EX-13 7 dex13.htm PAGES 17 TO 108 OF THE 2009 ANNUAL REPORT Pages 17 to 108 of the 2009 Annual Report
Table of Contents

Exhibit 13

Financial Review

 

 

 

Financial Contents   

Selected Financial Data — Five-Year Review

  

page 18

Consolidated Statements of Earnings

  

page 19

Consolidated Balance Sheets

  

page 20

Consolidated Statements of Cash Flows

  

page 22

Consolidated Statements of Stockholders’ Equity

  

page 24

Notes to Consolidated Financial Statements

  

page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

page 81

Report of Independent Registered Public Accounting Firm

  

page 107

Report of Management on Internal Control Over Financial Reporting

  

page 108

 

 

 

Guide To Select Disclosures

For easy reference, areas that may be of interest to investors are highlighted in the index below.

Acquisitions — Note 3

  

page 29  

Asset Impairment, Exit, Implementation and Integration Costs — Note 6

  

page 32

Benefit Plans — Note 18 includes a discussion of pension plans

  

page 43

Contingencies — Note 22 includes a discussion of the litigation environment

  

page 50

Finance Assets, net — Note 9 includes a discussion of leasing activities

  

page 34

Goodwill and Other Intangible Assets, net — Note 5

  

page 31

Long-Term Debt — Note 11

  

page 36

Segment Reporting — Note 17

  

page 42

Stock Plans — Note 13 includes a discussion of stock compensation

  

page 38

 

 

 

17


Table of Contents

Selected Financial Data — Five-Year Review

(in millions of dollars, except per share data)

 

    2009   2008   2007   2006   2005
                     

Summary of Operations:

         

Net revenues

  $   23,556   $   19,356   $   18,664   $   18,790   $   18,452

Cost of sales

    7,990     8,270     7,827     7,387     7,274

Excise taxes on products

    6,732     3,399     3,452     3,617     3,659
                               

Operating income

    5,462     4,882     4,373     4,518     4,104

Interest and other debt expense, net

    1,185     167     205     225     427

Earnings from equity investment in SABMiller

    600     467     510     460     446

Earnings from continuing operations before income taxes

    4,877     4,789     4,678     4,753     4,123

Pre-tax profit margin from continuing operations

    20.7%     24.7%     25.1%     25.3%     22.3%

Provision for income taxes

    1,669     1,699     1,547     1,571     1,574
                               

Earnings from continuing operations

    3,208     3,090     3,131     3,182     2,549

Earnings from discontinued operations, net of income taxes

      1,901     7,006     9,463     8,442

Net earnings

    3,208     4,991     10,137     12,645     10,991
                               

Net earnings attributable to Altria Group, Inc.

    3,206     4,930     9,786     12,022     10,435

Basic EPS    — continuing operations

    1.55     1.49     1.49     1.52     1.23

                    — discontinued operations

      0.88     3.15     4.22     3.80

                    — net earnings attributable to Altria Group, Inc.

    1.55     2.37     4.64     5.74     5.03

Diluted EPS — continuing operations

    1.54     1.48     1.48     1.51     1.22

                    — discontinued operations

      0.88     3.14     4.19     3.77

                    — net earnings attributable to Altria Group, Inc.

    1.54     2.36     4.62     5.70     4.99

Dividends declared per share

    1.32     1.68     3.05     3.32     3.06

Weighted average shares (millions) — Basic

    2,066     2,075     2,101     2,087     2,070

Weighted average shares (millions) — Diluted

    2,071     2,084     2,113     2,101     2,084
                               

Capital expenditures

    273     241     386     399     299

Depreciation

    271     208     232     255     269

Property, plant and equipment, net (consumer products)

    2,684     2,199     2,422     2,343     2,259

Inventories (consumer products)

    1,810     1,069     1,254     1,605     1,821

Total assets

    36,677     27,215     57,746     104,531     107,949

Total long-term debt

    11,185     7,339     2,385     5,195     6,459

Total debt    — consumer products

    11,960     6,974     4,239     4,580     6,462

                    — financial services

      500     500     1,119     2,014
                               

Total stockholders' equity

    4,072     2,828     19,320     43,317     39,848

Common dividends declared as a % of Basic EPS

    85.2%     70.9%     65.7%     57.8%     60.8%

Common dividends declared as a % of Diluted EPS

    85.7%     71.2%     66.0%     58.2%     61.3%

Book value per common share outstanding

    1.96     1.37     9.17     20.66     19.12

Market price per common share — high/low

    20.47-14.50     79.59-14.34     90.50-63.13     86.45-68.36     78.68-60.40
                               

Closing price of common share at year end

    19.63     15.06     75.58     85.82     74.72

Price/earnings ratio at year end — Basic

    13     6     16     15     15

Price/earnings ratio at year end — Diluted

    13     6     16     15     15

Number of common shares outstanding
at year end (millions)

    2,076     2,061     2,108     2,097     2,084

Number of employees

    10,000     10,400     84,000     175,000     199,000
                               

The Selected Financial Data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1. Background and Basis of Presentation to the consolidated financial statements. Certain prior year amounts in the table above have been reclassified to conform with the current year's presentation due to the adoption of the Financial Accounting Standards Board's authoritative guidance which requires (i) transactions between an entity and a noncontrolling interest to be accounted for as equity transactions and (ii) unvested share-based payment awards containing nonforfeitable rights to dividends be included as participating securities in the earnings per share ("EPS") calculation pursuant to the two class method.

 

18


Table of Contents

Consolidated Statements of Earnings

(in millions of dollars, except per share data)

 

for the years ended December 31,    2009        2008        2007  
                          

Net revenues

   $ 23,556         $ 19,356         $ 18,664   

Cost of sales

     7,990           8,270           7,827   

Excise taxes on products

     6,732           3,399           3,452   
                                

Gross profit

     8,834           7,687           7,385   

Marketing, administration and research costs

     2,931           2,753           2,784   

Asset impairment and exit costs

     421           449           442   

Gain on sale of corporate headquarters building

          (404     

Recoveries from airline industry exposure

               (214

Amortization of intangibles

     20           7        
                                

Operating income

     5,462           4,882           4,373   

Interest and other debt expense, net

     1,185           167           205   

Loss on early extinguishment of debt

          393        

Earnings from equity investment in SABMiller

     (600        (467        (510
                                

Earnings from continuing operations before income taxes

     4,877           4,789           4,678   

Provision for income taxes

     1,669           1,699           1,547   
                                

Earnings from continuing operations

     3,208           3,090           3,131   

Earnings from discontinued operations, net of income taxes

          1,901          7,006  
                                

Net earnings

     3,208           4,991           10,137   

Net earnings attributable to noncontrolling interests

     (2        (61 )        (351 )
                                

Net earnings attributable to Altria Group, Inc.

   $ 3,206         $ 4,930         $ 9,786   
                                

Amounts attributable to Altria Group, Inc. stockholders:

            

Earnings from continuing operations

   $ 3,206         $ 3,090         $ 3,131   

Earnings from discontinued operations

          1,840          6,655  
                                

Net earnings attributable to Altria Group, Inc.

   $ 3,206         $ 4,930         $ 9,786   
                                

Per share data:

            

Basic earnings per share:

            

Continuing operations

   $ 1.55         $ 1.49         $ 1.49   

Discontinued operations

          0.88          3.15  
                                

Net earnings attributable to Altria Group, Inc.

   $ 1.55         $ 2.37         $ 4.64   
                                

Diluted earnings per share:

            

Continuing operations

   $ 1.54         $ 1.48         $ 1.48   

Discontinued operations

          0.88           3.14   
                                

Net earnings attributable to Altria Group, Inc.

   $ 1.54         $ 2.36         $ 4.62   
                                

See notes to consolidated financial statements.

 

19


Table of Contents

Consolidated Balance Sheets

(in millions of dollars, except share and per share data)

 

at December 31,    2009      2008
             

Assets

       

Consumer products

       

Cash and cash equivalents

   $ 1,871      $ 7,916

Receivables (less allowances of $3 in 2009 and 2008)

     96        44

Inventories:

       

Leaf tobacco

     993        727

Other raw materials

     157        145

Work in process

     293        9

Finished product

     367        188
                 
     1,810        1,069

Deferred income taxes

     1,336        1,690

Other current assets

     660        357
                 

Total current assets

     5,773        11,076

Property, plant and equipment, at cost:

       

Land and land improvements

     366        174

Buildings and building equipment

     1,909        1,678

Machinery and equipment

     3,649        3,122

Construction in progress

     220        370
                 
     6,144        5,344

Less accumulated depreciation

     3,460        3,145
                 
     2,684        2,199

Goodwill

     5,174        77

Other intangible assets, net

     12,138        3,039

Investment in SABMiller

     4,980        4,261

Other assets

     1,097        1,080
                 

Total consumer products assets

     31,846        21,732

Financial services

       

Finance assets, net

     4,803        5,451

Other assets

     28        32
                 

Total financial services assets

     4,831        5,483
                 

Total Assets

   $ 36,677      $ 27,215
                 

 

See notes to consolidated financial statements.

 

20


Table of Contents

 

at December 31,    2009        2008  
                 

Liabilities

       

Consumer products

       

Current portion of long-term debt

   $ 775         $ 135   

Accounts payable

     494           510   

Accrued liabilities:

       

Marketing

     467           374   

Taxes, except income taxes

     318           98   

Employment costs

     239           248   

Settlement charges

     3,635           3,984   

Other

     1,354           1,128   

Dividends payable

     710           665   
                     

Total current liabilities

     7,992           7,142   

Long-term debt

     11,185           6,839   

Deferred income taxes

     4,383           351   

Accrued pension costs

     1,157           1,393   

Accrued postretirement health care costs

     2,326           2,208   

Other liabilities

     1,248           1,208   
                     

Total consumer products liabilities

     28,291           19,141   

Financial services

       

Debt

          500   

Deferred income taxes

     4,180           4,644   

Other liabilities

     102           102   
                     

Total financial services liabilities

     4,282           5,246   
                     

Total liabilities

     32,573           24,387   

Contingencies (Note 22)

       

Redeemable noncontrolling interest

     32        

Stockholders’ Equity

       

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

     935           935   

Additional paid-in capital

     5,997           6,350   

Earnings reinvested in the business

     22,599           22,131   

Accumulated other comprehensive losses

     (1,561        (2,181

Cost of repurchased stock (729,932,673 shares in 2009
and 744,589,733 shares in 2008)

     (23,901        (24,407
                     

Total stockholders’ equity attributable to Altria Group, Inc.

     4,069           2,828   

Noncontrolling interests

     3        
                     

Total stockholders’ equity

     4,072           2,828   
                     

Total Liabilities and Stockholders’ Equity

   $ 36,677         $ 27,215   
                     

 

21


Table of Contents

Consolidated Statements of Cash Flows

(in millions of dollars)

 

for the years ended December 31,    2009        2008        2007  
                          

Cash Provided by (Used in) Operating Activities

            

Earnings from continuing operations

  — Consumer products                               $ 3,054         $ 3,065         $ 2,910   
  — Financial services      154           25           221   

Earnings from discontinued operations, net of income taxes

          1,901           7,006   
                                

Net earnings

     3,208           4,991           10,137   

Impact of earnings from discontinued operations, net of income taxes

          (1,901        (7,006

Adjustments to reconcile net earnings to operating cash flows:

            

Consumer products

            

Depreciation and amortization

     291           215           232   

Deferred income tax provision

     499           121           101   

Earnings from equity investment in SABMiller

     (600        (467        (510

Dividends from SABMiller

     254           249           224   

Escrow bond for the Engle tobacco case

               1,300   

Asset impairment and exit costs, net of cash paid

     (22        197           333   

Gain on sale of corporate headquarters building

          (404     

Loss on early extinguishment of debt

          393        

Cash effects of changes, net of the effects
from acquired and divested companies:

            

Receivables, net

     (7        (84        162   

Inventories

     51           185           375   

Accounts payable

     (25        (162        (82

Income taxes

     130           (201        (900

Accrued liabilities and other current assets

     218           (27        (247

Accrued settlement charges

     (346        5           434   

Pension plan contributions

     (37        (45        (37

Pension provisions and postretirement, net

     193           192           165   

Other

     232           139           302   

Financial services

            

Deferred income tax benefit

     (456        (259        (320

Allowance for losses

     15           100        

Other

     (155        (22        (83
                                

Net cash provided by operating activities, continuing operations

     3,443           3,215           4,580   

Net cash provided by operating activities, discontinued operations

          1,666           5,736   
                                

Net cash provided by operating activities

     3,443           4,881           10,316   
                                

 

See notes to consolidated financial statements.

