10-Q 1 a2013form10-qq32013.htm FORM 10-Q 2013 FORM 10-Q (Q3 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 September 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 October 15, 2013, there were 2,000,014,810 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, 2013
 
December 31, 2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
4,211

 
$
2,900

Receivables
 
92

 
193

Inventories:
 

 

Leaf tobacco
 
798

 
876

Other raw materials
 
177

 
173

Work in process
 
307

 
349

Finished product
 
436

 
348

 
 
1,718

 
1,746

Deferred income taxes
 
1,218

 
1,216

Other current assets
 
310

 
260

Total current assets
 
7,549

 
6,315

Property, plant and equipment, at cost
 
4,787

 
4,750

Less accumulated depreciation
 
2,746

 
2,648

 
 
2,041

 
2,102

Goodwill
 
5,174

 
5,174

Other intangible assets, net
 
12,063

 
12,078

Investment in SABMiller
 
6,520

 
6,637

Finance assets, net
 
2,153

 
2,581

Other assets
 
450

 
442

Total Assets
 
$
35,950

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

 
$
1,459

Accounts payable
 
347

 
451

Accrued liabilities:
 

 

Marketing
 
523

 
568

Employment costs
 
215

 
184

Settlement charges
 
3,047

 
3,616

Other
 
1,258

 
1,093

Dividends payable
 
963

 
888

Total current liabilities
 
8,337

 
8,259

Long-term debt
 
12,892

 
12,419

Deferred income taxes
 
6,466

 
6,652

Accrued pension costs
 
1,243

 
1,735

Accrued postretirement health care costs
 
2,492

 
2,504

Other liabilities
 
505

 
556

Total liabilities
 
31,935

 
32,125

Contingencies (Note 11)
 

 

Redeemable noncontrolling interest
 
34

 
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
 
5,701

 
5,688

Earnings reinvested in the business
 
25,636

 
24,316

Accumulated other comprehensive losses
 
(2,223
)
 
(2,040
)
Cost of repurchased stock
(805,674,097 shares in 2013 and 796,221,021 shares in 2012)
 
(26,068
)
 
(25,731
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
3,981

 
3,168

Noncontrolling interests
 

 
2

Total stockholders’ equity
 
3,981

 
3,170

Total Liabilities and Stockholders’ Equity
 
$
35,950

 
$
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 Nine Months Ended September 30,
 
 
2013
 
2012
Net revenues
 
$
18,386

 
$
18,376

Cost of sales
 
5,210

 
5,860

Excise taxes on products
 
5,127

 
5,336

Gross profit
 
8,049

 
7,180

Marketing, administration and research costs
 
1,723

 
1,678

Changes to Mondelēz and PMI tax-related receivables/payables
 
25

 
(48
)
Asset impairment and exit costs
 
1

 
47

Amortization of intangibles
 
15

 
15

Operating income
 
6,285

 
5,488

Interest and other debt expense, net
 
794

 
868

Loss on early extinguishment of debt
 

 
874

Earnings from equity investment in SABMiller
 
(738
)
 
(973
)
Earnings before income taxes
 
6,229

 
4,719

Provision for income taxes
 
2,182

 
1,641

Net earnings
 
4,047

 
3,078

Net earnings attributable to noncontrolling interests
 

 
(1
)
Net earnings attributable to Altria Group, Inc.
 
$
4,047

 
$
3,077

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
2.02

 
$
1.51

Dividends declared
 
$
1.36

 
$
1.26



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,
 
 
2013
 
2012
Net revenues
 
$
6,553

 
$
6,242

Cost of sales
 
1,939

 
1,982

Excise taxes on products
 
1,793

 
1,776

Gross profit
 
2,821

 
2,484

Marketing, administration and research costs
 
659

 
548

Changes to Mondelēz and PMI tax-related receivables/payables
 
25

 
(48
)
Asset impairment and exit costs
 

 
10

Amortization of intangibles
 
5

 
5

Operating income
 
2,132

 
1,969

Interest and other debt expense, net
 
269

 
282

Loss on early extinguishment of debt
 

 
874

Earnings from equity investment in SABMiller
 
(255
)
 
(230
)
Earnings before income taxes
 
2,118

 
1,043

Provision for income taxes
 
722

 
386

Net earnings
 
1,396

 
657

Net earnings attributable to noncontrolling interests
 

 

Net earnings attributable to Altria Group, Inc.
 
