10-Q 1 a2014form10-qq32014.htm FORM 10-Q 2014 FORM 10-Q (Q3 2014)


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, 2014
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 20, 2014, there were 1,976,470,062 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.





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-


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,241

 
$
3,175

Receivables
 
106

 
115

Inventories:
 

 

Leaf tobacco
 
838

 
933

Other raw materials
 
190

 
180

Work in process
 
347

 
394

Finished product
 
515

 
372

 
 
1,890

 
1,879

Deferred income taxes
 
1,095

 
1,100

Other current assets
 
330

 
321

Total current assets
 
5,662

 
6,590

Property, plant and equipment, at cost
 
4,851

 
4,817

Less accumulated depreciation
 
2,853

 
2,789

 
 
1,998

 
2,028

Goodwill
 
5,285

 
5,174

Other intangible assets, net
 
12,054

 
12,058

Investment in SABMiller
 
6,640

 
6,455

Finance assets, net
 
1,773

 
1,997

Other assets
 
670

 
557

Total Assets
 
$
34,082

 
$
34,859

 
See notes to condensed consolidated financial statements.



- 3-




Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)
 
 
 
September 30, 2014
 
December 31, 2013
Liabilities
 
 
 
 
Current portion of long-term debt
 
$
1,300

 
$
525

Accounts payable
 
332

 
409

Accrued liabilities:
 

 

Marketing
 
567

 
512

Employment costs
 
141

 
255

Settlement charges
 
3,139

 
3,391

Other
 
857

 
1,007

Dividends payable
 
1,031

 
959

Total current liabilities
 
7,367

 
7,058

Long-term debt
 
12,693

 
13,992

Deferred income taxes
 
6,829

 
6,854

Accrued pension costs
 
215

 
212

Accrued postretirement health care costs
 
2,150

 
2,155

Other liabilities
 
502

 
435

Total liabilities
 
29,756

 
30,706

Contingencies (Note 9)
 

 

Redeemable noncontrolling interest
 
35

 
35

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

 
935

Additional paid-in capital
 
5,723

 
5,714

Earnings reinvested in the business
 
26,066

 
25,168

Accumulated other comprehensive losses
 
(1,454
)
 
(1,378
)
Cost of repurchased stock
(828,948,255 shares at September 30, 2014 and
812,482,035 shares at December 31, 2013)
 
(26,976
)
 
(26,320
)
Total stockholders’ equity attributable to Altria Group, Inc.
 
4,294

 
4,119

Noncontrolling interests
 
(3
)
 
(1
)
Total stockholders’ equity
 
4,291

 
4,118

Total Liabilities and Stockholders’ Equity
 
$
34,082

 
$
34,859

See notes to condensed consolidated financial statements.


- 4-



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,
 
 
2014
 
2013
Net revenues
 
$
18,264

 
$
18,386

Cost of sales
 
5,799

 
5,210

Excise taxes on products
 
4,932

 
5,127

Gross profit
 
7,533

 
8,049

Marketing, administration and research costs
 
1,821

 
1,738

Changes to Mondelēz and PMI tax-related receivables/payables
 
5

 
25

Asset impairment and exit costs
 
(1
)
 
1

Operating income
 
5,708

 
6,285

Interest and other debt expense, net
 
596

 
794

Earnings from equity investment in SABMiller
 
(753
)
 
(738
)
Earnings before income taxes
 
5,865

 
6,229

Provision for income taxes
 
2,031

 
2,182

Net earnings
 
3,834

 
4,047

Net earnings attributable to noncontrolling interests
 

 

Net earnings attributable to Altria Group, Inc.
 
$
3,834

 
$
4,047

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
1.93

 
$
2.02

Dividends declared
 
$
1.48

 
$
1.36


See notes to condensed consolidated financial statements.


- 5-



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,
 
 
2014
 
2013
Net revenues
 
$
6,491

 
$
6,553

Cost of sales
 
2,079

 
1,939

Excise taxes on products
 
1,738

 
1,793

Gross profit
 
2,674

 
2,821

Marketing, administration and research costs
 
663

 
664

Changes to Mondelēz and PMI tax-related receivables/payables
 
5

 
25

Asset impairment and exit costs
 
7

 

Operating income
 
1,999

 
2,132

Interest and other debt expense, net
 
213

 
269

Earnings from equity investment in SABMiller
 
(328
)
 
(255
)
Earnings before income taxes
 
2,114

 
2,118

Provision for income taxes
 
717

 
722

Net earnings
 
1,397

 
1,396

Net earnings attributable to noncontrolling interests
 

 

Net earnings attributable to Altria Group, Inc.
 
$
1,397

 
$
1,396

Per share data:
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
 
$
0.71

 
$
0.70

Dividends declared
 
$
0.52

 
$
0.48


See notes to condensed consolidated financial statements.


- 6-



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

 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
Net earnings
 
$
3,834

 
$
4,047

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 
(1
)
 
(1
)
Benefit plans
 
71

 
159

SABMiller
 
(146
)
 
(341
)
Other comprehensive losses, net of deferred income taxes
 
(76
)
 
(183
)
 
 
 
 
 
Comprehensive earnings
 
3,758

 
3,864

Comprehensive earnings attributable to noncontrolling interests
 

 

Comprehensive earnings attributable to Altria Group, Inc.
 
