvacate or modify the settlement from proceeding or to seek other relief with respect toStipulated Award, although PM USA believes that the settlement.statutory deadline for the filing of such motions has now passed. No assurance can be given that the arbitration panel will issue the order necessary for the Term Sheet to proceed or that the objectionsthis litigation or any other such actionsattempts by other non-signatory Statesstates will be resolved in a manner favorable to PM USA.USA, nor can PM USA continuespredict the remedy that might be ordered if any such litigation were to reserve all rights regarding the NPM Adjustments with respectbe resolved unfavorably to the non-signatory States.PM USA.
Under theThe Term Sheet provides for the OPMs willto receive reductions to futuretheir MSA payments in an amount equal to 46% of the signatory States'states’ aggregate allocable share of the OPMs'OPMs’ aggregate 2003 - 2012 NPM Adjustments.Adjustments plus interest. The OPMs have agreed that, subject to certain conditions, PM USA will receive approximately 28% of such reductionreductions (which is the maximum percentage allocation of the total 2003 - 2012 NPM Adjustments to which PM USA was entitled under the MSA); R.J. Reynolds will receive approximately 60% of such reductions; and Lorillard will receive approximately 12% of such reductions. Based on the identity of the current signatory States and an estimatestates on April 15, 2013, the reduction in PM USA’s April 2013 MSA payment obligation was approximately $483 million.
PM USA received all of its approximately $483 million reduction with respect to the signatory states that had joined the Term Sheet prior to the date of the 2012 NPM Adjustment,April 2013 MSA payment through a credit against that MSA payment. PM USA expects to receive a reduction inan additional $36 million credit to be applied to its April 2014 MSA payment obligation of approximately $450 million. This estimated amount is subject to change depending onas a variety of factors related to the calculationresult of the reductions. Iftwo additional states that joined the Term Sheet proceeds, PM USA would recordafter the amount as a corresponding increase in its reported pre-tax earnings.
Subject to certain conditions, PM USA expects to receive alldate of its reduction under the Term Sheet through a credit against its April 2013 MSA payment. R.J. Reynolds and Lorillard are expected to receive part of their respective reductions through creditsover a five-year period. PM USA recorded the $483 million, which it received as a credit against theirits April 2013 MSA paymentspayment as a reduction to cost of sales that increased its reported pre-tax earnings in the first quarter of 2013, and part through reductions in their MSA paymentsrecorded the additional $36 million credit that it expects to receive in April 2014 - April 2017.as a reduction to cost of sales, which increased its reported pre-tax earnings in the second quarter of 2013.
As part of the settlement, each of the signatory States willstates that had joined the Term Sheet prior to the date of the April 2013 MSA payment is to receive its portion of over $44.7 billion from the DPA. In this context, PM USA will authorizeauthorized release to the signatory Statesstates of their allocable share of the $458658 million that PM USA has paid into the DPA (plus the accumulated earnings thereon), which amountsamounted to approximately $190272 million. In addition, PM USA authorized release of additional funds from the DPA to the two signatory states that joined the Term Sheet after the date of
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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the April 2013 MSA payment in an amount of approximately $22 million. Furthermore, PM USA will deposit the signatory states’ allocable share of its portion of the 2011 - 2012 NPM Adjustments into the DPA in connection with its April 2014 - 2015 MSA payments and then, following such deposit, authorize the release of such share to the signatory states as provided in the Stipulated Award.
The Term Sheet also provides that the NPM Adjustment provision will be revised and streamlined as to the signatory Statesstates for years after 2012. In connection with the settlement, the formula for allocating among the OPMs the revised NPM Adjustments applicable in the future to the signatory Statesstates will be modified in a manner favorable to PM USA, although the extent to which it is favorable to PM USA will be dependentdepend upon certain future events, including the future relative market shares of the OPMs.
Except toIn September 2013, the extentarbitration panel for the 2003 NPM Adjustment issued awards ruling that a settlement undersix of the 15 contested states that had not joined the Term Sheet proceedsdid not diligently enforce their respective escrow statutes during 2003. Based on this ruling, the participating manufacturers are entitled to the entire 2003 NPM Adjustment remaining after the pro rata reduction ordered in light of the Term Sheet by the arbitration panel in the Stipulated Award. Based on the pro rata reduction method specified by the panel as described above and exceptthe 20% partial liability reduction applicable to signatories of the agreement regarding arbitration described above, PM USA is entitled to an NPM Adjustment for 2003, likely in the form of a credit against its April 2014 MSA payment, in the amount of approximately $145 million. PM USA also is entitled to interest on that amount, although a potential dispute has been raised as to how interest and earnings are to be allocated among the OPMs. PM USA recorded the $145 million credit that it expects to receive as a reduction to cost of sales, which increased its reported pre-tax earnings in the third quarter of 2013. This credit will be applied only to the non-diligent states. All six non-diligent states have filed motions in their state courts to vacate the panel’s rulings as to their diligence. Furthermore, as noted above, all six non-diligent states had already filed motions in their state courts to vacate and/or modify the Stipulated Award seeking a more favorable reduction method as to them than the pro rata reduction ordered by the panel in the Stipulated Award. While PM USA intends to contest these motions vigorously, no assurance can be given that one or more of these states will not be successful in vacating the panel’s ruling that it was not diligent and/or in seeking to have a more favorable reduction method applied as to it. If one or more states are successful with respect to any such motions, the amount of the 2003 NPM Adjustment to which PM USA is entitled could be lower than the amount described above.
PM USA continues to reserve all rights regarding the NPM Adjustments with respect to the non-contested non-signatory States in regardstates and intends to the 2003 NPM Adjustment, PM USA intendscontinue to pursue vigorously the disputed
NPM Adjustments for 20032004 - 2011 through2012 against them. No proceedings to determine state diligent enforcement claims for 2004 - 2012 have yet been scheduled. PM USA believes that the MSA requires state claims of diligent enforcement for 2004 - 2012 to be determined in a national arbitration, although a number of non-signatory states have filed motions in their state courts contending, or have reserved rights to contend, that such claims for those years are to be determined either in separate arbitrations for each state or in state court on a state-by-state basis. No assurance can be given as to if and when proceedings described above. Iffor 2004 - 2012 will be scheduled or the Term Sheet proceeds, the maximum principalprecise form those proceedings will take.
The amounts of PM USA's share of the disputed NPM Adjustments for 20032004 - 2012 set forth in the table above are subject to beingwill be reduced to reflect the settlement underin light of the Term Sheet in a manner to be determined. PM USA believes thatdetermine the maximum amount of such determination would be made as part ofadjustments potentially available from the arbitration proceedings, but some non-signatory States have indicated that they may takestates. The Stipulated Award did not specify the position thatreduction method applicable to the determination would be made by state courts. In addition, the2004 - 2012 NPM Adjustment claims.
The amounts in suchthe table above may be recalculated by the MSA'sMSA’s Independent Auditor if it receives information that is different from or in addition to the information on which it based these
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calculations, including, among other things, if it receives revised sales volumes from any participating manufacturer. Disputes among the manufacturers could also reduce the foregoing amounts. The availability and the precise amount of any NPM Adjustment for 20032004 - 20112012 obtained through such proceedings (as opposed to the settlement)Term Sheet) will not be finally determined until 2013later in 2014 or thereafter. There is no certainty that the OPMs and other MSA-participating manufacturers would ultimately receive any adjustment from the non-signatory states as a result of these proceedings, and the amount of any adjustment received for a year could be less than the amount for that year listed above.above (even as reduced in light of the Term Sheet). If the OPMs do receive such an adjustment through these proceedings (apart from the Term Sheet), the adjustment amount would be allocated among the OPMs pursuant to the MSA'sMSA’s provisions. It is expected that PM USA would receive its share of any adjustments for 20032004 - 2007 likely in the form of a credit against future MSA payments and its share of any adjustment for 2008 or 2009- 2010 in the form of either a withdrawal from the DPA or a combination of a credit against future MSA payments and a withdrawal from the DPA.
▪Other Disputes Related to MSA Payments: In addition to the disputed NPM Adjustments described above, MSA states and participating manufacturers, including PM USA, are conductingconducted another arbitration to resolve certain other disputes related to the calculation of the participating manufacturers'manufacturers’ payments under the MSA. PM USA disputesdisputed the method by which ounces of "roll“roll your own"own” tobacco havehad been converted to cigarettes for purposes of calculating the downward volume adjustments to its MSA payments. PM USA believesbelieved that, for the years 2004 −- 2012, the use of an incorrect conversion method resulted in excess MSA payments by PM USA in those years of approximately $92 million in the aggregate. IfIn
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February 2013, the arbitration panel issued a ruling in favor of the MSA states. Consequently, PM USA prevails on this issue, it would be entitled to awill not receive any credit against its future MSA payments on account of this dispute. This same arbitration panel also issued a ruling in that amount, plus interest. In addition, PM USA seeks application of what it believes to be the correct method for payments to be made in years subsequent to 2012.
This arbitration will also resolve a dispute concerningover whether the total domestic cigarette market and certain other calculations related to“adjusted gross” or the participating manufacturers' MSA payments should be determined based on the "net" number of cigarettes on which federal excise tax is paid, as is currently the case, or whether the "adjusted gross"“net” number of cigarettes on which federal excise tax is paid is the correct methodology.methodology for calculating MSA payments due from certain subsequent participating manufacturers. It is unclear precisely which past and future MSA payments may be affected by this ruling. PM USA also does not currently have sufficient information at this timeaccess to the data that would be necessary to determine the aggregate impact on its MSA payments that would result from a change frommagnitude and the "net" to the "adjusted gross" methodology.direction of such effects, if any.
This arbitration proceeding concluded on December 13, 2012, but the panel has not issued a ruling. No assurance can be given that PM USA will prevail in this arbitration.
▪Other MSA-Related Litigation: Without naming PM USA or any other private party as a defendant,Since the MSA’s inception, NPMs and/or their distributors or customers have filed several legala number of challenges to the MSA and related legislation. New York stateThey have named as defendants the states and their officials, in an effort to enjoin enforcement of important parts of the MSA and related legislation, and/or participating manufacturers, in an effort to obtain damages. To date, no such challenge has been successful, and the Attorneys General of a number of other states were defendants in a lawsuit (King, formerly Pryor) filed in the United States District Court for the Southern District of New York in which plaintiffs
alleged that the MSA and/or related legislation violated federal antitrust laws and the Commerce Clause of the United States Constitution. In March 2011, the trial court granted summary judgment on all claims for the New York state officials. Plaintiffs appealed to the United States CourtU.S. Courts of Appeals for the Second, Circuit. In June 2012, the Second Circuit dismissed that appeal pursuant to a stipulation of the parties, concluding the litigation.
In addition to the King decision above, the United States Courts of Appeals for the Second,Third, Fourth, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have affirmed dismissals or grants of summary judgmentjudgments in favor of state officialsdefendants in seven other cases asserting antitrust and constitutional challenges to the allocable share amendment legislation in those states.16 such cases.
In January 2011, an international arbitration tribunal rejected claims brought against the United States challenging MSA-related legislation in various states under the North American Free Trade Agreement.
▪Federal Government's Lawsuit
Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the United StatesU.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria Group, Inc., asserting claims under three federal statutes, namely the Medical Care Recovery Act ("MCRA"(“MCRA”), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants'defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans'veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits that arose from defendants'defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government'sgovernment’s future costs of providing health care resulting from defendants'defendants’ alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the government'sgovernment’s MCRA and MSP claims, but permitted discovery to proceed on the government'sgovernment’s claims for relief under the civil provisions of RICO.
The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate remedy. In May 2004, the trial court issued an order denying defendants'defendants’ motion for partial summary judgment limiting the
disgorgement remedy. In February 2005, a panel of the United StatesU.S. Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of RICO and entered summary judgment in favor of defendants with respect to the disgorgement claim. In July 2005, the government petitioned
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the United States Supreme Court for further review of the Court of Appeals'Appeals’ ruling that disgorgement is not an available remedy, and in October 2005, the Supreme Court denied the petition.
In June 2005, the government filed with the trial court its proposed final judgment seeking remedies of approximately $14 billion, including $10 billion over a five-year period to fund a national smoking cessation program and $4 billion over a 10-year period to fund a public education and counter-marketing campaign. Further, the government'sgovernment’s proposed remedy would have required defendants to pay additional monies to these programs if targeted reductions in the smoking rate of those under 21 were not achieved according to a prescribed timetable. The government'sgovernment’s proposed remedies also included a series of measures and restrictions applicable to cigarette business operations, including, but not limited to, restrictions on advertising and marketing, potential measures with respect to certain price promotional activities and research and development, disclosure requirements for certain confidential data and implementation of a monitoring system with potential broad powers over cigarette operations.
In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in seven of the eight "sub-schemes"“sub-schemes” to defraud that the government had alleged. Specifically, the court found that:
| |
| ▪ | defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking; |
| |
| ▪ | defendants hid from the public that cigarette smoking and nicotine are addictive; |
| |
| ▪ | defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction; |
| |
| ▪ | defendants falsely marketed and promoted "low“low tar/light"light” cigarettes as less harmful than full-flavor cigarettes; |
| |
| ▪ | defendants falsely denied that they intentionally marketed to youth; |
| |
| ▪ | defendants publicly and falsely denied that ETS is hazardous to non-smokers; and |
| |
| ▪ | defendants suppressed scientific research. |
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The court did not impose monetary penalties on the defendants, but ordered the following relief: (i) an injunction against "committing“committing any act of racketeering"racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against "making,“making, or causing to be made in any way, any
material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes"cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including "lights," "ultra lights"“lights,” “ultra lights” and "low“low tar,"” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of "corrective statements"“corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking "low tar"“low tar” or "light"“light” cigarettes, defendants'defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants'defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission ("FTC"(“FTC”) for a period of ten10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government'sgovernment’s costs in bringing the action.
The defendantsDefendants appealed and, in May 2009, a three judge panel of the Court of Appeals for the District of Columbia Circuit issued a per curiam decision largely affirming the trial court'scourt’s judgment against defendants and in favor of the government. Although the panel largely affirmed the remedial order that was issued by the trial court, it vacated the following aspects of the order:
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| ▪ | its application to defendants'defendants’ subsidiaries; |
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| ▪ | the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application; |
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| ▪ | its point-of-sale display provisions; and |
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| ▪ | its application to Brown & Williamson Holdings. |
The Court of Appeals panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly.
Furthermore, the Court of Appeals panel rejected all of the government'sgovernment’s and intervenors'intervenors’ cross appeal arguments and refused to broaden the remedial order entered by the trial court. The Court of Appeals panel also left undisturbed its prior holding that the government cannot obtain disgorgement as a permissible remedy under RICO.
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In July 2009, defendants filed petitions for a rehearing before the panel and for a rehearing by the entire Court of Appeals. Defendants also filed a motion to vacate portions of the trial court'scourt’s judgment on the grounds of mootness because of the passage of the Family Smoking Prevention and Tobacco Control Act ("FSPTCA"(“FSPTCA”), granting the United StatesU.S. Food and Drug Administration (the "FDA"“FDA”) broad authority over the regulation of tobacco products. In September 2009, the Court of Appeals entered three per curiam rulings. Two of them denied defendants'defendants’ petitions for panel rehearing or for rehearing en bancbanc. . In the third per curiam decision, the Court of Appeals denied defendants'defendants’ suggestion of mootness and motion for partial vacatur. In February 2010, PM USA and Altria Group, Inc. filed their certiorari petitions with the United States Supreme Court. In addition, the federal government and the intervenors filed their own certiorari petitions, asking the court to reverse an earlier Court of Appeals decision and hold that civil RICO allows the trial court to order disgorgement as well as other equitable relief, such as smoking cessation remedies, designed to redress continuing consequences of prior RICO violations. In June 2010, the United States Supreme Court denied all of the parties'parties’ petitions. In July 2010, the Court of Appeals issued its mandate lifting the stay of the trial court'scourt’s judgment and remanding the case to the trial court. As a result of the mandate, except for those matters remanded to the trial court for further proceedings, defendants are now subject to the injunction discussed above and the other elements of the trial court'scourt’s judgment.
In February 2011, the government submitted its proposed corrective statements and the trial court referred issues relating to a document repository to a special master. The defendantsDefendants filed a response to the government'sgovernment’s proposed corrective statements and filed a motion to vacate the trial court'scourt’s injunction in light of the FSPTCA, which motion was denied in June 2011. The defendantsDefendants appealed the trial court'scourt’s ruling to the United StatesU.S. Court of Appeals for the District of Columbia Circuit. OnIn July 27, 2012, the Court of Appeals
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affirmed the district court'scourt’s denial of the defendants'defendants’ motion to vacate the district court'scourt’s injunction.