$
1,396

 
$
657

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
0.70

 
$
0.32

Dividends declared
 
$
0.48

 
$
0.44


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,
 
 
2013
 
2012
Net earnings
 
$
4,047

 
$
3,078

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

Benefit plans
 
159

 
98

SABMiller
 
(341
)
 
185

Other comprehensive (losses) earnings, net of deferred income taxes
 
(183
)
 
283

 
 
 
 
 
Comprehensive earnings
 
3,864

 
3,361

Comprehensive earnings attributable to noncontrolling interests
 

 
(1
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
3,864

 
$
3,360


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,
 
 
2013
 
2012
Net earnings
 
$
1,396

 
$
657

Other comprehensive earnings, net of deferred income taxes:
 
 
 
 
Benefit plans
 
46

 
37

SABMiller
 
61

 
33

Other comprehensive earnings, net of deferred income taxes
 
107

 
70

 
 
 
 
 
Comprehensive earnings
 
1,503

 
727

Comprehensive earnings attributable to noncontrolling interests
 

 

Comprehensive earnings attributable to Altria Group, Inc.
 
$
1,503

 
$
727


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 Nine Months Ended September 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)
 

 

 
4,047

 

 

 
(2
)
 
4,045

Other comprehensive losses, net of deferred income tax benefit
 

 

 

 
(183
)
 

 

 
(183
)
Stock award activity
 

 
13

 

 

 
11

 

 
24

Cash dividends declared ($1.36 per share)
 

 

 
(2,727
)
 

 

 

 
(2,727
)
Repurchases of common stock
 

 

 

 

 
(348
)
 

 
(348
)
Balances, September 30, 2013
 
$
935

 
$
5,701

 
$
25,636

 
$
(2,223
)
 
$
(26,068
)
 
$

 
$
3,981


(1) 
Net earnings/losses attributable to noncontrolling interests for the nine months ended September 30, 2013 and for the year ended December 31, 2012 exclude net earnings of $2 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 September 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 Nine Months Ended September 30,
 
 
2013
 
2012
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
4,047

 
$
3,078

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
158

 
169

Deferred income tax benefit
 
(105
)
 
(1,088
)
Earnings from equity investment in SABMiller
 
(738
)
 
(973
)
Dividends from SABMiller
 
331

 
299

IRS payment related to the Closing Agreement
 

 
(456
)
Loss on early extinguishment of debt
 

 
874

Cash effects of changes:
 
 
 
 
Receivables, net
 
101

 
202

Inventories
 
28

 
155

Accounts payable
 
(19
)
 
(38
)
Income taxes
 
181

 
825

Accrued liabilities and other current assets
 
(103
)
 
(195
)
Accrued settlement charges
 
(569
)
 
(277
)
Pension plan contributions
 
(391
)
 
(538
)
Pension provisions and postretirement, net
 
133

 
134

Other
 
(78
)
 
(51
)
Net cash provided by operating activities
 
2,976

 
2,120

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,
 
 
2013
 
2012
Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
$
(90
)
 
$
(77
)
Proceeds from finance assets
 
559

 
813

Other
 
16

 
(8
)
Net cash provided by investing activities
 
485

 
728

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

 
2,787

Long-term debt repaid
 

 
(2,600
)
Repurchases of common stock
 
(382
)
 
(595
)
Dividends paid on common stock
 
(2,652
)
 
(2,508
)
Financing fees and debt issuance costs
 
(12
)
 
(22
)
Tender premiums and fees related to early extinguishment of debt
 

 
(864
)
Other
 
(100
)
 