$
3,758

 
$
3,864

See notes to condensed consolidated financial statements.


- 7-



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

 
 
For the Three Months Ended September 30,
 
 
2014
 
2013
Net earnings
 
$
1,397

 
$
1,396

Other comprehensive earnings (losses), net of deferred income taxes:
 
 
 
 
Currency translation adjustments
 
(2
)
 

Benefit plans
 
22

 
46

SABMiller
 
(245
)
 
61

Other comprehensive (losses) earnings, net of deferred income taxes
 
(225
)
 
107

 
 
 
 
 
Comprehensive earnings
 
1,172

 
1,503

Comprehensive earnings attributable to noncontrolling interests
 

 

Comprehensive earnings attributable to Altria Group, Inc.
 
$
1,172

 
$
1,503


See notes to condensed consolidated financial statements.



- 8-



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Year Ended December 31, 2013 and
the Nine Months Ended September 30, 2014
(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, 2012
 
$
935

 
$
5,688

 
$
24,316

 
$
(2,040
)
 
$
(25,731
)
 
$
2

 
$
3,170

Net earnings (losses) (1)
 

 

 
4,535

 

 

 
(3
)
 
4,532

Other comprehensive earnings, net of deferred income taxes
 

 

 

 
662

 

 

 
662

Stock award activity
 

 
26

 

 

 
11

 

 
37

Cash dividends declared ($1.84 per share)
 

 

 
(3,683
)
 

 

 

 
(3,683
)
Repurchases of common stock
 

 

 

 

 
(600
)
 

 
(600
)
Balances, December 31, 2013
 
935

 
5,714

 
25,168

 
(1,378
)
 
(26,320
)
 
(1
)
 
4,118

Net earnings (losses) (1)
 

 

 
3,834

 

 

 
(2
)
 
3,832

Other comprehensive losses, net of deferred income taxes
 

 

 

 
(76
)
 

 

 
(76
)
Stock award activity
 

 
9

 

 

 
23

 

 
32

Cash dividends declared ($1.48 per share)
 

 

 
(2,936
)
 

 

 

 
(2,936
)
Repurchases of common stock
 

 

 

 

 
(679
)
 

 
(679
)
Balances, September 30, 2014
 
$
935

 
$
5,723

 
$
26,066

 
$
(1,454
)
 
$
(26,976
)
 
$
(3
)
 
$
4,291


(1) 
Net losses attributable to noncontrolling interests for the nine months ended September 30, 2014 and for the year ended December 31, 2013 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, 2014 and December 31, 2013.

See notes to condensed consolidated financial statements.




- 9-



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
                                            
 
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
Cash Provided by (Used in) Operating Activities
 
 
 
 
Net earnings
 
$
3,834

 
$
4,047

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
 
149

 
158

Deferred income tax benefit
 
(36
)
 
(105
)
Earnings from equity investment in SABMiller
 
(753
)
 
(738
)
Dividends from SABMiller
 
344

 
331

Cash effects of changes, net of the effects from acquisition of Green Smoke:
 
 
 
 
Receivables, net
 
10

 
101

Inventories
 
(20
)
 
28

Accounts payable
 
(64
)
 
(139
)
Income taxes
 
17

 
181

Accrued liabilities and other current assets
 
(320
)
 
(103
)
Accrued settlement charges
 
(252
)
 
(569
)
Pension plan contributions
 
(12
)
 
(391
)
Pension provisions and postretirement, net
 
17

 
133

Other
 
146

 
(75
)
Net cash provided by operating activities
 
3,060

 
2,859

See notes to condensed consolidated financial statements.






- 10-



Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
                                            
 
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
Cash Provided by (Used in) Investing Activities
 
 
 
 
Capital expenditures
 
$
(116
)
 
$
(90
)
Acquisition of Green Smoke, net of acquired cash
 
(93
)
 

Proceeds from finance assets
 
190

 
559

Other
 
79

 
16

Net cash provided by investing activities
 
60

 
485

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

 
996

Long-term debt repaid
 
(525
)
 

Repurchases of common stock
 
(679
)
 
(382
)
Dividends paid on common stock
 
(2,864
)
 
(2,652
)
Financing fees and debt issuance costs
 
(1
)
 
(12
)
Other
 
15

 
17

Net cash used in financing activities
 
(4,054
)
 
(2,033
)
Cash and cash equivalents:
 
 
 
 
(Decrease) increase
 
(934
)
 
1,311

Balance at beginning of period
 
3,175

 
2,900

Balance at end of period
 
$
2,241

 
$
4,211

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, 2014, Altria Group, Inc.’s 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 wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary, which is engaged in the manufacture and sale of innovative tobacco products, and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary, which maintains a portfolio of leveraged and direct finance leases. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and consumer engagement services to Altria Group, Inc.’s operating subsidiaries, and Altria Client Services Inc., which provides various support services, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries. 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. At September 30, 2014, 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 equity interests.
        
