10-Q 1 a2013form10-qq22013.htm FORM 10-Q 2013 FORM 10-Q (Q2 2013)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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 July 15, 2013, there were 2,004,409,870 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)
 
 
 
June 30, 2013
 
December 31, 2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,571

 
$
2,900

Receivables
 
114

 
193

Inventories:
 

 

Leaf tobacco
 
759

 
876

Other raw materials
 
182

 
173

Work in process
 
311

 
349

Finished product
 
449

 
348

 
 
1,701

 
1,746

Deferred income taxes
 
1,217

 
1,216

Other current assets
 
257

 
260

Total current assets
 
5,860

 
6,315

Property, plant and equipment, at cost
 
4,776

 
4,750

Less accumulated depreciation
 
2,736

 
2,648

 
 
2,040

 
2,102

Goodwill
 
5,174

 
5,174

Other intangible assets, net
 
12,068

 
12,078

Investment in SABMiller
 
6,502

 
6,637

Finance assets, net
 
2,345

 
2,581

Other assets
 
451

 
442

Total Assets
 
$
34,440

 
$
35,329

 
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)
 
 
 
June 30, 2013
 
December 31, 2012
Liabilities
 
 
 
 
Current portion of long-term debt
 
$
1,984

 
$
1,459

Accounts payable
 
275

 
451

Accrued liabilities:
 

 

Marketing
 
513

 
568

Employment costs
 
169

 
184

Settlement charges
 
2,088

 
3,616

Other
 
1,156

 
1,093

Dividends payable
 
885

 
888

Total current liabilities
 
7,070

 
8,259

Long-term debt
 
12,890

 
12,419

Deferred income taxes
 
6,560

 
6,652

Accrued pension costs
 
1,293

 
1,735

Accrued postretirement health care costs
 
2,498

 
2,504

Other liabilities
 
530

 
556

Total liabilities
 
30,841

 
32,125

Contingencies (Note 11)
 

 

Redeemable noncontrolling interest
 
33

 
34

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

 
5,688

Earnings reinvested in the business
 
25,201

 
24,316

Accumulated other comprehensive losses
 
(2,330
)
 
(2,040
)
Cost of repurchased stock
(801,155,447 shares in 2013 and 796,221,021 shares in 2012)
 
(25,911
)
 
(25,731
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
3,565

 
3,168

Noncontrolling interests
 
1

 
2

Total stockholders’ equity
 
3,566

 
3,170

Total Liabilities and Stockholders’ Equity
 
$
34,440

 
$
35,329

See notes to condensed consolidated financial statements.


- 4-

Table of Contents        

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Six Months Ended June 30,
 
 
2013
 
2012
Net revenues
 
$
11,833

 
$
12,134

Cost of sales
 
3,271

 
3,878

Excise taxes on products
 
3,334

 
3,560

Gross profit
 
5,228

 
4,696

Marketing, administration and research costs
 
1,064

 
1,130

Asset impairment and exit costs
 
1

 
37

Amortization of intangibles
 
10

 
10

Operating income
 
4,153

 
3,519

Interest and other debt expense, net
 
525

 
586

Earnings from equity investment in SABMiller
 
(483
)
 
(743
)
Earnings before income taxes
 
4,111

 
3,676

Provision for income taxes
 
1,460

 
1,255

Net earnings
 
2,651

 
2,421

Net earnings attributable to noncontrolling interests
 

 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
2,651

 
$
2,420

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
1.32

 
$
1.19

Dividends declared
 
$
0.88

 
$
0.82



See notes to condensed consolidated financial statements.



- 5-

Table of Contents        


Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
 
For the Three Months Ended June 30,
 
 
2013
 
2012
Net revenues
 
$
6,305

 
$
6,487

Cost of sales
 
1,972

 
2,086

Excise taxes on products
 
1,779

 
1,907

Gross profit
 
2,554

 
2,494

Marketing, administration and research costs
 
547

 
596

Asset impairment and exit costs
 
1

 
16

Amortization of intangibles
 
5

 
5

Operating income
 
2,001

 
1,877

Interest and other debt expense, net
 
264

 
293

Earnings from equity investment in SABMiller
 
(227
)
 
(223
)
Earnings before income taxes
 
1,964

 
1,807

Provision for income taxes
 
698

 
581

Net earnings
 
1,266

 
1,226

Net earnings attributable to noncontrolling interests
 

 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
1,266

 
$
1,225

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
0.63

 
$
0.60

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 Six Months Ended June 30,
 
 
2013
 
2012
Net earnings
 
$
2,651

 
$
2,421

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

Benefit plans
 
113

 
61

SABMiller
 
(402
)
 
152

Other comprehensive (losses) earnings, net of deferred income taxes
 
(290
)
 
213

 
 
 
 
 
Comprehensive earnings
 
2,361

 
2,634

Comprehensive earnings attributable to noncontrolling interests
 

 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
2,361

 
$
2,633


See notes to condensed consolidated financial statements.