(130
)
Net cash used in financing activities
 
(2,150
)
 
(3,932
)
Cash and cash equivalents:
 
 
 
 
Increase (decrease)
 
1,311

 
(1,084
)
Balance at beginning of period
 
2,900

 
3,270

Balance at end of period
 
$
4,211

 
$
2,186

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, 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 tobacco products in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC (“UST”), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Nu Mark LLC (“Nu Mark”), an indirect wholly-owned subsidiary of Altria Group, Inc., is engaged in the development and marketing of innovative tobacco products for adult tobacco consumers. Philip Morris Capital Corporation (“PMCC”), 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 September 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 September 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.

Dividends and Share Repurchases

During the third quarter of 2013, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved a 9.1% increase in the quarterly dividend rate to $0.48 per common share versus the previous rate of $0.44 per common share. The current annualized dividend rate is $1.92 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of the Board of Directors.

In October 2011, the Board of Directors authorized a $1.0 billion share repurchase program that 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) and completed 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, the Board of Directors authorized a new $300 million share repurchase program that was expanded to $1.0 billion in August 2013 (as expanded, the “April 2013 share repurchase program”). Altria Group, Inc. expects to complete this program by the end of the third quarter of 2014. During the nine and three months ended September 30, 2013, Altria Group, Inc. repurchased 8.2 million shares (aggregate cost of approximately $291 million, and $35.44 average price per share) and 4.5 million shares (aggregate cost of approximately $156 million, and $34.75 average price per share), respectively, under the April 2013 share repurchase program. At September 30, 2013, Altria Group, Inc. had approximately $709 million remaining in the April 2013 share repurchase program.

During the nine months ended September 30, 2013 and 2012, Altria Group, Inc. repurchased 9.9 million shares (aggregate cost of approximately $348 million, and $35.20 average price per share) and 19.6 million shares (aggregate cost of approximately $622 million, and $31.76 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. The program remains subject to the discretion of the 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

- 12-

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

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”).

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 nine months ended September 30, 2013, pre-tax asset impairment and exit costs of $1 million were recorded in the smokeable products segment. For the nine months ended September 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 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 (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 nine months ended September 30, 2012, pre-tax implementation (gain) costs of $(7) million shown in the table above were recorded on Altria Group, Inc.’s condensed consolidated statement of earnings 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, pre-tax 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.

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


- 13-

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

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,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Service cost
 
$
65

 
$
59

 
$
22

 
$
19

Interest cost
 
235

 
258

 
78

 
86

Expected return on plan assets
 
(370
)
 
(331
)
 
(123
)
 
(110
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
203

 
168

 
67

 
56

Prior service cost
 
8

 
8

 
3

 
3

Net periodic pension cost
 
$
141

 
$
162

 
$
47

 
$
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 $41 million were made to Altria Group, Inc.’s pension plans during the nine months ended September 30, 2013. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2013 of up to approximately $5 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.


- 14-

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

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,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Service cost
 
$
13

 
$
16

 
$
3

 
$
5

Interest cost
 
74

 
87

 
23

 
27

Amortization:
 
 
 
 
 
 
 
 
Net loss
 
38

 
34

 
10

 
10

Prior service credit
 
(33
)
 
(32
)
 
(11
)
 
(9
)
Curtailment gain
 

 
(26
)
 

 

Net postretirement health care costs
 
$
92

 
$
79

 
$
25

 
$
33


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.


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,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Equity earnings
 
$
662

 
$
942

 
$
243

 
$
216

Gains resulting from issuances of common stock by SABMiller
 
76

 
31

 
12

 
14

 
 
$
738

 
$
973

 
$
255

 
$
230


Altria Group, Inc.’s equity earnings for the nine months ended September 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.