At September 30, 2014, Altria Group, Inc. also held approximately 27% of the economic and voting interest of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.

Dividends and Share Repurchases

During the third quarter of 2014, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved an 8.3% increase in the quarterly dividend rate to $0.52 per common share versus the previous rate of $0.48 per common share. The current annualized dividend rate is $2.08 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of the Board of Directors.

Altria Group, Inc.’s share repurchase activity was as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions, except per share data)
Total number of shares repurchased
 
17.2

 
9.9

 
6.4

 
4.5

Aggregate cost of shares repurchased
 
$
679

 
$
348

 
$
275

 
$
156

Average price per share of shares repurchased
 
$
39.44

 
$
35.20

 
$
42.87

 
$
34.75


In October 2011, the Board of Directors authorized a $1.0 billion share repurchase program and expanded it to $1.5 billion in October 2012 (as expanded, the “October 2011 share repurchase program”). During the first quarter of 2013, Altria Group, Inc. completed the October 2011 share repurchase program. Under the October 2011 share repurchase 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 $300 million share repurchase program and expanded it to $1.0 billion in August 2013 (as expanded, the “April 2013 share repurchase program”). During the three months ended September 30, 2014, Altria Group, Inc. repurchased 1.3 million shares of its common stock (at an aggregate cost of approximately $53 million, and at an average price of $41.39 per share), thereby completing the April 2013 share repurchase program. Under this program, Altria Group, Inc. repurchased a total of 27.1 million shares of its common stock at an average price of $36.97 per share.


- 12-

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

In July 2014, the Board of Directors authorized a new $1.0 billion share repurchase program (the “July 2014 share repurchase program”). During the three months ended September 30, 2014, Altria Group, Inc. repurchased 5.1 million shares of its common stock (at an aggregate cost of approximately $222 million, and at an average price of $43.24 per share) under the July 2014 share repurchase program. At September 30, 2014, Altria Group, Inc. had approximately $778 million remaining in the July 2014 share repurchase program. The timing of share repurchases under the July 2014 share repurchase program depends upon marketplace conditions and other factors, and 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 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, 2013.

Certain prior-period amounts have been reclassified to conform with the current-period presentation, due primarily to the reclassification of changes in book overdrafts on Altria Group, Inc.’s condensed consolidated statements of cash flows to operating activities. These amounts were previously classified as financing activities.

Note 2. Acquisition of Green Smoke:

In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”) for a total purchase price of up to approximately $130 million, which includes contingent consideration and is subject to post-closing adjustments. The acquisition complements Nu Mark’s capabilities and enhances its competitive position by adding e-vapor experience, broadening product offerings and strengthening supply chain capabilities.

Green Smoke’s financial position and results of operations have been consolidated with Altria Group, Inc. as of April 1, 2014.

Pro forma results, as well as net revenues and net earnings for Green Smoke subsequent to the acquisition, have not been presented because the acquisition of Green Smoke is not material to Altria Group, Inc.’s consolidated results of operations.

The following amounts represent the fair value of identifiable assets acquired and liabilities assumed in the Green Smoke acquisition, and are subject to post-closing adjustments, which are expected to be finalized during the fourth quarter of 2014:
 
(in millions)
Cash and cash equivalents
$
3

Inventory and other current assets
12

Indefinite-lived intangible asset - trademark
10

Definite-lived intangible assets
1

Current liabilities
(8
)
Other assets and liabilities, net
1

Total identifiable net assets
19

Total purchase price
130

Goodwill
$
111


Costs incurred to effect the acquisition, as well as integration costs, are being recognized as expenses in the periods in which the costs are incurred. For the nine and three months ended September 30, 2014, Altria Group, Inc. incurred $23 million and $14 million, respectively, of integration and acquisition-related costs, consisting primarily of contract termination costs,

- 13-

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

transaction costs and inventory adjustments, which were included in Altria Group, Inc.’s condensed consolidated statements of earnings.
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,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Service cost
 
$
51

 
$
65

 
$
17

 
$
22

Interest cost
 
258

 
235

 
86

 
78

Expected return on plan assets
 
(389
)
 
(370
)
 
(129
)
 
(123
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
111

 
203

 
36

 
67

Prior service cost
 
8

 
8

 
3

 
3

Net periodic pension cost
 
$
39

 
$
141

 
$
13

 
$
47


Employer Contributions

Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. Employer contributions of $12 million were made to Altria Group, Inc.’s pension plans during the nine months ended September 30, 2014. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2014 of up to approximately $10 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,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Service cost
 
$
11

 
$
13

 
$
3

 
$
3

Interest cost
 
80

 
74

 
26

 
23

Amortization:
 
 
 
 
 
 
 
 
Net loss
 
17

 
38

 
3

 
10

Prior service credit
 
(32
)
 
(33
)
 
(11
)
 
(11
)
Net postretirement health care costs
 
$
76

 
$
92

 
$
21

 
$
25


On October 27, 2014, the Society of Actuaries released a new set of mortality tables. Altria Group, Inc. will evaluate any impact of these tables to its employee benefit plans.
Note 4. 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,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Net earnings attributable to Altria Group, Inc.
 