Remaining issues pending include: (i) the specifics relating to the court-ordered corrective statements and (ii) the requirements related to point-of-sale signage. OnIn November 27, 2012, the district court issued its order specifying the content of the corrective statements described above. The district court'scourt’s order requires that the parties engage in negotiations with the special master regarding implementation of the corrective statements remedy, which negotiations are to conclude by March 2013. Unresolved issues will be decided by the special master and the court. Theremedy. In January 2013, defendants filed a notice of appeal from the corrective statements order on January 25, 2013the content of the corrective statements and a motion to hold the notice of appeal in abeyance pending completion of the negotiations, which the U.S. Court of Appeals granted in February 2013. On January 10, 2014, the parties submitted a motion for entry of a consent order in the district court, setting forth their agreement on January 30, 2013.the implementation details of the corrective communications remedy. The agreement provides that the “trigger date” for implementation is after the appeal on the content of the communications has been exhausted.
In December 2011, the parties to the lawsuit entered into an agreement as to the issues concerning the document
repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million into the district court in installments over a five-year period.
"
“Lights/Ultra Lights"Lights” Cases
▪Overview: Plaintiffs in certain pending matters seek certification of their cases as class actions and allege, among other things, that the uses of the terms "Lights"“Lights” and/or "Ultra Lights"“Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. As of December 31, 2012,2013, a total of 1415 such cases wereare pending in the United States. Three of these cases wereare pending in U.S. federal courts as discussed below. The other cases wereare pending in various U.S. state courts. In addition, a purported "Lights"“Lights” class action is pending against PM USA in Israel.
In the one "Lights" case pending in Israel (El-Roy).
In El-Roy, hearings on plaintiffs'plaintiffs’ motion for class certification were held in November and December 2008, and an additional hearing on class certification was held in November 2011. On In November 28, 2012,, the trial court denied
the plaintiffs'plaintiffs’ motion for class certification and ordered the plaintiffs to pay the defendants approximately $100,000 in attorney fees. Plaintiffs in that case have noticed an appeal. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
▪The Good Case: In May 2006, a federal trial court in Maine granted PM USA'sUSA’s motion for summary judgment in Good, a purported "Lights"“Lights” class action, on the grounds that plaintiffs'plaintiffs’ claims are preempted by the Federal Cigarette Labeling and Advertising Act ("FCLAA"(“FCLAA”) and dismissed the case. In December 2008, the United States Supreme Court ruled that plaintiffs'plaintiffs’ claims are not barred by federal preemption. Although the Court rejected the argument that the FTC'sFTC’s actions were so extensive with respect to the descriptors that the state law claims were barred as a matter of federal law, the Court'sCourt’s decision was limited: it did not address the ultimate merits of plaintiffs'plaintiffs’ claim, the viability of the action as a class action or other state law issues. The case was returned to the federal court in Maine and consolidated with other federal cases in the multidistrict litigation
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proceeding discussed below. In June 2011, the plaintiffs voluntarily dismissed the case without prejudice after the district court denied plaintiffs'plaintiffs’ motion for class certification, concluding the litigation.
▪Federal Multidistrict Proceeding and Subsequent Developments: Since the December 2008 United States Supreme Court decision in Good, and through December 31, 2012,January 27, 2014, 2426 purported "Lights"“Lights” class actions were served upon PM USA and, in certain cases, Altria Group, Inc. These cases were filed in 1415 states, the U.S. Virgin Islands and the District of Columbia. All of these cases either were filed in federal court or were removed to federal court by PM USA and were transferred and consolidated by the Judicial Panel on Multidistrict Litigation ("JPMDL"(“JPMDL”) before the United StatesU.S. District Court for the District of Maine for pretrial proceedings ("(“MDL proceeding"proceeding”).
In November 2010,, the district court in the MDL proceeding denied plaintiffs'plaintiffs’ motion for class certification in four cases, covering the jurisdictions of California, the District of Columbia, Illinois and Maine. These jurisdictions were selected by the parties as sample cases, with two selected by plaintiffs and two selected by defendants. Plaintiffs sought appellate review of this decision but, in February 2011, the United StatesU.S. Court of Appeals for the First Circuit denied plaintiffs'plaintiffs’ petition for leave to appeal. Later that year, plaintiffs in 13 cases voluntarily dismissed without prejudice their cases. In April 2012, the JPMDL remanded the remaining four cases (Phillips, Tang, Wyatt and Cabbat) back to the federal district courts in which the suits originated. In Tang, which was pending in the United StatesU.S. District Court for the Eastern District of New York, the plaintiffs voluntarily
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dismissed the case without prejudice in July 2012, concluding the litigation.
In Phillips, which is now pending in the United StatesU.S. District Court for the Northern District of Ohio, defendants filed in June 2012 a motion for partial judgment on the pleadings on plaintiffs'plaintiffs’ class action consumer sales practices claims and a motion for judgment on the pleadings on plaintiffs'plaintiffs’ state deceptive trade practices claims. A hearingIn March 2013, the court granted defendants’ motions, dismissing with prejudice the associated claims. In April 2013, defendants filed a motion for judgment on plaintiff'sthe pleadings on the class component of plaintiffs’ claims for fraud and unjust enrichment. If defendants’ motion is successful, the only remaining claims that could potentially be pursued on a class-wide basis would be claims for implied and express warranty. Plaintiffs filed a motion for class certification currentlyin August 2013, which the court heard on October 30, 2013. On November 5, 2013, the district court, upon agreement of the parties, dismissed Altria Group, Inc. without prejudice. PM USA is set for August 30, 2013.now the sole defendant in the case.
In Cabbat, which is pending in the United StatesU.S. District Court for the District of Hawaii, plaintiffs amended their complaint in July 2012, amended their complaint, adding a claim for unjust enrichment and dropping their claims for breach of express and implied warranty. Plaintiffs filed a motion for class certification in April 2013, which the trial court denied on January 6, 2014. On January 13, 2014, the trial court vacated the trial date of February 10, 2014. A new trial date has not been set. On January 21, 2014, plaintiffs petitioned the U.S. Court of Appeals for the Ninth Circuit for appellate review of the class certification decision.
In Wyatt, which is pending in the United StatesU.S. District Court for the Eastern District of Wisconsin, plaintiffs filed a motion for class certification onin January 11,2013, which the court denied in August 2013. Also in August 2013, plaintiffs filed a petition for appeal to the U.S. Court of Appeals for the Seventh Circuit, which the court denied in September 2013. In October 2013, plaintiffs filed a motion in the district court seeking reconsideration of the denial of class certification.
▪"Lights"“Lights” Cases Dismissed, Not Certified or Ordered De-Certified: To date, in addition to the district court in the MDL proceeding, 1618 courts in 1719 "Lights"“Lights” cases have refused to certify class actions, dismissed class action allegations,
reversed prior class certification decisions or have entered judgment in favor of PM USA.
Trial courts in Arizona, Hawaii, Illinois, Kansas, New Jersey, New Mexico, Oregon, Tennessee, Washington and WashingtonWisconsin have refused to grant class certification or have dismissed plaintiffs'plaintiffs’ class action allegations. Plaintiffs voluntarily dismissed a case in Michigan after a trial court dismissed the claims plaintiffs asserted under the Michigan Unfair Trade and Consumer Protection Act.
Several appellate courts have issued rulings that either affirmed rulings in favor of Altria Group, Inc. and/or PM
USA or reversed rulings entered in favor of plaintiffs. In Florida, an intermediate appellate court overturned an order by a trial court that granted class certification in HinesHines. . The Florida Supreme Court denied review in January 2008. The Supreme Court of Illinois has overturned a judgment that awarded damages to a certified class in the Price case. See The Price Case below for further discussion. In Louisiana, the United StatesU.S. Court of Appeals for the Fifth Circuit dismissed a purported "Lights"“Lights” class action brought in Louisiana federal court (Sullivan) on the grounds that plaintiffs'plaintiffs’ claims were preempted by the FCLAA. In New York, the United StatesU.S. Court of Appeals for the Second Circuit overturned a decision by a New York trial court in Schwab that granted plaintiffs'plaintiffs’ motion for certification of a nationwide class of all United StatesU.S. residents that purchased cigarettes in the United States that were labeled "Light"“Light” or "Lights."“Lights.” In July 2010, plaintiffs in Schwab voluntarily dismissed the case with prejudice. In Ohio, the Ohio Supreme Court overturned class certifications in the Marrone and Phillips cases. Plaintiffs voluntarily dismissed without prejudice both cases in August 2009, but refiled in federal court (discussedas the Phillips case(discussed above). The Supreme Court of Washington denied a motion for interlocutory review filed by the plaintiffs in the Davies case that sought review of an order by the trial court that refused to certify a class. Plaintiffs subsequently voluntarily dismissed the Davies case with prejudice. In August 2011, the United StatesU.S. Court of Appeals for the Seventh Circuit affirmed the Illinois federal district court'scourt’s dismissal of "Lights"“Lights” claims brought against PM USA in the Cleary case. In Curtis, a certified class action, in May 2012, the Minnesota Supreme Court affirmed the trial court'scourt’s entry of summary judgment in favor of PM USA, concluding this litigation.
In Lawrence, in August 2012, the New Hampshire Supreme Court reversed the trial court'scourt’s order to certify a class and subsequently denied plaintiffs'plaintiffs’ rehearing petition. OnIn October 26, 2012, the case was dismissed after plaintiffs filed a motion to dismiss the case with prejudice, concluding this litigation.
▪Other Developments: In Oregon (Pearson), a state court denied plaintiff'splaintiffs’ motion for interlocutory review of the trial court'scourt’s refusal to certify a class. In February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the district
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court granted PM USA'sUSA’s motion based on express preemption under the FCLAA, and plaintiffs appealed this dismissal and the class certification denial to the Oregon Court of Appeals. Argument was held in April 2010. In June 2013, the Oregon Court of Appeals reversed the trial court’s denial of class certification and remanded to the trial court for further consideration of class certification. In July 2013, PM USA filed a petition for reconsideration with the Oregon Court of Appeals, which was denied in August 2013. PM USA filed its petition for review to the Oregon Supreme Court on October 25, 2013, which the court accepted on
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January 16, 2014. Oral argument is scheduled for June 23, 2014.
In December 2009, the state trial court in the Carroll (formerly known as Holmes) case (pending in Delaware) denied PM USA'sUSA’s motion for summary judgment based on an exemption provision in the Delaware Consumer Fraud Act. In January 2011, the trial court allowed the plaintiffs to file an amended complaint substituting class representatives and naming Altria Group, Inc. and PMI as additional defendants. In July 2011, the parties stipulated to the dismissal without prejudice of Altria Group, Inc. and PMI. The stipulation is signed by the parties but not yet approved byIn February 2013, the trial court. See Guarantees and Other Similar Matters below for a discussioncourt approved the parties’ stipulation to the dismissal without prejudice of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
In June 2007,PMI. PM USA is now the United States Supreme Court reversed the lower court rulingssole defendant in the case.Miner (formerly known as Watson) case that denied plaintiffs' motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants' contention that the case must be tried in federal court under the "federal officer" statute. The case was removed to federal court in Arkansas and the case was transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the case to Arkansas state court. In December 2011, the plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice. A class certification hearing is set to begin on October 22, 2013.
▪The Price Case: Trial in the Price case commenced in state court in Illinois in January 2003 and, in March 2003, the judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $33.0 billion in punitive damages against PM USA. In December 2005,, the Illinois Supreme Court reversed the trial court'scourt’s judgment in favor of the plaintiffs. In November 2006, the United States Supreme Court denied plaintiffs'plaintiffs’ petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County enforced the Illinois Supreme Court'sCourt’s mandate and dismissed the case with prejudice.
In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment that was entered in favor of PM USA. Specifically, plaintiffs sought to vacate the judgment entered by the trial court on remand from the 2005 Illinois Supreme Court decision overturning the verdict on the ground that the United States Supreme Court'sCourt’s December 2008 decision in Good demonstrated that the Illinois Supreme Court'sCourt’s decision was "inaccurate."“inaccurate.” PM USA filed a motion to dismiss plaintiffs'plaintiffs’ petition and, in February 2009, the trial court granted PM USA'sUSA’s motion on the basis that the petition was not timely filed. In March 2009, the
Price plaintiffs filed a notice of appeal with the Fifth Judicial District of the Appellate Court of Illinois. In February 2011, the intermediate appellate court ruled that the petition was timely filed and reversed the trial court'scourt’s dismissal of the plaintiffs'plaintiffs’ petition and, in September 2011, the Illinois Supreme Court declined PM USA'sUSA’s petition for review. As a result, the case was returned to the trial court for proceedings on whether the court should grant the plaintiffs'plaintiffs’ petition to reopen the prior judgment. In February 2012, plaintiffs filed an amended petition, which PM USA opposed. Subsequently, in responding to PM USA'sUSA’s opposition to the amended petition, plaintiffs asked the trial court to reinstate the original judgment. The trial court denied plaintiffs'plaintiffs’ petition onin December 12, 2012. OnIn January 8, 2013, plaintiffs filed a notice of appeal with the Fifth Judicial District. OnIn January 16, 2013, PM USA filed a motion asking the Illinois Supreme Court to immediately exercise its jurisdiction over the appeal. In February 2013, the Illinois Supreme Court denied PM USA’s
motion. Oral argument on plaintiffs’ appeal to the Fifth Judicial District was heard in October 2013.
In June 2009, the plaintiff in an individual smoker lawsuit (Kelly) brought on behalf of an alleged smoker of "Lights"“Lights” cigarettes in Madison County, Illinois state court filed a motion seeking a declaration that his claims under the Illinois Consumer Fraud Act are not (i) barred by the exemption in that statute based on his assertion that the Illinois Supreme Court'sCourt’s decision in Price is no longer good law in light of the decisions by the United States Supreme Court in Good and Watson, and (ii) preempted in light of the United States Supreme Court'sCourt’s decision in GoodGood. . In September 2009, the court granted plaintiff'splaintiff’s motion as to federal preemption, but denied it with respect to the state statutory exemption.
▪State Trial Court Class Certifications: State trial courts have certified classes against PM USA in several jurisdictions. Over time, several such cases have been dismissed by the courts at the summary judgment stage. Certified class actions remain pending at the trial or appellate level in California (Brown), Massachusetts (AspinallAspinall), Missouri (Larsen) and MissouriArkansas (LarsenMiner). Significant developments in these cases include:
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| ▪ | Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USA'sUSA’s motion for summary judgment and granted plaintiffs' motionplaintiffs’ cross-motion for summary judgment on the defenses of federal preemption and a state law exemption to Massachusetts'Massachusetts’ consumer protection statute. On motion of the parties, the trial court subsequently reported its decision to deny summary judgment to the appeals court for review and stayed further proceedings pending completion of the appellate review. In December 2008, subsequent to the United States Supreme Court's decision in Good,March 2009, the Massachusetts Supreme Judicial Court issued anaffirmed the order requesting thatdenying summary judgment to PM USA and granting the plaintiffs’ cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit described above). In March 2012, the trial court denied plaintiffs’ motion. In February 2013, the trial court, upon agreement of the parties, advise the court within 30 days whether the Good decision is dispositive of federal preemption issues pending on appeal. In January 2009,dismissed without prejudice plaintiffs’ claims against Altria Group, Inc. PM USA notifiedis now the sole defendant in the case. In September 2013, the case was transferred to the Business Litigation Session of the Massachusetts Supreme JudicialSuperior Court. Also in September 2013, plaintiffs filed a motion for partial summary |
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Court that Good is dispositive of the federal preemption issues on appeal, but requested further briefingjudgment on the state law statutory exemption issue. In March 2009, the Massachusetts Supreme Judicial Court affirmed the order denying summary judgment to PM USA and granting the plaintiffs' cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findingsscope of remedies available in the case brought by the Department of Justice (see Health Care Cost Recovery Litigation - Federal Government's Lawsuit described above). In March 2012, the trial court denied plaintiffs' motion.case.