 

22


Table of Contents

 

for the years ended December 31,    2009        2008        2007  
                              

Cash Provided by (Used in) Investing Activities

            

Consumer products

            

Capital expenditures

   $ (273      $ (241      $ (386

Acquisition of UST LLC, net of acquired cash

     (10,244          

Proceeds from sale of corporate headquarters building

          525        

Acquisition of John Middleton Co., net of acquired cash

               (2,898

Other

     (31        110           108   

Financial services

            

Investments in finance assets

     (9        (1        (5

Proceeds from finance assets

     793           403           486   
                                

Net cash (used in) provided by investing activities,
continuing operations

     (9,764        796           (2,695

Net cash used in investing activities, discontinued
operations

          (317        (2,560
                                

Net cash (used in) provided by investing activities

     (9,764        479           (5,255
                                

Cash Provided by (Used in) Financing Activities

            

Consumer products

            

Net (repayment) issuance of short-term borrowings

     (205             2   

Long-term debt issued

     4,221           6,738        

Long-term debt repaid

     (375        (4,057        (500

Financial services

            

Debt repaid

     (500             (617

Repurchase of Altria Group, Inc. common stock

          (1,166     

Dividends paid on Altria Group, Inc. common stock

     (2,693        (4,428        (6,652

Issuance of Altria Group, Inc. common stock

     89           89           423   

Kraft Foods Inc. dividends paid to Altria Group, Inc.

               728   

Philip Morris International Inc. dividends paid to Altria Group, Inc.

          3,019           6,560   

Financing fees and debt issuance costs

     (177        (93     

Tender and consent fees related to the early extinguishment of debt

          (371     

Changes in amounts due to/from Philip Morris International Inc.

          (664        (370

Other

     (84        (4        278   
                                

Net cash provided by (used in) financing activities, continuing operations

     276           (937        (148

Net cash used in financing activities, discontinued operations

          (1,648        (3,531
                                

Net cash provided by (used in) financing activities

     276           (2,585        (3,679
                                

Effect of exchange rate changes on cash and cash equivalents:

            

Discontinued operations

          (126        347   
                                

Cash and cash equivalents, continuing operations:

            

(Decrease) increase

     (6,045        3,074           1,737   

Balance at beginning of year

     7,916           4,842           3,105   
                                

Balance at end of year

   $ 1,871         $ 7,916         $ 4,842   
                                

Cash paid, continuing operations:    Interest

  — Consumer products                  $ 904         $ 208         $ 348   
                                    
  — Financial services    $ 38         $ 38         $ 62   
                                    

                    Income taxes

   $ 1,606         $ 1,837         $ 2,241   
                                    

 

23


Table of Contents

Consolidated Statements of Stockholders’ Equity

(in millions of dollars, except per share data)

 

        Attributable to Altria Group, Inc.                      
         

Common

Stock

      

Additional

Paid-in

Capital

        

Earnings

Reinvested in
the Business

        

Accumulated

Other

Comprehensive
Earnings

(Losses)

        

Cost of

Repurchased

Stock

        

Comprehensive

Earnings

        

Non-

controlling
Interests

        

Total
Stockholders’

Equity

 

Balances, January 1, 2007

    $ 935     $ 6,356        $ 59,879        $ (3,638     $ (23,743     $        $ 3,528        $ 43,317   

Comprehensive earnings:

                               

Net earnings

              9,786                  9,786          351          10,137   

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

                               

Currency translation adjustments

                  736              736          46          782   

Change in net loss and prior service cost

                  744              744          6          750   

Change in fair value of derivatives accounted for as hedges

                  (18           (18       (2       (20

Ownership share of SABMiller other comprehensive earnings

                  178              178              178   
                                                                                               

Total other comprehensive earnings

                          1,640          50          1,690   
                                                                                               

Total comprehensive earnings

                          11,426          401          11,827   
                                                                                               

Adoption of FASB authoritative guidance for income taxes

              711                      22          733   

Exercise of stock options and other stock award activity

          528                  289              22          839   

Cash dividends declared ($3.05 per share)

              (6,430                       (6,430

Payments/other related to noncontrolling interests

                              (483       (483

Spin-off of Kraft Foods Inc.

              (29,520       2,109                  (3,072       (30,483
                                                                                               

Balances, December 31, 2007

      935       6,884          34,426          111          (23,454           418          19,320   

Comprehensive earnings:

                               

Net earnings

              4,930                  4,930          61          4,991   

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

                               

Currency translation adjustments

                  233              233          7          240   

Change in net loss and prior service cost

                  (1,385           (1,385           (1,385

Change in fair value of derivatives accounted for as hedges

                  (177           (177           (177

Ownership share of SABMiller other comprehensive losses

                  (308           (308           (308
                                                                                               

Total other comprehensive (losses) earnings

                          (1,637       7          (1,630
                                                                                               

Total comprehensive earnings

                          3,293          68          3,361   
                                                                                               

Exercise of stock options and other stock award activity

          (534               213                  (321

Cash dividends declared ($1.68 per share)

              (3,505                       (3,505

Stock repurchased

                      (1,166               (1,166

Payments/other related to noncontrolling interests

                              (130       (130

Spin-off of Philip Morris International Inc.

              (13,720       (655               (356       (14,731
                                                                                               

Balances, December 31, 2008

      935       6,350          22,131          (2,181       (24,407                    2,828   

Comprehensive earnings:

                               

Net earnings

              3,206                  3,206          1 (a)        3,207 (a) 

Other comprehensive earnings, net of income taxes:

                               

Currency translation adjustments

                  3              3              3   

Change in net loss and prior service cost

                  375              375              375   

Ownership share of SABMiller other comprehensive earnings

                  242              242              242   
                                                                                               

Total other comprehensive earnings

                          620                   620   
                                                                                               

Total comprehensive earnings

                          3,826          1          3,827   
                                                                                               

Exercise of stock options and other stock award activity

          (353               506                  153   

Cash dividends declared ($1.32 per share)

              (2,738                       (2,738

Other

                              2          2   
                                                                                               

Balances, December 31, 2009

    $ 935     $ 5,997        $ 22,599        $ (1,561     $ (23,901         $ 3        $ 4,072   
                                                                                               

(a) Net earnings attributable to noncontrolling interests excludes $1 million related to the redeemable noncontrolling interest which is reported in the mezzanine equity section in the consolidated balance sheet at December 31, 2009.

See notes to consolidated financial statements.

 

24


Table of Contents

Notes to Consolidated Financial Statements

 

Note 1.                                                                                            

Background and Basis of Presentation:

n    Background: At December 31, 2009, 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 products in the United States; UST LLC (“UST”), which through its subsidiaries is engaged in the manufacture and sale of smokeless products and wine; and John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held a 27.3% economic and voting interest in SABMiller plc (“SABMiller”) at December 31, 2009. Altria Group, Inc.’s access to the operating cash flows of its subsidiaries consists principally of cash received from the payment of dividends by its subsidiaries.

UST Acquisition: As discussed in Note 3. Acquisitions, on January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST, whose direct and indirect wholly-owned subsidiaries include U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”). As a result of the acquisition, UST has become an indirect wholly-owned subsidiary of Altria Group, Inc. The UST acquisition was accounted for using new authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2009. In accordance with this guidance, previous acquisitions were not restated.

PMI Spin-Off: On March 28, 2008 (the “PMI Distribution Date”), Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. (“PMI”) to Altria Group, Inc. stockholders of record as of the close of business on March 19, 2008 (the “PMI Record Date”), in a tax-free distribution. Altria Group, Inc. distributed one share of PMI common stock for every share of Altria Group, Inc. common stock outstanding as of the PMI Record Date. Following the PMI Distribution Date, Altria Group, Inc. does not own any shares of PMI stock. Altria Group, Inc. has reflected the results of PMI prior to the PMI Distribution Date as discontinued operations on the consolidated statements of earnings and the consolidated statements of cash flows for the years ended December 31, 2008 and 2007. The distribution resulted in a net decrease to Altria Group, Inc.’s total stockholders’ equity of $14.7 billion on the PMI Distribution Date.

Holders of Altria Group, Inc. stock options were treated similarly to public stockholders and, accordingly, had their stock awards split into two instruments. Holders of Altria Group, Inc. stock options received the following stock options, which, immediately after the spin-off, had an aggregate

intrinsic value equal to the intrinsic value of the pre-spin Altria Group, Inc. options:

n  a new PMI option to acquire the same number of shares of PMI common stock as the number of Altria Group, Inc. options held by such person on the PMI Distribution Date; and

n  an adjusted Altria Group, Inc. option for the same number of shares of Altria Group, Inc. common stock with a reduced exercise price.

As set forth in the Employee Matters Agreement between Altria Group, Inc. and PMI (the “PMI Employee Matters Agreement”), the exercise price of each option was developed to reflect the relative market values of PMI and Altria Group, Inc. shares, by allocating the share price of Altria Group, Inc. common stock before the spin-off ($73.83) to PMI shares ($51.44) and Altria Group, Inc. shares ($22.39) and then multiplying each of these allocated values by the Option Conversion Ratio as defined in the PMI Employee Matters Agreement. The Option Conversion Ratio was equal to the exercise price of the Altria Group, Inc. option, prior to any adjustment for the spin-off, divided by the share price of Altria Group, Inc. common stock before the spin-off ($73.83).

Holders of Altria Group, Inc. restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of restricted or deferred stock of PMI. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by Altria Group, Inc. after the PMI Distribution Date, received additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the PMI Distribution Date, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award.

To the extent that employees of Altria Group, Inc. after the PMI Distribution Date received PMI stock options, Altria Group, Inc. reimbursed PMI in cash for the Black-Scholes fair value of the stock options received. To the extent that PMI employees held Altria Group, Inc. stock options, PMI reimbursed Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options. To the extent that employees of Altria Group, Inc. received PMI deferred stock, Altria Group, Inc. paid to PMI the fair value of the PMI deferred stock less the value of projected forfeitures. To the extent that PMI employees held Altria Group, Inc. restricted stock or deferred stock, PMI reimbursed Altria Group, Inc. in cash for the fair value of the restricted or deferred stock less the value of projected forfeitures and any amounts previously charged to PMI for the restricted or deferred stock. Based upon the number of


 

25


Table of Contents

Altria Group, Inc. stock awards outstanding at the PMI Distribution Date, the net amount of these reimbursements resulted in a payment of $449 million from Altria Group, Inc. to PMI. The reimbursement to PMI is reflected as a decrease to the additional paid-in capital of Altria Group, Inc. on the December 31, 2008 consolidated balance sheet.

In connection with the spin-off, PMI paid to Altria Group, Inc. $4.0 billion in special dividends in addition to its normal dividends to Altria Group, Inc. PMI paid $3.1 billion of these special dividends in 2007 and paid the additional $900 million in the first quarter of 2008.