$
3,834

 
$
4,047

 
$
1,397

 
$
1,396

Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares
 
(9
)
 
(11
)
 
(3
)
 
(4
)
Earnings for basic and diluted EPS
 
$
3,825

 
$
4,036

 
$
1,394

 
$
1,392

 
 
 
 
 
 
 
 
 
Weighted-average shares for basic and diluted EPS
 
1,981

 
2,001

 
1,976

 
1,998


- 15-

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

Note 5. 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, 2014
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, December 31, 2013
 
$

 
$
(1,273
)
 
$
(105
)
 
$
(1,378
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(1
)
 

 
(280
)
 
(281
)
Deferred income taxes
 

 

 
98

 
98

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

 
(182
)
 
(183
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
116

 
56

 
172

Deferred income taxes
 

 
(45
)
 
(20
)
 
(65
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
71

 
36

 
107

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(1
)
 
71

 
(146
)
(1) 
(76
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2014
 
$
(1
)
 
$
(1,202
)
 
$
(251
)
 
$
(1,454
)

 
 
For the Three Months Ended September 30, 2014
 
 
Currency
Translation
Adjustments
 
Benefit Plans
 
SABMiller
 
Accumulated
Other
Comprehensive
Losses
 
 
(in millions)
Balances, June 30, 2014
 
$
1

 
$
(1,224
)
 
$
(6
)
 
$
(1,229
)
 
 
 
 
 
 
 
 
 
Other comprehensive losses before reclassifications
 
(2
)
 

 
(430
)
 
(432
)
Deferred income taxes
 

 

 
151

 
151

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(2
)
 

 
(279
)
 
(281
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 

 
36

 
53

 
89

Deferred income taxes
 

 
(14
)
 
(19
)
 
(33
)
Amounts reclassified to net earnings, net of deferred income taxes
 

 
22

 
34

 
56

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(2
)
 
22

 
(245
)
(1) 
(225
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2014
 
$
(1
)
 
$
(1,202
)
 
$
(251
)
 
$
(1,454
)


- 16-

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

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

 
$
(2,255
)
 
$
31

 
$
(2,223
)

 
 
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

(1) 
107

 
 
 
 
 
 
 
 
 
Balances, September 30, 2013
 
$
1

 
$
(2,255
)
 
$
31

 
$
(2,223
)

(1) For the nine and three months ended September 30, 2014 and 2013, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments.


- 17-

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


The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:

 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Benefit Plans: (1)
 
 
 
 
 
 
 
 
Net loss
 
$
140

 
$
255

 
$
44

 
$
82

Prior service cost/credit
 
(24
)
 
(25
)
 
(8
)
 
(8
)
 
 
116

 
230

 
36

 
74

 
 
 
 
 
 
 
 
 
SABMiller (2)
 
56

 
2

 
53

 
1

 
 
 
 
 
 
 
 
 
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
172

 
$
232

 
$
89

 
$
75


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

(2) Amounts are included in earnings from equity investment in SABMiller.
Note 6. 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 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 innovative tobacco products businesses are included in all other.

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.

- 18-

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

Segment data were as follows: 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Net revenues:
 
 
 
 
 
 
 
 
Smokeable products
 
$
16,428

 
$
16,448

 
$
5,859

 
$
5,802

Smokeless products
 
1,345

 
1,333

 
466

 
485

Wine
 
428

 
411

 
153

 
148

All other
 
63

 
194

 
13

 
118

Net revenues
 
$
18,264

 
$
18,386

 
$
6,491

 
$
6,553

Earnings before income taxes:
 
 
 
 
 
 
 
 
Operating companies income (loss):
 
 
 
 
 
 
 
 
Smokeable products
 
$
5,160

 
$
5,471

 
$
1,840

 
$
1,825

Smokeless products
 
804

 
769

 
280

 
277

Wine
 
81

 
73

 
31

 
28

All other
 
(143
)
 
185

 
(89
)
 
92

Amortization of intangibles
 
(15
)
 
(15
)
 
(5
)
 
(5
)
General corporate expenses
 
(174
)
 
(173
)
 
(53
)
 
(60
)
Changes to Mondelēz and PMI tax-related receivables/payables
 
(5
)
 
(25
)
 
(5
)
 
(25
)
Operating income
 
5,708

 
6,285

 
1,999

 
2,132

Interest and other debt expense, net
 
(596
)
 
(794
)
 
(213
)
 
(269
)
Earnings from equity investment in SABMiller
 
753

 
738

 
328

 
255

Earnings before income taxes
 
$
5,865

 
$
6,229

 
$
2,114

 
$
2,118


The comparability of operating companies income for the reportable segments was affected by the following items:

Non-Participating Manufacturer (“NPM”) Adjustment Items - For the nine and three months ended September 30, 2014 and 2013, pre-tax income for NPM adjustment items was recorded in Altria Group, Inc.’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Smokeable products segment
 
$
43

 
$
664

 
$

 
$
145

Interest and other debt expense, net
 
47

 

 

 

Total
 
$
90

 
$
664

 
$

 
$
145

These adjustments resulted from the settlement of, and determinations made in connection with, 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 (such settlements and determinations are referred to collectively as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 9. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as reductions to cost of sales, which increased operating companies income in the smokeable products segment.