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| ▪ | Brown: In June 1997, plaintiffs filed suit in California state court alleging that domestic cigarette manufacturers, including PM USA and others, violated California law regarding unfair, unlawful and fraudulent business practices. In May 2009, the California Supreme Court reversed thean earlier trial court decision decertifyingthat decertified the class and remanded the case to the trial court. At thisThe class consists of individuals who, at the time they were residents of California, (i) smoked in California one or more cigarettes manufactured by PM USA that were labeled and/or advertised with the sole remaining theoryterms or phrases “light,” “medium,” “mild,” “low tar,” and/or “lowered tar and nicotine,” but not including any cigarettes labeled or advertised with the terms or phrases “ultra light” or “ultra low tar,” and (ii) who were exposed to defendant’s marketing and advertising activities in California. Plaintiffs are seeking restitution of liability in this action is whethera portion of the marketingcosts of "Lights"“light” cigarettes was deceptive to consumers.purchased during the class period and injunctive relief ordering corrective communications. In September 2012, at the plaintiffs'plaintiffs’ request, the trial court dismissed all defendants except PM USA from the lawsuit. Trial is currently scheduledbegan in April 2013. In May 2013 the plaintiffs redefined the class to include California residents who smoked in California one or more of defendant’s Marlboro Lights cigarettes between January 1, 1998 and April 23, 2001, and who were exposed to defendant’s marketing and advertising activities in California. In June 2013, PM USA filed a motion to decertify the class. Trial concluded in July 2013. In September 2013, the court issued a final Statement of Decision, in which the court found that PM USA violated California law, but that plaintiffs had not established a basis for April 19,relief. On this basis, the court granted judgment for PM USA. The court also denied PM USA’s motion to decertify the class. In October 2013, the court entered final judgment in favor of PM USA. PM USA filed a motion seeking $766,321 in costs as the prevailing party. On October 30, 2013, plaintiffs filed a motion for sanctions seeking to offset PM USA’s claimed costs in light of alleged discovery violations and, on November 8, 2013, filed a motion requesting the court deny or reduce such costs. On November 8, 2013, plaintiffs moved for a new trial, which the court denied on December 12, 2013. On December 13, 2013, plaintiffs filed a notice of appeal and, on January 2, 2014, PM USA filed a conditional cross appeal. |
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| ▪ | Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs'plaintiffs’ motion for reconsideration of the period during which potential class members can qualify to become part of the class. The class period remains 1995 through- 2003. In June 2010, PM USA'sUSA’s motion for partial summary judgment regarding plaintiffs'plaintiffs’ request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Government'sGovernment’s Lawsuit described above). The plaintiffs'plaintiffs’ motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs'plaintiffs’ claims. In August 2011, the trial court granted PM USA'sUSA’s motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that Marlboro Lights are more dangerous than Marlboro Reds. The trial court denied PM USA'sUSA’s remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011 the court declared a mistrial after the jury failed to reach a verdict. TheOn January 27, 2014, the trial court has continued the newreversed its prior ruling granting partial summary judgment against plaintiffs’ “more dangerous” claim and allowed plaintiffs to pursue that claim. Currently, there is no scheduled trial through January 2014, with an exact date to be determined.date. |
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| ▪ | Miner: In June 2007, the United States Supreme Court reversed the lower court rulings in Miner (formerly known as Watson) that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. The case was removed to federal court in Arkansas and the case was transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the case to Arkansas state court. In December 2011, plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice. In March 2013, plaintiffs filed a class certification motion. On November 8, 2013, the trial court granted class certification. The certified class includes those individuals who, from November 1, 1971 through June 22, 2010, purchased Marlboro Lights, including Marlboro Ultra Lights, for personal consumption in Arkansas. PM USA filed a notice of appeal of the class certification ruling to the Arkansas Supreme Court on December 2, 2013. |
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Certain Other Tobacco-Related Litigation
▪Tobacco Price Case: One case remains pending in Kansas (Smith) in which plaintiffs allege that defendants, including PM USA and Altria Group, Inc., conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs'Plaintiffs’ motion for class certification was granted. In March 2012, the trial court granted defendants'defendants’ motions for summary
judgment. Plaintiffs sought the trial court'scourt’s reconsideration of its decision, but in June 2012, the trial court denied plaintiffs'plaintiffs’ motion for reconsideration. Plaintiffs have appealed the decision, and the defendants have cross-appealed the trial court'scourt’s class certification decision, to the Court of Appeals of Kansas. Oral argument occurred on December 11, 2013.
▪Ignition Propensity Cases: PM USA isand Altria Group, Inc. are currently facing litigation alleging that a fire caused by cigarettes led to individuals'individuals’ deaths. In a Kentucky case (Walker), the federal district court denied plaintiffs'plaintiffs’ motion to remand the case to state court and dismissed plaintiffs'plaintiffs’ claims in February 2009. Plaintiffs subsequently filed a notice of appeal. In October 2011, the United StatesU.S. Court of Appeals for the Sixth Circuit reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky state court. The Sixth Circuit did not address the merits of the district court'scourt’s dismissal order. Defendants'Defendants’ petition for rehearing with the Sixth Circuit was denied in December 2011. Defendants filed a renewed motion to dismiss in state court in March 2013. Based on new evidence, in June 2013, defendants removed the case for a second time to the U.S. District Court for the Western District of Kentucky and re-filed their motion to dismiss in June 2013. In July 2013, plaintiffs filed a motion to remand the case to Kentucky state court.
▪False Claims Act Case: PM USA is a defendant in a qui tam action filed in the United StatesU.S. District Court for the District of Columbia (United States ex rel. Anthony Oliver) alleging violation of the False Claims Act in connection with sales of cigarettes to the U.S. military. The relator contends that PM USA violated "most“most favored customer"customer” provisions in government contracts and regulations by selling cigarettes to non-military customers in overseas markets at more favorable prices than it sold to the U.S. military exchange services for resale on overseas military bases in those same markets. The relator has dropped Altria Group, Inc. as a defendant and has dropped claims related to post-MSA price increases on cigarettes sold to the U.S. military. In July 2012, PM USA filed a motion to dismiss.dismiss, which was granted in June 2013, and the case was dismissed with prejudice. In July 2013, the relator appealed the dismissal to the U.S. Court of Appeals for the D.C. Circuit.
▪Argentine Grower Cases:PM USA and Altria Group, Inc. wereare named as defendants in threefive cases (Hupan, Chalanuk,
Rodriguez Da Silva, Aranda and Rodriguez Da Silva)Taborda) filed in Delaware state court against multiple defendants by the parents of minor Argentine children born with alleged birth defects. Plaintiffs in these cases allege that they grew tobacco in Argentina under contract with Tabacos Norte S.A., an alleged subsidiary of PMI, and that they and their infant children were exposed directly and in utero to hazardous herbicides and pesticides used in the production and cultivation of tobacco. Plaintiffs seek compensatory and punitive damages against all defendants under U.S. and Argentine law.defendants. Altria Group, Inc. and PM USA are in discussions with PMI regarding indemnification for these cases pursuant to the Distribution Agreement between Altria Group, Inc. and PMI. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement. Discussion with other defendants regarding indemnification are also ongoing. OnIn December 11, 2012, Altria Group, Inc. and certain other defendants were dismissed from the Hupan, Chalanuk and Rodriguez Da Silvacases. The three
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certain other defendants were dismissed from Aranda and Taborda in May 2013 and October 2013, respectively. The three remaining defendants in the five cases are PM USA, Philip Morris Global Brands (a subsidiary of PMI) and Monsanto Company.
UST Litigation
Claims related to smokeless tobacco products generally fall within the following categories:
First, UST and/or its tobacco subsidiaries has been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought by or on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are five individuals alleging use of USSTC'sUSSTC’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.
Second, UST and/or its tobacco subsidiaries has been named in a number of other individual tobacco and health suits over time. Plaintiffs'Plaintiffs’ allegations of liability in these cases are based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs seek various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. USSTC is currently named in one such action in Florida (Vassallo).
Certain Other Actions
▪IRS Challenges to PMCC Leases: As discussed in Note 7. Finance Assets, net, Note 14. Income Taxes and Note 15. Segment Reporting above, Altria Group, Inc. entered into the Closing Agreement with the IRS in May 2012 that conclusively resolved the federal income tax treatment for all prior and future tax years of LILO and SILO transactions entered into by PMCC.
Pursuant to the Closing Agreement, Altria Group, Inc. paid $456 million in federal income taxes and related estimated interest with respect to the 2000 through 2010 tax years in June 2012. This payment is net of federal income taxes that Altria Group, Inc. paid on gains associated with sales of assets leased in the LILO and SILO transactions from January 1, 2008 through December 31, 2011. In addition, Altria Group, Inc. expects to pay approximately $50 million in state taxes and related estimated interest for the 2000 through 2010 tax years, of which $28 million was paid in 2012 with the balance expected to be paid in 2013. The tax component of these payments represents an acceleration of federal and state income taxes that Altria Group, Inc. would have
otherwise paid over the lease terms of the LILO and SILO transactions.
The IRS disallowed the tax benefits pertaining to PMCC's LILO and SILO transactions for the 1996 through 2003 tax years and was expected to disallow such benefits for the 2004 through 2009 tax years. Pursuant to the Closing Agreement, the IRS will not assess against Altria Group, Inc. any additional taxes or any penalties in any open tax year through the 2010 tax year related to the LILO and SILO transactions; nor will the IRS impose penalties with respect to any prior tax years. Altria Group, Inc. did not claim tax benefits pertaining to the LILO and SILO transactions in the 2010 and 2011 tax years and, under the terms of the Closing Agreement, will not claim such benefits in future tax years.
In June 2011, Altria Group, Inc. recorded a one-time charge of $627 million against its reported earnings related to the tax treatment of the LILO and SILO transactions. In quantifying this charge, Altria Group, Inc. was required to make assumptions regarding the timing and terms of a potential settlement of this matter with the IRS. As a result of differences between those assumptions and the terms of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012 due primarily to lower than estimated interest expense on tax underpayments.
Pursuant to the Closing Agreement, Altria Group, Inc. also agreed to dismiss, with prejudice, the litigation in federal court related to the tax treatment of the LILO and SILO transactions and to relinquish its right to seek refunds for federal taxes and interest previously paid. The court entered the order of dismissal in May 2012 and Altria Group, Inc. reduced both Other assets and tax liabilities on its condensed consolidated balance sheet by approximately $750 million, which represents the remaining amount of federal taxes and interest that Altria Group, Inc. previously paid and accounted for as deposits pending the outcome of the LILO and SILO dispute.
Altria Group, Inc. previously paid a total of approximately $1.1 billion ($945 million in 2010) in federal income taxes and interest with respect to the LILO and SILO transactions. Altria Group, Inc. treated the amounts paid to the IRS as deposits for financial reporting purposes pending the ultimate outcomes of the litigation and did not include such amounts in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows in the years paid. During the years ended December 31, 2012 and 2011, Altria Group, Inc. relinquished its right to seek refunds of the deposits and included approximately $750 million and $362 million, respectively, in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows.
▪Kraft Thrift Plan Cases: Four participants in the Kraft Foods Global, Inc. Thrift Plan ("Kraft Thrift Plan"), a defined contribution plan, filed a class action complaint (George II) on behalf of all participants and beneficiaries of the Kraft Thrift
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Plan in July 2008 in the United States District Court for the Northern District of Illinois alleging breach of fiduciary duty under the Employee Retirement Income Security Act ("ERISA"). Named defendants in this action included Altria Corporate Services, Inc. (now Altria Client Services Inc.) and certain company committees that allegedly had a relationship to the Kraft Thrift Plan. Plaintiffs requested, among other remedies, that defendants restore to the Kraft Thrift Plan all losses improperly incurred. In August 2011, Altria Client Services Inc. and a company committee that allegedly had a relationship to the Kraft Thrift Plan were added as defendants in another class action previously brought by the same plaintiffs in 2006 (George I), in which plaintiffs allege defendants breached their fiduciary duties under ERISA by offering company stock funds in a unitized format and by allegedly overpaying for recordkeeping services. In June 2012, the district court approved a court-approved class-wide settlement for George I and George II that does not require any payment by the Altria Group, Inc. defendants, concluding this litigation.
Environmental Regulation
Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "Superfund"“Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.'s’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.'s’s consolidated results of operations, capital expenditures, financial position or cash flows.
Guarantees and Other Similar Matters
In the ordinary course of business, certain subsidiaries of
Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, 20122013, subsidiaries of Altria Group, Inc. and certain of its subsidiaries were also contingently liable for $31$32 million of guarantees related to their own performance, consisting primarily of surety bonds. In addition, from time to time, subsidiaries of Altria Group, Inc. issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.'s’s liquidity.
Under the terms of a distribution agreement between Altria Group, Inc. and PMI (the "Distribution Agreement"“Distribution Agreement”), entered into as a result of Altria Group, Inc.'s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, 20122013 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 19. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria Group, Inc.'s’s obligations under its outstanding debt securities, borrowings under itsthe Credit Agreement and amounts outstanding under its commercial paper program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of Stag'sStag’s Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC ("Michelle-Antinori"(“Michelle-Antinori”), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California ("Antinori"(“Antinori”). In connection with the acquisition of Stag'sStag’s Leap Wine Cellars, Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinori'sAntinori’s initial investment of $27 million.$27 million. The put arrangement became exercisable on September 11, 2010 and has no expiration date. As of December 31, 20122013, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized on the consolidated balance sheet for the put arrangement.
The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 20122013 and 2011.2012.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 19. Condensed Consolidating Financial Information
PM USA, which is a wholly-owned subsidiary of Altria Group, Inc., has issued guarantees relating toguaranteed Altria Group, Inc.'s’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the "Guarantees"“Guarantees”). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.'s’s obligations under the guaranteed debt instruments (the "Obligations"“Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.
The obligations of PM USA under the Guarantees are limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees, result in PM USA'sUSA’s obligations under the Guarantees not constituting a fraudulent transfer or conveyance. For this
purpose, "Bankruptcy Law"“Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
PM USA will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;
▪the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of Altria Group, Inc.'s’s long-term senior unsecured debt by Standard & Poor'sPoor’s of A or higher.
At December 31, 20122013, the respective principal wholly-owned subsidiaries of Altria Group, Inc. and PM USA were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
The following sets forth the condensed consolidating balance sheets as of December 31, 20122013 and 20112012, condensed consolidating statements of earnings and comprehensive earnings for the years ended December 31, 20122013, 20112012 and 20102011, and condensed consolidating statements of cash flows for the years ended December 31, 20122013, 20112012 and 20102011 for Altria Group, Inc., PM USA and Altria Group, Inc.'s’s other subsidiaries that are not guarantors of Altria Group, Inc.'s’s debt instruments (the "Non-Guarantor Subsidiaries"“Non-Guarantor Subsidiaries”). The financial information is based on Altria Group, Inc.'s’s understanding of the Securities and Exchange Commission ("SEC"(“SEC”) interpretation and application of Rule 3-10 of SEC Regulation S-X.
The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.
Certain prior-period amounts have been recast to conform with the current-period presentation, due to Middleton becoming a wholly-owned subsidiary of PM USA effective January 1, 2012.
Beginning in the second quarter of 2012, Altria Group, Inc. revised the classification of cash dividends received from subsidiaries on its condensed consolidating statements of cash flows to present them as cash flows from operating activities. These amounts were previously classified as cash flows from financing activities. As other prior period financial information is presented, Altria Group, Inc. will similarly revise the condensed consolidating statements of cash flows in its future filings. The impact of this revision, which Altria Group, Inc. determined is not material to the related financial statements, is to increase cash inflows from operating activities (and decrease cash inflows from financing activities) for Altria Group, Inc. and PM USA as follows:
|
| | | | | | | |
| (in millions) | Altria Group, Inc. | | PM USA |
| For the years ended: | | | |
| December 31, 2011 | $ | 3,666 |
| | $ | 213 |
|
| December 31, 2010 | $ | 3,438 |
| | $ | 179 |
|
| For the three months ended: | | | |
| March 31, 2012 | $ | 923 |
| | $ | 59 |
|
| March 31, 2011 | $ | 890 |
| | $ | 26 |
|
This revision had no impact on Altria Group, Inc.'s consolidated statements of cash flows.