- 7-

Table of Contents        


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

 
 
For the Three Months Ended June 30,
 
 
2013
 
2012
Net earnings
 
$
1,266

 
$
1,226

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

Benefit plans
 
47

 
39

SABMiller
 
(308
)
 
(28
)
Other comprehensive (losses) earnings, net of deferred income taxes
 
(262
)
 
11

 
 
 
 
 
Comprehensive earnings
 
1,004

 
1,237

Comprehensive earnings attributable to noncontrolling interests
 

 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
1,004

 
$
1,236


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, 2012 and
the Six Months Ended June 30, 2013
(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, 2011
 
$
935

 
$
5,674

 
$
23,583

 
$
(1,887
)
 
$
(24,625
)
 
$
3

 
$
3,683

Net earnings (1)
 

 

 
4,180

 

 

 

 
4,180

Other comprehensive losses, net of deferred income tax benefit
 

 

 

 
(153
)
 

 

 
(153
)
Stock award activity
 

 
14

 

 

 
10

 

 
24

Cash dividends declared ($1.70 per share)
 

 

 
(3,447
)
 

 

 

 
(3,447
)
Repurchases of common stock
 

 

 

 

 
(1,116
)
 

 
(1,116
)
Other
 

 

 

 

 

 
(1
)
 
(1
)
Balances, December 31, 2012
 
935

 
5,688

 
24,316

 
(2,040
)
 
(25,731
)
 
2

 
3,170

Net earnings (losses) (1)
 

 

 
2,651

 

 

 
(1
)
 
2,650

Other comprehensive losses, net of deferred income tax benefit
 

 

 

 
(290
)
 

 

 
(290
)
Stock award activity
 

 
(18
)
 

 

 
12

 

 
(6
)
Cash dividends declared ($0.88 per share)
 

 

 
(1,766
)
 

 

 

 
(1,766
)
Repurchases of common stock
 

 

 

 

 
(192
)
 

 
(192
)
Balances, June 30, 2013
 
$
935

 
$
5,670

 
$
25,201

 
$
(2,330
)
 
$
(25,911
)
 
$
1

 
$
3,566


(1) 
Net earnings/losses attributable to noncontrolling interests for the six months ended June 30, 2013 and for the year ended December 31, 2012 exclude net earnings of $1 million and $3 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 June 30, 2013 and December 31, 2012. 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 Six Months Ended June 30,
 
 
2013
 
2012
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
2,651

 
$
2,421

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
106

 
113

Deferred income tax provision (benefit)
 
50

 
(971
)
Earnings from equity investment in SABMiller
 
(483
)
 
(743
)
IRS payment related to LILO and SILO transactions
 

 
(456
)
Cash effects of changes:
 
 
 
 
Receivables, net
 
79

 
2

Inventories
 
45

 
95

Accounts payable
 
(79
)
 
(64
)
Income taxes
 
89

 
1,186

Accrued liabilities and other current assets
 
(87
)
 
62

Accrued settlement charges
 
(1,528
)
 
(1,329
)
Pension plan contributions
 
(365
)
 
(514
)
Pension provisions and postretirement, net
 
94

 
85

Other
 
(2
)
 
28

Net cash provided by (used in) operating activities
 
570

 
(85
)
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 Six Months Ended June 30,
 
 
2013
 
2012
Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
$
(41
)
 
$
(39
)
Proceeds from finance assets
 
274

 
552

Other
 
6

 
(3
)
Net cash provided by investing activities
 
239

 
510

Cash Provided by (Used in) Financing Activities
 
 
 
 
Long-term debt issued
 
996

 

Repurchases of common stock
 
(226
)
 
(360
)
Dividends paid on common stock
 
(1,769
)
 
(1,674
)
Financing fees and debt issuance costs
 
(8
)
 

Other
 
(131
)
 
(133
)
Net cash used in financing activities
 
(1,138
)
 
(2,167
)
Cash and cash equivalents:
 
 
 
 
Decrease
 
(329
)
 
(1,742
)
Balance at beginning of period
 
2,900

 
3,270

Balance at end of period
 
$
2,571

 
$
1,528

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 June 30, 2013, 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. Nu Mark LLC (“Nu Mark”), an indirect wholly-owned subsidiary of Altria Group, Inc., is engaged in the development and marketing of innovative tobacco products for adult tobacco consumers. Philip Morris Capital Corporation (“PMCC”), a direct wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held approximately 26.8% of the economic and voting interest of SABMiller plc (“SABMiller”) at June 30, 2013, which Altria Group, Inc. accounts 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 June 30, 2013, 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.

Share Repurchases

In October 2011, Altria Group, Inc.’s Board of Directors authorized a $1.0 billion share repurchase program, which was expanded to $1.5 billion in October 2012 (as expanded, the “October 2011 share repurchase program”). During the first quarter of 2013, Altria Group, Inc. repurchased 1.7 million shares (aggregate cost of approximately $57 million, and $34.05 average price per share), completing the October 2011 share repurchase program. Under this program, Altria Group, Inc. repurchased a total of 48.3 million shares of its common stock at an average price of $31.06 per share.