- 19-

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

Tobacco and Health Litigation Items - For the nine and three months ended September 30, 2014 and 2013, pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’s condensed consolidated statements of earnings as follows:
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Smokeable products segment
 
$
22

 
$
18

 
$
3

 
$
13

General corporate expenses
 
15

 

 

 

Interest and other debt expense, net
 
2

 
4

 
1

 
3

Total
 
$
39

 
$
22

 
$
4

 
$
16

During the second quarter of 2014, Altria Group, Inc. and PM USA recorded an aggregate pre-tax charge of $31 million in marketing, administration and research costs for the estimated costs of implementing the corrective communications remedy in connection with the federal government’s lawsuit against Altria Group, Inc. and PM USA. For further discussion, see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit in Note 9. Contingencies.
Asset Impairment and Exit Costs - During the second quarter of 2014, PM USA sold its Cabarrus, North Carolina manufacturing facility for approximately $66 million in connection with the previously completed manufacturing optimization program associated with PM USA’s closure of the manufacturing facility in 2009. As a result, during the second quarter of 2014, PM USA recorded a pre-tax gain of $10 million.
Note 7. 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, 2014, finance assets, net, of $1,773 million were comprised of investments in finance leases of $1,815 million, reduced by the allowance for losses of $42 million. At December 31, 2013, finance assets, net, of $1,997 million were comprised of investments in finance leases of $2,049 million, reduced by the allowance for losses of $52 million.

PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. PMCC believes that, as of September 30, 2014, the allowance for losses of $42 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 activity in the allowance for losses on finance assets for the nine months ended September 30, 2014 and 2013 was as follows:
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(in millions)
Balance at beginning of the year
 
$
52

 
$
99

Decrease to allowance
 
(10
)
 
(47
)
Balance at September 30
 
$
42

 
$
52


During the nine months ended September 30, 2014 and 2013, PMCC determined that its allowance for losses exceeded the amounts required based on management’s assessment of the credit quality and size of PMCC’s leasing portfolio. As a result, PMCC reduced its allowance for losses by $10 million and $47 million for the nine months ended September 30, 2014 and 2013, respectively. These decreases to the allowance for losses were recorded as reductions to marketing, administration and research costs on Altria Group, Inc.’s condensed consolidated statements of earnings.

All PMCC lessees were current on their lease payment obligations as of September 30, 2014.

- 20-

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

The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at September 30, 2014 and December 31, 2013 was as follows:

 
 
September 30, 2014
 
December 31, 2013
 
 
(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
 
“AAA/Aaa” to “A-/A3”
 
$
437

 
$
464

“BBB+/Baa1” to “BBB-/Baa3”
 
878

 
927

“BB+/Ba1” and Lower
 
500

 
658

Total
 
$
1,815

 
$
2,049


Note 8. Debt:

At September 30, 2014 and December 31, 2013, Altria Group, Inc. had no short-term borrowings.

Effective August 19, 2014, Altria Group, Inc. entered into an extension agreement (the “Extension Agreement”) to amend its $3.0 billion senior unsecured 5-year revolving credit agreement, dated as of August 19, 2013 (the “Credit Agreement”). The Extension Agreement extends the expiration date of the Credit Agreement from August 19, 2018 to August 19, 2019 pursuant to the terms of the Credit Agreement. All other terms and conditions of the Credit Agreement remain in full force and effect. The Credit Agreement contains an additional option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for an additional one-year period.

Any borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 10. Condensed Consolidating Financial Information. At September 30, 2014, credit available to Altria Group, Inc. under the Credit Agreement was $3.0 billion.

Long-term Debt

On September 29, 2014, UST issued a notice of full redemption for its $300 million (aggregate principal amount) 5.75% senior notes due 2018 (“UST Notes”). The redemption date for the UST Notes is October 29, 2014. The UST Notes have been included in the current portion of long-term debt on Altria Group, Inc.’s condensed consolidated balance sheet at September 30, 2014. As a result of the redemption, a pre-tax loss on early extinguishment of debt of approximately $45 million will be recorded in the fourth quarter of 2014.
During the first quarter of 2014, Altria Group, Inc. repaid in full at maturity senior unsecured notes in the aggregate principal amount of $525 million.

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, 2014 and December 31, 2013, was $16.0 billion and $16.1 billion, respectively, as compared with its carrying value of $14.0 billion and $14.5 billion, respectively.
Note 9. 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 competitors or 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

- 21-

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

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 attorneys’ fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states and Puerto Rico 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 Altria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

Altria Group, Inc. and its subsidiaries record provisions in the 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 9. 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.