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________ | | | at December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| at December 31, 2013 | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Assets | | | | | | | | | | | | | | | | | | |
| Consumer products | | | | | | | | | | |
| Cash and cash equivalents | $ | 2,862 |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | $ | 2,900 |
| $ | 3,114 |
| | $ | 1 |
| | $ | 60 |
| | $ | — |
| | $ | 3,175 |
|
| Receivables | 101 |
| | 7 |
| | 85 |
| | — |
| | 193 |
| — |
| | 11 |
| | 104 |
| | — |
| | 115 |
|
| Inventories: | | | | | | | | | | | | | | | | | | |
| Leaf tobacco | — |
| | 512 |
| | 364 |
| | — |
| | 876 |
| — |
| | 564 |
| | 369 |
| | — |
| | 933 |
|
| Other raw materials | — |
| | 127 |
| | 46 |
| | — |
| | 173 |
| — |
| | 121 |
| | 59 |
| | — |
| | 180 |
|
| Work in process | — |
| | 3 |
| | 346 |
| | — |
| | 349 |
| — |
| | 3 |
| | 391 |
| | — |
| | 394 |
|
| Finished product | — |
| | 117 |
| | 231 |
| | — |
| | 348 |
| — |
| | 141 |
| | 231 |
| | — |
| | 372 |
|
| | — |
| | 759 |
| | 987 |
| | — |
| | 1,746 |
| — |
| | 829 |
| | 1,050 |
| | — |
| | 1,879 |
|
| Due from Altria Group, Inc. and subsidiaries | 834 |
| | 3,424 |
| | 1,157 |
| | (5,415 | ) | | — |
| 590 |
| | 3,253 |
| | 1,706 |
| | (5,549 | ) | | — |
|
| Deferred income taxes | — |
| | 1,246 |
| | 16 |
| | (46 | ) | | 1,216 |
| 2 |
| | 1,133 |
| | 26 |
| | (61 | ) | | 1,100 |
|
| Other current assets | — |
| | 193 |
| | 175 |
| | (108 | ) | | 260 |
| 109 |
| | 125 |
| | 105 |
| | (18 | ) | | 321 |
|
| Total current assets | 3,797 |
| | 5,629 |
| | 2,458 |
| | (5,569 | ) | | 6,315 |
| 3,815 |
| | 5,352 |
| | 3,051 |
| | (5,628 | ) | | 6,590 |
|
| Property, plant and equipment, at cost | 2 |
| | 3,253 |
| | 1,495 |
| | — |
| | 4,750 |
| 2 |
| | 3,269 |
| | 1,546 |
| | — |
| | 4,817 |
|
| Less accumulated depreciation | 2 |
| | 2,073 |
| | 573 |
| | — |
| | 2,648 |
| 2 |
| | 2,168 |
| | 619 |
| | — |
| | 2,789 |
|
| | — |
| | 1,180 |
| | 922 |
| | — |
| | 2,102 |
| — |
| | 1,101 |
| | 927 |
| | — |
| | 2,028 |
|
| Goodwill | — |
| | — |
| | 5,174 |
| | — |
| | 5,174 |
| — |
| | — |
| | 5,174 |
| | — |
| | 5,174 |
|
| Other intangible assets, net | — |
| | 2 |
| | 12,076 |
| | — |
| | 12,078 |
| — |
| | 2 |
| | 12,056 |
| | — |
| | 12,058 |
|
| Investment in SABMiller | 6,637 |
| | — |
| | — |
| | — |
| | 6,637 |
| 6,455 |
| | — |
| | — |
| | — |
| | 6,455 |
|
| Investment in consolidated subsidiaries | 9,521 |
| | 3,018 |
| | — |
| | (12,539 | ) | | — |
| 11,227 |
| | 2,988 |
| | — |
| | (14,215 | ) | | — |
|
| Due from Altria Group, Inc. and subsidiaries | 4,500 |
| | — |
| | — |
| | (4,500 | ) | | — |
| |
| Other assets | 136 |
| | 530 |
| | 124 |
| | (365 | ) | | 425 |
| |
| Total consumer products assets | 24,591 |
| | 10,359 |
| | 20,754 |
| | (22,973 | ) | | 32,731 |
| |
| Financial services | | | | | | | | | | |
| Finance assets, net | — |
| | — |
| | 2,581 |
| | — |
| | 2,581 |
| — |
| | — |
| | 1,997 |
| | — |
| | 1,997 |
|
| Due from Altria Group, Inc. and subsidiaries | — |
| | — |
| | 14 |
| | (14 | ) | | — |
| 4,790 |
| | — |
| | — |
| | (4,790 | ) | | — |
|
| Other assets | — |
| | — |
| | 17 |
| | — |
| | 17 |
| 157 |
| | 455 |
| | 218 |
| | (273 | ) | | 557 |
|
| Total financial services assets | — |
| | — |
| | 2,612 |
| | (14 | ) | | 2,598 |
| |
| Total Assets | $ | 24,591 |
| | $ | 10,359 |
| | $ | 23,366 |
| | $ | (22,987 | ) | | $ | 35,329 |
| $ | 26,444 |
| | $ | 9,898 |
| | $ | 23,423 |
| | $ | (24,906 | ) | | $ | 34,859 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
| | | at December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| at December 31, 2013 | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | | | | | | | | | | |
| Consumer products | | | | | | | | | | |
| Current portion of long-term debt | $ | 1,459 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,459 |
| $ | 525 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 525 |
|
| Accounts payable | 4 |
| | 155 |
| | 292 |
| | — |
| | 451 |
| 26 |
| | 106 |
| | 277 |
| | — |
| | 409 |
|
| Accrued liabilities: | | | | | | | | | | | | | | | | | | |
| Marketing | — |
| | 526 |
| | 42 |
| | — |
| | 568 |
| — |
| | 464 |
| | 48 |
| | — |
| | 512 |
|
| Employment costs | 27 |
| | 10 |
| | 147 |
| | — |
| | 184 |
| 94 |
| | 10 |
| | 151 |
| | — |
| | 255 |
|
| Settlement charges | — |
| | 3,610 |
| | 6 |
| | — |
| | 3,616 |
| — |
| | 3,386 |
| | 5 |
| | — |
| | 3,391 |
|
| Other | 469 |
| | 506 |
| | 264 |
| | (154 | ) | | 1,085 |
| 302 |
| | 531 |
| | 253 |
| | (79 | ) | | 1,007 |
|
| Dividends payable | 888 |
| | — |
| | — |
| | — |
| | 888 |
| 959 |
| | — |
| | — |
| | — |
| | 959 |
|
| Due to Altria Group, Inc. and subsidiaries | 3,965 |
| | 409 |
| | 1,055 |
| | (5,429 | ) | | — |
| 4,487 |
| | 473 |
| | 589 |
| | (5,549 | ) | | — |
|
| Total current liabilities | 6,812 |
| | 5,216 |
| | 1,806 |
| | (5,583 | ) | | 8,251 |
| 6,393 |
| | 4,970 |
| | 1,323 |
| | (5,628 | ) | | 7,058 |
|
| Long-term debt | 12,120 |
| | — |
| | 299 |
| | — |
| | 12,419 |
| 13,692 |
| | — |
| | 300 |
| | — |
| | 13,992 |
|
| Deferred income taxes | 2,034 |
| | — |
| | 3,284 |
| | (365 | ) | | 4,953 |
| 1,867 |
| | — |
| | 5,260 |
| | (273 | ) | | 6,854 |
|
| Accrued pension costs | 235 |
| | — |
| | 1,500 |
| | — |
| | 1,735 |
| 197 |
| | — |
| | 15 |
| | — |
| | 212 |
|
| Accrued postretirement health care costs | — |
| | 1,759 |
| | 745 |
| | — |
| | 2,504 |
| — |
| | 1,437 |
| | 718 |
| | — |
| | 2,155 |
|
| Due to Altria Group, Inc. and subsidiaries | — |
| | — |
| | 4,500 |
| | (4,500 | ) | | — |
| — |
| | — |
| | 4,790 |
| | (4,790 | ) | | — |
|
| Other liabilities | 222 |
| | 178 |
| | 156 |
| | — |
| | 556 |
| 176 |
| | 130 |
| | 129 |
| | — |
| | 435 |
|
| Total consumer products liabilities | 21,423 |
| | 7,153 |
| | 12,290 |
| | (10,448 | ) | | 30,418 |
| |
| Financial services | | | | | | | | | | |
| Deferred income taxes | — |
| | — |
| | 1,699 |
| | — |
| | 1,699 |
| |
| Other liabilities | — |
| | — |
| | 8 |
| | — |
| | 8 |
| |
| Total financial services liabilities | — |
| | — |
| | 1,707 |
| | — |
| | 1,707 |
| |
| Total liabilities | 21,423 |
| | 7,153 |
| | 13,997 |
| | (10,448 | ) | | 32,125 |
| |
| Total Liabilities | | 22,325 |
| | 6,537 |
| | 12,535 |
| | (10,691 | ) | | 30,706 |
|
| Contingencies | | | | | | | | |
| | | | | | | | | |
| Redeemable noncontrolling interest | — |
| | — |
| | 34 |
| | — |
| | 34 |
| — |
| | — |
| | 35 |
| | — |
| | 35 |
|
| Stockholders' Equity | | | | | | | | | | |
| Stockholders’ Equity | | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
| 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,688 |
| | 3,321 |
| | 10,272 |
| | (13,593 | ) | | 5,688 |
| 5,714 |
| | 3,310 |
| | 10,328 |
| | (13,638 | ) | | 5,714 |
|
| Earnings reinvested in the business | 24,316 |
| | 314 |
| | 943 |
| | (1,257 | ) | | 24,316 |
| 25,168 |
| | 282 |
| | 1,498 |
| | (1,780 | ) | | 25,168 |
|
| Accumulated other comprehensive losses | (2,040 | ) | | (429 | ) | | (1,891 | ) | | 2,320 |
| | (2,040 | ) | (1,378 | ) | | (231 | ) | | (981 | ) | | 1,212 |
| | (1,378 | ) |
| Cost of repurchased stock | (25,731 | ) | | — |
| | — |
| | — |
| | (25,731 | ) | (26,320 | ) | | — |
| | — |
| | — |
| | (26,320 | ) |
| Total stockholders' equity attributable to Altria Group, Inc. | 3,168 |
| | 3,206 |
| | 9,333 |
| | (12,539 | ) | | 3,168 |
| |
| Total stockholders’ equity attributable to Altria Group, Inc. | | 4,119 |
| | 3,361 |
| | 10,854 |
| | (14,215 | ) | | 4,119 |
|
| Noncontrolling interests | — |
| | — |
| | 2 |
| | — |
| | 2 |
| — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Total stockholders' equity | 3,168 |
| | 3,206 |
| | 9,335 |
| | (12,539 | ) | | 3,170 |
| |
| Total Liabilities and Stockholders' Equity | $ | 24,591 |
| | $ | 10,359 |
| | $ | 23,366 |
| | $ | (22,987 | ) | | $ | 35,329 |
| |
| Total stockholders’ equity | | 4,119 |
| | 3,361 |
| | 10,853 |
| | (14,215 | ) | | 4,118 |
|
| Total Liabilities and Stockholders’ Equity | | $ | 26,444 |
| | $ | 9,898 |
| | $ | 23,423 |
| | $ | (24,906 | ) | | $ | 34,859 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
|
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Assets | | | | | | | | | |
| Consumer products | | | | | | | | | |
| Cash and cash equivalents | $ | 3,245 |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 3,270 |
|
| Receivables | 174 |
| | 16 |
| | 78 |
| | — |
| | 268 |
|
| Inventories: | | | | | | | | | |
| Leaf tobacco | — |
| | 565 |
| | 369 |
| | — |
| | 934 |
|
| Other raw materials | — |
| | 128 |
| | 42 |
| | — |
| | 170 |
|
| Work in process | — |
| | 4 |
| | 312 |
| | — |
| | 316 |
|
| Finished product | — |
| | 126 |
| | 233 |
| | — |
| | 359 |
|
| | — |
| | 823 |
| | 956 |
| | — |
| | 1,779 |
|
| Due from Altria Group, Inc. and subsidiaries | 403 |
| | 3,007 |
| | 1,765 |
| | (5,175 | ) | | — |
|
| Deferred income taxes | 9 |
| | 1,157 |
| | 41 |
| | — |
| | 1,207 |
|
| Other current assets | 6 |
| | 224 |
| | 242 |
| | (76 | ) | | 396 |
|
| Total current assets | 3,837 |
| | 5,227 |
| | 3,107 |
| | (5,251 | ) | | 6,920 |
|
| Property, plant and equipment, at cost | 2 |
| | 3,280 |
| | 1,446 |
| | — |
| | 4,728 |
|
| Less accumulated depreciation | 2 |
| | 2,005 |
| | 505 |
| | — |
| | 2,512 |
|
| | — |
| | 1,275 |
| | 941 |
| | — |
| | 2,216 |
|
| Goodwill | — |
| | — |
| | 5,174 |
| | — |
| | 5,174 |
|
| Other intangible assets, net | — |
| | 2 |
| | 12,096 |
| | — |
| | 12,098 |
|
| Investment in SABMiller | 5,509 |
| | — |
| | — |
| | — |
| | 5,509 |
|
| Investment in consolidated subsidiaries | 7,009 |
| | 3,035 |
| �� | — |
| | (10,044 | ) | | — |
|
| Due from Altria Group, Inc. and subsidiaries | 6,500 |
| | — |
| | — |
| | (6,500 | ) | | — |
|
| Other assets | 941 |
| | 586 |
| | 111 |
| | (381 | ) | | 1,257 |
|
| Total consumer products assets | 23,796 |
| | 10,125 |
| | 21,429 |
| | (22,176 | ) | | 33,174 |
|
| Financial services | | | | | | | | | |
| Finance assets, net | — |
| | — |
| | 3,559 |
| | — |
| | 3,559 |
|
| Due from Altria Group, Inc. and subsidiaries | — |
| | — |
| | 292 |
| | (292 | ) | | — |
|
| Other assets | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
| Total financial services assets | — |
| | — |
| | 3,869 |
| | (292 | ) | | 3,577 |
|
| Total Assets | $ | 23,796 |
| | $ | 10,125 |
| | $ | 25,298 |
| | $ | (22,468 | ) | | $ | 36,751 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
|
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | |
| Consumer products | | | | | | | | | |
| Current portion of long-term debt | $ | — |
| | $ | — |
| | $ | 600 |
| | $ | — |
| | $ | 600 |
|
| Accounts payable | 69 |
| | 159 |
| | 275 |
| | — |
| | 503 |
|
| Accrued liabilities: | | | | | | | | | |
| Marketing | — |
| | 390 |
| | 40 |
| | — |
| | 430 |
|
| Employment costs | 29 |
| | 12 |
| | 184 |
| | — |
| | 225 |
|
| Settlement charges | — |
| | 3,508 |
| | 5 |
| | — |
| | 3,513 |
|
| Other | 384 |
| | 623 |
| | 389 |
| | (76 | ) | | 1,320 |
|
| Dividends payable | 841 |
| | — |
| | — |
| | — |
| | 841 |
|
| Due to Altria Group, Inc. and subsidiaries | 3,792 |
| | 474 |
| | 1,201 |
| | (5,467 | ) | | — |
|
| Total current liabilities | 5,115 |
| | 5,166 |
| | 2,694 |
| | (5,543 | ) | | 7,432 |
|
| Long-term debt | 12,790 |
| | — |
| | 299 |
| | — |
| | 13,089 |
|
| Deferred income taxes | 1,787 |
| | — |
| | 3,345 |
| | (381 | ) | | 4,751 |
|
| Accrued pension costs | 236 |
| | — |
| | 1,426 |
| | — |
| | 1,662 |
|
| Accrued postretirement health care costs | — |
| | 1,562 |
| | 797 |
| | — |
| | 2,359 |
|
| Due to Altria Group, Inc. and subsidiaries | — |
| | — |
| | 6,500 |
| | (6,500 | ) | | — |
|
| Other liabilities | 188 |
| | 216 |
| | 198 |
| | — |
| | 602 |
|
| Total consumer products liabilities | 20,116 |
| | 6,944 |
| | 15,259 |
| | (12,424 | ) | | 29,895 |
|
| Financial services | | | | | | | | | |
| Deferred income taxes | — |
| | — |
| | 2,811 |
| | — |
| | 2,811 |
|
| Other liabilities | — |
| | — |
| | 330 |
| | — |
| | 330 |
|
| Total financial services liabilities | — |
| | — |
| | 3,141 |
| | — |
| | 3,141 |
|
| Total liabilities | 20,116 |
| | 6,944 |
| | 18,400 |
| | (12,424 | ) | | 33,036 |
|
| Contingencies | | | | | | | | |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
| Stockholders' Equity | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,674 |
| | 3,283 |
| | 8,238 |
| | (11,521 | ) | | 5,674 |
|
| Earnings reinvested in the business | 23,583 |
| | 210 |
| | 265 |
| | (475 | ) | | 23,583 |
|
| Accumulated other comprehensive losses | (1,887 | ) | | (312 | ) | | (1,649 | ) | | 1,961 |
| | (1,887 | ) |
| Cost of repurchased stock | (24,625 | ) | | — |
| | — |
| | — |
| | (24,625 | ) |
| Total stockholders' equity attributable to Altria Group, Inc. | 3,680 |
| | 3,181 |
| | 6,863 |
| | (10,044 | ) | | 3,680 |
|
| Noncontrolling interests | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total stockholders' equity | 3,680 |
| | 3,181 |
| | 6,866 |
| | (10,044 | ) | | 3,683 |
|
| Total Liabilities and Stockholders' Equity | $ | 23,796 |
| | $ | 10,125 |
| | $ | 25,298 |
| | $ | (22,468 | ) | | $ | 36,751 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,531 |
| | $ | 3,110 |
| | $ | (23 | ) | | $ | 24,618 |
|
| Cost of sales | — |
| | 7,067 |
| | 893 |
| | (23 | ) | | 7,937 |
|
| Excise taxes on products | — |
| | 6,831 |
| | 287 |
| | — |
| | 7,118 |
|
| Gross profit | — |
| | 7,633 |
| | 1,930 |
| | — |
| | 9,563 |
|
| Marketing, administration and research costs | 210 |
| | 1,867 |
| | 204 |
| | — |
| | 2,281 |
|
| Changes to Mondelēz & PMI tax-related receivables | (52 | ) | | — |
| | — |
| | — |
| | (52 | ) |
| Asset impairment and exit costs | 1 |
| | 59 |
| | 1 |
| | — |
| | 61 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (159 | ) | | 5,707 |
| | 1,705 |
| | — |
| | 7,253 |
|
| Interest and other debt expense (income), net | 705 |
| | (3 | ) | | 424 |
| | — |
| | 1,126 |
|
| Loss on early extinguishment of debt | 874 |
| | — |
| | — |
| | — |
| | 874 |
|
| Earnings from equity investment in SABMiller | (1,224 | ) | | — |
| | — |
| | — |
| | (1,224 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (514 | ) | | 5,710 |
| | 1,281 |
| | — |
| | 6,477 |
|
| (Benefit) provision for income taxes | (196 | ) | | 2,100 |
| | 390 |
| | — |
| | 2,294 |
|
| Equity earnings of subsidiaries | 4,498 |
| | 218 |
| | — |
| | (4,716 | ) | | — |
|
| Net earnings | 4,180 |
| | 3,828 |
| | 891 |
| | (4,716 | ) | | 4,183 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 4,180 |
| | $ | 3,828 |
| | $ | 888 |
| | $ | (4,716 | ) | | $ | 4,180 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 4,180 |
| | $ | 3,828 |
| | $ | 891 |
| | $ | (4,716 | ) | | $ | 4,183 |
|
Other comprehensive losses, net of deferred income tax benefit | (153 | ) | | (117 | ) | | (242 | ) | | 359 |
| | (153 | ) |
| Comprehensive earnings | 4,027 |
| | 3,711 |
| | 649 |
| | (4,357 | ) | | 4,030 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 4,027 |
| | $ | 3,711 |
| | $ | 646 |
| | $ | (4,357 | ) | | $ | 4,027 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive EarningsBalance Sheets
(in millions of dollars)