Prior to the PMI spin-off, PMI was included in the Altria Group, Inc. consolidated federal income tax return, and PMI’s federal income tax contingencies were recorded as liabilities on the balance sheet of Altria Group, Inc. Altria Group, Inc. reimbursed PMI in cash for these liabilities. See Note 16. Income Taxes for a discussion of the Tax Sharing Agreement between Altria Group, Inc. and PMI that is currently in effect.

Prior to the PMI spin-off, certain employees of PMI participated in the U.S. benefit plans offered by Altria Group, Inc. The benefits previously provided by Altria Group, Inc. are now provided by PMI. As a result, new plans were established by PMI, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities were transferred to the PMI plans. Altria Group, Inc. paid PMI in cash for these transfers.

A subsidiary of Altria Group, Inc. previously provided PMI with certain corporate services at cost plus a management fee. After the PMI Distribution Date, PMI independently undertook most of these activities. All remaining limited services provided to PMI ceased in 2008. The settlement of the intercompany accounts as of the PMI Distribution Date (including amounts related to stock awards, tax contingencies and benefit plans discussed above) resulted in a net payment from Altria Group, Inc. to PMI of $332 million. In March 2008, Altria Group, Inc. made an estimated payment of $427 million to PMI, thereby resulting in PMI reimbursing $95 million to Altria Group, Inc. in the second quarter of 2008.

Kraft Spin-Off: On March 30, 2007 (the “Kraft Distribution Date”), Altria Group, Inc. distributed all of its remaining interest in Kraft Foods Inc. (“Kraft”) on a pro-rata basis to Altria Group, Inc. stockholders of record as of the close of business on March 16, 2007 (the “Kraft Record Date”) in a tax-free distribution. The distribution ratio was 0.692024 of a share of Kraft for each share of Altria Group, Inc. common stock outstanding. Altria Group, Inc. stockholders received cash in lieu of fractional shares of Kraft. Following the Kraft Distribution Date, Altria Group, Inc. does not own any shares of Kraft. Altria Group, Inc. has reflected the results of Kraft prior to the Kraft Distribution Date as discontinued operations on the consolidated statements of earnings and the consolidated statements of cash flows for the year ended December 31, 2007. The distribution resulted in a net decrease to Altria Group, Inc.’s total stockholders’ equity of $30.5 billion on the Kraft Distribution Date.

Holders of Altria Group, Inc. stock options were treated similarly to public stockholders and, accordingly, had their

stock awards split into two instruments. Holders of Altria Group, Inc. stock options received the following stock options, which, immediately after the spin-off, had an aggregate intrinsic value equal to the intrinsic value of the pre-spin Altria Group, Inc. options:

n  a new Kraft option to acquire the number of shares of Kraft Class A common stock equal to the product of (a) the number of Altria Group, Inc. options held by such person on the Kraft Distribution Date and (b) the distribution ratio of 0.692024 mentioned above; and

n  an adjusted Altria Group, Inc. option for the same number of shares of Altria Group, Inc. common stock with a reduced exercise price.

The new Kraft option has an exercise price equal to the Kraft market price at the time of the distribution ($31.66) multiplied by the Option Conversion Ratio, which represents the exercise price of the original Altria Group, Inc. option divided by the Altria Group, Inc. market price immediately before the distribution ($87.81). The reduced exercise price of the adjusted Altria Group, Inc. option is determined by multiplying the Altria Group, Inc. market price immediately following the distribution ($65.90) by the Option Conversion Ratio.

Holders of Altria Group, Inc. restricted stock or deferred stock awarded prior to January 31, 2007, retained their existing award and received restricted stock or deferred stock of Kraft Class A common stock. The amount of Kraft restricted stock or deferred stock awarded to such holders was calculated using the same formula set forth above with respect to new Kraft options. All of the restricted stock and deferred stock will vest at the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. deferred stock awarded on January 31, 2007, did not receive restricted stock or deferred stock of Kraft. Rather, they received additional deferred shares of Altria Group, Inc. to preserve the intrinsic value of the original award.

To the extent that employees of Altria Group, Inc. after the Kraft Distribution Date received Kraft stock options, Altria Group, Inc. reimbursed Kraft in cash for the Black-Scholes fair value of the stock options received. To the extent that Kraft employees held Altria Group, Inc. stock options, Kraft reimbursed Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options. To the extent that holders of Altria Group, Inc. deferred stock received Kraft deferred stock, Altria Group, Inc. paid to Kraft the fair value of the Kraft deferred stock less the value of projected forfeitures. Based upon the number of Altria Group, Inc. stock awards outstanding at the Kraft Distribution Date, the net amount of these reimbursements resulted in a payment of $179 million from Kraft to Altria Group, Inc. in April 2007. The reimbursement from Kraft is reflected as an increase to the additional paid-in capital of Altria Group, Inc. on the December 31, 2007 consolidated balance sheet.

Prior to the Kraft spin-off, Kraft was included in the Altria Group, Inc. consolidated federal income tax return, and Kraft’s federal income tax contingencies were recorded as liabilities on the balance sheet of Altria Group, Inc. Altria Group, Inc.


 

26


Table of Contents

reimbursed Kraft in cash for these liabilities. See Note 16. Income Taxes for a discussion of the Tax Sharing Agreement between Altria Group, Inc. and Kraft that is currently in effect.

A subsidiary of Altria Group, Inc. previously provided Kraft with certain services at cost plus a management fee. After the Kraft Distribution Date, Kraft independently undertook most of these activities, and any remaining limited services provided to Kraft ceased during 2007. All intercompany accounts were settled in cash within 30 days of the Kraft Distribution Date. The settlement of the intercompany accounts as of the Kraft Distribution Date (including amounts related to stock awards and tax contingencies discussed above) resulted in a net payment from Kraft to Altria Group, Inc. of $85 million in April 2007.

Dividends and Share Repurchases: Following the Kraft spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and Kraft shares would receive initially, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the Kraft spin-off. Similarly, following the PMI spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and PMI shares would receive initially, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the PMI spin-off.

During the third quarter of 2009, Altria Group, Inc.’s Board of Directors approved a 6.3% increase in the quarterly dividend to $0.34 per common share. The present annualized dividend rate is $1.36 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of Altria Group, Inc.’s Board of Directors.

During the second quarter of 2008, Altria Group, Inc. repurchased 53.5 million shares of its common stock at an aggregate cost of approximately $1.2 billion, or an average price of $21.81 per share. In September 2009, Altria Group, Inc. suspended indefinitely its $4.0 billion (2008 to 2010) share repurchase program, which is at the discretion of its Board of Directors.

n    Basis of presentation: The consolidated financial statements include Altria Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc. exercises significant influence (20%-50% ownership interest) are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, lives and valuation assumptions of goodwill and other intangible assets, marketing programs, income taxes, and the allowance for loan losses and estimated residual values of finance leases. Actual results could differ from those estimates. As part of the preparation of the consolidated financial

statements, Altria Group, Inc. performed an evaluation of subsequent events occurring after the consolidated balance sheet date of December 31, 2009, through January 28, 2010, the date the consolidated financial statements were issued. Additionally, Altria Group, Inc. has updated this evaluation of subsequent events from January 28, 2010, through February 24, 2010 (unaudited).

Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices.

On January 1, 2009, Altria Group, Inc. adopted new FASB authoritative guidance, which changed the reporting for certain minority interests by reporting these as noncontrolling interests within equity. Moreover, any transactions between an entity and a noncontrolling interest are accounted for as equity transactions. As a result, Altria Group, Inc. (i) adjusted earnings from discontinued operations to include $61 million and $351 million of net earnings attributable to noncontrolling interests for the years ended December 31, 2008 and 2007, respectively; (ii) disclosed the net earnings attributable to the noncontrolling interests and net earnings attributable to Altria Group, Inc. on the consolidated statements of earnings and (iii) reclassified to stockholders’ equity $418 million and $3,528 million of noncontrolling interests reported at December 31, 2007 and 2006, respectively, as long-term liabilities of discontinued operations.

Beginning with the first quarter of 2009, Altria Group, Inc. revised its reportable segments to reflect the change in the way in which Altria Group, Inc.’s chief operating decision maker reviews the business as a result of the acquisition of UST. Altria Group, Inc.’s segments, which are reflected in these financial statements, are cigarettes, smokeless products, cigars, wine and financial services.

Certain prior year amounts have been reclassified to conform with the current year’s presentation, due primarily to the adoption of the FASB’s authoritative guidance that requires transactions between an entity and a noncontrolling interest to be accounted for as equity transactions.

Note 2.                                                                                            

Summary of Significant Accounting Policies:

n    Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

n    Depreciation, amortization and intangible asset valuation: Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 15 years, and buildings and building improvements over periods up to 50 years.

Definite-lived intangible assets are amortized over their estimated useful lives. Altria Group, Inc. is required to conduct an annual review of goodwill and indefinite-lived intangible assets for potential impairment. Goodwill impair -


 

27


Table of Contents

ment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During 2009, 2008 and 2007, Altria Group, Inc. completed its annual review of goodwill and indefinite-lived intangible assets, and no charges resulted from these reviews.

n    Environmental costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment. Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change.

While it is not possible to quantify with certainty the potential impact of actions regarding environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future, in the opinion of management, environmental remediation and compliance costs are not expected to have a material adverse effect on Altria Group, Inc.’s consolidated financial position, results of operations or cash flows.

n    Finance leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. Investments in leveraged leases are stated net of related nonrecourse debt obligations.

Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant pre-tax rates of return on the net investment balances.

Finance leases include unguaranteed residual values that represent PMCC’s estimates at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC’s management, which includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values. Such reviews resulted in no adjustments in 2009 and 2008. A decrease of $11 million to PMCC’s net revenues and results of operations was recorded in 2007.

n     Foreign currency translation: Altria Group, Inc. translated the results of operations of its foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts were translated using exchange rates at the end of each period. Currency translation adjustments were recorded as a component of stockholders’ equity. The accumulated currency translation adjustments related to Kraft and PMI were recognized and recorded in connection with the Kraft and PMI distributions. Transaction gains and losses

were recorded in the consolidated statements of earnings and were not significant for any of the periods presented.

n    Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 22. Contingencies for a further discussion of guarantees.

n    Hedging instruments: Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated other comprehensive earnings (losses) or in earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive earnings (losses) are reclassified to the consolidated statements of earnings in the periods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified in the same manner as the affected hedged item in the consolidated statements of cash flows. At December 31, 2009, Altria Group, Inc. had no derivative financial instruments remaining.

n    Impairment of long-lived assets: Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

n     Income taxes: Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

On January 1, 2007, Altria Group, Inc. adopted the provisions of the FASB authoritative guidance which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As a result of the January 1, 2007 adoption, Altria Group, Inc. lowered its liability for unrecognized tax benefits by $1,021 million. This resulted in an increase to stockholders’ equity of $857 million


 

28


Table of Contents

($835 million, net of noncontrolling interest), a reduction of Kraft’s goodwill of $85 million and a reduction of federal deferred tax benefits of $79 million.

On January 1, 2007, Altria Group, Inc. adopted the provisions of the FASB authoritative guidance requiring the revenue recognition calculation to be reevaluated if there is a revision to the projected timing of income tax cash flows generated by a leveraged lease. The adoption of this guidance by Altria Group, Inc. resulted in a reduction to stockholders’ equity of $124 million as of January 1, 2007.

n    Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to cost substantially all tobacco inventories. The cost of the remaining inventories is determined using the first-in, first-out (“FIFO”) and average cost methods. It is a generally recognized industry practice to classify leaf tobacco and wine inventories as current assets although part of such inventory, because of the duration of the curing and aging process, ordinarily would not be utilized within one year.

n    Marketing costs: The consumer products businesses promote their products with advertising, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. Advertising costs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates. For interim reporting purposes, advertising and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.

n    Revenue recognition: The consumer products businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment or delivery of goods when title and risk of loss pass to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued liabilities until revenue is recognized. Altria Group, Inc.’s consumer products businesses also include excise taxes billed to customers in revenues. Shipping and handling costs are classified as part of cost of sales.

n    Software costs: Altria Group, Inc. capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in

property, plant and equipment on the consolidated balance sheets and are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed five years.

n     Stock-based compensation: Altria Group, Inc. measures compensation cost for all stock-based awards at fair value on date of grant and recognizes compensation expense over the service periods for awards expected to vest. The fair value of restricted stock and deferred stock is determined based on the number of shares granted and the market value at date of grant. The fair value of stock options is determined using a modified Black-Scholes methodology.