- 22-

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

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 27, 2014, October 21, 2013 and October 25, 2012.
Type of Case
Number of Cases
Pending as of October 27, 2014
Number of Cases
Pending as of
October 21, 2013
Number of Cases
Pending as of
October 25, 2012
Individual Smoking and Health Cases (1)
67
68
77
Smoking and Health Class Actions and Aggregated Claims Litigation (2)
5
6
7
Health Care Cost Recovery Actions (3)
1
1
1
“Lights/Ultra Lights” Class Actions
13
15
14

(1) Does not include 2,563 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 August 2013, the trial court denied all post-trial motions. The trial court entered final judgment in October 2013 and, in November 2013, plaintiffs filed their notice of appeal to the West Virginia Supreme Court of Appeals.
(3) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.

International Tobacco-Related Cases

As of October 27, 2014, 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 Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.

Tobacco-Related Cases Set for Trial

As of October 27, 2014, 4 Engle progeny cases and no individual smoking and health cases against PM USA are set for trial in 2014. Cases against other companies in the tobacco industry are also scheduled for trial in 2014. Trial dates are subject to change.

Trial Results

Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 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), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. Oral argument of plaintiff’s appeal of this ruling occurred on September 9, 2014. See Types and Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).


- 23-

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

Of the 18 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 14 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, but plaintiff is seeking to reinstate the verdict, which an intermediate appellate court ordered in April 2014. PM USA filed a petition for leave to appeal, which automatically stayed the April 2014 order. On September 24, 2014, the Illinois Supreme Court granted PM USA’s motion for leave to appeal. See “Lights/Ultra Lights” Cases - The Price Case below for a discussion of developments in Price.

As of October 27, 2014, 64 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision. Thirty-two verdicts were returned in favor of plaintiffs and 32 verdicts were returned in favor of PM USA. See Smoking and Health Litigation - Engle Progeny Trial Court Results below for a discussion of these verdicts.

Judgments Paid and Provisions Related to Tobacco and Health Litigation (Including Engle Progeny Litigation)
 
After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments (and related costs and fees) totaling approximately $266 million and interest totaling approximately $144 million as of October 27, 2014. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $13.8 million and interest totaling approximately $2.5 million.

The changes in Altria Group, Inc.’s accrued liability for provisions related to tobacco and health litigation, 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,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Accrued liability for tobacco and health litigation at beginning of period
$
3

 
$

 
$
34

 
$
6

Pre-tax charges for tobacco and health judgments
6

 
18

 
3

 
13

Pre-tax charges for judgment-related interest costs
2

 
4

 
1

 
3

Pre-tax charges related to implementation of corrective communications remedy pursuant to the federal government’s lawsuit
31

 

 

 

Payments
(4
)
 
(16
)
 

 
(16
)
Accrued liability for tobacco and health litigation at end of period
$
38

 
$
6

 
$
38

 
$
6


The accrued liability for tobacco and health litigation, including related interest costs, was included in liabilities on Altria Group, Inc.’s condensed consolidated balance sheets. Pre-tax charges for tobacco and health judgments and corrective communications 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, 2014, PM USA has posted various forms of security totaling approximately $62 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 cases 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 2014 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 Court Results below.

Mulholland: In July 2013, a jury in the U.S. District Court for the Southern District of New York returned a verdict in favor of plaintiff and awarded $5.5 million in compensatory damages against PM USA. In August 2013, after taking into account a prior recovery by the plaintiff against third parties, the court entered final judgment in the amount of $4.9 million. In September 2013, PM USA filed a renewed motion for judgment as a matter of law and plaintiff moved to modify the amount of the judgment. In December 2013, the trial court denied the parties’ post-trial motions. In January 2014, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit, plaintiff cross-appealed and PM USA posted a bond in the amount of $5.5 million. Oral argument is currently scheduled for December 11, 2014.

Schwarz: In March 2002, an Oregon jury awarded $168,500 in compensatory damages and $150 million in punitive damages against PM USA. In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals’ 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. Oral argument at the Oregon Court of Appeals occurred on September 9, 2014.

See Health Care Cost Recovery Litigation - Federal Government’s 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 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.

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

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

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 Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. In October 2007, the United States Supreme Court denied defendants’ 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 would receive no credit at that 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.
    
Engle Progeny Cases

The deadline for filing Engle progeny cases, as required by the Florida Supreme Court’s Engle decision, expired in January 2008. As of October 27, 2014, approximately 3,100 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 4,200 state court plaintiffs.  Furthermore, as of October 27, 2014, approximately 900 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. Most of these federal cases are pending in the U.S.

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

District Court for the Middle District of Florida. Because of a number of factors, including, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates.

In July 2013, the district court issued an order transferring, for case management purposes, all the Middle District of Florida Engle progeny cases to a judge presiding in the District of Massachusetts. The order 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. The U.S. District Court for the Middle District of Florida dismissed a significant number of cases, of which approximately 750 were appealed by plaintiffs to the U.S. Court of Appeals for the Eleventh Circuit. In September 2014, the Eleventh Circuit affirmed those dismissals. All remaining cases pending in the Middle District of Florida have been activated or are scheduled to be activated by May 2015.

Engle Progeny Trial Court Results

As of October 27, 2014, 64 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Thirty-two verdicts were returned in favor of plaintiffs.