_________________________________________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,330 |
| | $ | 2,496 |
| | $ | (26 | ) | | $ | 23,800 |
|
| Cost of sales | — |
| | 6,883 |
| | 823 |
| | (26 | ) | | 7,680 |
|
| Excise taxes on products | — |
| | 6,846 |
| | 335 |
| | — |
| | 7,181 |
|
| Gross profit | — |
| | 7,601 |
| | 1,338 |
| | — |
| | 8,939 |
|
| Marketing, administration and research costs | 186 |
| | 2,164 |
| | 293 |
| | — |
| | 2,643 |
|
| Changes to Mondelēz and PMI tax-related receivables | (14 | ) | | — |
| | — |
| | — |
| | (14 | ) |
| Asset impairment and exit costs | 8 |
| | 200 |
| | 14 |
| | — |
| | 222 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (180 | ) | | 5,237 |
| | 1,011 |
| | — |
| | 6,068 |
|
| Interest and other debt expense, net | 698 |
| | 61 |
| | 457 |
| | — |
| | 1,216 |
|
| Earnings from equity investment in SABMiller | (730 | ) | | — |
| | — |
| | — |
| | (730 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (148 | ) | | 5,176 |
| | 554 |
| | — |
| | 5,582 |
|
| (Benefit) provision for income taxes | (199 | ) | | 1,930 |
| | 458 |
| | — |
| | 2,189 |
|
| Equity earnings of subsidiaries | 3,339 |
| | 153 |
| | — |
| | (3,492 | ) | | — |
|
| Net earnings | 3,390 |
| | 3,399 |
| | 96 |
| | (3,492 | ) | | 3,393 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 3,390 |
| | $ | 3,399 |
| | $ | 93 |
| | $ | (3,492 | ) | | $ | 3,390 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 3,390 |
| | $ | 3,399 |
| | $ | 96 |
| | $ | (3,492 | ) | | $ | 3,393 |
|
Other comprehensive losses, net of deferred income tax benefit | (403 | ) | | (36 | ) | | (209 | ) | | 245 |
| | (403 | ) |
| Comprehensive earnings (losses) | 2,987 |
| | 3,363 |
| | (113 | ) | | (3,247 | ) | | 2,990 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 2,987 |
| | $ | 3,363 |
| | $ | (116 | ) | | $ | (3,247 | ) | | $ | 2,987 |
|
|
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 2,862 |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | $ | 2,900 |
|
| Receivables | 101 |
| | 7 |
| | 85 |
| | — |
| | 193 |
|
| Inventories: | | | | | | | | | |
| Leaf tobacco | — |
| | 512 |
| | 364 |
| | — |
| | 876 |
|
| Other raw materials | — |
| | 127 |
| | 46 |
| | — |
| | 173 |
|
| Work in process | — |
| | 3 |
| | 346 |
| | — |
| | 349 |
|
| Finished product | — |
| | 117 |
| | 231 |
| | — |
| | 348 |
|
| | — |
|
| 759 |
|
| 987 |
|
| — |
|
| 1,746 |
|
| Due from Altria Group, Inc. and subsidiaries | 834 |
| | 3,424 |
| | 1,171 |
| | (5,429 | ) | | — |
|
| Deferred income taxes | — |
| | 1,246 |
| | 16 |
| | (46 | ) | | 1,216 |
|
| Other current assets | — |
| | 193 |
| | 175 |
| | (108 | ) | | 260 |
|
| Total current assets | 3,797 |
| | 5,629 |
| | 2,472 |
| | (5,583 | ) | | 6,315 |
|
| Property, plant and equipment, at cost | 2 |
| | 3,253 |
| | 1,495 |
| | — |
| | 4,750 |
|
| Less accumulated depreciation | 2 |
| | 2,073 |
| | 573 |
| | — |
| | 2,648 |
|
| | — |
| | 1,180 |
| | 922 |
| | — |
| | 2,102 |
|
| Goodwill | — |
| | — |
| | 5,174 |
| | — |
| | 5,174 |
|
| Other intangible assets, net | — |
| | 2 |
| | 12,076 |
| | — |
| | 12,078 |
|
| Investment in SABMiller | 6,637 |
| | — |
| | — |
| | — |
| | 6,637 |
|
| Investment in consolidated subsidiaries | 9,521 |
| | 3,018 |
| | — |
| | (12,539 | ) | | — |
|
| Finance assets, net | — |
| | — |
| | 2,581 |
| | — |
| | 2,581 |
|
| Due from Altria Group, Inc. and subsidiaries | 4,500 |
| | — |
| | — |
| | (4,500 | ) | | — |
|
| Other assets | 136 |
| | 530 |
| | 141 |
| | (365 | ) | | 442 |
|
| Total Assets | $ | 24,591 |
| | $ | 10,359 |
| | $ | 23,366 |
| | $ | (22,987 | ) | | $ | 35,329 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive EarningsBalance Sheets (Continued)
(in millions of dollars)
_________________________________________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2010 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,580 |
| | $ | 2,809 |
| | $ | (26 | ) | | $ | 24,363 |
|
| Cost of sales | — |
| | 6,990 |
| | 740 |
| | (26 | ) | | 7,704 |
|
| Excise taxes on products | — |
| | 7,136 |
| | 335 |
| | — |
| | 7,471 |
|
| Gross profit | — |
| | 7,454 |
| | 1,734 |
| | — |
| | 9,188 |
|
| Marketing, administration and research costs | 147 |
| | 2,280 |
| | 308 |
| | — |
| | 2,735 |
|
| Changes to Mondelēz and PMI tax-related receivables | 169 |
| | — |
| | — |
| | — |
| | 169 |
|
| Asset impairment and exit costs | — |
| | 24 |
| | 12 |
| | — |
| | 36 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (316 | ) | | 5,150 |
| | 1,394 |
| | — |
| | 6,228 |
|
| Interest and other debt expense, net | 549 |
| | 2 |
| | 582 |
| | — |
| | 1,133 |
|
| Earnings from equity investment in SABMiller | (628 | ) | | — |
| | — |
| | — |
| | (628 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (237 | ) | | 5,148 |
| | 812 |
| | — |
| | 5,723 |
|
| (Benefit) provision for income taxes | (329 | ) | | 1,864 |
| | 281 |
| | — |
| | 1,816 |
|
| Equity earnings of subsidiaries | 3,813 |
| | 143 |
| | — |
| | (3,956 | ) | | — |
|
| Net earnings | 3,905 |
| | 3,427 |
| | 531 |
| | (3,956 | ) | | 3,907 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 3,905 |
| | $ | 3,427 |
| | $ | 529 |
| | $ | (3,956 | ) | | $ | 3,905 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 3,905 |
| | $ | 3,427 |
| | $ | 531 |
| | $ | (3,956 | ) | | $ | 3,907 |
|
| Other comprehensive earnings, net of deferred income taxes | 77 |
| | 15 |
| | 25 |
| | (40 | ) | | 77 |
|
| Comprehensive earnings | 3,982 |
| | 3,442 |
| | 556 |
| | (3,996 | ) | | 3,984 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 3,982 |
| | $ | 3,442 |
| | $ | 554 |
| | $ | (3,996 | ) | | $ | 3,982 |
|
|
| | | | | | | | | | | | | | | | | | | |
| at December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Liabilities | | | | | | | | | |
| Current portion of long-term debt | $ | 1,459 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,459 |
|
| Accounts payable | 4 |
| | 155 |
| | 292 |
| | — |
| | 451 |
|
| Accrued liabilities: | | | | | | | | | |
| Marketing | — |
| | 526 |
| | 42 |
| | — |
| | 568 |
|
| Employment costs | 27 |
| | 10 |
| | 147 |
| | — |
| | 184 |
|
| Settlement charges | — |
| | 3,610 |
| | 6 |
| | — |
| | 3,616 |
|
| Other | 469 |
| | 506 |
| | 272 |
| | (154 | ) | | 1,093 |
|
| Dividends payable | 888 |
| | — |
| | — |
| | — |
| | 888 |
|
| Due to Altria Group, Inc. and subsidiaries | 3,965 |
| | 409 |
| | 1,055 |
| | (5,429 | ) | | — |
|
| Total current liabilities | 6,812 |
| | 5,216 |
| | 1,814 |
| | (5,583 | ) | | 8,259 |
|
| Long-term debt | 12,120 |
| | — |
| | 299 |
| | — |
| | 12,419 |
|
| Deferred income taxes | 2,034 |
| | — |
| | 4,983 |
| | (365 | ) | | 6,652 |
|
| Accrued pension costs | 235 |
| | — |
| | 1,500 |
| | — |
| | 1,735 |
|
| Accrued postretirement health care costs | — |
| | 1,759 |
| | 745 |
| | — |
| | 2,504 |
|
| Due to Altria Group, Inc. and subsidiaries | — |
| | — |
| | 4,500 |
| | (4,500 | ) | | — |
|
| Other liabilities | 222 |
| | 178 |
| | 156 |
| | — |
| | 556 |
|
| Total Liabilities | 21,423 |
| | 7,153 |
| | 13,997 |
| | (10,448 | ) | | 32,125 |
|
| Contingencies | | | | | | | | | |
| Redeemable noncontrolling interest | — |
| | — |
| | 34 |
| | — |
| | 34 |
|
| Stockholders’ Equity | | | | | | | | | |
| Common stock | 935 |
| | — |
| | 9 |
| | (9 | ) | | 935 |
|
| Additional paid-in capital | 5,688 |
| | 3,321 |
| | 10,272 |
| | (13,593 | ) | | 5,688 |
|
| Earnings reinvested in the business | 24,316 |
| | 314 |
| | 943 |
| | (1,257 | ) | | 24,316 |
|
| Accumulated other comprehensive losses | (2,040 | ) | | (429 | ) | | (1,891 | ) | | 2,320 |
| | (2,040 | ) |
| Cost of repurchased stock | (25,731 | ) | | — |
| | — |
| | — |
| | (25,731 | ) |
| Total stockholders’ equity attributable to Altria Group, Inc. | 3,168 |
| | 3,206 |
| | 9,333 |
| | (12,539 | ) | | 3,168 |
|
| Noncontrolling interests | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Total stockholders’ equity | 3,168 |
| | 3,206 |
| | 9,335 |
| | (12,539 | ) | | 3,170 |
|
| Total Liabilities and Stockholders’ Equity | $ | 24,591 |
| | $ | 10,359 |
| | $ | 23,366 |
| | $ | (22,987 | ) | | $ | 35,329 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash FlowsEarnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 3,059 |
| | $ | 4,206 |
| | $ | 565 |
| | $ | (3,927 | ) | | $ | 3,903 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | |
|
| Consumer products | | | | | | | | | |
| Capital expenditures | — |
| | (35 | ) | | (89 | ) | | — |
| | (124 | ) |
| Other | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Financial services | | | | | | | | | |
| Proceeds from finance assets | — |
| | — |
| | 1,049 |
| | — |
| | 1,049 |
|
| Net cash (used in) provided by investing activities | — |
| | (35 | ) | | 955 |
| | — |
| | 920 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Consumer products | | | | | | | | | |
| Long-term debt issued | 2,787 |
| | — |
| | — |
| | — |
| | 2,787 |
|
| Long-term debt repaid | (2,000 | ) | | — |
| | (600 | ) | | — |
| | (2,600 | ) |
| Repurchases of common stock | (1,082 | ) | | — |
| | — |
| | — |
| | (1,082 | ) |
| Dividends paid on common stock | (3,400 | ) | | — |
| | — |
| | — |
| | (3,400 | ) |
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 1,128 |
| | (475 | ) | | (653 | ) | | — |
| | — |
|
| Financing fees and debt issuance costs | (22 | ) | | — |
| | — |
| | — |
| | (22 | ) |
Tender premiums and fees related to early extinguishment of debt | (864 | ) | | — |
| | — |
| | — |
| | (864 | ) |
| Cash dividends paid to parent | — |
| | (3,690 | ) | | (237 | ) | | 3,927 |
| | — |
|
| Other | 11 |
| | (6 | ) | | (17 | ) | | — |
| | (12 | ) |
| Net cash used in financing activities | (3,442 | ) | | (4,171 | ) | | (1,507 | ) | | 3,927 |
| | (5,193 | ) |
| Cash and cash equivalents: | | | | | | | | | |
| (Decrease) increase | (383 | ) | | — |
| | 13 |
| | — |
| | (370 | ) |
| Balance at beginning of year | 3,245 |
| | — |
| | 25 |
| | — |
| | 3,270 |
|
| Balance at end of year | $ | 2,862 |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | $ | 2,900 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2013 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,231 |
| | $ | 3,269 |
| | $ | (34 | ) | | $ | 24,466 |
|
| Cost of sales | — |
| | 6,281 |
| | 959 |
| | (34 | ) | | 7,206 |
|
| Excise taxes on products | — |
| | 6,553 |
| | 250 |
| | — |
| | 6,803 |
|
| Gross profit | — |
| | 8,397 |
| | 2,060 |
| | — |
| | 10,457 |
|
| Marketing, administration and research costs | 223 |
| | 1,837 |
| | 260 |
| | — |
| | 2,320 |
|
| Changes to Mondelēz & PMI tax-related receivables/payables | 25 |
| | (3 | ) | | — |
| | — |
| | 22 |
|
| Asset impairment and exit costs | — |
| | 3 |
| | 8 |
| | — |
| | 11 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (248 | ) | | 6,560 |
| | 1,772 |
| | — |
| | 8,084 |
|
| Interest and other debt expense, net | 643 |
| | 2 |
| | 404 |
| | — |
| | 1,049 |
|
| Loss on early extinguishment of debt | 1,084 |
| | — |
| | — |
| | — |
| | 1,084 |
|
| Earnings from equity investment in SABMiller | (991 | ) | | — |
| | — |
| | — |
| | (991 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (984 | ) | | 6,558 |
| | 1,368 |
| | — |
| | 6,942 |
|
| (Benefit) provision for income taxes | (488 | ) | | 2,406 |
| | 489 |
| | — |
| | 2,407 |
|
| Equity earnings of subsidiaries | 5,031 |
| | 216 |
| | — |
| | (5,247 | ) | | — |
|
| Net earnings | 4,535 |
| | 4,368 |
| | 879 |
| | (5,247 | ) | | 4,535 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
| Net earnings attributable to Altria Group, Inc. | $ | 4,535 |
| | $ | 4,368 |
| | $ | 879 |
| | $ | (5,247 | ) | | $ | 4,535 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 4,535 |
| | $ | 4,368 |
| | $ | 879 |
| | $ | (5,247 | ) | | $ | 4,535 |
|
| Other comprehensive earnings, net of deferred income taxes | 662 |
| | 198 |
| | 910 |
| | (1,108 | ) | | 662 |
|
| Comprehensive earnings | 5,197 |
| | 4,566 |
| | 1,789 |
| | (6,355 | ) | | 5,197 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive earnings attributable to Altria Group, Inc. | $ | 5,197 |
| | $ | 4,566 |
| | $ | 1,789 |
| | $ | (6,355 | ) | | $ | 5,197 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash FlowsEarnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 3,515 |
| | $ | 3,775 |
| | $ | 202 |
| | $ | (3,879 | ) | | $ | 3,613 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Consumer products | | | | | | | | | |
| Capital expenditures | — |
| | (26 | ) | | (79 | ) | | — |
| | (105 | ) |
| Other | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
|
| Financial services | | | | | | | | | |
| Proceeds from finance assets | — |
| | — |
| | 490 |
| | — |
| | 490 |
|
| Net cash (used in) provided by investing activities | — |
| | (25 | ) | | 412 |
| | — |
| | 387 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Consumer products | | | | | | | | | |
| Long-term debt issued | 1,494 |
| | — |
| | — |
| | — |
| | 1,494 |
|
| Repurchases of stock | (1,327 | ) | | — |
| | — |
| | — |
| | (1,327 | ) |
| Dividends paid on common stock | (3,222 | ) | | — |
| | — |
| | — |
| | (3,222 | ) |
| Issuances of common stock | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 441 |
| | (28 | ) | | (413 | ) | | — |
| | — |
|
| Financing fees and debt issuance costs | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) |
| Cash dividends paid to parent | — |
| | (3,666 | ) | | (213 | ) | | 3,879 |
| | — |
|
| Other | 41 |
| | (56 | ) | | 21 |
| | — |
| | 6 |
|
| Net cash used in financing activities | (2,568 | ) | | (3,750 | ) | | (605 | ) | | 3,879 |
| | (3,044 | ) |
| Cash and cash equivalents: | | | | | | | | | |
| Increase | 947 |
| | — |
| | 9 |
| | — |
| | 956 |
|
| Balance at beginning of year | 2,298 |
| | — |
| | 16 |
| | — |
| | 2,314 |
|
| Balance at end of year | $ | 3,245 |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 3,270 |
|
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2012 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,531 |
| | $ | 3,110 |
| | $ | (23 | ) | | $ | 24,618 |
|
| Cost of sales | — |
| | 7,067 |
| | 893 |
| | (23 | ) | | 7,937 |
|
| Excise taxes on products | — |
| | 6,831 |
| | 287 |
| | — |
| | 7,118 |
|
| Gross profit | — |
| | 7,633 |
| | 1,930 |
| | — |
| | 9,563 |
|
| Marketing, administration and research costs | 210 |
| | 1,867 |
| | 204 |
| | — |
| | 2,281 |
|
| Changes to Mondelēz and PMI tax-related receivables/payables | (52 | ) | | — |
| | — |
| | — |
| | (52 | ) |
| Asset impairment and exit costs | 1 |
| | 59 |
| | 1 |
| | — |
| | 61 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (159 | ) | | 5,707 |
| | 1,705 |
| | — |
| | 7,253 |
|
| Interest and other debt expense (income), net | 705 |
| | (3 | ) | | 424 |
| | — |
| | 1,126 |
|
| Loss on early extinguishment of debt | 874 |
| | — |
| | — |
| | — |
| | 874 |
|
| Earnings from equity investment in SABMiller | (1,224 | ) | | — |
| | — |
| | — |
| | (1,224 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (514 | ) | | 5,710 |
| | 1,281 |
| | — |
| | 6,477 |
|
| (Benefit) provision for income taxes | (196 | ) | | 2,100 |
| | 390 |
| | — |
| | 2,294 |
|
| Equity earnings of subsidiaries | 4,498 |
| | 218 |
| | — |
| | (4,716 | ) | | — |
|
| Net earnings | 4,180 |
| | 3,828 |
