0000764180-12-000030.txt : 20121030 0000764180-12-000030.hdr.sgml : 20121030 20121030154736 ACCESSION NUMBER: 0000764180-12-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20120930 FILED AS OF DATE: 20121030 DATE AS OF CHANGE: 20121030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTRIA GROUP, INC. CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 121168718 BUSINESS ADDRESS: STREET 1: 6601 WEST BROAD STREET CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: (804) 274-2200 MAIL ADDRESS: STREET 1: 6601 WEST BROAD STREET CITY: RICHMOND STATE: VA ZIP: 23230 FORMER COMPANY: FORMER CONFORMED NAME: ALTRIA GROUP INC DATE OF NAME CHANGE: 20030127 FORMER COMPANY: FORMER CONFORMED NAME: PHILIP MORRIS COMPANIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10-q.htm FORM 10-Q FORM 10-Q
                

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-08940
Altria Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Virginia
 
13-3260245
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
6601 West Broad Street, Richmond, Virginia
 
23230
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code (804) 274-2200 
 Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 a smaller reporting company)
  
Smaller reporting company
  
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No   þ
At October 19, 2012, there were 2,025,106,086 shares outstanding of the registrant's common stock, par value $0.33 1/3 per share.

Table of Contents        



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


- 2-
Table of Contents        

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
 
September 30, 2012
 
December 31, 2011
Assets
 
 
 
 
Consumer products
 
 
 
 
Cash and cash equivalents
 
$
2,186

 
$
3,270

Receivables
 
196

 
268

Inventories:
 

 

Leaf tobacco
 
752

 
934

Other raw materials
 
182

 
170

Work in process
 
261

 
316

Finished product
 
429

 
359

 
 
1,624

 
1,779

Deferred income taxes
 
1,287

 
1,207

Other current assets
 
641

 
607

Total current assets
 
5,934

 
7,131

Property, plant and equipment, at cost
 
4,719

 
4,728

Less accumulated depreciation
 
2,608

 
2,512

 
 
2,111

 
2,216

Goodwill
 
5,174

 
5,174

Other intangible assets, net
 
12,083

 
12,098

Investment in SABMiller
 
6,468

 
5,509

Other assets
 
419

 
1,257

Total consumer products assets
 
32,189

 
33,385

Financial services
 
 
 
 
Finance assets, net
 
2,805

 
3,559

Other assets
 
44

 
18

Total financial services assets
 
2,849

 
3,577

Total Assets
 
$
35,038

 
$
36,962

 
See notes to condensed consolidated financial statements.
Continued


- 3-
Table of Contents        



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 
 
September 30, 2012
 
December 31, 2011
Liabilities
 
 
 
 
Consumer products
 
 
 
 
Current portion of long-term debt
 
$
—

 
$
600

Accounts payable
 
289

 
503

Accrued liabilities:
 

 

Marketing
 
526

 
430

Taxes, except income taxes
 
65

 
220

Employment costs
 
146

 
225

Settlement charges
 
3,236

 
3,513

Other
 
1,191

 
1,311

Dividends payable
 
895

 
841

Total current liabilities
 
6,348

 
7,643

Long-term debt
 
13,878

 
13,089

Deferred income taxes
 
5,095

 
4,751

Accrued pension costs
 
1,111

 
1,662

Accrued postretirement health care costs
 
2,364

 
2,359

Other liabilities
 
560

 
602

Total consumer products liabilities
 
29,356

 
30,106

Financial services
 
 
 
 
Deferred income taxes
 
1,720

 
2,811

Other liabilities
 
61

 
330

Total financial services liabilities
 
1,781

 
3,141

Total liabilities
 
31,137

 
33,247

Contingencies (Note 11)
 

 

Redeemable noncontrolling interest
 
33

 
32

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

 
935

Additional paid-in capital
 
5,670

 
5,674

Earnings reinvested in the business
 
24,098

 
23,583

Accumulated other comprehensive losses
 
(1,604
)
 
(1,887
)
Cost of repurchased stock
(780,829,684 shares in 2012 and 761,542,032 shares in 2011)
 
(25,233
)
 
(24,625
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
3,866

 
3,680

Noncontrolling interests
 
2

 
3

Total stockholders' equity
 
3,868

 
3,683

Total Liabilities and Stockholders' Equity
 
$
35,038

 
$
36,962

See notes to condensed consolidated financial statements.


- 4-
Table of Contents        


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Nine Months Ended September 30,
 
 
2012
 
2011
Net revenues
 
$
18,376

 
$
17,671

Cost of sales
 
5,860

 
5,708

Excise taxes on products
 
5,336

 
5,398

Gross profit
 
7,180

 
6,565

Marketing, administration and research costs
 
1,678

 
1,853

Changes to Mondelēz and PMI tax-related receivables
 
(48
)
 
(19
)
Asset impairment and exit costs
 
47

 
3

Amortization of intangibles
 
15

 
16

Operating income
 
5,488

 
4,712

Interest and other debt expense, net
 
868

 
865

Loss on early extinguishment of debt
 
874

 
—

Earnings from equity investment in SABMiller
 
(973
)
 
(552
)
Earnings before income taxes
 
4,719

 
4,399

Provision for income taxes
 
1,641

 
1,843

Net earnings
 
3,078

 
2,556

Net earnings attributable to noncontrolling interests
 
(1
)
 
(2
)
Net earnings attributable to Altria Group, Inc.
 
$
3,077

 
$
2,554

Per share data:
 
 
 
 
Basic earnings per share attributable to Altria Group, Inc.
 
$
1.51

 
$
1.23

Diluted earnings per share attributable to Altria Group, Inc.
 
$
1.51

 
$
1.23

Dividends declared
 
$
1.26

 
$
1.17



See notes to condensed consolidated financial statements.