Thirty-two verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious, Szymanski, Gollihue, McCray, Denton, Hancock, Wilder, D. Cohen, LaMotte, J. Campbell, Dombey, Haldeman, Jacobson, Blasco, Gonzalez, Reider, Banks, Surico, Davis, Harris and Baum). On July 31, 2014, the jury in Harris returned a verdict indicating that plaintiff was not a member of the Engle class, but also awarded $238,975 against PM USA. Defendants’ motion to enter a defense verdict is pending. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of October 27, 2014. The juries in the Reider and Banks cases returned zero damages verdicts in favor of PM USA. The juries in the Weingart and Hancock cases returned verdicts against PM USA awarding no damages, but the trial court in each case granted an additur. In the Russo case (formerly Frazier), however, 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 in September 2013. Oral argument occurred in April 2014 in the Florida Supreme Court on the question of whether the statute of repose applies in Engle progeny cases.

The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs (including Hancock, where the verdict originally was returned in favor of PM USA). The first chart lists such cases that are pending as of October 27, 2014; the second chart lists such cases that were pending earlier in 2014 but that are now concluded.
Currently-Pending Cases
____________________________________________________________________________________________________
Plaintiff: Kerrivan
Date:     October 2014

Verdict:
On October 20, 2014, a jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA and R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding plaintiff $15.8 million in compensatory damages and allocating 50% of the fault to PM USA and 31% of the fault to R.J. Reynolds. On October 22, 2014, the jury awarded plaintiff $25.3 million in punitive damages and allocated $15.7 million to PM USA.
___________________________________________________________________________________________________
Plaintiff: Lourie
Date:     October 2014

Verdict:
On October 10, 2014, a Hillsborough County jury returned a verdict against PM USA, R.J. Reynolds and Lorillard Tobacco Company (“Lorillard”) awarding plaintiff $1,371,549 in compensatory damages and allocating 27% of the fault to PM USA (an amount of $370,318).

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

____________________________________________________________________________________________________
Plaintiff: Berger
Date:     September 2014

Verdict:
On September 12, 2014, a jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff $6.25 million in compensatory damages. On September 16, 2014, the jury awarded plaintiff $20.76 million in punitive damages.

Post-Trial Developments:
The court entered final judgment against PM USA on September 19, 2014. On October 1, 2014, the court entered an order scheduling post-trial motions and confirming that plaintiff agreed to waive bond for appeal. On October 17, 2014, PM USA filed a motion for a new trial or, in the alternative, remittitur of the jury’s damages awards.
___________________________________________________________________________________________________
Plaintiff: Griffin
Date:    June 2014

Verdict:
In June 2014, a jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA awarding $1,268,402 in compensatory damages and allocating 50% of the fault to PM USA (an amount of $634,201).

Post-Trial Developments:
The court entered final judgment against PM USA in July 2014. On August 14, 2014, PM USA filed a motion to amend the judgment to reduce plaintiff's damages by the amount paid by collateral sources, which the court denied on September 15, 2014. On October 9, 2014, PM USA posted a bond in the amount of $640,543 and, on October 14, 2014, filed a notice of appeal to the U.S. District Court of Appeals for the Eleventh Circuit.
__________________________________________________________________________________________________
Plaintiff: Burkhart
Date:    May 2014

Verdict:
In May 2014, a jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $5 million in compensatory damages and allocating fault among the defendants as follows: 15% to PM USA, 25% to R.J. Reynolds and 10% to Lorillard. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability. The following day, the jury awarded plaintiff $2.5 million in punitive damages, allocating $750,000 to PM USA.

Post-Trial Developments:
In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or remittitur of the damages awards, which the court denied on September 16, 2014. On October 10, 2014, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
___________________________________________________________________________________________________
Plaintiff: Bowden
Date:    March 2014

Verdict:
In March 2014, a Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $5 million in compensatory damages and allocated 30% of the fault to PM USA (an amount of $1.5 million).

Post-Trial Developments:
The court entered final judgment against defendants in March 2014. In April 2014, defendants filed post-trial motions, including motions for a new trial and to set aside the verdict. In May 2014, the court denied defendants’ post-trial motions. In June 2014, defendants filed a notice of appeal to the Florida First District Court of Appeal and PM USA posted a bond in the amount of $1.5 million.

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

___________________________________________________________________________________________________
Plaintiff: Goveia
Date:    February 2014

Verdict:
An Orange County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. In February 2014, the jury awarded $850,000 in compensatory damages and allocated 35% of the fault against each defendant (an amount of $297,500). The jury also awarded $2.25 million in punitive damages against each defendant.

Post-Trial Developments:
In February 2014, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In April 2014, the court denied defendants’ motions and entered final judgment against defendants. In April 2014, defendants filed a notice of appeal to the Florida Fifth District Court of Appeal. In May 2014, PM USA posted a bond in the amount of $2.5 million.
___________________________________________________________________________________________________
Plaintiff: Cuculino
Date:    January 2014

Verdict:
In January 2014, a Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded plaintiff $12.5 million in compensatory damages and allocated 40% of the fault to PM USA (an amount of $5 million).