| | 891 |
| | (4,716 | ) | | 4,183 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 4,180 |
| | $ | 3,828 |
| | $ | 888 |
| | $ | (4,716 | ) | | $ | 4,180 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 4,180 |
| | $ | 3,828 |
| | $ | 891 |
| | $ | (4,716 | ) | | $ | 4,183 |
|
Other comprehensive losses, net of deferred income taxes | (153 | ) | | (117 | ) | | (242 | ) | | 359 |
| | (153 | ) |
| Comprehensive earnings | 4,027 |
| | 3,711 |
| | 649 |
| | (4,357 | ) | | 4,030 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 4,027 |
| | $ | 3,711 |
| | $ | 646 |
| | $ | (4,357 | ) | | $ | 4,027 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Net revenues | $ | — |
| | $ | 21,330 |
| | $ | 2,496 |
| | $ | (26 | ) | | $ | 23,800 |
|
| Cost of sales | — |
| | 6,883 |
| | 823 |
| | (26 | ) | | 7,680 |
|
| Excise taxes on products | — |
| | 6,846 |
| | 335 |
| | — |
| | 7,181 |
|
| Gross profit | — |
| | 7,601 |
| | 1,338 |
| | — |
| | 8,939 |
|
| Marketing, administration and research costs | 186 |
| | 2,164 |
| | 293 |
| | — |
| | 2,643 |
|
| Changes to Mondelēz and PMI tax-related receivables/payables | (14 | ) | | — |
| | — |
| | — |
| | (14 | ) |
| Asset impairment and exit costs | 8 |
| | 200 |
| | 14 |
| | — |
| | 222 |
|
| Amortization of intangibles | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Operating (expense) income | (180 | ) | | 5,237 |
| | 1,011 |
| | — |
| | 6,068 |
|
| Interest and other debt expense, net | 698 |
| | 61 |
| | 457 |
| | — |
| | 1,216 |
|
| Earnings from equity investment in SABMiller | (730 | ) | | — |
| | — |
| | — |
| | (730 | ) |
| (Loss) earnings before income taxes and equity earnings of subsidiaries | (148 | ) | | 5,176 |
| | 554 |
| | — |
| | 5,582 |
|
| (Benefit) provision for income taxes | (199 | ) | | 1,930 |
| | 458 |
| | — |
| | 2,189 |
|
| Equity earnings of subsidiaries | 3,339 |
| | 153 |
| | — |
| | (3,492 | ) | | — |
|
| Net earnings | 3,390 |
| | 3,399 |
| | 96 |
| | (3,492 | ) | | 3,393 |
|
| Net earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 3,390 |
| | $ | 3,399 |
| | $ | 93 |
| | $ | (3,492 | ) | | $ | 3,390 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Net earnings | $ | 3,390 |
| | $ | 3,399 |
| | $ | 96 |
| | $ | (3,492 | ) | | $ | 3,393 |
|
Other comprehensive losses, net of deferred income taxes | (403 | ) | | (36 | ) | | (209 | ) | | 245 |
| | (403 | ) |
| Comprehensive earnings (losses) | 2,987 |
| | 3,363 |
| | (113 | ) | | (3,247 | ) | | 2,990 |
|
| Comprehensive earnings attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Comprehensive earnings attributable to Altria Group, Inc. | $ | 2,987 |
| | $ | 3,363 |
| | $ | (116 | ) | | $ | (3,247 | ) | | $ | 2,987 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2013 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 4,520 |
| | $ | 4,192 |
| | $ | 387 |
| | $ | (4,724 | ) | | $ | 4,375 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (31 | ) | | (100 | ) | | — |
| | (131 | ) |
| Proceeds from finance assets | — |
| | — |
| | 716 |
| | — |
| | 716 |
|
| Other | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Net cash (used in) provided by investing activities | — |
| | (31 | ) | | 633 |
| | — |
| | 602 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Long-term debt issued | 4,179 |
| | — |
| | — |
| | — |
| | 4,179 |
|
| Long-term debt repaid | (3,559 | ) | | — |
| | — |
| | — |
| | (3,559 | ) |
| Repurchases of common stock | (634 | ) | | — |
| | — |
| | — |
| | (634 | ) |
| Dividends paid on common stock | (3,612 | ) | | — |
| | — |
| | — |
| | (3,612 | ) |
Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 432 |
| | 240 |
| | (672 | ) | | — |
| | — |
|
| Financing fees and debt issuance costs | (39 | ) | | — |
| | — |
| | — |
| | (39 | ) |
Tender premiums and fees related to early extinguishment
of debt | (1,054 | ) | | — |
| | — |
| | — |
| | (1,054 | ) |
| Cash dividends paid to parent | — |
| | (4,400 | ) | | (324 | ) | | 4,724 |
| | — |
|
| Other | 19 |
| | — |
| | (2 | ) | | — |
| | 17 |
|
| Net cash used in financing activities | (4,268 | ) | | (4,160 | ) | | (998 | ) | | 4,724 |
| | (4,702 | ) |
| Cash and cash equivalents: | | | | | | | | | |
| Increase | 252 |
| | 1 |
| | 22 |
| | — |
| | 275 |
|
| Balance at beginning of year | 2,862 |
| | — |
| | 38 |
| | — |
| | 2,900 |
|
| Balance at end of year | $ | 3,114 |
| | $ | 1 |
| | $ | 60 |
| | $ | — |
| | $ | 3,175 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
| | | for the year ended December 31, 2010 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
| |
| for the year ended December 31, 2012 | | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 2,726 |
| | $ | 3,172 |
| | $ | 486 |
| | $ | (3,617 | ) | | $ | 2,767 |
| $ | 3,063 |
| | $ | 4,200 |
| | $ | 549 |
| | $ | (3,927 | ) | | $ | 3,885 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | | | | | | | | | | |
| Consumer products | | | | | | | | | | |
| Capital expenditures | — |
| | (54 | ) | | (114 | ) | | — |
| | (168 | ) | — |
| | (35 | ) | | (89 | ) | | — |
| | (124 | ) |
| Proceeds from finance assets | | — |
| | — |
| | 1,049 |
| | — |
| | 1,049 |
|
| Other | — |
| | 3 |
| | 112 |
| | — |
| | 115 |
| — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| Financial services | | | | | | | | | | |
| Proceeds from finance assets | — |
| | — |
| | 312 |
| | — |
| | 312 |
| |
| Net cash (used in) provided by investing activities | — |
| | (51 | ) | | 310 |
| | — |
| | 259 |
| — |
| | (35 | ) | | 955 |
| | — |
| | 920 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | | | | | | | | | | |
| Consumer products | | | | | | | | | | |
| Long-term debt issued | 1,007 |
| | — |
| | — |
| | — |
| | 1,007 |
| 2,787 |
| | — |
| | — |
| | — |
| | 2,787 |
|
| Long-term debt repaid | (775 | ) | | — |
| | — |
| | — |
| | (775 | ) | (2,000 | ) | | — |
| | (600 | ) | | — |
| | (2,600 | ) |
| Repurchases of common stock | | (1,082 | ) | | — |
| | — |
| | — |
| | (1,082 | ) |
| Dividends paid on common stock | (2,958 | ) | | — |
| | — |
| | — |
| | (2,958 | ) | (3,400 | ) | | — |
| | — |
| | — |
| | (3,400 | ) |
| Issuances of common stock | 104 |
| | — |
| | — |
| | — |
| | 104 |
| |
| Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 279 |
| | 325 |
| | (604 | ) | | — |
| | — |
| 1,128 |
| | (475 | ) | | (653 | ) | | — |
| | — |
|
| Financing fees and debt insurance costs | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | |
| Financing fees and debt issuance costs | | (22 | ) | | — |
| | — |
| | — |
| | (22 | ) |
Tender premiums and fees related to early extinguishment of debt | | (864 | ) | | — |
| | — |
| | — |
| | (864 | ) |
| Cash dividends paid to parent | — |
| | (3,438 | ) | | (179 | ) | | 3,617 |
| | — |
| — |
| | (3,690 | ) | | (237 | ) | | 3,927 |
| | — |
|
| Other | 59 |
| | (8 | ) | | (6 | ) | | — |
| | 45 |
| 7 |
| | — |
| | (1 | ) | | — |
| | 6 |
|
| Net cash used in financing activities | (2,290 | ) | | (3,121 | ) | | (789 | ) | | 3,617 |
| | (2,583 | ) | (3,446 | ) | | (4,165 | ) | | (1,491 | ) | | 3,927 |
| | (5,175 | ) |
| Cash and cash equivalents: | | | | | | | | | | | | | | | | | | |
| Increase | 436 |
| | — |
| | 7 |
| | — |
| | 443 |
| |
| (Decrease) increase | | (383 | ) | | — |
| | 13 |
| | — |
| | (370 | ) |
| Balance at beginning of year | 1,862 |
| | — |
| | 9 |
| | — |
| | 1,871 |
| 3,245 |
| | — |
| | 25 |
| | — |
| | 3,270 |
|
| Balance at end of year | $ | 2,298 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 2,314 |
| $ | 2,862 |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | $ | 2,900 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
|
| | | | | | | | | | | | | | | | | | | |
| for the year ended December 31, 2011 | Altria Group, Inc. |
| | PM USA |
| | Non- Guarantor Subsidiaries |
| | Total Consolidating Adjustments |
| | Consolidated |
|
| Cash Provided by Operating Activities | | | | | | | | | |
| Net cash provided by operating activities | $ | 3,515 |
| | $ | 3,719 |
| | $ | 226 |
| | $ | (3,879 | ) | | $ | 3,581 |
|
| Cash Provided by (Used in) Investing Activities | | | | | | | | | |
| Capital expenditures | — |
| | (26 | ) | | (79 | ) | | — |
| | (105 | ) |
| Proceeds from finance assets | — |
| | — |
| | 490 |
| | — |
| | 490 |
|
| Other | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
|
| Net cash (used in) provided by investing activities | — |
| | (25 | ) | | 412 |
| | — |
| | 387 |
|
| Cash Provided by (Used in) Financing Activities | | | | | | | | | |
| Long-term debt issued | 1,494 |
| | — |
| | — |
| | — |
| | 1,494 |
|
| Repurchases of common stock | (1,327 | ) | | — |
| | — |
| | — |
| | (1,327 | ) |
| Dividends paid on common stock | (3,222 | ) | | — |
| | — |
| | — |
| | (3,222 | ) |
| Issuances of common stock | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
| Changes in amounts due to/from Altria Group, Inc. and subsidiaries | 441 |
| | (28 | ) | | (413 | ) | | — |
| | — |
|
| Financing fees and debt issuance costs | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) |
| Cash dividends paid to parent | — |
| | (3,666 | ) | | (213 | ) | | 3,879 |
| | — |
|
| Other | 41 |
| | — |
| | (3 | ) | | — |
| | 38 |
|
| Net cash used in financing activities | (2,568 | ) | | (3,694 | ) | | (629 | ) | | 3,879 |
| | (3,012 | ) |
| Cash and cash equivalents: | | | | | | | | �� | |
| Increase | 947 |
| | — |
| | 9 |
| | — |
| | 956 |
|
| Balance at beginning of year | 2,298 |
| | — |
| | 16 |
| | — |
| | 2,314 |
|
| Balance at end of year | $ | 3,245 |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 3,270 |
|
Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________
Note 20. Quarterly Financial Data (Unaudited)
| | | | | 2013 Quarters |
| (in millions, except per share data) | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | | $ | 5,528 |
| | $ | 6,305 |
| | $ | 6,553 |
| | $ | 6,080 |
|
| Gross profit | | $ | 2,674 |
| | $ | 2,554 |
| | $ | 2,821 |
| | $ | 2,408 |
|
| Net earnings | | $ | 1,385 |
| | $ | 1,266 |
| | $ | 1,396 |
| | $ | 488 |
|
| Net earnings attributable to Altria Group, Inc. | | $ | 1,385 |
| | $ | 1,266 |
| | $ | 1,396 |
| | $ | 488 |
|
| Per share data: | |
| |
| |
| |
|
| Basic and diluted EPS attributable to Altria Group, Inc. | | $ | 0.69 |
| | $ | 0.63 |
| | $ | 0.70 |
| | $ | 0.24 |
|
| Dividends declared | | $ | 0.44 |
| | $ | 0.44 |
| | $ | 0.48 |
| | $ | 0.48 |
|
| Market price — high | | $ | 35.47 |
| | $ | 37.61 |
| | $ | 37.48 |
| | $ | 38.58 |
|
| — low | | $ | 31.85 |
| | $ | 34.08 |
| | $ | 33.12 |
| | $ | 34.23 |
|
| | | | | | | | | | | | | | | | |
| | 2012 Quarters | 2012 Quarters |
| (in millions, except per share data) | 1st (a) |
| | 2nd |
| | 3rd |
| | 4th |
| 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Net revenues | $ | 5,647 |
| | $ | 6,487 |
| | $ | 6,242 |
| | $ | 6,242 |
| $ | 5,647 |
| | $ | 6,487 |
| | $ | 6,242 |
| | $ | 6,242 |
|
| Gross profit | $ | 2,202 |
| | $ | 2,494 |
| | $ | 2,484 |
| | $ | 2,383 |
| $ | 2,202 |
| | $ | 2,494 |
| | $ | 2,484 |
| | $ | 2,383 |
|
| Net earnings | $ | 1,195 |
| | $ | 1,226 |
| | $ | 657 |
| | $ | 1,105 |
| $ | 1,195 |
| | $ | 1,226 |
| | $ | 657 |
| | $ | 1,105 |
|
| Net earnings attributable to noncontrolling interests | — |
| | (1 | ) | | — |
| | (2 | ) | — |
| | (1 | ) | | — |
| | (2 | ) |
| Net earnings attributable to Altria Group, Inc. | $ | 1,195 |
| | $ | 1,225 |
| | $ | 657 |
| | $ | 1,103 |
| $ | 1,195 |
| | $ | 1,225 |
| | $ | 657 |
| | $ | 1,103 |
|
| Per share data: |
| |
| |
| |
|
| |
| |
| |
|
| Basic EPS attributable to Altria Group, Inc. | $ | 0.59 |
| | $ | 0.60 |
| | $ | 0.32 |
| | $ | 0.55 |
| |
| Diluted EPS attributable to Altria Group, Inc. | $ | 0.59 |
| | $ | 0.60 |
| | $ | 0.32 |
| | $ | 0.55 |
| |
| Basic and diluted EPS attributable to Altria Group, Inc. | | $ | 0.59 |
| | $ | 0.60 |
| | $ | 0.32 |
| | $ | 0.55 |
|
| Dividends declared | $ | 0.41 |
| | $ | 0.41 |
| | $ | 0.44 |
| | $ | 0.44 |
| $ | 0.41 |
| | $ | 0.41 |
| | $ | 0.44 |
| | $ | 0.44 |
|
| Market price — high | $ | 31.00 |
| | $ | 34.60 |
| | $ | 36.29 |
| | $ | 34.25 |
| $ | 31.00 |
| | $ | 34.60 |
| | $ | 36.29 |
| | $ | 34.25 |
|
| — low | $ | 28.00 |
| | $ | 30.74 |
| | $ | 32.72 |
| | $ | 30.01 |
| $ | 28.00 |
| | $ | 30.74 |
| | $ | 32.72 |
| | $ | 30.01 |
|
| | 2011 Quarters | |
| (in millions, except per share data) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| |
| Net revenues | $ | 5,643 |
| | $ | 5,920 |
| | $ | 6,108 |
| | $ | 6,129 |
| |
| Gross profit | $ | 2,148 |
| | $ | 1,972 |
| | $ | 2,445 |
| | $ | 2,374 |
| |
| Net earnings | $ | 938 |
| | $ | 444 |
| | $ | 1,174 |
| | $ | 837 |
| |
| Net earnings attributable to noncontrolling interests | (1 | ) | | — |
| | (1 | ) | | (1 | ) | |
| Net earnings attributable to Altria Group, Inc. | $ | 937 |
| | $ | 444 |
| | $ | 1,173 |
| | $ | 836 |
| |
| Per share data: |
| |
| |
| |
| |
| Basic EPS attributable to Altria Group, Inc. | $ | 0.45 |
| | $ | 0.21 |
| | $ | 0.57 |
| | $ | 0.41 |
| |
| Diluted EPS attributable to Altria Group, Inc. | $ | 0.45 |
| | $ | 0.21 |
| | $ | 0.57 |
| | $ | 0.41 |
| |
| Dividends declared | $ | 0.38 |
| | $ | 0.38 |
| | $ | 0.41 |
| | $ | 0.41 |
| |
| Market price — high | $ | 26.27 |
| | $ | 28.13 |
| | $ | 27.41 |
| | $ | 30.40 |
| |
| — low | $ | 23.34 |
| | $ | 25.81 |
| | $ | 23.20 |
| | $ | 25.94 |
| |
During 20122013 and 20112012, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.: | | | | 2012 Quarters | 2013 Quarters |
| (in millions) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| NPM Adjustment Items | | $ | (483 | ) | | $ | (36 | ) | | $ | (145 | ) | | $ | — |
|
| Tobacco and health judgments, including accrued interest | | 6 |
| | — |
| | 16 |
| | — |
|
| PMCC decrease to allowance for losses | | (20 | ) | | (27 | ) | | — |
| | — |
|
| Asset impairment, exit and implementation costs | $ | 4 |
| | $ | 25 |
| | $ | 11 |
| | $ | 16 |
| 1 |
| | 1 |
| | — |
| | 10 |
|
| Tobacco and health judgments, including accrued interest | — |
| | 1 |
| | 3 |
| | 1 |
| |
| PMCC decrease to allowance for losses and recoveries | — |
| | (11 | ) | | (33 | ) | | — |
| |
| Reduction to cumulative lease earnings related to the Closing Agreement | — |
| | 7 |
| | — |
| | — |
| |
SABMiller special items (a) | (309 | ) | | 26 |
| | 19 |
| | 16 |
| |
| Loss on early extinguishment of debt | — |
| | — |
| | 874 |
| | — |
| — |
| | — |
| | — |
| | 1,084 |
|
| SABMiller special items | | 15 |
| | (4 | ) | | 14 |
| | 6 |
|
| | | $ | (481 | ) | | $ | (66 | ) | | $ | (115 | ) | | $ | 1,100 |
|
| | $ | (305 | ) | | $ | 48 |
| | $ | 874 |
| | $ | 33 |
| | | | | | | |
| | 2011 Quarters | 2012 Quarters |
| (in millions) | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| 1st |
| | 2nd |
| | 3rd |
| | 4th |
|
| Asset impairment, exit, implementation and integration costs | $ | 2 |
| | $ | 3 |
| | $ | 1 |
| | $ | 220 |
| |
| Reduction to cumulative lease earnings related to the Closing Agreement | | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
|
| Tobacco and health judgments, including accrued interest | — |
| | 41 |
| | — |
| | 121 |
| — |
| | 1 |
| | 3 |
| | 1 |
|
| UST acquisition-related costs | 4 |
| | — |
| | 1 |
| | 1 |
| |
| PMCC (decrease) increase to allowance for losses | — |