- 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,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
4,047

 
$
3,077

 
$
1,396

 
$
657

Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares
 
(11
)
 
(10
)
 
(4
)
 
(2
)
Earnings for basic and diluted EPS
 
$
4,036

 
$
3,067

 
$
1,392

 
$
655

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
2,001

 
2,028

 
1,998

 
2,024

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

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 Nine Months Ended September 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

 
(527
)
 
(498
)
Deferred income taxes
 

 
(13
)
 
184

 
171

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

 
(343
)
 
(327
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
230

 
2

 
232

Deferred income taxes
 

 
(88
)
 

 
(88
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
142

 
2

 
144

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(1
)
 
159

 
(341
)
 
(183
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2013
 
$
1

 
$
(2,255
)
 
$
31

 
$
(2,223
)


- 16-

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

 
 
For the Three Months Ended September 30, 2013
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2013
 
$
1

 
$
(2,301
)
 
$
(30
)
 
$
(2,330
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 

 
92

 
92

Deferred income taxes
 

 

 
(32
)
 
(32
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 

 
60

 
60

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
74

 
1

 
75

Deferred income taxes
 

 
(28
)
 

 
(28
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
46

 
1

 
47

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 

 
46

 
61

 
107

 
 
 
 
 
 
 
 
 
Balances, September 30, 2013
 
$
1

 
$
(2,255
)
 
$
31

 
$
(2,223
)



 
 
For the Nine Months Ended September 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
 

 

 
280

 
280

Deferred income taxes
 

 

 
(98
)
 
(98
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 

 
182

 
182

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
162

 
4

 
166

Deferred income taxes
 

 
(64
)
 
(1
)
 
(65
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
98

 
3

 
101

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 

 
98

 
185

 
283

 
 
 
 
 
 
 
 
 
Balances, September 30, 2012
 
$
2

 
$
(1,964
)
 
$
358

 
$
(1,604
)



- 17-

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

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

 
$
(2,001
)
 
$
325

 
$
(1,674
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings before reclassifications
 

 

 
43

 
43

Deferred income taxes
 

 

 
(15
)
 
(15
)
Other comprehensive earnings before reclassifications, net of deferred income taxes
 

 

 
28

 
28

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
60

 
8

 
68

Deferred income taxes
 

 
(23
)
 
(3
)
 
(26
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
37

 
5

 
42

 
 
 
 
 
 
 
 
 
Other comprehensive earnings, net of deferred income taxes
 

 
37

 
33

 
70

 
 
 
 
 
 
 
 
 
Balances, September 30, 2012
 
$
2

 
$
(1,964
)
 
$
358

 
$
(1,604
)

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

 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Benefit Plans: (a)
 
 
 
 
 
 
 
 
Net loss
 
$
255

 
$
212

 
$
82

 
$
66

Prior service cost/credit
 
(25
)
 
(50
)
 
(8
)
 
(6
)
 
 
230

 
162

 
74

 
60

 
 
 
 
 
 
 
 
 
SABMiller (b)
 
2

 
4

 
1

 
8

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
232

 
$
166

 
$
75

 
$
68


(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. 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 Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
16,448

 
$
16,616

 
$
5,802

 
$
5,613

Smokeless products
 
1,333

 
1,243

 
485

 
437

Wine
 
411

 
381

 
148

 
140

All other
 
194

 
136

 
118

 
52

Net revenues
 
$
18,386

 
$
18,376

 
$
6,553

 
$
6,242

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income:
 
 
 
 
 
 
 
 
Smokeable products
 
$
5,471

 
$
4,716

 
$
1,825

 
$
1,637

Smokeless products
 
769

 
678

 
277

 
246

Wine
 
73

 
63

 
28

 
26

All other
 
185

 
166

 
92

 
79

Amortization of intangibles
 
(15
)
 
(15
)
 
(5
)
 
(5
)
General corporate expenses
 
(173
)
 
(168
)
 
(60
)
 
(62
)
Changes to Mondelēz and PMI tax-related receivables/payables
 
(25
)
 
48

 
(25
)
 
48

Operating income
 
6,285

 
5,488

 
2,132

 
1,969

Interest and other debt expense, net
 
(794
)
 
(868
)
 
(269
)
 