Post-Trial Developments:
In January 2014, the court entered final judgment against PM USA, and PM USA filed post-trial motions, including motions to set aside the verdict and for a new trial. In March 2014 and April 2014, the court denied PM USA’s post-trial motions. Also in April 2014, PM USA filed a notice of appeal to the Florida Third District Court of Appeal, plaintiff cross-appealed and PM USA posted a bond in the amount of $5 million.
___________________________________________________________________________________________________
Plaintiff: Rizzuto
Date:    August 2013

Verdict:
In August 2013, a Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group LLC (“Liggett Group”). The jury awarded plaintiff $12.55 million in compensatory damages.

Post-Trial Developments:
In September 2013, defendants filed post-trial motions, including a motion to reduce damages. In September 2013, the court granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1 million in compensatory damages. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability for the compensatory damages. The court denied all other motions except for defendants’ motion for a juror interview, which was granted. In October 2013, defendants filed a notice of appeal to the Florida Fifth District Court of Appeal, which ordered resolution of the juror issue prior to appeal. In December 2013, subsequent to the juror interview, the court entered an order that granted no relief with respect to the alleged misconduct of the juror. Plaintiff agreed to waive the bond for the appeal.
___________________________________________________________________________________________________
Plaintiff: Skolnick
Date:    June 2013

Verdict:
In June 2013, a Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $2.555 million in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).

Post-Trial Developments:
In June 2013, defendants and plaintiff filed post-trial motions. The court entered final judgment against defendants in July 2013. In November 2013, the trial court denied plaintiff’s post-trial motion and, in December 2013, denied defendants’ post-

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

trial motions. Defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, and plaintiffs cross-appealed in December 2013. Also in December 2013, PM USA posted a bond in the amount of $766,500.
____________________________________________________________________________________________________
Plaintiff: Starr-Blundell
Date:    June 2013

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

Post-Trial Developments:
In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict or, in the alternative, for a new trial, which was denied in October 2013. In November 2013, final judgment was entered in favor of plaintiff affirming the compensatory damages award. In December 2013, plaintiff filed a notice of appeal to the Florida First District Court of Appeal. Plaintiff agreed to waive the bond for the appeal.
____________________________________________________________________________________________________
Plaintiff: Ruffo
Date:    May 2013

Verdict:
In May 2013, a Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and Lorillard. The jury awarded plaintiff $1.5 million in compensatory damages and allocated 12% of the fault to PM USA (an amount of $180,000).

Post-Trial Developments:
In May 2013, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict, which the trial court denied in October 2013 and entered final judgment in favor of plaintiff. In October 2013, PM USA and Lorillard appealed to the Florida Third District Court of Appeal, and PM USA posted a bond in the amount of $180,000.
____________________________________________________________________________________________________
Plaintiff: Graham
Date:    May 2013

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

Post-Trial Developments:
In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which the trial court denied in September 2013. In October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit, and PM USA posted a bond in the amount of $277,750.
____________________________________________________________________________________________________
Plaintiff: Searcy
Date:    April 2013

Verdict:
In April 2013, a jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $6 million in compensatory damages (allocating 30% of the fault to each defendant) and $10 million in punitive damages against each defendant.

Post-Trial Developments:
In June 2013, the trial court entered final judgment declining defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault and imposing joint and several liability for the compensatory damages. In July 2013, defendants filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court denied all other post-trial motions. Plaintiffs filed a motion to reconsider the

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

district court’s remittitur and, in the alternative, to certify the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied in October 2013. In November 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In December 2013, defendants filed an amended notice of appeal after the district court corrected a clerical error in the final judgment, and PM USA posted a bond in the amount of approximately $2.2 million.
____________________________________________________________________________________________________
Plaintiff: Buchanan
Date:     December 2012        

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

Post-Trial Developments:
In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March 2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group refusing to reduce the compensatory damages award by plaintiff’s comparative fault and holding PM USA and Liggett Group jointly and severally liable for $5.5 million. In April 2013, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in the amount of $2.5 million. In July 2014, the Florida First District Court of Appeal affirmed the judgment, but certified to the Florida Supreme Court the issue of the statute of repose, which is currently before the court in Hess. On August 13, 2014, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. On September 4, 2014, the Florida Supreme Court stayed the case pending the outcome of Hess.
____________________________________________________________________________________________________
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 approximately $110,000, which is subject to the jury’s comparative fault finding.

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

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

Post-Trial Developments:
In May and June 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions and entered final judgment, reducing the total compensatory damages award to $16.1 million but leaving undisturbed the separate punitive damages awards. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in the trial court on the ground that the bond cap statute is unconstitutional, which the court denied.

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

____________________________________________________________________________________________________
Plaintiff: Hallgren
Date:     January 2012        

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

Post-Trial Developments:
The trial court entered final judgment in March 2012. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In October 2013, the Second District Court of Appeal affirmed the judgment. In November 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the case pending the outcome of Russo (presenting the same statute of repose issue as Hess).
____________________________________________________________________________________________________
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