| | — |
| | (35 | ) | | 60 |
| |
| Reduction to cumulative lease earnings related to the 2011 PMCC Leveraged Lease Charge | — |
| | 490 |
| | — |
| | — |
| |
| PMCC decrease to allowance for losses and recoveries | | — |
| | (11 | ) | | (33 | ) | | — |
|
| Asset impairment, exit and implementation costs | | 4 |
| | 25 |
| | 11 |
| | 16 |
|
| Loss on early extinguishment of debt | | — |
| | — |
| | 874 |
| | — |
|
| SABMiller special items | (32 | ) | | 57 |
| | 11 |
| | 46 |
| (309 | ) | | 26 |
| | 19 |
| | 16 |
|
| | $ | (26 | ) | | $ | 591 |
| | $ | (22 | ) | | $ | 448 |
| $ | (305 | ) | | $ | 48 |
| | $ | 874 |
| | $ | 33 |
|
| |
(a) | During the second quarter of 2012, Altria Group, Inc. determined that it had not recorded in its financial statements for the three months ended March 31, 2012, its share of non-cash gains from its equity investment in SABMiller, relating to SABMiller's strategic alliance transactions with Anadolu Efes and Castel that were closed during the first quarter of 2012. Because Altria Group, Inc. did not record these gains, it understated by $342 million, $222 million and $0.11 earnings before income taxes, net earnings and diluted earnings per share attributable to Altria Group, Inc., respectively, for the three months ended March 31, 2012. Altria Group, Inc. revised its first quarter of 2012 financial statements and reflected this revision in the financial statements as of and for the six months ended June 30, 2012. Financial results for the first quarter of 2012 reported above reflect this revision.
|
As discussed in Note 14. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated statements of earnings during 20122013 and 20112012 as a result of various tax events.
Report of Independent Registered Public Accounting Firm To the Board of Directors and
Stockholders of Altria Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive earnings, stockholders'stockholders’ equity, and cash flows, present fairly, in all material respects, the financial position of Altria Group, Inc. and its subsidiaries at December 31, 20122013 and 2011,2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20122013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Altria Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Altria Group, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on Altria Group, Inc.'s’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
January 31, 2013
Richmond, Virginia
January 30, 2014
Report of Management On Internal Control Over Financial Reporting
Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Altria Group, Inc.’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:
n pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Altria Group, Inc.;
n provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
n provide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance with the authorization of management and directors of Altria Group, Inc.; and
n provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Altria Group, Inc.'s’s internal control over financial reporting as of December 31, 2012.2013. Management based this assessment on criteria for effective internal control over financial reporting described in "Internal Control —- Integrated Framework"Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management'sManagement’s assessment included an evaluation of the design of Altria Group, Inc.'s’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2012,2013, Altria Group, Inc. maintained effective internal control over financial reporting.
PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of Altria Group, Inc. included in this report, has audited the effectiveness of Altria Group, Inc.'s’s internal control over financial reporting as of December 31, 2012,2013, as stated in their report herein.
January 31, 201330, 2014
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.'s’s management, including Altria Group, Inc.'s’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.'s’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended)Act) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, Altria Group, Inc.'s ’s
Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.'s’s disclosure controls and procedures are effective. There have been no changes in Altria Group, Inc.'s’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Altria Group, Inc.'s’s internal control over financial reporting.
The Report of Independent Registered Public Accounting Firm and the Report of Management on Internal Control over Financial Reporting are included in Item 8.
Item 9B. Other Information.
None.
Part III
Except for the information relating to the executive officers set forth in Item 10, and the information relating to equity compensation plans set forth in Item 12, the information called for by Items 10-14 is hereby incorporated by reference to Altria Group, Inc.'s’s definitive proxy statement for use in connection with its Annual Meeting of Shareholders to be held on May 16, 201314, 2014 that will be filed with the Securities and Exchange CommissionSEC on or about April 4, 20133, 2014 (the "proxy statement"“proxy statement”), and, except as indicated therein, made a part hereof.
Item 10. Directors, Executive Officers and Corporate Governance.
Refer to "Proposals“Proposals Requiring Your Vote - Proposal 1 - Election of Directors," "Ownership” “Ownership of Equity Securities of the Company - Section 16(a) Beneficial Ownership Reporting Compliance"Compliance” and "Board“Board and Governance Matters - Committees of the Board of Directors"Directors” sections of the proxy statement.
Executive Officers as of February 15, 2013:14, 2014:
|
| | |
Name | Office | Age |
| Martin J. Barrington | Chairman of the Board and Chief Executive Officer | 5960 |
| David R. Beran | President and Chief Operating Officer | 5859 |
| Ivan S. Feldman | Vice President and Controller | 4647 |
| Clifford B. Fleet | President and Chief Executive Officer, Philip Morris USA Inc. | 43 |
| Michael B. French | Senior Vice President and Chief Marketing and Innovation Officer, Altria Client Services Inc. | 5859 |
| William F. Gifford, Jr. | Senior Vice President, Strategy and Chief Executive Officer, Philip Morris USA Inc.Business Development | 4243 |
| Louanna O. Heuhsen | Vice President, Corporate Governance and Associate General Counsel | 6263 |
| Craig A. Johnson | President and Chief Executive Officer, Altria Group Distribution Company | 6061 |
| Denise F. Keane | Executive Vice President and General Counsel | 6061 |
| Salvatore Mancuso | Treasurer and Senior Vice President, Investor Relations and Treasurer, Finance and StrategyAccounting | 4748 |
| John R. Nelson | Executive Vice President and Chief Technology Officer | 6061 |
| Brian W. Quigley | President and Chief Executive Officer, U.S. Smokeless Tobacco Company LLC | 3940 |
| W. Hildebrandt Surgner, Jr. | Corporate Secretary and Senior Assistant General Counsel | 48 |
| Charles N. Whitaker | Senior Vice President, Human Resources & Compliance and Chief Compliance Officer | 47 |
| Howard A. Willard III | Executive Vice President and Chief Financial Officer | 49 |
Charles N. Whitaker | Senior Vice President, Human Resources & Compliance
and Chief Compliance Officer
| 4650 |
All of the above-mentioned officers have been employed by Altria Group, Inc. or its subsidiaries in various capacities
during the past five years, except for Ms. Heuhsen, who joined in 2008 after serving as a partner in the law firm of Hunton &
Williams LLP, and Mr. French, who joined Altria Client Services Inc. in 2012 following the retirement of Nancy E. Brennan. Mr. French joined the company after having served as Senior Vice President, Corporate Strategy at Brown Forman Corporation,
one of the leading American-owned companies in the wine and spirits business, from March 2007 until May 2011. From May 2011 until joining Altria Client Services Inc., Mr. French worked as a private marketing and strategy consultant. On February 24, 2012,
Effective November 16, 2013, Mr. Feldman was appointed ViceGifford, previously President and Controller, following Linda M. Warren's decision to retire. Mr. Feldman has been continuously employed by Altria Client Services Inc. in positions overseeing financial reporting and analysis since June 2000.
Upon the retirement of Michael E. Szymanczyk as Chairman and Chief Executive Officer of PM USA, was appointed Senior Vice President, Strategy & Business Development of Altria Group, Inc.
Effective November 16, 2013, Mr. Mancuso, previously Vice President and Treasurer, Finance and Strategy of Altria Group, Inc., effective as of the conclusionwas appointed Treasurer and Senior Vice President, Investor Relations and Accounting of Altria Group, Inc.'s Annual Meeting of Shareholders on May 17, 2012,
Effective November 16, 2013, Mr. Barrington became Chairman and Chief Executive Officer of Altria Group, Inc. and Mr. Beran became President and Chief Operating Officer. Mr. Szymanczyk's status as an executive officer terminated on May 17, 2012.
Effective April 16, 2012, Mr. QuigleyFleet was appointed President and Chief Executive Officer U.S. Smokeless Tobacco Company LLC following Peter P. Paoli's decision to retire.of PM USA. Since 1995, Mr. QuigleyFleet has been continuously employed by Altria Group, Inc.’s businesses or its subsidiaries in various brand management, developmentpositions including Manufacturing, Sales, Investor Relations, Strategy & Business Development and planning positions since 2003.Brand Management.
Effective May 16, 2012, Mr. Whitaker was appointed Senior Vice President, Human Resources & Compliance and Chief Compliance Officer. Mr. Whitaker has been continuously employed by Altria Group, Inc. or its subsidiaries in various legal
and compliance related positions since 2002. Mr. Whitaker'sWhitaker’s wife and Mr. Surgner'sSurgner’s wife are first cousins.
Codes of Conduct and Corporate Governance
Altria Group, Inc. has adopted the Altria Code of Conduct for Compliance and Integrity, which complies with requirements set forth in Item 406 of Regulation S-K. This Code of Conduct applies to all of its employees, including its principal executive
officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Altria Group, Inc. has also adopted a code of business conduct and ethics that applies to the members of its Board of Directors. These documents are available free of charge on Altria Group, Inc.'s’s website at www.altria.com.
In addition, Altria Group, Inc. has adopted corporate governance guidelines and charters for its Audit, Compensation and Nominating, Corporate Governance and Social Responsibility Committees and the other committees of the Board of Directors. All of these documents are available free of charge on Altria Group, Inc.'s website at www.altria.com. Any waiver granted by Altria Group, Inc. to its principal executive officer, principal financial officer or controller under the Code of Conduct, and certain amendments to the Code of Conduct, will be disclosed on Altria Group, Inc.'s website at www.altria.com within the time period required by applicable rules.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 11. Executive Compensation.
Refer to "Executive“Executive Compensation," "Compensation” “Compensation Committee Matters - Compensation Committee Interlocks and Insider Participation," "Compensation” “Compensation Committee Matters - Compensation Committee Report for the Year Ended December 31, 2012,"2013,” and "Board“Board and Governance Matters - Directors - Compensation of Directors"Directors” sections of the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under Altria Group, Inc.'s’s equity compensation plans at December 31, 20122013, were as follows:
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| | Number of Shares to be Issued upon Exercise of Outstanding Options and Vesting of Deferred Stock (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (c) |
Equity compensation plans approved by shareholders (1) | 54,90354,442 (2)
| $— | 47,167,00845,789,309 (3)
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(1) | The following plans have been approved by Altria Group, Inc. shareholders and have shares referenced in column (a) or column (c): the 2005 Performance Incentive Plan, the 2010 Performance Incentive Plan and the Stock Compensation Plan for Non-Employee Directors. |
| |
(2) | Represents 54,90354,442 shares of deferred stock. |
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(3) | Includes 46,574,32745,254,733 shares available under the 2010 Performance Incentive Plan and 592,681534,576 shares available under the Stock Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a). |
Refer to "Ownership“Ownership of Equity Securities of the Company - Directors and Executive Officers"Officers” and "Ownership“Ownership of Equity Securities of the Company - Certain Other Beneficial Owners"Owners” sections of the proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Refer to "Related“Related Person Transactions and Code of Conduct"Conduct” and "Board“Board and Governance Matters - Directors - Director Independence Determinations"Determinations” sections of the proxy statement.
Item 14. Principal Accounting Fees and Services.
Refer to "Audit“Audit Committee Matters - Independent Registered Public Accounting Firm's Fees"Firm’s Fees” and "Audit“Audit Committee Matters - Pre-Approval Policy"Policy” sections of the proxy statement.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements and Schedules
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Consolidated Balance Sheets at December 31, 20122013 and 20112012 | |
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Consolidated Statements of Earnings for the years ended December 31, 2013, 2012 2011 and 20102011 | |
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Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2013, 2012 2011 and 20102011 | |
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Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 2011 and 20102011 | |
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Consolidated Statements of Stockholders'Stockholders’ Equity for the years ended December 31, 2013, 2012 2011 and 20102011 | |
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| Notes to Consolidated Financial Statements | |
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| Report of Independent Registered Public Accounting Firm | |
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| Report of Management on Internal Control Over Financial Reporting | |
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| Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | S-1 |
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| Financial Statement Schedule - Valuation and Qualifying Accounts | S-2 |
Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable.
In accordance with Regulation S-X Rule 3-09, the financial statements of SABMiller plc ("SABMiller") for its fiscal years ended March 31, 2014 (unaudited), 2013 and 2012 and 2011,(unaudited), will be filed by amendment within six months after SABMiller'sSABMiller’s fiscal year ended March 31, 2013.2014.