Note 3.                                                                                            

Acquisitions:

n    UST Acquisition: On January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST, in exchange for $69.50 in cash for each outstanding share of UST common stock. Additionally, each employee stock option of UST that was outstanding and unexercised was cancelled in exchange for the right to receive the difference between the exercise price for such option and $69.50. The transaction was valued at approximately $11.7 billion, which represented a purchase price of $10.4 billion and included the assumption of approximately $1.3 billion of debt, which together with acquisition-related costs and payments of approximately $0.6 billion (consisting primarily of structuring and arrangement fees, the funding of UST’s non-qualified pension plans, investment banking fees and the early retirement of UST’s revolving credit facility), represent a total cash outlay of approximately $11 billion.

In connection with the acquisition of UST, Altria Group, Inc. had in place at December 31, 2008, a 364-day term bridge loan facility (“Bridge Facility”). On January 6, 2009, Altria Group, Inc. borrowed the entire available amount of $4.3 billion under the Bridge Facility, which was used along with available cash of $6.7 billion, representing the net proceeds from the issuances of senior unsecured long-term notes in November and December 2008, to fund the acquisition of UST. As discussed in Note 11. Long-Term Debt, in February 2009, Altria Group, Inc. issued $4.2 billion of senior unsecured long-term notes. The net proceeds from the issuance of these notes, along with available cash, were used to prepay all of the outstanding borrowings under the Bridge Facility. Upon such prepayment, the Bridge Facility was terminated.


 

29


Table of Contents

UST’s financial position and results of operations have been consolidated with Altria Group, Inc. as of January 6, 2009. The following unaudited supplemental pro forma data present consolidated information of Altria Group, Inc. as if the acquisition of UST had been consummated on January 1, 2008. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition and related borrowings had been consummated on January 1, 2008.

 

(in millions, except per share data)  

Pro Forma

Year Ended
December 31, 2008

Net revenues

  $ 21,339

Earnings from continuing operations

  $ 2,677

Net earnings

  $ 4,578

Net earnings attributable to Altria Group, Inc.

  $ 4,515

Per share data:

 

Basic earnings per share:

 

Continuing operations

  $ 1.29

Discontinued operations

    0.88
       

Net earnings attributable to Altria Group, Inc.

  $ 2.17
       

Diluted earnings per share:

 

Continuing operations

  $ 1.28

Discontinued operations

    0.88
       

Net earnings attributable to Altria Group, Inc.

  $ 2.16
       

Pro forma results of Altria Group, Inc., for the year ended December 31, 2009 assuming the acquisition had occurred on January 1, 2009, would not be materially different from the actual results reported for the year ended December 31, 2009.

The pro forma amounts reflect the application of the following adjustments as if the acquisition had occurred on January 1, 2008:

n   additional depreciation and amortization expense that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2008;

n   additional interest expense and structuring and arrangement fees that would have been incurred assuming all borrowing arrangements used to fund the acquisition had been in place as of January 1, 2008;

n   restructuring costs incurred to restructure and integrate UST operations;

n  transaction costs associated with the acquisition; and

n   increased cost of sales, reflecting the fair value adjustment of UST’s subsidiaries’ inventory sold during the year.

During the fourth quarter of 2009, the allocation of purchase price relating to the acquisition of UST was completed.

The following amounts represent the fair value of identifiable assets acquired and liabilities assumed in the UST acquisition:

 

(in millions)        

Cash and cash equivalents

   $ 163   

Inventories

     796   

Property, plant and equipment

     688   

Other intangible assets:

  

Indefinite-lived trademarks

     9,059   

Definite-lived (20-year life)

     60   

Short-term borrowings

     (205

Current portion of long-term debt

     (240

Long-term debt

     (900

Deferred income taxes

     (3,535

Other assets and liabilities, net

     (540

Noncontrolling interests

     (36
          

Total identifiable net assets

     5,310   

Total purchase price

     10,407   
          

Goodwill

   $ 5,097   
          

The excess of the purchase price paid by Altria Group, Inc. over the fair value of identifiable net assets acquired in the acquisition of UST primarily reflects the value of adding USSTC and its subsidiaries to Altria Group, Inc.’s family of tobacco operating companies (PM USA and Middleton), with leading brands in cigarettes, smokeless products and machine-made large cigars. The acquisition is anticipated to generate approximately $300 million in annual synergies by 2011, driven primarily by reduced selling, general and administrative, and corporate expenses. None of the goodwill or other intangible assets will be deductible for tax purposes.

The assets acquired, liabilities assumed and noncontrolling interests of UST have been measured as of the acquisition date. In valuing trademarks, Altria Group, Inc. estimated the fair value using a discounted cash flow methodology. No material contingent liabilities were recognized as of the acquisition date because the acquisition date fair value of such contingencies cannot be determined, and the contingencies are not both probable and reasonably estimable. Additionally, costs incurred to effect the acquisition, as well as costs to restructure UST, are being recognized as expenses in the periods in which the costs are incurred. For the years ended December 31, 2009 and 2008, Altria Group, Inc. incurred acquisition-related charges, as well as restructuring and integration costs, consisting of the following:

 

     For the Years Ended    
December 31,    
(in millions)    2009    2008     

Asset impairment and exit costs

   $ 202    $  

Integration costs

     49     

Inventory adjustments

     36     

Structuring and arrangement fees

     91      58  

Transaction costs

     60     
                   

Total

   $ 438    $ 58  
                   

 

30


Table of Contents

In 2010, Altria Group, Inc. expects to incur approximately $50 million of restructuring and integration costs related to the acquisition of UST.

n    Middleton Acquisition: On December 11, 2007, Altria Group, Inc. acquired all of the outstanding stock of Middleton, a manufacturer of machine-made large cigars and pipe tobacco, for $2.9 billion in cash. The acquisition was financed with existing cash. Middleton’s balance sheet was consolidated with Altria Group, Inc.’s as of December 31, 2007. Earnings from December 12, 2007 to December 31, 2007, the amounts of which were insignificant, were included in Altria Group, Inc.’s consolidated operating results for the year ended December 31, 2007.

During the first quarter of 2008, the allocation of purchase price relating to the acquisition of Middleton was completed. Assets purchased consist primarily of indefinite-lived intangible assets related to acquired brands of $2.6 billion, definite-lived intangible assets of $0.1 billion, goodwill of $0.1 billion and other assets of $0.1 billion, partially offset by accrued liabilities assumed in the acquisition.

Note 4.                                                                                            

Divestitures:

As discussed in Note 1. Background and Basis of Presentation, on March 28, 2008, Altria Group, Inc. distributed all of its interest in PMI to Altria Group, Inc. stockholders in a tax-free distribution, and on March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution.

Summarized financial information for discontinued operations for the years ended December 31, 2008 and 2007 were as follows:

 

            2008  
(in millions)        PMI  

Net revenues

    $ 15,376   
             

Earnings before income taxes

    $ 2,701   

Provision for income taxes

      (800
             

Earnings from discontinued operations, net of income taxes

      1,901   

Net earnings attributable to noncontrolling interests

      (61
             

Earnings from discontinued operations

    $ 1,840   
             

 

        2007  
(in millions)        PMI     Kraft     Total  

Net revenues

    $ 55,137      $ 8,586      $ 63,723   
                             

Earnings before income taxes

    $ 8,852      $ 1,059      $ 9,911   

Provision for income taxes

      (2,549     (356     (2,905
                             

Earnings from discontinued operations, net of income taxes

      6,303        703        7,006   

Net earnings attributable to noncontrolling interests

      (273     (78     (351
                             

Earnings from discontinued operations

    $ 6,030      $ 625      $ 6,655   
                             

 

Note 5.                                                                                            

Goodwill and Other Intangible Assets, net:

Goodwill and other intangible assets, net, by segment were as follows:

 

    Goodwill       Other Intangible Assets, net
(in millions)  

December 31,

2009

 

December 31,

2008

      

December 31,

2009

 

December 31,

2008

Cigarettes

  $   $     $ 272   $ 283

Smokeless products

    5,023         8,845  

Cigars

    77     77       2,750     2,756

Wine

    74         271  
                             

Total

  $ 5,174   $ 77     $ 12,138   $ 3,039
                             

Intangible assets were as follows:

 

    December 31, 2009       December 31, 2008
(in millions)  

Gross

Carrying
Amount

  Accumulated
Amortization
       Gross
Carrying
Amount
  Accumulated
Amortization

Indefinite-lived intangible assets

  $ 11,701       $ 2,642  

Definite-lived intangible assets

    464   $ 27       404   $ 7
                             

Total intangible assets

  $ 12,165   $ 27     $ 3,046   $ 7
                             

Indefinite-lived intangible assets consist substantially of trademarks from the January 2009 acquisition of UST ($9.1 billion) and the December 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets consist primarily of customer relationships and certain cigarette trademarks. Pre-tax amortization expense for definite-lived intangible assets during the years ended December 31, 2009 and 2008, was $20 million and $7 million, respectively. There was no pre-tax amortization expense for intangible assets during the year ended December 31, 2007. Annual amortization expense for each of the next five years is estimated to be approximately $20 million, assuming no additional transactions occur that require the amortization of intangible assets.

Goodwill relates to the January 2009 acquisition of UST and the December 2007 acquisition of Middleton. The change in goodwill and gross carrying amount of other intangible assets is as follows:

 

    2009       2008  
(in millions)   Goodwill  

Other

Intangible

Assets

       Goodwill  

Other

Intangible

Assets

 

Balance at January 1

  $ 77   $ 3,046     $ 76   $ 3,049   

Changes due to:

         

Acquisition of UST

    5,097     9,119      

Purchase price revisions

          1     (3
                               

Balance at December 31

  $ 5,174   $ 12,165     $ 77   $ 3,046   
                               

 

31


Table of Contents

The changes in goodwill and other intangible assets during 2008 resulted from revisions to the purchase price allocation as appraisals for the acquisition of Middleton were

finalized during the first quarter of 2008. See Note 3. Acquisitions for a discussion of the UST and Middleton acquisitions.