(282
)
Loss on early extinguishment of debt
 

 
(874
)
 

 
(874
)
Earnings from equity investment in SABMiller
 
738

 
973

 
255

 
230

Earnings before income taxes
 
$
6,229

 
$
4,719

 
$
2,118

 
$
1,043


- 19-

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


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

Non-Participating Manufacturer (“NPM”) Adjustment Items - For the nine and three months ended September 30, 2013, PM USA recorded pre-tax income of $664 million and $145 million, respectively, on Altria Group, Inc.’s condensed consolidated statements of earnings, which increased operating companies income in the smokeable products segment. This recording of pre-tax income resulted from the following:
a reduction to cost of sales of $519 million for the nine months ended September 30, 2013 for the settlement of disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (the “MSA”) for the years 2003 - 2012; and

a reduction to cost of sales of $145 million for the nine and three months ended September 30, 2013 for the September 11, 2013 diligent enforcement rulings of the arbitration panel presiding over the NPM adjustment dispute for 2003.

For further discussion of these items, see Possible Adjustments in MSA Payments for 2003 - 2012 in Note 11. Contingencies.
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 tobacco and health judgments recorded in operating companies income in the smokeable products segment.

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 September 30, 2013, finance assets, net, of $2,153 million were comprised of investments in finance leases of $2,194 million and a receivable of $11 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 nine months ended September 30, 2013 and 2012 was as follows:
 
 
For the Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(in millions)
Balance at beginning of the year
 
$
99

 
$
227

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

 
(118
)
Balance at September 30
 
$
52

 
$
99


PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During the nine months ended September 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 for the nine months ended September 30, 2013, and by $10 million for the nine months ended September 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.


- 20-

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

In addition, as a result of developments related to the 2011 American Airlines, Inc. (“American”) bankruptcy filing, during the nine months ended September 30, 2012, PMCC wrote off $118 million of the related investment in finance lease balance against its allowance for losses. Also, 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. 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 September 30, 2013.

PMCC believes that, as of September 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.
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, 2013 and December 31, 2012 was as follows:

 
 
September 30, 2013
 
December 31, 2012
 
 
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
 
“AAA/Aaa” to “A-/A3”
 
$
611

 
$
961

“BBB+/Baa1” to “BBB-/Baa3”
 
931

 
938

“BB+/Ba1” and Lower
 
663

 
781

Total
 
$
2,205

 
$
2,680


Note 9. Debt:

Short-term Borrowings and Borrowing Arrangements

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

On August 19, 2013, Altria Group, Inc. amended and restated its $3.0 billion senior unsecured 5-year revolving credit agreement to extend the expiration date to August 19, 2018, with an option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for two additional one-year periods (as amended and restated, the “Credit Agreement”). All other terms of the Credit Agreement remain substantially the same.

Any borrowings under the Credit Agreement are guaranteed by PM USA (see Note 12. Condensed Consolidating Financial Information). At September 30, 2013, the credit line available to Altria Group, Inc. under the Credit Agreement was $3.0 billion.

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 were 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.


- 21-

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

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 September 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.

Tender Offer for Altria Group, Inc. Senior Notes

In August 2012, Altria Group, Inc. issued $1.9 billion aggregate principal amount of 2.85% senior unsecured long-term notes due 2022 and $0.9 billion aggregate principal amount of 4.25% senior unsecured long-term notes due 2042. The net proceeds from the issuances of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used in connection with a tender offer to purchase for cash $2.0 billion aggregate principal amount of certain of its senior unsecured notes. During the third quarter of 2012, Altria Group, Inc. repurchased $1,151 million aggregate principal amount of its 9.70% notes due 2018, and $849 million aggregate principal amount of its 9.25% notes due 2019. As a result of this tender offer, Altria Group, Inc. recorded, during the third quarter of 2012, 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 35.0% for the nine months ended September 30, 2013 increased 0.2 percentage points from 34.8% for the nine months ended September 30, 2012, due primarily to the following:
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 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 (the “Closing Agreement”); and
the reversal in 2012 of tax reserves and associated interest 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”);
partially offset by:
the resolution of various Kraft Foods Inc. (now known as Mondelēz International, Inc. (“Mondelēz”)) and Philip Morris International Inc. (“PMI”) tax matters in the third quarters of 2013 and 2012, as discussed further below;
the reduction in certain consolidated tax benefits in 2012 resulting from the third quarter of 2012 debt tender offer (see Note 9. Debt); and
the reversal in 2013 of tax accruals no longer required.
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.