(b) The following exhibits are filed as part of this Annual Report on Form 10-K:
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| | 2.1 | | Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of January 31, 2007. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on January 31, 2007 (File No. 1-08940). |
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| | 2.2 | | Distribution Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on January 30, 2008 (File No. 1-08940). |
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| | 2.3 | | Agreement and Plan of Merger by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of September 7, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on September 8, 2008 (File No. 1-08940). |
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| | 2.4 | | Amendment No. 1 to the Agreement and Plan of Merger, dated as of September 7, 2008, by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of October 2, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on October 3, 2008 (File No. 1-08940). |
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| | 3.1 | | Articles of Amendment to the Restated Articles of Incorporation of Altria Group, Inc. and Restated Articles of Incorporation of Altria Group, Inc. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940). |
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| | 3.2 | | Amended and Restated By-laws of Altria Group, Inc., effective February 26, 2013.on the date of the 2013 Annual Meeting of Shareholders. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on February 26, 2013 (File No. 1-08940). |
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| | 4.1 | | Indenture between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of December 2, 1996. Incorporated by reference to Altria Group, Inc.'s’s Registration Statement on Form S-3/A filed on January 29, 1998 (No. 333-35143). |
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| | 4.2 | | First Supplemental Indenture to Indenture, dated as of December 2, 1996, between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of February 13, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on February 15, 2008 (File No. 1-08940). |
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| | 4.3 | | Indenture among Altria Group, Inc., as Issuer, Philip Morris USA Inc., as Guarantor, and Deutsche Bank Trust Company Americas, as Trustee, dated as of November 4, 2008. Incorporated by reference to Altria Group, Inc.'s’s Registration Statement on Form S-3 filed on November 4, 2008 (No. 333-155009). |
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| | 4.4 | | 5-Year Revolving Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, Barclays Capital, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs Bank USA, The Bank of Nova Scotia and The Royal Bank of Scotland plc, as Syndication Agents and Sovereign Bank, HSBC Bank USA, National Association, Morgan Stanley Senior Funding, Inc., Wells Fargo Bank, National Association and U.S. Bank National Association, as Documentation Agents, dated as of June 30, 2011.Agents. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940). |
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| | 4.5 | | Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013, among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 23, 2013 (File No. 1-08940). |
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| 4.6 | | The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request. |
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| | 10.1 | | Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940). |
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| | 10.2 | | Settlement Agreement related to settlement of Florida health care cost recovery action, dated August 25, 1997. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on September 3, 1997 (File No. 1-08940). |
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| | 10.3 | | Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940). |
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| | 10.4 | | Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). |
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| | 10.5 | | Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). |
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| | 10.6 | | Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). |
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| | 10.7 | | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). |
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| | 10.8 | | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Florida health care cost recovery action, dated as of September 11, 1998. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 1-08940). |
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| | 10.9 | | Master Settlement Agreement relating to state health care cost recovery and other claims, dated as of November 23, 1998. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on November 25, 1998, as amended by Form 8-K/A filed on December 24, 1998 (File No. 1-08940). |
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| | 10.10 | | Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters, dated as of May 7, 2001. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on May 8, 2001 (File No. 1-08940). |
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| | 10.11 | | Term Sheet effective December 17, 2012, between Philip Morris USA Inc., the other participating manufacturers, and various states and territories for settlement of the 2003-20122003 - 2012 Non-Participating Manufacturer Adjustment with those states. Incorporated by reference to Altria Group, Inc.'s’s Current Report on From 8-K filed on December 18, 2012 (File No. 1-08940). |
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| | 10.12 | | Stock Purchase Agreement by and among Altria Group, Inc., Bradford Holdings, Inc. and John Middleton, Inc., dated as of October 31, 2007. Incorporated by reference to Altria Group, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 1-08940). |
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| 10.13 | | Employee Matters Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). |
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| | 10.1410.13 | | Tax Sharing Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). |
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| | 10.15 | | Transition Services Agreement by and between Altria Corporate Services, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). |
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| 10.1610.14 | | Intellectual Property Agreement by and between Philip Morris International Inc. and Philip Morris USA Inc., dated as of January 1, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). |
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| | 10.1710.15 | | Employee Matters Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). |
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| | 10.1810.16 | | Tax Sharing Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). |
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| | 10.19 | | Transition Services Agreement by and between Altria Corporate Services, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). |
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| 10.2010.17 | | Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 5-Year Revolving Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of June 30, 2011. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940). |
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| | 10.2110.18 | | Financial Counseling Program. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* |
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| | 10.2210.19 | | Benefit Equalization Plan, effective September 2, 1974, as amended. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).* |
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| | 10.2310.20 | | Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).* |
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| | 10.2410.21 | | Form of Supplemental Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-08940).* |
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| | 10.2510.22 | | Automobile Policy. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).* |
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| | 10.2610.23 | | Supplemental Management Employees'Employees’ Retirement Plan of Altria Group, Inc., effective as of October 1, 1987, as amended and in effect as of January 1, 2012. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No. 1-08940).* |
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| | 10.2710.24 | | Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996, as amended effective October 1, 2012. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).* |
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| | 10.2810.25 | | Grantor Trust Agreement by and between Altria Client Services Inc. and Wells Fargo Bank, National Association, dated February 23, 2011. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).* |
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| | 10.2910.26 | | Long-Term Disability Benefit Equalization Plan, effective as of January 1, 1989, as amended. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 1-08940).* |
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| | 10.3010.27 | | Survivor Income Benefit Equalization Plan, effective as of January 1, 1985, as amended and in effect as of January 1, 2010. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (File No. 1-08940).* |
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| | 10.3110.28 | | 2000 Stock Compensation Plan for Non-Employee Directors, as amended and restated as of March 1, 2003. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).* |
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| | 10.3210.29 | | 2005 Performance Incentive Plan, effective on May 1, 2005. Incorporated by reference to Altria Group, Inc.'s’s definitive proxy statement filed on March 14, 2005 (File No. 1-08940).* |
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| | 10.3310.30 | | Deferred Fee Plan for Non-Employee Directors, as amended and restated effective October 1, 2012. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).* |
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| | 10.3410.31 | | Stock Compensation Plan for Non-Employee Directors, as amended and restated effective October 1, 2012. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).* |
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| | 10.3510.32 | | 2010 Performance Incentive Plan, effective on May 20, 2010. Incorporated by reference to Altria Group, Inc.'s’s definitive proxy statement filed on April 9, 2010 (File No. 1-08940).* |
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| | 10.3610.33 | | Kraft Foods Inc. (now known as Mondelēz International, Inc.) Supplemental Benefits Plan I (including First Amendment adding Supplement A), as amended and restated effective as of January 1, 1996. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 1-08940).* |
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| | 10.37 | | Agreement among Altria Group, Inc., Philip Morris USA Inc. and Michael E. Szymanczyk, dated as of May 15, 2002. Incorporated by reference to Altria Group, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File No. 1-08940).* |
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| 10.3810.34 | | Form of Indemnity Agreement. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on October 30, 2006 (File No. 1-08940). |
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| | 10.3910.35 | | Form of Restricted Stock Agreement, dated as of April 23, 2008.December 31, 2009. Incorporated by reference to Altria Group, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* |
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| 10.36 | | Form of Restricted Stock Agreement, dated as of January 26, 2010. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on April 29, 2008January 28, 2010 (File No. 1-08940).* |
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| 10.37 | | Form of Restricted Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011(File No. 1-08940).* |
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| 10.38 | | Form of Deferred Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* |
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| | 10.4010.39 | | Form of Restricted Stock Agreement, dated as of January 27, 2009.25, 2012. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on January 29, 200927, 2012 (File No. 1-08940).* |
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| 10.40 | | Form of Restricted Stock Agreement, dated as of May 16, 2012. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on May 17, 2012 (File No. 1-08940).* |
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| | 10.41 | | Form of Restricted Stock Agreement, dated as of December 31, 2009.January 29, 2013. Incorporated by reference to Altria Group, Inc.'s Annual’s Current Report on Form 10-K for the year ended December8-K filed on January 31, 20092013 (File No. 1-08940).* |
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| | 10.42 | | Form of RestrictedDeferred Stock Agreement, dated as of January 26, 2010.29, 2013. Incorporated by reference to Altria Group, Inc.'s Current’s Quarterly Report on Form 8-K filed on January 28, 201010-Q for the period ended March 31, 2013 (File No. 1-08940).* |
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| | 10.43 | | Form of Restricted Stock Agreement, dated as of January 25, 2011.Executive Confidentiality and Non-Competition Agreement. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2011(File No. 1-08940).* |
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| 10.44 | | Form of Deferred Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.'s’s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* |
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| | 10.45 | | Form of Restricted Stock Agreement, dated as of January 25, 2012. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).* |
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| 10.46 | | Amendment to Restricted Stock Agreement, dated January 26, 2010, and Restricted Stock Agreement, dated April 23, 2008, each between Altria Group, Inc. and Michael E. Szymanczyk. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).* |
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| 10.47 | | Form of Restricted Stock Agreement, dated as of May 16, 2012. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on May 17, 2012 (File No. 1-08940).* |
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| 10.48 | | Form of Executive Confidentiality and Non-Competition Agreement. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* |
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| 10.49 | | Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, dated January 28, 2009. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 29, 2009 (File No. 1-08940).* |
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| 10.50 | | First Amendment to the Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, dated November 12, 2009. Incorporated by reference to Altria Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* |
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| 10.51 | | Second Amendment to the Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, effective October 14, 2010. Incorporated by reference to Altria Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).* |
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| 10.52 | | Time Sharing Termination Letter to Michael E. Szymanczyk, dated May 17, 2012. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on May 17, 2012 (File No. 1-08940).* |
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| 10.5310.44 | | Time Sharing Agreement between Altria Client Services Inc. and Martin J. Barrington, dated as of July 25, 2012. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (File No. 1-08940).* |
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| | 10.5410.45 | | Time Sharing Agreement between Altria Client Services Inc. and David R. Beran, dated as of July 25, 2012. Incorporated by reference to Altria Group, Inc.'s’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (File No. 1-08940).*
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| 10.55 | | Consulting Agreement between Altria Group, Inc. and Michael E. Szymanczyk, dated January 26, 2012. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).* |
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| 10.56 | | Agreement and General Release between Altria Group, Inc. and Michael E. Szymanczyk, dated January 26, 2012. Incorporated by reference to Altria Group, Inc.'s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).* |
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| | 12 | | Statements regarding computation of ratios of earnings to fixed charges. |
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| | 21 | | Significant subsidiariesSubsidiaries of Altria Group, Inc. |
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| | 23 | | Consent of independent registered public accounting firm. |
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| | 24 | | Powers of attorney. |
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| | 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | 99.1 | | Certain Litigation Matters. |
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| | 99.2 | | Trial Schedule for Certain Cases. |
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| | 99.3 | | Definitions of Terms Related to Financial Covenants Included in Altria Group, Inc.'s’s Amended and Restated 5-Year Revolving Credit Agreement, dated as of June 30, 2011.August 19, 2013. Incorporated by reference to Altria Group, Inc.'s Annual’s Quarterly Report on Form 10-K10-Q for the yearperiod ended December 31, 2011September 30, 2013 (File No. 1-08940). |
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| | 101.INS | | XBRL Instance Document. |
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| | 101.SCH | | XBRL Taxonomy Extension Schema. |
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| | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
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| | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
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| | 101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
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| | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | ALTRIA GROUP, INC. |
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| | By: /s/ | /s/ MARTIN J. BARRINGTON |
| | (Martin J. Barrington Chairman of the Board and Chief Executive Officer) |
Date: February 27, 201326, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
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Signature | | Title | | Date |
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/s/ MARTIN J. BARRINGTON (Martin J. Barrington) | | Director, Chairman of the Board and Chief Executive Officer | | February 27, 201326, 2014 |
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/s/ HOWARD A. WILLARD III (Howard A. Willard III) | | Executive Vice President and Chief Financial Officer | | February 27, 201326, 2014 |
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/s/ IVAN S. FELDMAN (Ivan S. Feldman) | | Vice President and Controller | | February 27, 201326, 2014 |
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*ELIZABETH E. BAILEY, * GERALD L. BALILES, JOHN T. CASTEEN III, DINYAR S. DEVITRE, THOMAS F. FARRELL II, THOMAS W. JONES, DEBRA J. KELLY-ENNIS W. LEO KIELY III, KATHRYN B. MCQUADE, GEORGE MUÑOZ, NABIL Y. SAKKAB | | Directors | | |
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| *By: | /s/ MARTIN J. BARRINGTON (MARTIN J. BARRINGTON ATTORNEY-IN-FACT) | | | | February 27, 201326, 2014 |
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
To the Board of Directors and Stockholders of Altria Group, Inc.:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated January 31, 201330, 2014 appearing in this Annual Report on Form 10-K of Altria Group, Inc. also included an audit of the financial statement schedule appearing on Page S-2 of this Annual Report on Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 31, 201330, 2014
Altria Group, Inc. and Subsidiaries
Valuation and Qualifying Accounts
For the Years Ended December 31, 2013, 2012 2011 and 20102011
(in millions)
| | | Col. A | | Col. B | | | Col. C | | | Col. D | | Col. E | | Col. B | | | Col. C | | | Col. D | | Col. E |
| | | | | Additions | | | | | | | | Additions | | | | |
| Description | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| | | | | | | | | (a) | | | | | | | | | | (a) | | |
| 2013: | | | | | | | | | | | |
| | | | | | | | | | | | |
| Allowance for discounts | | | $ | — |
| | $ | 610 |
| | $ | — |
| | $ | 610 |
| | $ | — |
|
| Allowance for returned goods | | | 42 |
| | 150 |
| | — |
| | 151 |
| | 41 |
|
| Allowance for losses on finance assets | | | 99 |
| | (47 | ) | | — |
| | — |
| | 52 |
|
| | | | $ | 141 |
| | $ | 713 |
| | $ | — |
| | $ | 761 |
| | $ | 93 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| 2012: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| CONSUMER PRODUCTS: | | | | | | | | | | | |
| Allowance for discounts | | $ | — |
| | $ | 619 |
| | $ | — |
| | $ | 619 |
| | $ | — |
| | $ | — |
| | $ | 619 |
| | $ | — |
| | $ | 619 |
| | $ | — |
|
| Allowance for returned goods | | 54 |
| | 114 |
| | — |
| | 126 |
| | 42 |
| | 54 |
| | 114 |
| | — |
| | 126 |
| | 42 |
|
| Allowance for losses on finance assets | | | 227 |
| | (10 | ) | | — |
| | 118 |
| | 99 |
|
| | | $ | 54 |
| | $ | 733 |
| | $ | — |
| | $ | 745 |
| | $ | 42 |
| | $ | 281 |
| | $ | 723 |
| | $ | — |
| | $ | 863 |
| | $ | 141 |
|
| FINANCIAL SERVICES: | | | | | | | | | | | |
| Allowance for losses | | $ | 227 |
| | $ | (10 | ) | | $ | — |
| | $ | 118 |
| | $ | 99 |
| |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| 2011: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| CONSUMER PRODUCTS: | | | | | | | | | | | |
| Allowance for discounts | | $ | — |
| | $ | 602 |
| | $ | — |
| | $ | 602 |
| | $ | — |
| | $ | — |
| | $ | 602 |
| | $ | — |
| | $ | 602 |
| | $ | — |
|
| Allowance for returned goods | | 46 |
| | 102 |
| | — |
| | 94 |
| | 54 |
| | 46 |
| | 102 |
| | — |
| | 94 |
| | 54 |
|
| Allowance for losses on finance assets | | | 202 |
| | 25 |
| | — |
| | — |
| | 227 |
|
| | | $ | 46 |
| | $ | 704 |
| | $ | — |
| | $ | 696 |
| | $ | 54 |
| | $ | 248 |
| | $ | 729 |
| | $ | — |
| | $ | 696 |
| | $ | 281 |
|
| FINANCIAL SERVICES: | | | | | | | | | | | |
| Allowance for losses | | $ | 202 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 227 |
| |
| | | | | | | | | | | | |
| 2010: | | | | | | | | | | | |
| | | | | | | | | | | | |
| CONSUMER PRODUCTS: | | | | | | | | | | | |
| Allowance for discounts | | $ | — |
| | $ | 606 |
| | $ | — |
| | $ | 606 |
| | $ | — |
| |
| Allowance for doubtful accounts | | 3 |
| | — |
| | — |
| | 3 |
| | — |
| |
| Allowance for returned goods | | 47 |
| | 86 |
| | — |
| | 87 |
| | 46 |
| |
| | | $ | 50 |
| | $ | 692 |
| | $ | — |
| | $ | 696 |
| | $ | 46 |
| |
| FINANCIAL SERVICES: | | | | | | | | | | | |
| Allowance for losses | | $ | 266 |
| | $ | — |
| | $ | — |
| | $ | 64 |
| | $ | 202 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Notes: | | | | | | | | | | | | | | | | | | | | |
| (a) Represents charges for which allowances were created | (a) Represents charges for which allowances were created | | | | | | | | | (a) Represents charges for which allowances were created | | | | | | | | |