 

Note 6.                                                                                            

Asset Impairment, Exit, Implementation and Integration Costs:

Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2009, 2008 and 2007 consisted of the following:

 

       For the Year Ended December 31, 2009    
(in millions)  

Asset Impairment

and Exit Costs

 

Implementation

Costs

 

Integration

Costs

  Total     

Cigarettes

  $ 115   $ 139   $   $ 254  

Smokeless products

    193       43     236  

Cigars

        9     9  

Wine

    3       6     9  

Financial services

    19         19  

General corporate

    91         91  
                             

Total

  $ 421   $ 139   $ 58   $ 618  
                             
    For the Year Ended December 31, 2008
(in millions)   Exit Costs  

Implementation

Costs

 

Integration

Costs

  Total     

Cigarettes

  $ 97   $ 69   $   $ 166  

Cigars

        18     18  

Financial services

    2         2  

General corporate

    350         350  
                             

Total

  $ 449   $ 69   $ 18   $ 536  
                             
    For the Year Ended December 31, 2007
(in millions)  

Asset Impairment

and Exit Costs

 

Implementation

Costs

 

Integration

Costs

  Total     

Cigarettes

  $ 344   $ 27   $   $ 371  

General corporate

    98         98  
                             

Total

  $ 442   $ 27   $   $ 469  
                             

 

The movement in the severance liability and details of asset impairment and exit costs for Altria Group, Inc. for the years ended December 31, 2009 and 2008 was as follows:

 

(in millions)         Severance     Other     Total  

Severance liability balance, January 1, 2008

     $ 279      $      $ 279   

Charges, net

       216        233        449   

Cash spent

       (149     (103     (252

Liability recorded in pension and postretirement plans, and other

       2        (130     (128
                              

Severance liability balance, December 31, 2008

       348               348   

Charges

       185        236        421   

Cash spent

       (307     (119     (426

Liability recorded in pension and postretirement plans, and other

       2        (117     (115
                              

Severance liability balance, December 31, 2009

     $ 228      $      $ 228   
                              

 

Other charges in the table above for 2009 and 2008 primarily represent other employee termination benefits including pension and postretirement, as well as PMI spin-off fees in 2008. Charges, net, in the table above include the reversal of $14 million of severance associated with the Manufacturing Optimization Program in 2008.

Integration and Restructuring Program: Altria Group, Inc. has largely completed a restructuring program that commenced in December 2008, and was expanded in August 2009. Pursuant to this program, Altria Group, Inc. has restructured its corporate, manufacturing, and sales and marketing services functions as it completes the integration of UST into its operations and continues to focus on optimizing company-wide cost structures in light of ongoing declines in U.S. cigarette volumes. As part of this restructuring, Altria Group, Inc. created two new service organizations during the second quarter of 2009. Altria Sales & Distribution Inc. serves as agent for Altria Group, Inc.’s three tobacco operating companies in their interactions with tobacco wholesalers and retailers. Altria Consumer Engagement Services Inc. executes


 

32


Table of Contents

one-to-one adult consumer programs for the three tobacco operating companies.

As a result of this restructuring program, Altria Group, Inc. incurred aggregate pre-tax charges of $328 million in 2009 and expects to incur approximately $50 million in 2010. The 2009 charges are primarily related to employee separation costs, lease exit costs, relocation of employees, asset impairments and other costs related to the integration of UST operations. Substantially all of these charges will result in cash expenditures. The $328 million in pre-tax charges for this program was reported in the cigarettes segment, smokeless products segment, wine segment, financial services

segment and Altria Group, Inc. as pre-tax charges of $18 million, $236 million, $9 million, $4 million and $61 million, respectively. These charges included total exit costs of $250 million, integration costs of $49 million and asset impairment charges of $29 million. For the year ended December 31, 2008, the cigarettes segment, financial services segment and Altria Group, Inc. reported pre-tax charges for this program of $48 million, $2 million and $76 million, respectively, for total exit costs of $126 million.

The pre-tax integration costs were included in marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings for the year ended December 31, 2009. Total pre-tax charges incurred since the inception of the program were $454 million. Cash payments related to the program of $221 million were made during the year ended December 31, 2009, for a total of $221 million since inception.

Headquarters Relocation: During 2008, in connection with the spin-off of PMI, Altria Group, Inc. restructured its corporate headquarters, which included the relocation of Altria Group, Inc.’s corporate headquarters functions to Richmond, Virginia. During the years ended December 31, 2009 and 2008, Altria Group, Inc. incurred pre-tax charges of $30 million and $219 million, respectively, for this program. Total pre-tax charges incurred since the inception of this restructuring were $249 million as of December 31, 2009. These charges consist primarily of employee separation costs. Substantially all of these charges will result in cash expenditures. Cash payments related to this restructuring of $65 million and $136 million were made during the years ended December 31, 2009 and 2008, respectively, for a total of $201 million since inception.

For the years ended December 31, 2008 and 2007, general corporate exit costs also included $55 million and $81 million, respectively, of investment banking and legal fees associated with the PMI and Kraft spin-offs, as well as $17 million for the streamlining of various corporate functions in 2007.

 

Manufacturing Optimization Program: PM USA ceased production at its Cabarrus, North Carolina manufacturing facility and completed the consolidation of its cigarette manufacturing capacity into its Richmond, Virginia facility on July 29, 2009. PM USA took this action to address ongoing cigarette volume declines including the impact of the FET increase enacted in early 2009. PM USA expects to complete the de-commissioning of the Cabarrus facility during 2010.

As a result of this program, which commenced in 2007, PM USA expects to incur total pre-tax charges of approximately $785 million, of which $725 million have been incurred as of December 31, 2009 and are reflected in the cigarettes segment. Total pre-tax charges for this program consist of employee separation costs of $343 million, accelerated depreciation of $282 million and other charges of $160 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $400 million of the total pre-tax charges are expected to result in cash expenditures.

PM USA recorded pre-tax charges for this program as follows:

 

     For the Years Ended December 31,
(in millions)    2009    2008    2007     

Exit costs

   $ 97    $ 49    $ 309  

Asset impairment

           35  

Implementation costs

     139      69      27  
                          

Total

   $ 236    $ 118    $ 371  
                          

Pre-tax implementation costs related to this program were primarily related to accelerated depreciation and were included in cost of sales in the consolidated statements of earnings for the years ended December 31, 2009, 2008 and 2007, respectively.

Pre-tax charges of approximately $100 million are expected during 2010 for the program. Cash payments related to the program of $210 million, $85 million and $11 million were made during the years ended December 31, 2009, 2008 and 2007, respectively, for a total of $306 million since inception.

Note 7.                                                                                            

Inventories:

The cost of approximately 75% and 94% of inventories in 2009 and 2008, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.8 billion and $0.7 billion lower than the current cost of inventories at December 31, 2009 and 2008, respectively.


 

33


Table of Contents

Note 8.                                                                                            

Investment in SABMiller:

At December 31, 2009, Altria Group, Inc. held a 27.3% economic and voting interest in SABMiller. Altria Group, Inc.’s investment in SABMiller is being accounted for under the equity method.

Earnings from Altria Group, Inc.’s equity investment in SABMiller consisted of the following:

 

     For the Years Ended December 31,
(in millions)    2009    2008    2007     

Equity earnings

   $ 407    $ 467    $ 510  

Gains on issuances of common
stock by SABMiller

     193        
                          
   $ 600    $ 467    $ 510  
                          

Altria Group, Inc.’s earnings from its equity investment in SABMiller for the year ended December 31, 2009 included pre-tax gains of $193 million due primarily to the issuance of 60 million shares of common stock by SABMiller in connection with its acquisition of the remaining noncontrolling interest in its Polish subsidiary.

Summary financial data of SABMiller is as follows:

 

     At December 31,
(in millions)    2009   2008     

Current assets

   $ 4,495   $ 4,266  
                  

Long-term assets

   $ 33,841   $ 30,007  
                  

Current liabilities

   $ 5,307   $ 5,403  
                  

Long-term liabilities

   $ 13,199   $ 12,170  
                  

Non-controlling interests

   $ 672   $ 660  
                  

 

     For the Years Ended December 31,
(in millions)    2009   2008   2007     

Net revenues

   $ 17,020   $ 20,466   $ 20,825  
                        

Operating profit

   $ 2,173   $ 2,854   $ 3,230  
                        

Net earnings

   $ 1,473   $ 1,635   $ 1,865  
                        

The fair value, based on market quotes, of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2009, was $12.7 billion, as compared with its carrying value of $5.0 billion. The fair value, based on market quotes, of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2008, was $7.3 billion, as compared with its carrying value of $4.3 billion.


 

Note 9.                                                                                            

 

Finance Assets, net:

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its existing portfolio of finance assets in order to maximize gains and generate cash flow from asset sales and related activities. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold. During 2009, 2008 and 2007, proceeds from asset sales and bankruptcy recoveries totaled $793 million, $403 million and $486 million, respectively, and gains included in operating companies income totaled $257 million, $87 million and $274 million, respectively.

Included in the proceeds for 2007 were partial recoveries of amounts previously charged to earnings in the allowance for losses related to PMCC’s airline exposure. The operating companies income associated with these recoveries, which is included in the gains shown above, was $214 million for the year ended December 31, 2007.

At December 31, 2009, finance assets, net, of $4,803 million were comprised of an investment in finance leases of $5,069 million, reduced by the allowance for losses of $266 million. At December 31, 2008, finance assets, net, of $5,451 million were comprised of an investment in finance leases of $5,743 million and an other receivable of $12 million, reduced by the allowance for losses of $304 million.


 

A summary of the net investment in finance leases at December 31, before allowance for losses, was as follows:

 

    Leveraged Leases         Direct Finance Leases         Total
(in millions)   2009     2008          2009     2008          2009     2008       

Rentals receivable, net

  $ 5,137      $ 6,001        $ 274      $ 324        $ 5,411      $ 6,325     

Unguaranteed residual values

    1,411        1,459          87        89          1,498        1,548     

Unearned income

    (1,816     (2,101       (23     (26       (1,839     (2,127  

Deferred investment tax credits

    (1     (3             (1     (3  
                                                             

Investment in finance leases

    4,731        5,356          338        387          5,069        5,743     

Deferred income taxes

    (4,126     (4,577       (155     (180       (4,281     (4,757  
                                                             

Net investment in finance leases

  $ 605      $ 779        $ 183      $ 207        $ 788      $ 986     
                                                             

 

For leveraged leases, rentals receivable, net, represent unpaid rentals, net of principal and interest payments on third-party nonrecourse debt. PMCC’s rights to rentals receivable are subordinate to the third-party nonrecourse debtholders, and the leased equipment is pledged as collateral to

the debtholders. The payment of the nonrecourse debt is collateralized by lease payments due under the lease and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt of $9.2 billion and $11.5 billion at December 31, 2009


 

34


Table of Contents

and 2008, respectively, has been offset against the related rentals receivable. There were no leases with contingent rentals in 2009 and 2008.

At December 31, 2009, PMCC’s investment in finance leases was principally comprised of the following investment categories: rail and surface transport (28%), aircraft (25%), electric power (23%), manufacturing (12%), and real estate (12%). Investments located outside the United States, which are all U.S. dollar-denominated, represent 22% and 23% of PMCC’s investment in finance leases at December 31, 2009 and 2008, respectively.

Rentals receivable in excess of debt service requirements on third-party nonrecourse debt related to leveraged leases and rentals receivable from direct finance leases at December 31, 2009, were as follows:

 

(in millions)    Leveraged
Leases
  Direct
Finance
Leases
  Total

2010

   $ 155   $ 44   $ 199

2011

     100     50     150

2012

     140     50     190

2013

     190     50     240

2014

     285     45     330

Thereafter

     4,267     35     4,302
                    

Total

   $ 5,137   $ 274   $ 5,411
                    

Included in net revenues for the years ended December 31, 2009, 2008 and 2007, were leveraged lease revenues of $341 million, $210 million and $163 million, respectively, and direct finance lease revenues of $7 million, $5 million and $15 million, respectively. Income tax expense on leveraged lease revenues for the years ended December 31, 2009, 2008 and 2007, was $119 million, $72 million and $57 million, respectively.

Income from investment tax credits on leveraged leases, and initial direct and executory costs on direct finance leases were not significant during the years ended December 31, 2009, 2008 and 2007.

The activity in the allowance for losses on finance assets for the years ended December 31, 2009, 2008 and 2007 was as follows:

 

(in millions)    2009     2008   2007  

Balance at beginning of year

   $ 304      $ 204   $ 480  

Increase (decrease) to provision

     15       100     (129

Amounts written-off

     (53       (147
                        

Balance at end of year

   $ 266      $ 304   $ 204  
                        

PMCC leases under several lease arrangements various types of automotive manufacturing equipment to Motors Liquidation Company, formerly known as General Motors Corporation (“GM”), which filed for bankruptcy on June 1, 2009. Since GM’s bankruptcy filing, PMCC has not recorded income on the GM leases. In the third quarter of 2009, GM rejected one of the leases, which resulted in a $49 million write-off against PMCC’s allowance for losses. The remaining GM leases, which expire from 2012 through 2023, represent approximately 3% of PMCC’s portfolio of finance assets at December 31, 2009.