- 22-

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

The income tax rate of 34.1% for the three months ended September 30, 2013 decreased 2.9 percentage points from 37.0% for the three months ended September 30, 2012, due primarily to the following:
the resolution of various Mondelēz and PMI tax matters in the third quarters of 2013 and 2012, as discussed further below;
the reduction in certain consolidated tax benefits in 2012 resulting from the third quarter of 2012 debt tender offer; and
the reversal in 2013 of tax accruals no longer required;
partially offset by:
the reversal in 2012 of tax reserves and associated interest due primarily to the closure in August 2012 of the IRS 2004 - 2006 Audit.
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/payables from Mondelēz and PMI in its assets and liabilities. A third quarter 2013 tax benefit of $25 million for Mondelēz tax matters, relating to the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007 - 2009 tax years, was offset by the recording of a corresponding payable to Mondelēz, which was recorded as a decrease to operating income on Altria Group, Inc.’s condensed consolidated statements of earnings for the nine and three months ended September 30, 2013. A third quarter 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. Due to these offsets, the Mondelēz and PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the nine and three months ended September 30, 2013 and 2012.
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, and 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 Mondelēz and 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

- 23-

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

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 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 October 21, 2013, October 25, 2012 and October 24, 2011.

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

Type of Case
Number of Cases
Pending as of
October 21, 2013
Number of Cases
Pending as of
October 25, 2012
Number of Cases
Pending as of
October 24, 2011
Individual Smoking and Health Cases (1)
68
77
79
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
6
7
7
Health Care Cost Recovery Actions (3)
1
1
2
“Lights/Ultra Lights” Class Actions
15
14
18

(1) Does not include 2,572 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 were 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. In May 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase, if any, will consist of individual trials to determine liability and compensatory damages on that claim only. In July 2013, plaintiffs filed a renewed motion for judgment as a matter of law and a motion for a new trial. Also in July 2013, defendants filed a motion for judgment notwithstanding the verdict. On August 13, 2013, the trial court denied all post-trial motions. The trial court has yet to enter final judgment.

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

International Tobacco-Related Cases

As of October 21, 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 October 21, 2013, 2 Engle progeny cases and no 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 56 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 38 of the 56 cases. These 38 cases were tried in Alaska (1), California (6), 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),

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

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 18 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 October 21, 2013, 47 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision. Twenty-four verdicts were returned in favor of plaintiffs and 23 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 Tobacco and Health Litigation (Including Engle Progeny 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 $258 million and interest totaling approximately $142 million as of October 21, 2013. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $5.4 million and interest totaling approximately $500,000.

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

 
$
122

 
$
6

 
$
2

Pre-tax charges for tobacco and health judgments
18

 
4

 
13

 
3

Pre-tax charges for related interest costs
4

 

 
3

 

Payments
(16
)
 
(124
)
 
(16
)
 
(3
)
Accrued liability for tobacco and health judgments at
   end of period
$
6

 
$
2

 
$
6

 
$
2


The accrued liability for 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 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 September 30, 2013, PM USA has posted various forms of security totaling approximately $38 million, the majority of which has been collateralized with cash deposits that are included in other assets on the condensed consolidated balance sheet.


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

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.

Mulholland: On July 30, 2013, a jury in the U.S. District Court for the Southern District of New York returned a verdict in favor of plaintiff and awarded $5.5 million in compensatory damages. On August 15, 2013, after taking into account a prior recovery by the plaintiff against third parties, the court entered final judgment in the amount of $4.9 million. On September 12, 2013, PM USA filed a renewed motion for judgment as a matter of law and plaintiff moved to modify the amount of the judgment.
 