- 5-
Table of Contents        


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Three Months Ended September 30,
 
 
2012
 
2011
Net revenues
 
$
6,242

 
$
6,108

Cost of sales
 
1,982

 
1,883

Excise taxes on products
 
1,776

 
1,780

Gross profit
 
2,484

 
2,445

Marketing, administration and research costs
 
548

 
581

Changes to Mondelēz and PMI tax-related receivables
 
(48
)
 
(19
)
Asset impairment and exit costs
 
10

 
—

Amortization of intangibles
 
5

 
5

Operating income
 
1,969

 
1,878

Interest and other debt expense, net
 
282

 
293

Loss on early extinguishment of debt
 
874

 
—

Earnings from equity investment in SABMiller
 
(230
)
 
(208
)
Earnings before income taxes
 
1,043

 
1,793

Provision for income taxes
 
386

 
619

Net earnings
 
657

 
1,174

Net earnings attributable to noncontrolling interests
 
—

 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
657

 
$
1,173

Per share data:
 
 
 
 
Basic earnings per share attributable to Altria Group, Inc.
 
$
0.32

 
$
0.57

Diluted earnings per share attributable to Altria Group, Inc.
 
$
0.32

 
$
0.57

Dividends declared
 
$
0.44

 
$
0.41


See notes to condensed consolidated financial statements.



- 6-
Table of Contents        


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

 
 
For the Nine Months Ended September 30,
 
 
2012
 
2011
Net earnings
 
$
3,078

 
$
2,556

Other comprehensive earnings, net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 
—

 
(1
)
Benefit plans:
 
 
 
 
Amounts reclassified to net earnings
 
98

 
100

 
 

 

SABMiller:
 
 
 
 
Ownership share of SABMiller's other comprehensive earnings (losses) before reclassifications to net earnings
 
182

 
(81
)
Amounts reclassified to net earnings
 
3

 
5

 
 
185

 
(76
)
Other comprehensive earnings, net of deferred income taxes
 
283

 
23

 
 
 
 
 
Comprehensive earnings
 
3,361

 
2,579

Comprehensive earnings attributable to noncontrolling interests
 
(1
)
 
(2
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
3,360

 
$
2,577


See notes to condensed consolidated financial statements.



- 7-
Table of Contents        


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

 
 
For the Three Months Ended September 30,
 
 
2012
 
2011
Net earnings
 
$
657

 
$
1,174

Other comprehensive earnings, net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 
—

 
(2
)
Benefit plans:
 

 

Amounts reclassified to net earnings
 
37

 
36

 
 

 

SABMiller:
 

 

Ownership share of SABMiller's other comprehensive earnings (losses) before reclassifications to net earnings
 
28

 
(216
)
Amounts reclassified to net earnings
 
5

 
—

 
 
33

 
(216
)
Other comprehensive earnings (losses), net of deferred income taxes
 
70

 
(182
)
 
 
 
 
 
Comprehensive earnings
 
727

 
992

Comprehensive earnings attributable to noncontrolling interests
 
—

 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
727

 
$
991


See notes to condensed consolidated financial statements.



- 8-
Table of Contents        


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 2011 and
the Nine Months Ended September 30, 2012
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
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 (1)
 
—

 
—

 
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 (1)
 
—

 
—

 
3,077

 
—

 
—

 
—

 
3,077

Other comprehensive earnings, net of deferred income taxes
 
—

 
—

 
—

 
283

 
—

 
—

 
283

Exercise of stock options and other stock award activity
 
—

 
(4
)
 
—

 
—

 
14

 
—

 
10

Cash dividends declared ($1.26 per share)
 
—

 
—

 
(2,562
)
 
—

 
—

 
—

 
(2,562
)
Repurchases of common stock
 
—

 
—

 
—

 
—

 
(622
)
 
—

 
(622
)
Other
 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Balances, September 30, 2012
 
$
935

 
$
5,670

 
$
24,098

 
$
(1,604
)
 
$
(25,233
)
 
$
2

 
$
3,868


(1) 
Net earnings attributable to noncontrolling interests for the nine months ended September 30, 2012 and for the year ended December 31, 2011 exclude $1 million and $2 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in the condensed consolidated balance sheets at September 30, 2012 and December 31, 2011, respectively. See Note 11.

See notes to condensed consolidated financial statements.




- 9-
Table of Contents        


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
                                            
 
 
 
For the Nine Months Ended September 30,
 
 
2012
 
2011
Cash Provided by (Used In) Operating Activities
 
 
 
 
Net earnings (loss) - Consumer products
 
$
2,915

 
$
3,076

     - Financial services
 
163

 
(520
)
Net earnings
 
3,078

 
2,556

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Consumer products
 
 
 
 
Depreciation and amortization
 
169

 
184

Deferred income tax provision
 
226

 
190

Earnings from equity investment in SABMiller
 
(973
)
 
(552
)
Dividends from SABMiller
 
299

 
264

Asset impairment and exit costs, net of cash paid
 
(59
)
 
(28
)
IRS payment related to LILO and SILO transactions
 
(456
)
 
—

Loss on early extinguishment of debt
 
874

 
—

Cash effects of changes:
 
 
 
 
Receivables, net
 
202

 
(9
)
Inventories
 
155

 
178

Accounts payable
 
(38
)
 
(106
)
Income taxes
 
(559
)
 
215

Accrued liabilities and other current assets
 
(196
)
 
(208
)
Accrued settlement charges
 
(277
)
 
(394
)
Pension plan contributions
 
(538
)
 
(236
)
Pension provisions and postretirement, net
 
134

 
182

Other
 
95

 
145

Financial services
 
 
 
 
Deferred income tax benefit
 
(1,314
)
 
(639
)
PMCC leveraged lease charges
 
7

 
490

Decrease to allowance for losses
 
(10
)
 
(35
)
Other liabilities (income taxes)
 
1,384

 
373

Other
 
(83
)
 
(6
)
Net cash provided by operating activities
 
2,120

 
2,564

See notes to condensed consolidated financial statements.
Continued





- 10-
Table of Contents        







Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
                                            
 
 