In April 2013, Altria Group, Inc.’s Board of Directors authorized a new $300 million share repurchase program (the “April 2013 share repurchase program”), which Altria Group, Inc. expects to complete by the end of 2013. During the three months ended June 30, 2013, Altria Group, Inc. repurchased 3.7 million shares (aggregate cost of approximately $135 million, and $36.27 average price per share), under the April 2013 share repurchase program.

During the six months ended June 30, 2013 and 2012, Altria Group, Inc. repurchased 5.4 million shares (aggregate cost of approximately $192 million, and $35.58 average price per share) and 11.9 million shares (aggregate cost of approximately $360 million, and $30.16 average price per share), respectively, under the share repurchase programs discussed above.

The timing of share repurchases under the April 2013 share repurchase 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 on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).


- 12-

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

Effective January 1, 2013, Altria Group, Inc.’s reportable segments are smokeable products, smokeless products and wine. The financial services and the alternative products businesses have been combined in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s alternative products business to its consolidated results. In addition, due to the continued reduction of the lease portfolio of PMCC, Altria Group, Inc.’s balance sheet accounts are no longer segregated by consumer products and financial services, and all balance sheet accounts are classified as either current or non-current. Prior-period amounts have been reclassified to conform with the current-period presentation.

Effective January 1, 2013, Altria Group, Inc. adopted new authoritative guidance that requires an entity to provide additional information by component concerning the amounts reclassified out of accumulated other comprehensive earnings/losses. Altria Group, Inc. has included the additional disclosures in Note 6. Other Comprehensive Earnings/Losses.

Note 2. Asset Impairment, Exit and Implementation Costs:

For the six and three months ended June 30, 2013, pre-tax asset impairment and exit costs of $1 million were recorded in the smokeable products segment. For the six months ended June 30, 2013, pre-tax implementation costs of $1 million were recorded in marketing, administration and research costs in the smokeable products segment.

Pre-tax asset impairment, exit and implementation costs for the six and three months ended June 30, 2012 consisted of the following:
 
 
For the Six Months Ended June 30, 2012
 
For the Three Months Ended June 30, 2012
 
 
Asset Impairment and Exit Costs
 
Implementation (Gain) Costs
 
Total
 
Asset Impairment and Exit Costs
 
Implementation Costs
 
Total
 
 
(in millions)
Smokeable products
 
$
23

 
$
(12
)
 
$
11

 
$
16

 
$
9

 
$
25

Smokeless products
 
14

 
5

 
19

 

 

 

General corporate
 

 
(1
)
 
(1
)
 

 

 

Total
 
$
37

 
$
(8
)
 
$
29

 
$
16

 
$
9

 
$
25


The asset impairment, exit and implementation (gain) costs shown in the table above were related to Altria Group, Inc.’s cost reduction program announced in October 2011 (the “2011 Cost Reduction Program”). Total pre-tax charges, net related to this program were substantially completed as of December 31, 2012.

For the six months ended June 30, 2012, pre-tax implementation (gain) costs of $(8) million shown in the table above were recorded on Altria Group, Inc.’s condensed consolidated statement of earnings as follows: a net gain of $16 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 June 30, 2012, pre-tax implementation costs of $9 million shown in the table above were recorded in marketing, administration and research costs on Altria Group, Inc.’s condensed consolidated statement of earnings.

The severance liability related to the 2011 Cost Reduction Program was $37 million at December 31, 2012, substantially all of which was paid by June 30, 2013. 

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

- 13-

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

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 Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Service cost
 
$
43

 
$
40

 
$
22

 
$
20

Interest cost
 
157

 
172

 
79

 
86

Expected return on plan assets
 
(247
)
 
(221
)
 
(124
)
 
(110
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
136

 
112

 
67

 
56

Prior service cost
 
5

 
5

 
2

 
2

Net periodic pension cost
 
$
94

 
$
108

 
$
46

 
$
54


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 2, 2013, Altria Group, Inc. made a voluntary $350 million contribution to its pension plans. Additional employer contributions of $15 million were made to Altria Group, Inc.’s pension plans during the six months ended June 30, 2013. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans of approximately $10 million to $30 million during the remainder of 2013, 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 Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Service cost
 
$
10

 
$
11

 
$
5

 
$
6

Interest cost
 
51

 
60

 
26

 
30

Amortization:
 
 
 
 
 
 
 
 
Net loss
 
28

 
24

 
14

 
12

Prior service credit
 
(22
)
 
(23
)
 
(11
)
 
(12
)
Curtailment gain
 

 
(26
)
 

 

Net postretirement health care costs
 
$
67

 
$
46

 
$
34

 
$
36


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


- 14-

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


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 Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Equity earnings
 
$
419

 
$
726

 
$
220

 
$
218

Gains resulting from issuances of common stock by SABMiller
 
64

 
17

 
7

 
5

 
 