On October 30, 2009 General Motors LLC (“New GM”), which is the successor of GM’s North American automobile business, signed several agreements with PMCC. Pursuant to these agreements, New GM has agreed to lease substantially all the remaining equipment under the same terms as GM, except for a rebate of a portion of future rents. The agreements will become effective upon court approval of the assignment of the leases to New GM, which PMCC anticipates will occur in the first quarter 2010. GM will reject one additional lease that will not be assigned to New GM. The impact of the rent rebates and the additional lease rejection have been factored into PMCC’s assessment of the allowance for losses at December 31, 2009. Foreclosure of rejected lease properties will result in an acceleration of deferred tax payments on such leases.

All other PMCC lessees are current on their lease payment obligations. It is possible that adverse developments may require PMCC to increase its allowance for losses in the future.

During 2008, PMCC increased its allowance for losses by $100 million primarily as a result of credit rating downgrades of certain lessees and financial market conditions.

The net impact to the allowance for losses for 2007 related primarily to various airline leases. Amounts recovered of $129 million in 2007 related to partial recoveries of amounts charged to earnings in the allowance for losses in prior years. In addition in 2007, PMCC recovered $85 million related to amounts previously charged to earnings and written-off in prior years. In total, these recoveries resulted in additional operating companies income of $214 million for the year ended December 31, 2007. Acceleration of taxes on the foreclosures of leveraged leases written off amounted to approximately $50 million in 2007. There were no foreclosures in 2009 and 2008.

PMCC’s portfolio remains diversified by lessee, investment category and asset type. As of December 31, 2009, 74% of PMCC’s lessees were investment grade as defined by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“Standard & Poor’s”). Excluding aircraft lease investments, 87% of PMCC’s lessees were investment grade.

At December 31, 2009 PMCC’s portfolio included five aircraft under leveraged leases with Mesa Airlines, Inc. (“Mesa”) with a finance asset balance of $21 million. PMCC’s interest in these leases was secured by letters of credit issued by Citicorp North America, Inc. On January 5, 2010, Mesa filed for Chapter 11 bankruptcy protection. As a result of the bankruptcy filing PMCC drew on the letters of credit and recovered its outstanding investment.

PMCC has one remaining transaction with indirect exposure to Ambac Assurance Corporation, a credit support provider whose credit rating remains below investment grade. This risk is mitigated by the underlying strength of the lessee and the quality of the leased asset.

See Note 22. Contingencies, for a discussion of the Internal Revenue Service (“IRS”) disallowance of certain benefits pertaining to several PMCC leveraged lease transactions.


 

35


Table of Contents

Note 10.                                                                                            

Short-Term Borrowings and Borrowing

Arrangements:

At December 31, 2009 and 2008, Altria Group, Inc. had no short-term borrowings.

At December 31, 2009, the credit lines for Altria Group, Inc. and related activity were as follows:

 

(in billions)

Type

   Credit Lines  

Amount

Drawn

 

Commercial

Paper

Outstanding

 

Lines

Available

364-Day Agreement

   $ 0.6   $   —   $   —   $ 0.6

3-Year Agreement

     2.4         2.4
                          
   $ 3.0   $   —   $   —   $ 3.0
                          

On November 20, 2009, Altria Group, Inc. entered into a senior unsecured 364-day revolving credit agreement (the “364-Day Agreement”) and a senior unsecured 3-year revolving credit agreement (the “3-Year Agreement” and, together with the 364-Day Agreement, the “Revolving Credit Agreements”). The 364-Day Agreement provides for borrowings up to an aggregate principal amount of $0.6 billion and expires on November 19, 2010. The 3-Year Agreement provides for borrowings up to an aggregate principal amount of $2.4 billion and expires on November 20, 2012. Pricing under the Revolving Credit Agreements may be modified in the event of a change in the rating of Altria Group, Inc.’s long- term senior unsecured debt. Interest rates on borrowings under the Revolving Credit Agreements will be based on the London Interbank Offered Rate (“LIBOR”) plus a percentage equal to Altria Group, Inc.’s credit default swap spread subject to certain minimum rates and maximum rates based on the higher of the rating of Altria Group, Inc.’s long-term senior unsecured debt from Standard & Poor’s and Moody’s. The applicable minimum and maximum rates based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, 2009 are 2.0% and 4.0%, respectively. The Revolving Credit Agreements do not include any other rating triggers, nor do they contain any provisions that could require the posting of collateral.

The Revolving Credit Agreements replace Altria Group, Inc.’s prior $3.4 billion 5-year revolving credit agreement, which was due to expire on April 15, 2010, but was terminated effective November 20, 2009. The Revolving Credit Agreements will be used for general corporate purposes and to support Altria Group, Inc.’s commercial paper issuances. The Revolving Credit Agreements require that Altria Group, Inc. maintain (i) a ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1 and (ii) a ratio of EBITDA to interest expense of not less than 4.0 to 1. At December 31, 2009, the ratios of debt to EBITDA and EBITDA to interest expense, calculated in accordance with the Revolving Credit Agreements, were 1.9 to 1.0 and 5.3 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Revolving Credit Agreements.

In connection with the acquisition of UST, Altria Group, Inc. had in place at December 31, 2008, the Bridge Facility. On January 6, 2009, Altria Group, Inc. borrowed the entire

available amount of $4.3 billion under the Bridge Facility to fund in part the acquisition of UST (see Note 3. Acquisitions). As discussed in Note 11. Long-Term Debt, in February 2009, Altria Group, Inc. issued $4.2 billion of senior unsecured long-term notes. The net proceeds from the issuance of these notes, along with available cash, were used to prepay all of the outstanding borrowings under the Bridge Facility. Upon such prepayment, the Bridge Facility was terminated.

Any commercial paper of Altria Group, Inc. and borrowings under the Revolving Credit Agreements are fully and unconditionally guaranteed by PM USA (see Note 23. Condensed Consolidating Financial Information).

Note 11.                                                                                            

Long-Term Debt:

At December 31, 2009 and 2008, Altria Group, Inc.’s long-term debt consisted of the following:

 

(in millions)    2009     2008  

Consumer products:

    

Notes, 5.75% to 10.20% (average interest rate 9.1%), due through 2039

   $ 11,918      $ 6,797   

Debenture, 7.75% due 2027

     42        42   

Other

       135   
                  
     11,960        6,974   

Less current portion of long-term debt

     (775     (135
                  
   $ 11,185      $ 6,839   
                  

Financial services:

    

Eurodollar bonds, 7.50%, due 2009

   $      $ 500   
                  

Aggregate maturities of long-term debt are as follows:

 

(in millions)   

Altria

Group, Inc.

  UST  

Total

Long-Term

Debt

2010

   $ 775     $ 775

2012

     $  600     600

2013

     1,459       1,459

2014

     525       525

2018

     3,100     300     3,400

2019

     2,200       2,200

Thereafter

     3,042       3,042
                    

The aggregate fair value, based substantially on readily available quoted market prices, of Altria Group, Inc.’s long-term debt at December 31, 2009, was $14.4 billion, as compared with its carrying value of $12.0 billion. The aggregate fair value, based substantially on readily available quoted market prices, of Altria Group, Inc.’s long-term debt at December 31, 2008, was $8.6 billion, as compared with its carrying value of $7.5 billion.

Altria Group, Inc. Senior Notes: Altria Group, Inc. issued the following notes in 2008 and 2009:

November 2008 Issuance

n  $1.4 billion at 8.50%, due 2013, interest payable semi-annually;


 

36


Table of Contents

n  $3.1 billion at 9.70%, due 2018, interest payable semi-annually; and

n  $1.5 billion at 9.95%, due 2038, interest payable semi-annually.

December 2008 Issuance

n  $775 million at 7.125%, due 2010, interest payable semi-annually.

February 2009 Issuance

n  $525 million at 7.75%, due 2014, interest payable semi-annually;

n   $2.2 billion at 9.25%, due 2019, interest payable semi-annually; and

n  $1.5 billion at 10.20%, due 2039, interest payable semi-annually.

The net proceeds from the issuances of senior unsecured long-term notes in November and December 2008 were used along with borrowings under the Bridge Facility to fund the acquisition of UST. The net proceeds from the issuances of senior unsecured long-term notes in February 2009, along with available cash, were used to prepay all of the outstanding borrowings under the Bridge Facility.

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. The interest rate payable on each series of notes is subject to adjustment from time to time if the rating assigned to the notes of such series by Moody’s or Standard & Poor’s is downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes. 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 (“Fitch”) within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes of each series at a price equal to 101% of the aggregate principal amount of such series, plus accrued interest to the date of repurchase as and to the extent set forth in the terms of the notes.

The obligations of Altria Group, Inc. under the notes are fully and unconditionally guaranteed by PM USA (see Note 23. Condensed Consolidating Financial Information).

UST Senior Notes: At December 31, 2009, UST’s senior notes consisted of the following:

n   $600 million senior notes at 6.625%, due 2012, interest payable semi-annually; and

n  $300 million senior notes at 5.75%, due 2018, interest payable semi-annually.

UST senior notes of $200 million and $40 million matured and were repaid in June 2009.

The UST notes are senior unsecured obligations and rank equally in right of payment with all of UST’s existing and future senior unsecured and unsubordinated indebtedness. With respect to the $300 million senior notes, upon the

occurrence of both (i) a change of control of UST and (ii) these notes ceasing to be rated investment grade by each of Moody’s and Standard & Poor’s within a specified time period, UST would be required to make an offer to purchase these notes at a price equal to 101% of the aggregate principal amount of such series, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of these notes.

Other Consumer Products Debt: A subsidiary of PM USA repaid a $135 million term loan that matured in May 2009.

Financial Services Debt: Financial services debt of $500 million matured and was repaid in July 2009.

Tender Offer for Altria Group, Inc. Notes: In connection with the spin-off of PMI, in the first quarter of 2008, Altria Group, Inc. and its subsidiary, Altria Finance (Cayman Islands) Ltd. (dissolved in December 2009), completed tender offers to purchase for cash $2.3 billion of notes and debentures denominated in U.S. dollars, and 373 million in euro-denominated bonds, equivalent to $568 million in U.S. dollars.

As a result of the tender offers and consent solicitations, Altria Group, Inc. recorded a pre-tax loss of $393 million, which included tender and consent fees of $371 million, on the early extinguishment of debt in the first quarter of 2008.

Note 12.                                                                                            

Capital Stock:

Shares of authorized common stock are 12 billion; issued, repurchased and outstanding shares were as follows:

 

    

Shares

Issued

      

Shares

Repurchased

        

Shares

Outstanding

 

Balances, January 1, 2007

  2,805,961,317     (708,880,389     2,097,080,928   

Exercise of stock options and issuance of other stock awards

      10,595,834        10,595,834   
                         

Balances, December 31, 2007

  2,805,961,317     (698,284,555     2,107,676,762   

Exercise of stock options and issuance of other stock awards

      7,144,822        7,144,822   

Repurchased

      (53,450,000     (53,450,000
                         

Balances, December 31, 2008

  2,805,961,317     (744,589,733     2,061,371,584   

Exercise of stock options and issuance of other stock awards

      14,657,060        14,657,060   
                         

Balances, December 31, 2009

  2,805,961,317     (729,932,673     2,076,028,644   
                         

At December 31, 2009, 53,238,226 shares of common stock were reserved for stock options and other stock awards under Altria Group, Inc.’s stock plans, and 10 million shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued.