 
For the Nine Months Ended September 30,
 
 
2012
 
2011
Cash Provided by (Used In) Investing Activities
 
 
 
 
Consumer products
 
 
 
 
Capital expenditures
 
$
(77
)
 
$
(75
)
Other
 
(8
)
 
1

Financial services
 
 
 
 
Proceeds from finance assets
 
813

 
248

Net cash provided by investing activities
 
728

 
174

Cash Provided by (Used In) Financing Activities
 
 
 
 
Consumer products
 
 
 
 
Long-term debt issued
 
2,787

 
1,494

Long-term debt repaid
 
(2,600
)
 
—

Repurchases of common stock
 
(595
)
 
(1,000
)
Dividends paid on common stock
 
(2,508
)
 
(2,379
)
Issuances of common stock
 
—

 
29

Financing fees and debt issuance costs
 
(22
)
 
(24
)
Tender premiums and fees related to early extinguishment of debt
 
(864
)
 
—

Other
 
(130
)
 
(129
)
Net cash used in financing activities
 
(3,932
)
 
(2,009
)
Cash and cash equivalents:
 
 
 
 
(Decrease) increase
 
(1,084
)
 
729

Balance at beginning of period
 
3,270

 
2,314

Balance at end of period
 
$
2,186

 
$
3,043

See notes to condensed consolidated financial statements.



- 11-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Background and Basis of Presentation:

Background

At September 30, 2012, Altria Group, Inc.'s direct and indirect wholly-owned subsidiaries included Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless 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") and Ste. Michelle Wine Estates Ltd. ("Ste. Michelle"), is engaged in the manufacture and sale of smokeless products and wine. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held an approximate 27.0% economic and voting interest in SABMiller plc ("SABMiller") at September 30, 2012, which is accounted for under the equity method of accounting. Altria Group, Inc.'s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends. At September 30, 2012, Altria Group, Inc.'s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

Dividends and Share Repurchases

During the third quarter of 2012, Altria Group, Inc.'s Board of Directors approved a 7.3% increase in the quarterly dividend rate to $0.44 per common share versus the previous rate of $0.41 per common share. The current annualized dividend rate is $1.76 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of Altria Group, Inc.'s Board of Directors.

In October 2011, Altria Group, Inc.'s Board of Directors authorized a $1.0 billion share repurchase program. During the nine and three months ended September 30, 2012, Altria Group, Inc. repurchased 19.6 million shares (aggregate cost of approximately $622 million, and $31.76 average price per share) and 7.7 million shares (aggregate cost of approximately $262 million, and $34.25 average price per share), respectively. As of September 30, 2012, Altria Group, Inc. had repurchased a total of 31.4 million shares of its common stock under this program at an aggregate cost of approximately $950 million, and an average price of $30.29 per share.

On October 23, 2012, Altria Group, Inc.'s Board of Directors authorized the expansion of the current share repurchase program from $1.0 billion to $1.5 billion. Upon such authorization, Altria Group, Inc. had approximately $550 million remaining in the expanded program, which Altria Group, Inc. expects to complete by June 30, 2013. The timing of share repurchases under this expanded program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of Altria Group, Inc.'s Board of Directors.

Basis of Presentation

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

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria Group, Inc.'s Annual Report to Shareholders and which are incorporated by reference into Altria Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011.

Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, 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

- 12-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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, Altria Group, Inc.'s reportable segments are smokeable products, smokeless products, wine and financial services. For further discussion on the 2011 Cost Reduction Program, see Note 2. Asset Impairment, Exit, Implementation and Integration Costs.

Effective January 1, 2012, Altria Group, Inc. adopted new authoritative guidance that eliminated the option of presenting components of other comprehensive earnings as part of the statement of stockholders' equity. With the adoption of this guidance, Altria Group, Inc. is reporting other comprehensive earnings in separate statements immediately following the statements of earnings.


Note 2. Asset Impairment, Exit, Implementation and Integration Costs:

Pre-tax asset impairment, exit and implementation costs for the nine and three months ended September 30, 2012 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
September 30, 2012
 
For the Three Months Ended
September 30, 2012
 
 
Asset Impairment and Exit Costs
 
Implementation (Gain) Costs
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
 
(in millions)
Smokeable products
 
$
24

 
$
(11
)
 
$
13

 
$
1

 
$
1

 
$
2

Smokeless products
 
22

 
5

 
27

 
8

 
—

 
8

General corporate
 
1

 
(1
)
 
—

 
1

 
—

 
1

Total
 
$
47

 
$
(7
)
 
$
40

 
$
10

 
$
1

 
$
11


The asset impairment, exit and implementation costs shown in the table above are related to the 2011 Cost Reduction Program. The 2011 Cost Reduction Program and related costs are discussed further below.

For the nine months ended September 30, 2011, total pre-tax asset impairment and exit costs were $3 million, all of which were reported in the smokeable products segment. There were no asset impairment and exit costs incurred during the three months ended September 30, 2011. In addition, total pre-tax integration costs of $3 million and $1 million for the nine and three months ended September 30, 2011, respectively, were reported in the smokeless products segment. There were no implementation costs incurred during the nine months ended September 30, 2011.
The movement in the severance liability and details of asset impairment and exit costs for Altria Group, Inc. for the nine months ended September 30, 2012 was as follows:
 
 
 
Severance
 
Other
 
Total
 
 
(in millions)
Severance liability balance, December 31, 2011
 
$
156

 
$
—

 
$
156

      Charges
 
—

 
47

 
47

      Cash spent
 
(88
)
 
(18
)
 
(106
)
      Other
 
—

 
(29
)
 
(29
)
Severance liability balance, September 30, 2012
 
$
68

 
$
—

 
$
68


2011 Cost Reduction Program: In October 2011, Altria Group, Inc. announced a new 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 cigarettes volume declines. As a result of this program, Altria Group, Inc. expects to incur total net pre-tax charges

- 13-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

of approximately $300 million (concluding by the end of 2012). The estimated net charges include employee separation costs of approximately $220 million and other net charges of approximately $80 million. These other net charges include 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.