$
483

 
$
743

 
$
227

 
$
223


Altria Group, Inc.’s equity earnings for the six months ended June 30, 2012 included its share of pre-tax non-cash gains of $342 million resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel.
Note 5. Earnings Per Share:

Basic and diluted earnings per share (“EPS”) were calculated using the following:
 
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
2,651

 
$
2,420

 
$
1,266

 
$
1,225

Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares
 
(7
)
 
(8
)
 
(3
)
 
(4
)
Earnings for basic and diluted EPS
 
$
2,644

 
$
2,412

 
$
1,263

 
$
1,221

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
2,003

 
2,030

 
2,002

 
2,027

Since February 29, 2012, there were no stock options outstanding. For the six months ended June 30, 2012 computation, there were no antidilutive stock options.


- 15-

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

Note 6. Other Comprehensive Earnings/Losses:

The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:

 
 
For the Six Months Ended June 30, 2013
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2012
 
$
2

 
$
(2,414
)
 
$
372

 
$
(2,040
)
 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings before reclassifications
 
(1
)
 
30

 
(619
)
 
(590
)
Deferred income taxes
 

 
(13
)
 
216

 
203

Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes
 
(1
)
 
17

 
(403
)
 
(387
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
156

 
1

 
157

Deferred income taxes
 

 
(60
)
 

 
(60
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
96

 
1

 
97

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(1
)
 
113

 
(402
)
 
(290
)
 
 
 
 
 
 
 
 
 
Balances, June 30, 2013
 
$
1

 
$
(2,301
)
 
$
(30
)
 
$
(2,330
)


- 16-

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

 
 
For the Three Months Ended June 30, 2013
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, March 31, 2013
 
$
2

 
$
(2,348
)
 
$
278

 
$
(2,068
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(1
)
 

 
(476
)
 
(477
)
Deferred income taxes
 

 

 
166

 
166

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(1
)
 

 
(310
)
 
(311
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
77

 
3

 
80

Deferred income taxes
 

 
(30
)
 
(1
)
 
(31
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
47

 
2

 
49

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(1
)
 
47

 
(308
)
 
(262
)
 
 
 
 
 
 
 
 
 
Balances, June 30, 2013
 
$
1

 
$
(2,301
)
 
$
(30
)
 
$
(2,330
)



 
 
For the Six Months Ended June 30, 2012
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2011
 
$
2

 
$
(2,062
)
 
$
173

 
$
(1,887
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 

 
237

 
237

Deferred income taxes
 

 

 
(83
)
 
(83
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 

 
154

 
154

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
102

 
(4
)
 
98

Deferred income taxes
 

 
(41
)
 
2

 
(39
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
61

 
(2
)
 
59

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 

 
61

 
152

 
213

 
 
 
 
 
 
 
 
 
Balances, June 30, 2012
 
$
2

 
$
(2,001
)
 
$
325

 
$
(1,674
)


- 17-

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


 
 
For the Three Months Ended June 30, 2012
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, March 31, 2012
 
$
2

 
$
(2,040
)
 
$
353

 
$
(1,685
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 

 

 
(36
)
 
(36
)
Deferred income taxes
 

 

 
13

 
13

Other comprehensive losses before reclassifications, net of deferred income taxes
 

 

 
(23
)
 
(23
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
65

 
(8
)
 
57

Deferred income taxes
 

 
(26
)
 
3

 
(23
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
39

 
(5
)
 
34

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

 
39

 
(28
)
 
11

 
 
 
 
 
 
 
 
 
Balances, June 30, 2012
 
$
2

 
$
(2,001
)
 
$
325

 
$
(1,674
)

The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings for the six and three months ended June 30, 2013 and 2012:

 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Benefit Plans: (a)
 
 
 
 
 
 
 
 
Net loss
 
$
173

 
$
146

 
$
86

 
$
75

Prior service cost/credit
 
(17
)
 
(44
)
 
(9
)
 
(10
)
 
 
156

 
102

 
77

 
65

 
 
 
 
 
 
 
 
 
SABMiller (b)
 
1

 
(4
)
 
3

 
(8
)
 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
157

 
$
98

 
$
80

 
$
57


(a) Amounts are included in net defined benefit plan costs. For further details, see Note 3. Benefit Plans.

(b) Amounts are included in earnings from equity investment in SABMiller. For further information on Altria Group, Inc.’s equity investment in SABMiller, see Note 4. Earnings from Equity Investment in SABMiller.




- 18-

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

Note 7. Segment Reporting:

The products of Altria Group, Inc.’s subsidiaries include smokeable products comprised of cigarettes manufactured and sold by PM USA, and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; smokeless products manufactured and sold by or on behalf of USSTC and PM USA; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of smokeable products, smokeless products and wine. In addition, the financial services and the alternative products businesses are included in all other.

As discussed in Note 1. Background and Basis of Presentation, beginning with the first quarter of 2013, 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, 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 Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
10,646

 
$
11,003

 
$
5,678

 
$
5,903

Smokeless products
 
848

 
806

 
458

 
426

Wine
 
263

 
241

 
137

 
128

All other
 
76

 
84

 
32

 
30

Net revenues
 
$
11,833

 
$
12,134

 
$
6,305

 
$
6,487

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income:
 
 
 
 
 
 
 
 
Smokeable products
 
$
3,646

 
$
3,079

 
$
1,726

 
$
1,640

Smokeless products
 
492

 
432

 
270

 
240

Wine
 
45

 
37

 
25

 
22

All other
 
93

 
87

 
43

 
35

Amortization of intangibles
 
(10
)
 
(10
)
 
(5
)
 
(5
)
General corporate expenses
 
(113
)
 
(106
)
 
(58
)
 
(55
)
Operating income
 
4,153

 
3,519

 
2,001

 
1,877

Interest and other debt expense, net
 
(525
)
 
(586
)
 
(264
)
 
(293
)
Earnings from equity investment in SABMiller
 
483

 
743

 
227

 
223

Earnings before income taxes
 
$
4,111

 
$
3,676

 
$
1,964

 
$
1,807


Items affecting the comparability of operating companies income for the reportable segments were as follows:

Asset Impairment, Exit and Implementation Costs - See Note 2. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.

Tobacco and Health Judgments - See Note 11. Contingencies for pre-tax charges related to certain tobacco and health judgments recorded in operating companies income in the smokeable products segment.



- 19-

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


Non-Participating Manufacturer (“NPM”) Adjustment - For the six and three months ended June 30, 2013, PM USA recorded a reduction to cost of sales of $519 million and $36 million, respectively, on its condensed consolidated statements of earnings, which increased operating companies income in the smokeable products segment. This reduction to cost of sales resulted from the settlement of disputes with certain states related to the NPM adjustment provision under the 1998 Master Settlement Agreement (“NPM Adjustment”) for the years 2003 - 2012 discussed under Possible Adjustments in MSA Payments for 2003 - 2012 in Note 11. Contingencies.
Note 8. Finance Assets, net:

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold.

At June 30, 2013, finance assets, net, of $2,345 million were comprised of investments in finance leases of $2,376 million and a receivable of $21 million, reduced by the allowance for losses of $52 million. At December 31, 2012, finance assets, net, of $2,581 million were comprised of investments in finance leases of $2,680 million, reduced by the allowance for losses of $99 million.
The activity in the allowance for losses on finance assets for the six months ended June 30, 2013 and 2012 was as follows:
 
 
For the Six Months Ended June 30,
 
 
2013
 
2012
 
 
(in millions)
Balance at beginning of the year
 
$
99

 
$
227

Decrease to allowance
 
(47
)
 
(10
)
Amounts written-off
 

 
(29
)
Balance at June 30
 
$
52

 
$
188


PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During the six months ended June 30, 2013 and 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 $47 million and $27 million for the six and three months ended June 30, 2013, respectively, and by $10 million for the six and three months ended June 30, 2012. These decreases to the allowance for losses were recorded as a reduction to marketing, administration and research costs on Altria Group, Inc.’s condensed consolidated statements of earnings.

In addition, as a result of developments related to the 2011 American Airlines, Inc. (“American”) bankruptcy filing, during the six months ended June 30, 2012, PMCC wrote off $29 million of the related investment in finance lease balance against its allowance for losses. During the first quarter of 2013, PMCC sold its remaining interest in the American aircraft leases.

All PMCC lessees were current on their lease payment obligations as of June 30, 2013.

PMCC believes that, as of June 30, 2013, the allowance for losses of $52 million was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may increase or decrease its allowance for losses if such conditions change in the future.

- 20-

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

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 June 30, 2013 and December 31, 2012 was as follows:

 
 
June 30, 2013
 
December 31, 2012
 
 
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
 
“AAA/Aaa” to “A-/A3”
 
$
760

 
$
961

“BBB+/Baa1” to “BBB-/Baa3”
 
911

 
938

“BB+/Ba1” and Lower
 
726

 
781

Total
 
$
2,397

 
$
2,680


Note 9. Debt:

At June 30, 2013 and December 31, 2012, Altria Group, Inc. had no short-term borrowings.

Long-term Debt

On May 2, 2013, Altria Group, Inc. issued $350 million aggregate principal amount of 2.95% senior unsecured long-term notes due 2023 and $650 million aggregate principal amount of 4.50% senior unsecured long-term notes due 2043. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group. Inc.’s general funds and will be used for 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).

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 June 30, 2013 and December 31, 2012, was $17.4 billion and $17.6 billion, respectively, as compared with its carrying value of $14.9 billion and $13.9 billion, respectively.


Note 10. Income Taxes:

The income tax rate of 35.5% for the six months ended June 30, 2013 increased 1.4 percentage points from 34.1% for the six months ended June 30, 2012. The income tax rate of 35.5% for the three months ended June 30, 2013 increased 3.3 percentage points from 32.2% for the three months ended June 30, 2012. The increases in the income tax rates were due primarily to an interest benefit, recorded during the second quarter of 2012, resulting primarily from lower than estimated interest on tax underpayments related to the execution of a closing agreement (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 discussed in its 2012 Form 10-K, Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its condensed consolidated statements of earnings.
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. The tax component of these payments represents an acceleration of income taxes that Altria Group, Inc. would have otherwise paid over the lease terms of these transactions.

- 21-

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

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 examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $130 million, a portion of which would relate to the unrecognized tax benefits from Altria Group, Inc.’s former subsidiaries Kraft Foods Inc. (now known as Mondelēz International, Inc. (“Mondelēz”)) and Philip Morris International Inc. (“PMI”), for which Altria Group, Inc. is indemnified by Mondelēz and PMI under respective tax sharing agreements.

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. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorney’s fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’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 to the extent 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

- 22-

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

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 or statutory fraud, unjust enrichment, breach of warranty or violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”); and (v) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” cases are discussed below.

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of July 22, 2013, July 23, 2012 and July 25, 2011.
Type of Case
Number of Cases
Pending as of
July 22, 2013
Number of Cases
Pending as of
July 23, 2012
Number of Cases
Pending as of
July 25, 2011
Individual Smoking and Health Cases (1)
73
78
81
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
6
7
8
Health Care Cost Recovery Actions (3)
1
1
2
“Lights/Ultra Lights” Class Actions
15
16
19

(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 were 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 did not preclude a trial in two phases in this case. Issues related to defendants’ conduct and whether punitive damages are permissible were tried in the first phase. Trial in the first phase of this case began in April 2013. On May 15, 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase, if any, will consist of individual trials to determine liability and compensatory damages on that claim only. On July 15, 2013, plaintiffs filed a renewed motion for judgment as a matter of law and a motion for a new trial. Also on July 15, 2013, defendants filed a motion for judgment notwithstanding the verdict.

(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.


- 23-

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

International Tobacco-Related Cases

As of July 22, 2013, PM USA is a named defendant in Israel in one “Lights” class action. PM USA is a named defendant in nine health care cost recovery actions in Canada, seven of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

Tobacco-Related Cases Set for Trial

As of July 22, 2013, 12 Engle progeny cases and three individual smoking and health cases against PM USA are set for trial in 2013. Cases against other companies in the tobacco industry are also scheduled for trial in 2013. Trial dates are subject to change.

Trial Results
 
Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 54 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 37 of the 54 cases. These 37 cases were tried in Alaska (1), California (5), Florida (10), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska. In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. Plaintiff’s notice of appeal of this ruling remains pending. See Types and Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).

Of the 17 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 13 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. The plaintiff in Price is seeking to reopen the judgment dismissing this case. See below for a discussion of developments in Price.

As of July 22, 2013, 44 Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision. Twenty-three verdicts were returned in favor of plaintiffs and 21 verdicts were returned in favor of PM USA. See Smoking and Health Litigation - Engle Progeny Trial Results below for a discussion of these verdicts.

Judgments Paid and Provisions for Litigation

After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, PM USA has paid in the aggregate judgments (and related costs and fees) totaling approximately $245 million and interest totaling approximately $139 million as of July 22, 2013.


- 24-

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

The changes in Altria Group, Inc.’s accrued liability for certain tobacco and health judgments, including related interest costs, were as follows:
 
For the Six Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
       (in millions)
Accrued liability for tobacco and health judgments at beginning of period
$

 
$
122

 
$
6

 
$
1

Pre-tax charges for tobacco and health judgments
5

 
1

 

 
1

Pre-tax charges for related interest costs
1

 

 

 

Payments

 
(121
)
 

 

Accrued liability for tobacco and health judgments at
   end of period
$
6

 
$
2

 
$
6

 
$
2


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

Security for Judgments
 
To obtain stays of judgments pending current appeals, as of June 30, 2013, PM USA has posted various forms of security totaling approximately $39 million, the majority of which has been collateralized with cash deposits that are included in other assets on the condensed consolidated balance sheet.

Smoking and Health Litigation

Overview
 
Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health 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 pending during 2012 and 2013 in which verdicts were returned in favor of plaintiffs and against PM USA. Charts 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. On July 9, 2013, the California Court of Appeal affirmed the judgment. PM USA is considering its appellate options.


- 25-

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

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 September 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.

Engle Class Action

In July 2002, 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.


- 26-

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

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 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 July 22, 2013, 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 July 22, 2013, approximately 1,300 cases were pending against PM USA in federal district court asserting individual claims by or on behalf of a similar number of federal court plaintiffs. The U.S. District Court for the Middle District of Florida (Jacksonville) dismissed 521 Engle progeny cases with prejudice in January 2013 and 306 such cases with prejudice on June 17, 2013. In February 2013, plaintiffs appealed the January dismissal to the U.S Court of Appeals for the Eleventh Circuit. 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 U.S. Court of Appeals for the Eleventh Circuit and the appeals were consolidated. In February 2009, the appeal in Burr was dismissed for lack of prosecution, and in September 2012, the district court dismissed the case on statute of limitations grounds. Plaintiff is appealing the dismissal. In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates 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 and in Appeals of Engle Progeny Verdicts), which initially included Martin, an Engle progeny case against R.J. Reynolds Tobacco Company (“R.J. Reynolds”) in Escambia County, and J. Brown, an Engle progeny case

- 27-

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

against R.J. Reynolds in Broward County. More recently, the Eleventh Circuit’s ruling on Florida state law has been superseded by the Florida Supreme Court’s decision in Douglas, discussed below.

Following Martin and J. Brown, in the Waggoner case, the U.S. District Court for the Middle District of Florida (Jacksonville) ruled in December 2011 that application of the Engle findings to establish the wrongful conduct elements of plaintiffs’ 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. The court consolidated the two cases and scheduled oral argument for July 31, 2013.

Most of the Engle progeny cases pending against PM USA in the U.S. District Court for the Middle District of Florida (Jacksonville) asserting individual claims by or on behalf of approximately 1,250 plaintiffs remain stayed. There are currently 14 active cases pending in federal court. In January 2013, the U.S. District Court for the Middle District of Florida ordered the parties to negotiate an aggregate settlement mediation of all pending cases. In February 2013, defendants filed a motion for reconsideration by the District Court of the January 2013 order. In March 2013, the District Court issued a new order removing certain requirements of the January 2013 order. In April 2013, the mediators reported to the district court that the cases have not been resolved nor have the parties agreed to a mechanism for settlement.

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 Alexander. The Florida Supreme Court granted review of the Hall decision, but, in September 2012, the court dismissed the appeal as moot. In October 2012, the Florida Supreme Court denied the plaintiffs’ rehearing petition.

No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court. However, in April 2013, PM USA, R.J. Reynolds and Lorillard Tobacco Company (“Lorillard”) filed a motion in the U.S. District Court for the Middle District of Florida to have the court apply the Florida bond cap statute to all federal Engle progeny cases.

Engle Progeny Trial Results
 
As of July 22, 2013, 44 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Twenty-three verdicts were returned in favor of plaintiffs. For a further discussion of these cases, see the verdict charts below.

Twenty-one verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious, Szymanski, Gollihue, McCray, Denton, Hancock, Wilder, D. Cohen, LaMotte and J. Campbell). 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 July 22, 2013.


- 28-

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

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 charts below list the verdicts and post-trial developments in the Engle progeny cases that were pending during 2012 or 2013 in which verdicts were returned in favor of plaintiffs (including Weingart and Hancock, where the verdicts originally were returned in favor of PM USA).

Currently-Pending Cases
___________________________________________________________________________________________________
Plaintiff: Skolnick
Date:    June 2013

Verdict:
On June 14, 2013, a Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $2,555,000 in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).

Post-Trial Developments:
On June 24, 2013, defendants filed post-trial motions including a motion to set aside the verdict and a motion for a new trial.
____________________________________________________________________________________________________
Plaintiff: Starr-Blundell
Date:    June 2013

Verdict:
On June 4, 2013, a Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $500,000 in compensatory damages and allocated 10% of the fault to each defendant (an amount of $50,000).

Post-Trial Developments:
On June 12, 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict, or in the alternative, for a new trial.
____________________________________________________________________________________________________
Plaintiff: Ruffo
Date:    May 2013

Verdict:
On May 9, 2013, a Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and Lorillard. The jury awarded plaintiff $1,500,000 in compensatory damages and allocated 12% of the fault to PM USA (an amount of $180,000).

Post-Trial Developments:
On May 20, 2013, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict.
____________________________________________________________________________________________________
Plaintiff: Graham
Date:    May 2013

Verdict:
On May 23, 2013, a jury in the U.S. District Court for the Middle District of Florida (Jacksonville) returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $2.75 million in compensatory damages and allocated 10% of the fault to PM USA (an amount of $275,000).

Post-Trial Developments:

- 29-

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

On June 25, 2013, defendants filed several post-trial motions including motions for judgment as a matter of law and for a new trial.
____________________________________________________________________________________________________
Plaintiff: Searcy
Date:    April 2013

Verdict:
In April 2013, a jury in the U.S. District Court for the Middle District of Florida (Orlando) returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $6 million in compensatory damages and $10 million in punitive damages against each defendant.

Post-Trial Developments:
In April 2013, PM USA, R.J. Reynolds and Lorillard filed a motion in the U.S. District Court for the Middle District of Florida (Orlando) to have the court apply the Florida bond cap statute to all federal Engle progeny cases and to decide such motion before PM USA posts a bond in this case. On June 5, 2013, the trial court entered final judgment declining defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault and imposing joint and several liability for the compensatory damages. On July 3, 2013, defendants filed various post-trial motions.
____________________________________________________________________________________________________

Plaintiff: Buchanan
Date:     December 2012        

Verdict:
In December 2012, a Leon County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group LLC (“Liggett Group”). The jury awarded $5.5 million in compensatory damages and allocated 37% of the fault to each of the defendants (an amount of approximately $2 million).

Post-trial Developments:
In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March 2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group refusing to reduce the compensatory damages award by plaintiff’s comparative fault and holding PM USA and Liggett Group jointly and severally liable for $5.5 million. In April 2013, defendants filed a notice of appeal to the Florida First District Court of Appeal and PM USA posted a bond in the amount of $2.5 million.    
____________________________________________________________________________________________________
Plaintiff: Lock
Date:     October 2012        

Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $1.15 million in compensatory damages and allocated 9% of the fault to each of the defendants (an amount of $103,500).

Post-trial Developments:
In November 2012, defendants filed several post-trial motions, including motions for a new trial, to set aside the verdict and to reduce the damages award by the amount of economic damages paid by third parties. In January 2013, the trial court orally denied all post-trial motions. In February 2013, the trial court entered final judgment. PM USA’s portion of the damages was $103,500. On March 21, 2013, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In March 2013, PM USA posted bonds in the amount of $103,500.    
____________________________________________________________________________________________________
Plaintiff: Hancock
Date:     August 2012        

Verdict:
A Broward County jury returned a verdict in the amount of zero damages and allocated 5% 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.


- 30-

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

Post-trial Developments:
In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012, the trial court entered final judgment. PM USA’s portion of the damages was approximately $700. In November 2012, both sides filed notices of appeal to the Florida Fourth District Court of Appeal.
____________________________________________________________________________________________________
Plaintiff: Calloway
Date:     May 2012        

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA, but the trial court ruled that it will not apply the comparative fault allocations because the jury found against each defendant on the intentional tort claims. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group.

Post-trial Developments:
In May and June, 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions and entered final judgment, reducing the total compensatory damages award to $16.1 million but leaving undisturbed the separate punitive damages awards. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal.    
____________________________________________________________________________________________________
Plaintiff: Hallgren
Date:     January 2012        

Verdict:
A Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants.

Post-trial Developments:
The trial court entered final judgment in March 2012. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District Court of Appeal. The Court of Appeal heard the case on June 4, 2013.
____________________________________________________________________________________________________
Plaintiff: Allen
Date:     April 2011        

Verdict:
A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of $6 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of $900,000). The jury also awarded $17 million in punitive damages against each of the defendants.

Post-trial Developments:
In May 2011, the trial court entered final judgment. In October 2011, the trial court granted defendants’ motion for remittitur, reducing the punitive damages award against PM USA to $2.7 million, and denied defendants’ remaining post-trial motions. PM USA filed a notice of appeal to the Florida First District Court of Appeal and posted a bond in the amount of $1.25 million in November 2011. On May 10, 2013, the First District Court of Appeal reversed and remanded the case for a new trial on the basis that the trial court erred in failing to submit the question of addiction causation to the jury. On June 12, 2013, the plaintiff filed a motion for rehearing or rehearing en banc, which the First District Court of Appeal denied on July 12, 2013.     
____________________________________________________________________________________________________
Plaintiff: Tullo

- 31-

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

Date:     April 2011        

Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45% of the fault to PM USA (an amount of $2,025,000).

Post-trial Developments:
In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $2 million bond. The Court of Appeal heard the case on June 19, 2013.     
____________________________________________________________________________________________________
Plaintiff: Hatziyannakis
Date:     February 2011        

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA.  The jury awarded approximately $270,000 in compensatory damages and allocated 32% of the fault to PM USA (an amount of approximately $86,000). 

Post-trial Developments:
In April 2011, the trial court denied PM USA’s post-trial motions for a new trial and to set aside the verdict. In June 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted an $86,000 appeal bond. In January 2013, the Fourth District affirmed per curiam the trial court’s decision without issuing an opinion. In January 2013, PM USA filed a motion for a citation in order to facilitate further review of the case in the Florida Supreme Court, which was denied. In March 2013, the Fourth District denied PM USA’s various motions for post-decision relief. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $174,000 for the judgment plus interest and associated costs.    
____________________________________________________________________________________________________
Plaintiff: Kayton (formerly Tate)
Date:     July 2010

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA.

Post-trial Developments:
In August 2010, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5 million appeal bond. In November 2012, the Florida Fourth District Court of Appeal reversed the punitive damages award and remanded the case for a new trial on plaintiff’s conspiracy claim. Upon retrial, if the jury finds in plaintiff’s favor on that claim, the original $16.2 million punitive damages award will be reinstated. PM USA filed a motion for rehearing, which was denied in January 2013. In January 2013, plaintiff and defendant each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. PM USA filed a motion to stay the mandate, which was denied in March 2013. The Fourth District issued its mandate in April 2013. In June 2013, plaintiff moved to consolidate with Hess and R. Cohen, which PM USA does not oppose.
____________________________________________________________________________________________________
Plaintiff: Putney
Date:     April 2010

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million