 

37


Table of Contents

Note 13.                                                                                            

 

Stock Plans:

Under the Altria Group, Inc. 2005 Performance Incentive Plan (the “2005 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 50 million shares of common stock may be issued under the 2005 Plan. In addition, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. under the 2005 Stock Compensation Plan for Non-Employee Directors (the “2005 Directors Plan”). Shares available to be granted under the 2005 Plan and the 2005 Directors Plan at December 31, 2009 were 36,668,029 and 835,253 respectively.

As more fully described in Note 1. Background and Basis of Presentation, during 2008 and 2007 certain modifications were made to stock options, restricted stock and deferred stock as a result of the PMI and Kraft spin-offs.

Altria Group, Inc. has not granted stock options to employees since 2002. Under certain circumstances, senior executives who exercised outstanding stock options using shares to pay the option exercise price and taxes received Executive Ownership Stock Options (“EOSOs”) equal to the number of shares tendered. EOSOs were granted at an exercise price of not less than fair market value on the date of the grant, and became exercisable six months after the grant date. This feature ceased during 2007. During the year ended December 31, 2007, Altria Group, Inc. granted 0.5 million EOSOs.

Stock Option Plan

In connection with the PMI and Kraft spin-offs, Altria Group, Inc. employee stock options were modified through the issuance of PMI employee stock options (in connection with the PMI spin-off) and Kraft stock options (in connection with the Kraft spin-off), and the adjustment of the stock option exercise prices for the Altria Group, Inc. awards. For each employee stock option outstanding, the aggregate intrinsic value of the option immediately after each spin-off was not greater than the aggregate intrinsic value of the option immediately before each spin-off. Because the Black-Scholes fair values of the awards immediately before and immediately after each spin-off were equivalent, no incremental compensation expense was recorded as a result of the modifications of the Altria Group, Inc. awards.

Pre-tax compensation cost and the related tax benefit for stock option awards totaled $9 million and $3 million, respectively, for the year ended December 31, 2007. Pre-tax compensation cost for stock option awards included $1 million in 2007 related to employees of discontinued operations. The fair value of the awards was determined using a modified Black-Scholes methodology using the following weighted average assumptions:

 

    

Risk-Free

Interest Rate

   

Expected

Life

 

Expected

Volatility

   

Expected

Dividend

Yield

 

2007 Altria Group, Inc.

  4.56   4 years   25.98   3.99
                       

 

Altria Group, Inc. stock option activity was as follows for the year ended December 31, 2009:

 

    

Shares

Subject

to Option

    Weighted
Average
Exercise
Price
  Average
Remaining
Contractual
Term
  Aggregate
Intrinsic Value

Balance at
January 1,
2009

  22,663,338      $ 10.04    

Options exercised

  (9,915,980     8.95    

Options canceled

  (345,455     16.49    

Balance/
Exercisable at December 31, 2009

  12,401,903        10.74   1 year   $ 110 million
                       

As more fully described in Note 1. Background and Basis of Presentation, the weighted average exercise prices shown in the table above were reduced as a result of the PMI and Kraft spin-offs.

The aggregate intrinsic value shown in the table above was based on the December 31, 2009 closing price for Altria Group, Inc.’s common stock of $19.63. The weighted-average grant date fair value of options granted during the year ended December 31, 2007 was $15.55. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $87 million, $119 million and $454 million, respectively.

Restricted and Deferred Stock Plans

Altria Group, Inc. may grant shares of restricted stock and deferred stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares. Such shares are subject to forfeiture if certain employment conditions are not met. Restricted and deferred stock generally vests on the third anniversary of the grant date.

The fair value of the restricted shares and deferred shares at the date of grant is amortized to expense ratably over the restriction period, which is generally three years. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and deferred stock granted to employees of its continuing operations for the years ended December 31, 2009, 2008 and 2007 of $61 million, $38 million and $80 million, respectively. The deferred tax benefit recorded related to this compensation expense was $24 million, $15 million and $29 million for the years ended December 31, 2009, 2008 and 2007, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $80 million at December 31, 2009 and is expected to be recognized over a weighted average period of 2 years.


 

 

38


Table of Contents

Altria Group, Inc. restricted stock and deferred stock activity was as follows for the year ended December 31, 2009:

 

     Number of
Shares
    Weighted-Average
Grant Date Fair Value
Per Share

Balance at January 1, 2009

  5,752,777      $ 49.31

Granted

  5,700,570        16.71

Vested

  (2,776,628     45.39

Forfeited

  (461,638     33.91
             

Balance at December 31, 2009

  8,215,081        28.88
             

The grant price information for restricted stock and deferred stock awarded prior to January 30, 2008 reflects historical market prices which are not adjusted to reflect the PMI spin-off, and the grant price information for restricted and deferred stock awarded prior to January 31, 2007 reflects historical market prices which are not adjusted to reflect the Kraft spin-off. As discussed in Note 1. Background and Basis of Presentation, as a result of the PMI spin-off, holders of restricted stock and deferred stock awarded prior to January 30, 2008 retained their existing award and received restricted stock or deferred stock of PMI. In addition, as a result of the Kraft spin-off, holders of restricted and deferred stock awarded prior to January 31, 2007 retained their existing award and received restricted stock or deferred stock of Kraft Class A common stock.

The weighted-average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, 2009, 2008 and 2007 was $95 million, $56 million and $150 million, respectively, or $16.71, $22.98 and $65.62 per restricted or deferred share, respectively. The total fair value of Altria Group, Inc. restricted stock and deferred stock vested during the years ended December 31, 2009, 2008 and 2007 was $46 million, $140 million and $184 million, respectively.

Note 14.                                                                                            

Earnings per Share:

Effective January 1, 2009, Altria Group, Inc. adopted the FASB authoritative guidance that requires that unvested share-based payment awards containing nonforfeitable rights to dividends be included as participating securities in the earnings per share (“EPS”) calculation pursuant to the two class method.

The calculations of basic and diluted EPS reflect the adoption of this guidance and, accordingly, prior period calculations have been adjusted retrospectively. As a result, basic EPS from discontinued operations and basic EPS from net earnings each decreased by $0.01 and $0.02 for the years ended December 31, 2008 and 2007, respectively. Basic EPS from continuing operations for the years ended December 31, 2008 and 2007 remained unchanged. Diluted EPS for the years ended December 31, 2008 and 2007 remained unchanged.

Basic and diluted EPS from continuing and discontinued operations were calculated using the following:

 

     For the Years Ended December 31,
(in millions)    2009          2008          2007       

Earnings from continuing operations

   $ 3,206        $ 3,090        $ 3,131     

Earnings from discontinued operations

         1,840          6,655     
                                      

Net earnings attributable to Altria Group, Inc.

     3,206          4,930          9,786     

Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares

     (11       (13       (27  
                                      

Earnings for basic EPS

     3,195          4,917          9,759     

Add: Undistributed earnings attributable to unvested restricted and deferred shares

     2          4          10     

Less: Undistributed earnings reallocated to unvested
restricted and deferred shares

     (2       (4       (10  
                                      

Earnings for diluted EPS

   $ 3,195        $ 4,917        $ 9,759     
                                      

Weighted average shares for
basic EPS

     2,066          2,075          2,101     

Add: Incremental shares from
stock options

     5          9          12     
                                      

Weighted average shares for diluted EPS

     2,071          2,084          2,113     
                                      

For the 2009 computation, 0.7 million stock options were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive. For the 2008 and 2007 computations, there were no antidilutive stock options.


 

39


Table of Contents

Note 15.                                                                                                                                                                                                         

Accumulated Other Comprehensive Earnings (Losses):

The following table sets forth the changes in each component of accumulated other comprehensive earnings (losses) attributable to Altria Group, Inc.:

 

(in millions)    Currency
Translation
Adjustments
         Changes in Net
Loss and Prior
Service Cost
        

Changes in
Fair Value of
Derivatives
Accounted for

as Hedges

        

Ownership of
SABMiller’s Other
Comprehensive

Earnings (Losses)

         Accumulated
Other
Comprehensive
Earnings (Losses)
 

Balances, January 1, 2007

   $ (97     $ (3,724     $ 13        $ 170        $ (3,638

Period Change

     736          744          (18       178          1,640   

Spin-off of Kraft

     89          2,020                  2,109   
                                                          

Balances, December 31, 2007

     728          (960       (5       348          111   

Period Change

     233          (1,385       (177       (308       (1,637

Spin-off of PMI

     (961       124          182              (655
                                                          

Balances, December 31, 2008

              (2,221                40          (2,181

Period Change

     3          375              242          620   
                                                          

Balances, December 31, 2009

   $ 3        $ (1,846     $        $ 282        $ (1,561
                                                          

Note 16.                                                                                            

 

Income Taxes:

Earnings from continuing operations before income taxes, and provision for income taxes consisted of the following for the years ended December 31, 2009, 2008 and 2007:

 

(in millions)   2009          2008          2007  

Earnings from continuing operations before income taxes:

         

United States

  $ 4,868        $ 4,789        $ 4,674   

Outside United States

    9              4   
                                 

Total

  $ 4,877        $ 4,789        $ 4,678   
                                 

Provision for income taxes:

         

Current:

         

Federal

  $ 1,512        $ 1,486        $ 1,665   

State and local

    111          351          98   

Outside United States

    3              3   
                                 
    1,626          1,837          1,766   
                                 

Deferred:

         

Federal

    (14       (95       (211

State and local

    57          (43       (8
                                 
    43          (138       (219
                                 

Total provision for income taxes

  $ 1,669        $ 1,699        $ 1,547   
                                 

Altria Group, Inc.’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2000 and forward with years 2000 to 2006 currently under examination by the IRS. State jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Altria Group, Inc. is currently under examination in various states.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

(in millions)       

Balance at January 1, 2007

  $1,053

Additions based on tax positions related to the current year

  70

Additions for tax positions of prior years

  22

Reductions for tax positions of prior years

  (28)

Reductions for tax positions due to lapse of statutes of limitations

  (116)

Settlements

  (21)

Reduction of state and foreign unrecognized tax benefits due to Kraft spin-off

  (365)
     

Balance at December 31, 2007

  615

Additions based on tax positions related to
the current year

  50

Additions for tax positions of prior years

  70

Reductions for tax positions of prior years

  (10)

Settlements

  (2)

Reduction of state and foreign unrecognized tax
benefits due to PMI spin-off

  (54)
     

Balance at December 31, 2008

  669

Additions based on tax positions related to

 

    the current year

  15

Additions for tax positions of prior years

  34

Reductions for tax positions due to lapse of
statutes of limitations

  (22)

Reductions for tax positions of prior years

  (87)

Settlements

  (8)
     

Balance at December 31, 2009

  $   601
     

 

40


Table of Contents

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies were as follows:

 

(in millions)   December 31,
2009
       December 31,
2008

Unrecognized tax benefits — Altria Group, Inc.

  $283     $275

Unrecognized tax benefits — Kraft

  198     274

Unrecognized tax benefits — PMI

  120     120
             

Unrecognized tax benefits

  601     669

Accrued interest and penalties

  327     302

Tax credits and other indirect benefits

  (100)     (94)
             

Liability for tax contingencies

  $828     $877
             

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2009 was $548 million, along with $53 million affecting deferred taxes. However, the impact on net earnings from those unrecognized tax benefits that if recognized at December 31, 2009 would be $230 million, as a result of receivables from PMI and Kraft of $120 million and $198 million, respectively, discussed below. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2008 was $610 million, along with $59 million affecting deferred taxes. However, the impact on net earnings from those unrecognized tax benefits that if recognized at December 31, 2008 would be $216 million, as a result of receivables from PMI and Kraft of $120 million and $274 million, respectively, discussed below.