D. Boeken: This litigation has concluded. In August 2011, a California jury returned a verdict in favor of plaintiff, awarding $12.8 million in compensatory damages against PM USA. PM USA’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. In July 2013, the California Court of Appeal affirmed the judgment. PM USA sought a petition for rehearing, which the California Court of Appeal denied on July 30, 2013. In the third quarter of 2013, PM USA recorded a pre-tax provision of $12.8 million related to damages and costs and $2.8 million related to interest. On September 30, 2013, PM USA paid an amount of approximately $15.6 million in satisfaction of the judgment and associated costs and interest.

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.


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

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.

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

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

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 October 21, 2013, approximately 3,200 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 4,400 state court plaintiffs.  Furthermore, as of October 21, 2013, approximately 1,200 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 and 306 Engle progeny cases with prejudice in January 2013 and in June 2013, respectively. In February 2013, plaintiffs appealed the January dismissal to the U.S Court of Appeals for the Eleventh Circuit. 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, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made.

After the remand of B. Brown, the Eleventh Circuit’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 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.  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, R.J. Reynolds appealed the rulings in the Walker and Duke cases to the Eleventh Circuit, which, on September 6, 2013, rejected the due process defense and affirmed the underlying judgments. On October 7, 2013, R.J. Reynolds filed a petition for rehearing or rehearing en banc.

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 1,200 plaintiffs remain stayed. There are currently approximately 270 active cases pending in federal court, including cases that became active on August 1, 2013 following an order from the U.S. District Court for the Middle District of Florida (Jacksonville). In January 2013, the district court ordered the parties to negotiate an aggregate settlement mediation of all pending cases. In April 2013, the mediators reported to the district court that the cases have not been resolved and that the parties have not agreed to a mechanism for settlement. On July 29, 2013, the district court issued an order transferring, for case management purposes, all the Middle District of Florida Engle progeny cases to a judge presiding in the District of Massachusetts.

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

The district court directed that the cases will remain in the Middle District of Florida and that such judge will be designated a judge of that district for purposes of managing the cases.

Florida Bond Cap Statute

In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three state Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.

Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs’ 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. On August 1, 2013, in Calloway, discussed further below, plaintiff filed a motion in the trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional.

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. On August 16, 2013, the court denied the motion without prejudice on the grounds that it was premature to adjudicate such issue.

Engle Progeny Trial Results
 
As of October 21, 2013, 47 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Twenty-four verdicts were returned in favor of plaintiffs. For a further discussion of these cases, see the verdict charts below.

Twenty-three verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious, Szymanski, Gollihue, McCray, Denton, Hancock, Wilder, D. Cohen, LaMotte, J. Campbell, Dombey and Haldeman). 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 sought review of the case in the Florida Supreme Court, which was granted on September 3, 2013. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of October 21, 2013.

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). The first chart lists such cases that are currently pending; the second chart lists such cases that are concluded.


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

Currently-Pending Cases
___________________________________________________________________________________________________
Plaintiff: Rizzuto
Date:    August 2013

Verdict:
On August 23, 2013, a Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group LLC (“Liggett Group”). The jury awarded plaintiff $12,550,000 in compensatory damages.

Post-Trial Developments:
On September 3, 2013, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. On September 26, 2013, the court granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1 million in compensatory damages. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability for the compensatory damages. The court denied all other motions except for defendants’ motion for a juror interview, which was granted.
___________________________________________________________________________________________________
Plaintiff: Skolnick
Date:    June 2013

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

Post-Trial Developments:
In June 2013, defendants filed post-trial motions including a motion to set aside the verdict and a motion for a new trial. The court entered final judgment against defendants in July 2013. The post-trial motions remain pending.
____________________________________________________________________________________________________
Plaintiff: Starr-Blundell
Date:    June 2013

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