Implementation (gain) costs of ($7) million shown in the table above were recorded on Altria Group, Inc.'s condensed consolidated statement of earnings for the nine months ended September 30, 2012, as follows: a net gain of $15 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 $8 million were included in cost of sales. For the three months ended September 30, 2012 implementation costs of $1 million shown in the table above were recorded in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statement of earnings.

Total pre-tax charges, net, incurred since the inception of this program through September 30, 2012 were $264 million. Cash payments related to this program of $108 million and $35 million were made during nine and three months ended September 30, 2012, respectively, for total cash payments of $117 million since inception.

In connection with 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 7. Segment Reporting).


Note 3. 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.
  
Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
Service cost
 
$
59

 
$
56

 
$
19

 
$
18

Interest cost
 
258

 
263

 
86

 
88

Expected return on plan assets
 
(331
)
 
(317
)
 
(110
)
 
(106
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
168

 
129

 
56

 
43

Prior service cost
 
8

 
10

 
3

 
3

Net periodic pension cost
 
$
162

 
$
141

 
$
54

 
$
46


Employer Contributions

Altria Group, Inc. makes contributions to the extent that they are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service ("IRS") regulations. On January 3, 2012, Altria Group, Inc. made a voluntary $500 million contribution to its pension plans. Additional employer contributions of $38

- 14-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

million were made to Altria Group, Inc.'s pension plans during the nine months ended September 30, 2012. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2012 of up to approximately $20 million, based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following:

 
 
For the Nine Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
Service cost
 
$
16

 
$
25

 
$
5

 
$
8

Interest cost
 
87

 
104

 
27

 
35

Amortization:
 
 
 
 
 
 
 
 
Net loss
 
34

 
30

 
10

 
11

Prior service credit
 
(32
)
 
(16
)
 
(9
)
 
(5
)
Curtailment gain
 
(26
)
 
—

 
—

 
—

Net postretirement health care costs
 
$
79

 
$
143

 
$
33

 
$
49


The curtailment gain included in the table above is related to the 2011 Cost Reduction Program. For further information on this program, see Note 2. Asset Impairment, Exit, Implementation and Integration Costs.


Note 4. Earnings from Equity Investment in SABMiller:
Pre-tax earnings from Altria Group, Inc.'s equity investment in SABMiller consisted of the following:
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
Equity earnings
 
$
942

 
$
534

 
$
216

 
$
201

Gains resulting from issuances of common stock by SABMiller
 
31

 
18

 
14

 
7

 
 
$
973

 
$
552

 
$
230

 
$
208


Altria Group, Inc.'s equity earnings for the nine months ended September 30, 2012 included its share of non-cash gains resulting from SABMiller's strategic alliance transactions with Anadolu Efes and Castel.

- 15-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 5. Earnings Per Share:
Basic and diluted earnings per share ("EPS") were calculated using the following:
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
3,077

 
$
2,554

 
$
657

 
$
1,173

Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares
 
(10
)
 
(10
)
 
(2
)
 
(5
)
Earnings for basic and diluted EPS
 
$
3,067

 
$
2,544

 
$
655

 
$
1,168

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
2,028

 
2,071

 
2,024

 
2,054

As of February 29, 2012, there were no stock options outstanding. For the nine and three months ended September 30, 2012 and 2011 computations, there were no antidilutive stock options.


Note 6. Other Comprehensive Earnings/Losses:
The following table sets forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:
 
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2010
 
$
4

 
$
(1,811
)
 
$
323

 
$
(1,484
)
Period change
 
(2
)
 
(251
)
 
(150
)
 
(403
)
Balances, December 31, 2011
 
2

 
(2,062
)
 
173

 
(1,887
)
Period change
 
—

 
98

 
185

 
283

Balances, September 30, 2012
 
$
2

 
$
(1,964
)
 
$
358

 
$
(1,604
)

The following table sets forth deferred income tax expense (benefit) for the components of other comprehensive earnings (losses) for the nine and three months ended September 30, 2012 and 2011:
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Total
 
 
(in millions)
For the nine months ended September 30, 2012
 
$
—

 
$
64

 
$
99

 
$
163

For the nine months ended September 30, 2011
 
$
—

 
$
63

 
$
(39
)
 
$
24

 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2012
 
$
—

 
$
23

 
$
18

 
$
41

For the three months ended September 30, 2011
 
$
—

 
$
21

 
$
(114
)
 
$
(93
)



- 16-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 7. Segment Reporting:

The products of Altria Group, Inc.'s consumer products 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 reportable segments of smokeable products, smokeless products, wine and financial services.

As discussed in Note 1. Background and Basis of Presentation, beginning with the first quarter of 2012, Altria Group, Inc. revised its reportable segments. Prior-period segment data have been recast to conform with the current-period segment presentation.

Altria Group, Inc.'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 chief operating decision maker.
Segment data were as follows: 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
16,616

 
$
16,500

 
$
5,613

 
$
5,499

Smokeless products
 
1,243

 
1,209

 
437

 
426

Wine
 
381

 
349

 
140

 
132

Financial services
 
136

 
(387
)
 
52

 
51

Net revenues
 
$
18,376

 
$
17,671

 
$
6,242

 
$
6,108

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
4,716

 
$
4,527

 
$
1,637

 
$
1,575

Smokeless products
 
678

 
660

 
246

 
245

Wine
 
63

 
54

 
26

 
23

Financial services
 
166

 
(359
)
 
79

 
83

Amortization of intangibles
 
(15
)
 
(16
)
 
(5
)
 
(5
)
General corporate expenses
 
(167
)
 
(173
)
 
(61
)
 
(62
)
Changes to Mondelēz and PMI tax-related receivables
 
48

 
19

 
48

 
19

Corporate asset impairment and exit costs
 
(1
)
 
—

 
(1
)
 
—

Operating income
 
5,488

 
4,712

 
1,969

 
1,878

Interest and other debt expense, net
 
(868
)
 
(865
)
 
(282
)
 
(293
)
Loss on early extinguishment of debt
 
(874
)
 
—

 
(874
)
 
—

Earnings from equity investment in SABMiller
 
973

 
552

 
230

 
208

Earnings before income taxes
 
$
4,719

 
$
4,399

 
$
1,043

 
$
1,793


Items affecting the comparability of net revenues and/or operating companies income (loss) for the segments were as follows:

PMCC Leveraged Lease Benefit/Charge - During the second quarter of 2012, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million as a result of the execution of a closing agreement (the "Closing Agreement") with the

- 17-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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. Included in this net benefit was 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 a charge of $627 million related to the federal income tax treatment of these transactions (the "2011 PMCC Leveraged Lease Charge"). Included in this charge was a pre-tax charge of $490 million that was recorded as a decrease to PMCC's net revenues and operating companies income. See Note 8. Finance Assets, net, Note 10. Income Taxes and Note 11. Contingencies for further discussion of this matter.

PMCC Recoveries and Allowance for Losses - During the third quarter of 2012, PMCC recorded pre-tax income of $33 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"). In addition, during the second quarter of 2012 and the third quarter of 2011, PMCC decreased its allowance for losses by $10 million and $35 million, respectively, which was recorded as income during each respective period. See Note 8. Finance Assets, net.

Tobacco and Health Judgments - For the nine and three months ended September 30, 2012 , Altria Group, Inc. recorded pre-tax charges of $4 million and $3 million, respectively, related to certain tobacco and health judgments. For the nine months ended September 30, 2011, Altria Group, Inc. recorded pre-tax charges of $36 million (excluding accrued interest of $5 million), related to certain tobacco and health judgments. These charges are reflected in the smokeable products segment. See Note 11. Contingencies.

Asset Impairment, Exit, Implementation and Integration Costs - See Note 2. Asset Impairment, Exit, Implementation and Integration Costs for a breakdown of these costs by segment.
Note 8. Finance Assets, net:

At September 30, 2012, finance assets, net, of $2,805 million were comprised of investments in finance leases of $2,889 million and an other receivable of $15 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.

PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During the second quarter of 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 during the nine months ended September 30, 2012. During the third quarter of 2011, 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. As a result, PMCC reduced its allowance for losses by $35 million, which was recorded as income during the nine and three months ended September 30, 2011. PMCC believes that, as of September 30, 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.
The activity in the allowance for losses on finance assets for the nine months ended September 30, 2012, and 2011 was as follows:
 
 
For the Nine Months Ended September 30,
 
 
2012
 
2011
 
 
(in millions)
Balance at beginning of the year
 
$
227

 
$
202

Decrease to allowance
 
(10
)
 
(35
)
Amounts written-off
 
(118
)
 
—

Balance at September 30
 
$
99

 
$
167


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. In the first quarter of 2012, American filed a motion to reject the leases for nine of the 28 aircraft under lease, which resulted in

- 18-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

a $23 million write off of the related investment in finance lease balance against PMCC's allowance for losses. The debtholders subsequently foreclosed upon PMCC's interest in these nine aircraft. During the second quarter of 2012, as a result of the early termination of an additional American aircraft lease, PMCC wrote off $6 million against its allowance for losses. During the third quarter of 2012: (i) the bankruptcy court approved an agreement for American to purchase 10 aircraft, resulting in a $60 million write off against PMCC's allowance for losses; (ii) the bankruptcy court approved an agreement between PMCC and American to amend the eight remaining leases at reduced rent levels, resulting in a write off of $29 million against PMCC's allowance for losses; and (iii) PMCC sold the 10 aircraft, and bankruptcy claims related to these aircraft and to the eight remaining leases. As a result of the above activities, during the third quarter of 2012, deferred taxes of $22 million were accelerated and PMCC recorded $33 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. The remaining investment in finance lease balance with American was $7 million at September 30, 2012.

All PMCC lessees, including American under its restructured leases, were current on their lease payment obligations as of September 30, 2012.
The credit quality of PMCC’s investments in finance assets as assigned by Standard & Poor’s Ratings Services ("Standard & Poor’s") and Moody’s Investors Service, Inc. ("Moody’s") at September 30, 2012 and December 31, 2011 was as follows:

 
 
September 30, 2012
 
December 31, 2011
 
 
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
 
“AAA/Aaa” to “A-/A3”
 
$
1,137

 
$
1,570

“BBB+/Baa1” to “BBB-/Baa3”
 
978

 
1,080

“BB+/Ba1” and Lower
 
789

 
1,136

Total
 
$
2,904

 
$
3,786


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 due primarily to lower than estimated interest on tax underpayments.

During the second quarter of 2011, Altria Group, Inc. recorded the 2011 PMCC Leveraged Lease Charge. Approximately 50% of the charge ($315 million) represented a reduction in cumulative lease earnings recorded to date 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 nine months ended, September 30, 2012 and 2011, the benefit/charge associated with PMCC's leveraged lease transactions was recorded in Altria Group, Inc.'s condensed consolidated statements of earnings as follows:

 
 
For the Nine Months Ended
September 30, 2012
 
For the Nine Months Ended
September 30, 2011
 
 
Net Revenues
 
Benefit for Income Taxes
 
Total
 
Net Revenues
 
(Benefit) Provision for Income Taxes
 
Total
 
 
(in millions)
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 10. Income Taxes and Note 11. Contingencies for a further discussion of the Closing Agreement and the PMCC leveraged lease benefit/charge.

- 19-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 9. Debt:

At September 30, 2012 and December 31, 2011, Altria Group, Inc. had no short-term borrowings.

Long-term Debt

On August 9, 2012, Altria Group, Inc. issued $1.9 billion aggregate principal amount of 2.850% senior unsecured long-term notes due 2022 and $0.9 billion aggregate principal amount of 4.250% senior unsecured long-term notes due 2042. Interest on these notes is payable semi-annually. The net proceeds from the issuances of these senior unsecured notes were added to Altria Group, Inc.'s general funds and were used to repurchase certain of its senior unsecured notes in connection with the tender offer described below, and other general corporate purposes.

The notes are Altria Group, Inc.'s senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.'s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody's, Standard & Poor's and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.

The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA (see Note 12. Condensed Consolidating Financial Information).

In July 2012, senior unsecured notes issued by UST in the aggregate principal amount of $600 million matured and were repaid in full.

Altria Group, Inc.'s estimate of the fair value of its debt is based on observable market information derived from a third party pricing source and is classified in level 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.'s total long-term debt at September 30, 2012 and December 31, 2011, was $18.0 billion and $17.7 billion, respectively, as compared with its carrying value of $13.9 billion and $13.7 billion, respectively for each period.

Tender Offer for Altria Group, Inc. 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 9.700% notes due 2018, and $849 million aggregate principal amount of its 9.250% 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.
   

Note 10. Income Taxes:

The income tax rate of 34.8% for the nine months ended September 30, 2012 decreased 7.1 percentage points from 41.9% for the nine months ended September 30, 2011. The decrease in the income tax rate was due primarily to a $312 million charge that primarily represents interest on tax underpayments associated with the 2011 PMCC Leveraged Lease Charge that was recorded during the second quarter of 2011, and a $73 million interest benefit, recorded during the second quarter of 2012, resulting primarily from lower than estimated interest on tax underpayments related to the Closing Agreement with the IRS. The effect of these items on the nine-month income tax rate was partially offset by a reduction in certain consolidated tax benefits resulting from the third quarter of 2012 debt tender offer (see Note 9. Debt). The income tax rate of 37.0% for the three months ended September 30, 2012 increased 2.5 percentage points from 34.5% for the three months ended September 30, 2011 due primarily to the reduction in certain consolidated tax benefits resulting from the third quarter of 2012 debt tender offer. In addition, the income tax rate comparisons for the nine and three months were further impacted by: (i) the reversal of tax reserves and associated interest of $53 million due primarily to the closure in August 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries' 2004 - 2006 tax years ("IRS 2004 - 2006 Audit"); (ii) the resolution of various Kraft Foods Inc., now known as Mondelēz International, Inc. ("Mondelēz"), and Philip Morris International Inc. ("PMI") tax matters

- 20-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

in the third quarters of 2012 and 2011 as discussed further below; and (iii) the reversal of tax accruals no longer required and the expiration of statutes of limitations of $24 million during the third quarter of 2011.
As a result of the Closing Agreement, during the second quarter of 2012, Altria Group, Inc. paid $456 million in federal income taxes and related estimated interest on tax underpayments. Altria Group, Inc. also expects to pay approximately $50 million in state taxes and related estimated interest. 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 8. Finance Assets, net and Note 11. Contingencies for further discussion of the Closing Agreement and the PMCC leveraged lease benefit/charge.
Under tax sharing agreements entered into in connection with the 2007 and 2008 spin-offs between Altria Group, Inc. and its former subsidiaries Mondelēz 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's and PMI's pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continues to include the pre-spin-off federal income tax reserves of Mondelēz and PMI in its liability for uncertain tax positions. Altria Group, Inc. also includes corresponding receivables from Mondelēz and PMI in its assets. An additional third quarter of 2012 tax provision of $48 million for Mondelēz and PMI tax matters, resulting from the closure of the IRS 2004 - 2006 Audit, was offset by an increase to the corresponding receivables from Mondelēz and PMI, which was recorded as an increase to operating income on Altria Group, Inc.'s condensed consolidated statements of earnings for the nine and three months ended September 30, 2012. An additional third quarter of 2011 tax provision of $19 million related to various Mondelēz tax matters was offset by an increase to the corresponding receivable from Mondelēz, which was recorded as an increase to operating income on Altria Group, Inc.'s condensed consolidated statements of earnings for the nine and three months ended September 30, 2011. As a result, the Mondelēz and PMI tax matters discussed above had no impact on Altria Group, Inc.'s net earnings for the nine and three months ended September 30, 2012 and 2011.
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, since such timing is not entirely within the control of Altria Group, Inc. It is reasonably possible that within the next 12 months certain tax examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $90 million, the majority of which would relate to the unrecognized tax benefits of Mondelēz and PMI, for which Altria Group, Inc. is indemnified.

Note 11. 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' 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. 

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 44 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs

- 21-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

have challenged the constitutionality of Florida's bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or 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 condensed consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed elsewhere in this Note 11. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the condensed consolidated financial statements for unfavorable outcomes, if any. 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" and "Ultra Lights" constitute deceptive and unfair trade practices, common law fraud or violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"); and (v) other tobacco-related litigation described below. Plaintiffs' theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and "Lights/Ultra Lights" cases are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of October 25, 2012, October 24, 2011 and October 25, 2010.

Type of Case
Number of Cases
Pending as of
October 25, 2012
Number of Cases
Pending as of
October 24, 2011
Number of Cases
Pending as of
October 25, 2010
Individual Smoking and Health Cases (1)
77
79
85
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
7
7
9
Health Care Cost Recovery Actions
1
2
3
"Lights/Ultra Lights" Class Actions
14
18
29
Tobacco Price Cases
1
1
1

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


(1) Does not include 2,574 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke ("ETS"). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case 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).

(2) Includes as one case the 600 civil actions (of which 346 are actions against PM USA) that are 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 does not preclude a trial in two phases in this case. Under the current trial plan, issues related to defendants' conduct and whether punitive damages are permissible will be tried in the first phase. The second phase would consist of individual trials to determine liability, if any, as well as compensatory and punitive damages, if any. Trial in the case began in October 2011, but ended in a mistrial in November 2011. The court has scheduled trial for April 15, 2013.

International Tobacco-Related Cases

As of October 25, 2012, PM USA is a named defendant in Israel in one "Lights" class action. PM USA is a named defendant in eight health care cost recovery actions in Canada, six of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in six 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.

Pending and Upcoming Tobacco-Related Trials

As of October 25, 2012, one Engle progeny case and one individual smoking and health case against PM USA are set for trial for the remainder of 2012. Cases against other companies in the tobacco industry are also scheduled for trial in 2012. Trial dates are subject to change.

Trial Results
 
Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 51 smoking and health, "Lights/Ultra Lights" and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 34 of the 51 cases. These 34 cases were tried in Alaska (1), California (5), Florida (9), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (4), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (1). A motion for a new trial was granted in one of the cases in Florida.

Of the 17 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 15 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" class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December 2006. In December 2008, the plaintiff in Price filed a motion with the state trial court to vacate the judgment dismissing this case in light of the United States Supreme Court's decision in Good (see below for a discussion of developments in Good and Price).

As of October 25, 2012, 33 Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court's Engle decision. Sixteen verdicts were returned in favor of plaintiffs and 17 verdicts were returned in favor of PM USA. See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of these verdicts.

After exhausting all appeals in those cases resulting in adverse verdicts (Engle progeny and non-Engle progeny), PM USA has paid judgments (and related costs and fees) totaling approximately $242 million and interest totaling approximately $139 million as of October 25, 2012.


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

Security for Judgments
 
To obtain stays of judgments pending current appeals, as of September 30, 2012, PM USA has posted various forms of security totaling approximately $37 million, the majority of which has been collateralized with cash deposits that are included in other assets on the condensed consolidated balance sheets.

Smoking and Health Litigation

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

Non-Engle Progeny Trial Results

Summarized below are the non-Engle progeny smoking and health cases that were pending during 2012 in which verdicts were returned in favor of plaintiffs. A chart listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.

D. Boeken: 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'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.

Bullock: This litigation has concluded. In the fourth quarter of 2011, PM USA recorded a pre-tax provision of $14 million related to damages and costs and $3 million related to interest and in March 2012, paid an amount of approximately $19.1 million in satisfaction of the judgment and associated costs and interest.

Schwarz: In March 2002, an Oregon jury awarded against PM USA $168,500 in compensatory damages and $150 million in punitive damages. 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' 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' 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. On September 4, 2012, PM USA filed a notice of appeal from the trial court's judgment with the Oregon Court of Appeals.

Williams: This litigation has concluded. In the fourth quarter of 2011, PM USA recorded a provision of approximately $48 million related 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.

See Scott Class Action below for a discussion of the verdict and post-trial developments in the Scott class action and Federal Government Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America healthcare cost recovery case.


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

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.

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

In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified, and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants' cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff's claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court's order.

In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the 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 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 Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Third District Court of Appeal denied defendants' motion. In May 2007, defendants' motion for a partial stay of the mandate pending the completion of appellate review was denied by the 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' petition. In November 2007, the United States Supreme Court denied 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'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 will receive no credit at this time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.

In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs' claims except for those of Howard Engle. The only

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

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's decision, expired in January 2008. As of October 25, 2012, approximately 3,300 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 October 25, 2012, approximately 2,000 federal court cases were pending against PM USA or Altria Group, Inc asserting individual claims by or on behalf of a similar number of federal court plaintiffs.  Because of a number of factors including but not limited to docketing delays, duplicated filings, and overlapping dismissal orders, these numbers are estimates.

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' 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 States 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, on September 28, 2012, the district court dismissed the case on statute of limitations grounds. 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' due process rights. Rather, 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's ruling on Florida state law was superseded by state appellate rulings (discussed below), which include Martin, an Engle progeny case against R.J. Reynolds Tobacco Company ("R.J. 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 detail in Appeals of Engle Progeny Verdicts below.

Following Martin and J. Brown, in the Waggoner case, the United States 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' claims consistent with Martin or J. Brown did not violate 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 in the Walker and Duke cases pending before the Eleventh Circuit.

On August 1, 2012, in PM USA's third federal case to go to trial (Denton), the jury returned a defense verdict.
 
Engle progeny cases pending against PM USA or Altria Group, Inc. in the federal district courts in the Middle District of Florida asserting individual claims by or on behalf of approximately 2,000 plaintiffs remain stayed. There are currently 19 active cases pending in federal court.

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 depending on the number of judgments in effect at a given time. Plaintiffs in three Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.

Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs' bond cap statute challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and

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

Alexander. The Florida Supreme Court granted review of the Hall decision, but, on September 4, 2012, the court dismissed the appeal as moot. On October 12, 2012, the Florida Supreme Court denied the plaintiffs' rehearing petition.

No federal court has yet to address the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.

Engle Progeny Trial Results
 
As of October 25, 2012, 33 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Sixteen verdicts were returned in favor of plaintiffs. For a further discussion of these cases, see the verdict chart below.

Seventeen 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 and Hancock). 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' favor in April 2012 and remanded the case for a new trial. Defendants are seeking review of the case 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 October 25, 2012.

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' petition for rehearing with the Court of Appeal was denied, defendants paid the judgment.

The chart below lists the verdicts and post-trial developments in the Engle progeny cases that were pending during 2012 in which verdicts were returned in favor of plaintiffs.
Date
Plaintiff
Verdict
Post-Trial Developments
October 2012
Lock
On October 25, 2012, a Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $1,150,000 in compensatory damages and allocated 9% of the fault to each of the defendants (an amount of $103,500).
 
 
 
 
 
August 2012
Hancock
On August 10, 2012, 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 $110,000, which is subject to the jury's comparative fault finding.
On August 20, 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 on August 31, 2012. 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.

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

Date
Plaintiff
Verdict
Post-Trial Developments
May 2012
Calloway
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard Tobacco Company 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 Tobacco Company 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. On August 20, 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. On September 11, 2012, PM USA posted a bond in an amount of $1.5 million and on September 12, 2012, 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 Tobacco Company).
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 and, in November 2011, posted bonds in an aggregate amount of $48,000.
 
 
 
 
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 and posted a bond in the amount of $1.25 million in November 2011.
 
 
 
 

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

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 Tobacco Company 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 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 District Court of Appeal affirmed per 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. PM USA's $1.7 million appeal bond was released on August 29, 2012. 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 and posted an $86,000 appeal bond.
 
 
 
 

- 29-
Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Date
Plaintiff
Verdict
Post-Trial Developments
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 September 2010, the trial court entered final judgment. PM USA filed its notice of appeal and posted a $1.2 million appeal bond. In June 2012, the Florida Fourth District Court of Appeal affirmed per curiam the trial court's decision without issuing an opinion. In July 2012, the defendants filed a motion requesting that the court add a citation to its per curiam affirmance so that defendants could seek review of the decision in the Florida Supreme Court. Alternatively, the motion requested that the court stay the proceeding pending the Florida Supreme Court's disposition of Douglas. The court denied both motions on July 27, 2012. 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 and associated costs. On September 12, 2012, the United States Supreme Court granted defendants an extension to November 17, 2012 to file a petition for writ of certiorari.
 
 
 
 
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. Argument on the merits of the appeal was heard in June 2012.
 
 
 
 
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 and posted a $1.6 million appeal bond. Argument on the merits of the appeal occurred on September 27, 2012.
 
 
 
 

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

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. On September 12, 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 to determine whether the statute of repose barred the concealment claim, which was the only basis for the punitive damages award. If the jury finds in plaintiff's favor on that claim, the $10 million punitive damages award will be reinstated. On October 8, 2012, both plaintiff and defendants filed petitions for rehearing.
 
 
 
 
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.
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 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 on September 6, 2012.
 
 
 
 

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Date
Plaintiff
Verdict
Post-Trial Developments
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.
 
 
 
 
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.
 
 
 
 
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.
 
 
 
 

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Date
Plaintiff
Verdict
Post-Trial Developments
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 April 2012, PM USA filed a motion to stay the appeal pending the decision of the Florida Supreme Court on whether to review the Douglas case. In May 2012, the Fourth District denied PM USA's motion to stay the appeal. The Fourth District also 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 on September 14, 2012. On October 15, 2012, PM USA and plaintiffs filed notices to invoke the Florida Supreme Court's discretionary jurisdiction.

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's appeals of adverse verdicts are discussed in the chart above.

Since the remand of B. Brown (discussed above under the heading Federal Engle Progeny Cases), several state appellate rulings have superseded the Eleventh Circuit's ruling on Florida state law. These include Martin, an Engle progeny case against R.J. Reynolds in Escambia County, J. Brown, an Engle progeny case against R.J. Reynolds in Broward County, and Douglas, an Engle progeny case against PM USA, R.J. Reynolds and Liggett Group in Hillsborough 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' 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 Supreme Court denied the 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' burden of proof. However, the Fourth District expressly disagreed with the First District'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' burden may violate defendants' due process rights. In October 2011, the Fourth District denied R.J. 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 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 in Douglas 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 on September 6, 2012.

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 other cigarette manufacturers are pending.

Because of the substantial period of time required for the federal and state appellate processes, it is possible that PM USA

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Notes to Condensed Consolidated Financial Statements
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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).

PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in six actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan and British Columbia. In Saskatchewan and British Columbia, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants' cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants' cigarettes. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

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. The defendants' payments have been deposited into a court-supervised fund that is intended to pay for smoking cessation programs.

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 March 2012, the trial court denied defendants' motion challenging plaintiffs' counsel's request that defendants pay their attorneys' fees directly, as opposed to out of the court-supervised fund. Defendants subsequently filed a petition for a supervisory writ challenging the decision to the Louisiana Fourth Circuit Court of Appeal.

In May 2012, 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. Plaintiffs and defendants are challenging the standing of the trustee. Argument was scheduled for August 22, 2012, but the matter was removed from the docket.

Other Medical Monitoring Class Actions

In addition to the Scott class action discussed above, two 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 States District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in December 2006 in the United States District Court for the District of Massachusetts) on behalf of each state'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

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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-supervised program providing members of the purported class Low Dose CT Scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases do not seek punitive damages. A case brought in California (Xavier) was dismissed in July 2011, and a case brought in Florida (Gargano) was voluntarily dismissed with prejudice in August 2011.

In Caronia, in February 2010, the district court granted in part PM USA's summary judgment motion, dismissing 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's summary judgment motion as to 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's motion, dismissed plaintiffs' claims and declared plaintiffs' motion for class certification moot in light of the dismissal of the case. The plaintiffs have appealed that decision to the United States Court of Appeals for the Second Circuit. Argument before the Second Circuit was heard in March 2012.

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' motion for class certification, certifying the class as to plaintiffs' claims for breach of implied warranty and violation of the Massachusetts Consumer Protection Act, but denying certification as to plaintiffs' negligence claim. In July 2010, PM USA petitioned the United States 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. In October 2011, PM USA filed a motion for class decertification, which motion was denied in March 2012. 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'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 CT 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. Other studies in this area are ongoing.

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. 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" by 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" (namely, 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" any

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Notes to Condensed Consolidated Financial Statements
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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 in the 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.

Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by five circuit courts of appeals. In 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") 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 (8), and other entities have stated that they are considering filing such actions.

In September 2005, in the first of several health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA's and other defendants' challenge to the British Columbia court's exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. 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' 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 and Saskatchewan have all 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, Quebec, Alberta, Manitoba and Saskatchewan cases. Several other provinces and territories in Canada 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") 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 settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements"). The State Settlement Agreements require that the original participating manufacturers make substantial annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In