Under the Tax Sharing Agreements between Altria Group, Inc. and PMI, and between Altria Group, Inc. and Kraft, PMI and Kraft are responsible for their respective pre-spin-off tax obligations. However, due to regulations governing the U.S. federal consolidated tax return, Altria Group, Inc. remains severally liable for PMI’s and Kraft’s pre-spin-off federal taxes. As a result, Altria Group, Inc. continues to include $120 million and $198 million of unrecognized tax benefits for PMI and Kraft, respectively, in its liability for uncertain tax positions, and corresponding receivables from PMI and Kraft of $120 million and $198 million, respectively, are included in other assets.

In the third quarter of 2009, the IRS, Kraft, and Altria Group, Inc. (as parent of, and as agent for, Kraft) executed a closing agreement that resolved certain Kraft tax matters arising out of the 2000 to 2003 IRS audit of Altria Group, Inc. As a result of the closing agreement, income tax expense for 2009 included the benefit from the reversal of tax reserves and associated interest that are no longer required. This benefit was offset by a reduction to the corresponding receivable from Kraft. The reduction in this receivable was recorded as an increase to marketing, administration and research costs on Altria Group, Inc.’s consolidated statement of earnings for the year ended December 31, 2009. As a result, there was no impact on Altria Group, Inc.’s net earnings.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2009, Altria Group, Inc. had $327 million of accrued interest and penalties, of which approximately $39 million and $79 million related to PMI and Kraft, respectively, for which PMI and Kraft are responsible under their respective Tax Sharing Agreements. The receivables from PMI and Kraft are included in other assets. As of December 31, 2008, Altria Group, Inc. had $302 million of accrued interest and penalties, of which approximately $32 million and $100 million related to PMI and Kraft, respectively.

For the years ended December 31, 2009, 2008 and 2007, Altria Group, Inc. recognized in its consolidated statements of earnings $3 million, $41 million and $13 million, respectively, of interest expense associated with uncertain tax positions.

It is reasonably possible that within the next 12 months certain state examinations will be resolved, which could result in a decrease in unrecognized tax benefits and interest of approximately $13 million.

The effective income tax rate on pre-tax earnings from continuing operations differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2009, 2008 and 2007:

 

      2009      2008      2007  

U.S. federal statutory rate

   35.0    35.0    35.0

Increase (decrease) resulting from:

        

State and local income taxes,
net of federal tax benefit

   2.7       4.2       3.6   

Reversal of tax reserves no
longer required

   (1.7       (2.4

Domestic manufacturing deduction

   (1.5    (1.6    (1.7

SABMiller dividend benefit

   (2.4    (2.1    (2.0

Other

   2.1          0.6   
                      

Effective tax rate

   34.2    35.5    33.1
                      

The tax provision in 2009 includes tax benefits of $88 million from the reversal of tax reserves and associated interest resulting from the execution of the closing agreement with the IRS discussed above. The tax provision in 2009 also includes a benefit of $53 million from the utilization of net operating losses in the third quarter. The tax provision in 2008 includes net tax benefits of $58 million primarily from the reversal of tax accruals no longer required in the fourth quarter. The tax provision in 2007 includes net tax benefits of $111 million related to the reversal of tax reserves and associated interest resulting from the expiration of statutes of limitations ($55 million in the third quarter and $56 million in the fourth quarter). The tax provision in 2007 also includes $57 million related to the reversal of tax accruals no longer required in the fourth quarter.


 

41


Table of Contents

The tax effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 2009 and 2008:

 

(in millions)   2009     2008  

Deferred income tax assets:

   

Accrued postretirement and postemployment benefits

  $ 1,126      $  1,181   

Settlement charges

    1,428        1,659   

Accrued pension costs

    434        495   

Net operating losses and tax credit carryforwards

    113        126   

Other

      19   
                 

Total deferred income tax assets

    3,101        3,480   
                 

Deferred income tax liabilities:

   

Property, plant and equipment

    (503     (360

Intangible assets

    (3,579     (70

Investment in SABMiller

    (1,632     (1,389

Other

    (164  
                 

Total deferred income tax liabilities

    (5,878     (1,819
                 

Valuation allowances

    (76     (80
                 

Net deferred income tax (liabilities) assets

  $ (2,853   $ 1,581   
                 

Financial services deferred income tax liabilities are primarily attributable to temporary differences relating to net investments in finance leases.

At December 31, 2009, Altria Group, Inc. had state tax net operating losses of $2,483 million that, if unutilized, will expire in 2010 through 2029 and state tax credit carryforwards of $97 million which, if unutilized, will expire in 2010 through 2017. A valuation allowance is recorded against certain state net operating losses and state tax credit carryforwards due to uncertainty regarding their utilization.

Note 17.                                                                                            

Segment Reporting:

The products of Altria Group, Inc.’s consumer products subsidiaries include cigarettes manufactured and sold by PM USA, smokeless products manufactured and sold by USSTC and PM USA, machine-made large cigars and pipe tobacco manufactured and sold by Middleton, and wine produced and distributed by Ste. Michelle. Another subsidiary of Altria Group, Inc., PMCC, maintains a portfolio of leveraged and direct finance leases.

As discussed in Note 1. Background and Basis of Presentation, beginning with the first quarter of 2009, Altria Group, Inc. revised its reportable segments. Altria Group, Inc.’s reportable segments are cigarettes, smokeless products, cigars, wine and financial services.

Altria Group, Inc.’s chief operating decision maker reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and,

accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s chief operating decision maker. Information about total assets by segment is not disclosed because such information is not reported to or used by Altria Group, Inc.’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 5. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.

Segment data were as follows:

 

    For the Years Ended December 31,  
(in millions)   2009      2008     2007  

Net revenues:

      

Cigarettes

  $ 20,919       $ 18,753      $ 18,470   

Smokeless products

    1,366        

Cigars

    520         387        15   

Wine

    403        

Financial services

    348         216        179   
                          

Net revenues

  $ 23,556       $ 19,356      $ 18,664   
                          

Earnings from continuing operations before income taxes:

      

Operating companies
income:

      

Cigarettes

  $ 5,055       $ 4,866      $ 4,511   

Smokeless products

    381        

Cigars

    176         164        7   

Wine

    43        

Financial services

    270         71        380   

Amortization of intangibles

    (20      (7  

Gain on sale of corporate headquarters building

       404     

General corporate expenses

    (204      (266     (427

Reduction of Kraft receivable

    (88     

UST acquisition-related transaction costs

    (60     

Corporate asset impairment and exit costs

    (91      (350     (98
                          

Operating income

    5,462         4,882        4,373   

Interest and other debt expense, net

    (1,185      (167     (205

Loss on early extinguishment of debt

       (393  

Earnings from equity investment in SABMiller

    600         467        510   
                          

Earnings from continuing operations before
income taxes

  $ 4,877       $ 4,789      $ 4,678   
                          

PM USA, USSTC and Middleton’s largest customer, McLane Company, Inc., accounted for approximately 26%, 27% and 26% of Altria Group, Inc.’s consolidated net revenues for the years ended December 31, 2009, 2008 and 2007, respectively. These net revenues were reported in the cigarettes, smokeless products and cigars segments. Sales to


 

42


Table of Contents

three distributors accounted for approximately 64% of net revenues for the wine segment for the year ended December 31, 2009.

Items affecting the comparability of net revenues and operating companies income for the segments were as follows:

n    Acquisitions — In January 2009, Altria Group, Inc. acquired UST, the results of which are reflected in the smokeless products and wine segments. In December 2007, Altria Group, Inc. acquired Middleton, the results of which are reflected in the cigars segment (see Note 3. Acquisitions).

n    UST Inventory Adjustment — In connection with the acquisition of UST, Altria Group, Inc.’s cost of sales during the year ended December 31, 2009 included $36 million ($15 million and $21 million in the smokeless products and wine segments, respectively), relating to the fair value purchase accounting adjustment of UST’s inventory at the acquisition date that was sold during 2009.

n    Asset Impairment, Exit, Implementation and Integration Costs — See Note 6. Asset Impairment, Exit, Implementation and Integration Costs, for a breakdown of these costs by segment.

n    Sales to PMI — Subsequent to the PMI spin-off, PM USA recorded net revenues of $298 million, from contract volume manufactured for PMI under an agreement that terminated in the fourth quarter of 2008. For periods prior to the PMI spin-off, PM USA did not record contract volume manufactured for PMI in net revenues, but recorded the related profit, which was immaterial, for the years ended December 31, 2008 and 2007, in marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings. These amounts are reflected in the cigarettes segment.

n    PMCC Allowance for Losses — During 2009, PMCC increased its allowance for losses by $15 million based on management’s assessment of its portfolio including its exposure to GM. PMCC increased its allowance for losses by $100 million during 2008, primarily as a result of credit rating downgrades of certain lessees and financial market conditions. See Note 9. Finance Assets, net.

n    Recoveries from Airline Industry Exposure — As discussed in Note 9. Finance Assets, net, during 2007, PMCC recorded pre-tax gains of $214 million on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

 

    For the Years Ended December 31,  
(in millions)   2009   2008   2007  

Depreciation expense:

     

Cigarettes

  $ 168   $ 182   $ 210    

Smokeless products

    41    

Cigars

    2     1  

Wine

    22    

Corporate

    38     25     22   
                     

Total depreciation expense

  $ 271   $ 208   $ 232   
                     
    

For the Years Ended December 31,

(in millions)    2009      2008      2007

Capital expenditures:

            

Cigarettes

   $147      $220      $352

Smokeless products

   18          

Cigars

   4      7     

Wine

   24          

Corporate

   80      14      34
                    

Total capital expenditures

   $273      $241      $386
                    

Note 18.                                                                                            

Benefit Plans:

Altria Group, Inc. and its subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all employees, except that as of January 1, 2008, new employees (excluding certain participants in UST plans) are not eligible to participate in the defined benefit plans, but instead are eligible for a company match in a defined contribution plan. In addition, Altria Group, Inc. and its subsidiaries provide health care and other benefits to the majority of retired employees.

The plan assets and benefit obligations of Altria Group, Inc.’s pension plans and the benefit obligations of Altria Group, Inc.’s postretirement plans are measured at December 31 of each year.

The amounts recorded in accumulated other comprehensive losses at December 31, 2009 consisted of the following:

 

(in millions)    Pensions    

Post-

retirement

   

Post-

employment

    Total  

Net losses

   $ (2,372   $ (584   $ (153   $ (3,109

Prior service (cost) credit

     (59     145          86   

Deferred income taxes

     948        169        60        1,177   
                                  

Amounts recorded in accumulated other comprehensive losses

   $ (1,483   $ (270   $ (93   $ (1,846
                                  

The amounts recorded in accumulated other comprehensive losses at December 31, 2008 consisted of the following:

 

(in millions)    Pensions    

Post-

retirement

   

Post-

employment

    Total  

Net losses

   $ (2,907   $ (595   $ (140   $ (3,642

Prior service (cost) credit

     (71     79          8   

Deferred income taxes

     1,161        198        54        1,413   
                                  

Amounts recorded in accumulated other comprehensive losses

   $ (1,817   $ (318   $ (86   $ (2,221
                                  

 

43


Table of Contents

The amounts recorded in accumulated other comprehensive losses at December 31, 2007 consisted of the following:

 

(in millions)   Pensions    

Post-

retirement

   

Post-

employment

    Total  

Net losses

  $ (939   $ (356   $ (149   $ (1,444

Prior service (cost) credit

    (55     100          45   

Deferred income taxes

    386        95        58        539   
                                 

Amounts to be amortized — continuing operations

    (608     (161     (91     (860

Amounts related to discontinued operations

    (49       (51     (100
                                 

Amounts recorded in accumulated other comprehensive losses

  $ (657   $ (161   $ (142   $ (960
                                 

The movements in other comprehensive earnings/losses during the year ended December 31, 2009 were as follows: