EX-13 7 dex13.htm PAGES 17 TO 113 OF THE 2010 ANNUAL REPORT Pages 17 to 113 of the 2010 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 83

Report of Independent Registered Public Accounting Firm

  

page 112

Report of Management on Internal Control Over Financial Reporting

  

page 113

 

 

Guide To Select Disclosures

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

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

  

page 31  

Benefit Plans — Note 18 includes a discussion of pension plans

  

page 42

Contingencies — Note 21 includes a discussion of the litigation environment

  

page 50

Goodwill and Other Intangible Assets, net — Note 5

  

page 30

Income Taxes — Note 16

  

page 39

Investment in SABMiller — Note 8

  

page 33

Long-Term Debt — Note 11

  

page 36

Segment Reporting — Note 17

  

page 41

UST Acquisition — Note 3

  

page 28

 

 

 

17


Table of Contents

Selected Financial Data — Five-Year Review

(in millions of dollars, except per share data)

 

 

     2010     2009     2008     2007     2006  

Summary of Operations:

         

Net revenues

  $   24,363      $   23,556      $   19,356      $   18,664      $   18,790   

Cost of sales

    7,704        7,990        8,270        7,827        7,387   

Excise taxes on products

    7,471        6,732        3,399        3,452        3,617   
                                         

Operating income

    6,228        5,462        4,882        4,373        4,518   

Interest and other debt expense, net

    1,133        1,185        167        205        225   

Earnings from equity investment in SABMiller

    628        600        467        510        460   

Earnings from continuing operations before income taxes

    5,723        4,877        4,789        4,678        4,753   

Pre-tax profit margin from continuing operations

    23.5%        20.7%        24.7%        25.1%        25.3%   

Provision for income taxes

    1,816        1,669        1,699        1,547        1,571   
                                         

Earnings from continuing operations

    3,907        3,208        3,090        3,131        3,182   

Earnings from discontinued operations, net of income taxes

        1,901        7,006        9,463   

Net earnings

    3,907        3,208        4,991        10,137        12,645   
                                         

Net earnings attributable to Altria Group, Inc.

    3,905        3,206        4,930        9,786        12,022   

Basic EPS    — continuing operations

    1.87        1.55        1.49        1.49        1.52   

                    — discontinued operations

        0.88        3.15        4.22   

                    — net earnings attributable to Altria Group, Inc.

    1.87        1.55        2.37        4.64        5.74   

Diluted EPS — continuing operations

    1.87        1.54        1.48        1.48        1.51   

                    — discontinued operations

        0.88        3.14        4.19   

                    — net earnings attributable to Altria Group, Inc.

    1.87        1.54        2.36        4.62        5.70   

Dividends declared per share

    1.46        1.32        1.68        3.05        3.32   

Weighted average shares (millions) — Basic

    2,077        2,066        2,075        2,101        2,087   

Weighted average shares (millions) — Diluted

    2,079        2,071        2,084        2,113        2,101   
                                         

Capital expenditures

    168        273        241        386        399   

Depreciation

    256        271        208        232        255   

Property, plant and equipment, net (consumer products)

    2,380        2,684        2,199        2,422        2,343   

Inventories (consumer products)

    1,803        1,810        1,069        1,254        1,605   

Total assets

    37,402        36,677        27,215        57,746        104,531   

Total long-term debt

    12,194        11,185        7,339        2,385        5,195   

Total debt    — consumer products

    12,194        11,960        6,974        4,239        4,580   

                    — financial services

        500        500        1,119   
                                         

Total stockholders' equity

    5,195        4,072        2,828        19,320        43,317   

Common dividends declared as a % of Basic EPS

    78.1%        85.2%        70.9%        65.7%        57.8%   

Common dividends declared as a % of Diluted EPS

    78.1%        85.7%        71.2%        66.0%        58.2%   

Book value per common share outstanding

    2.49        1.96        1.37        9.17        20.66   

Market price per common share — high/low

    26.22-19.14        20.47-14.50        79.59-14.34        90.50-63.13        86.45-68.36   
                                         

Closing price of common share at year end

    24.62        19.63        15.06        75.58        85.82   

Price/earnings ratio at year end — Basic

    13        13        6        16        15   

Price/earnings ratio at year end — Diluted

    13        13        6        16        15   

Number of common shares outstanding
at year end (millions)

    2,089        2,076        2,061        2,108        2,097   

Approximate number of employees

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

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.

 

18


Table of Contents

Consolidated Statements of Earnings

(in millions of dollars, except per share data)

 

 

for the years ended December 31,    2010        2009        2008  

Net revenues

   $ 24,363         $ 23,556         $ 19,356   

Cost of sales

     7,704           7,990           8,270   

Excise taxes on products

     7,471           6,732           3,399   
                                

Gross profit

     9,188           8,834           7,687   

Marketing, administration and research costs

     2,735           2,843           2,753   

Reduction of Kraft and PMI tax-related receivables

     169           88        

Asset impairment and exit costs

     36           421           449   

Gain on sale of corporate headquarters building

               (404

Amortization of intangibles

     20           20           7   
                                

Operating income

     6,228           5,462           4,882   

Interest and other debt expense, net

     1,133           1,185           167   

Loss on early extinguishment of debt

               393   

Earnings from equity investment in SABMiller

     (628        (600        (467
                                

Earnings from continuing operations before income taxes

     5,723           4,877           4,789   

Provision for income taxes

     1,816           1,669           1,699   
                                

Earnings from continuing operations

     3,907           3,208           3,090   

Earnings from discontinued operations, net of income taxes

               1,901  
                                

Net earnings

     3,907           3,208           4,991   

Net earnings attributable to noncontrolling interests

     (2        (2        (61 )
                                

Net earnings attributable to Altria Group, Inc.

   $ 3,905         $ 3,206         $ 4,930   
                                

Amounts attributable to Altria Group, Inc. stockholders:

            

Earnings from continuing operations

   $ 3,905         $ 3,206         $ 3,090   

Earnings from discontinued operations

               1,840  
                                

Net earnings attributable to Altria Group, Inc.

   $ 3,905         $ 3,206         $ 4,930   
                                

Per share data:

            

Basic earnings per share:

            

Continuing operations

   $ 1.87         $ 1.55         $ 1.49   

Discontinued operations

               0.88  
                                

Net earnings attributable to Altria Group, Inc.

   $ 1.87         $ 1.55         $ 2.37   
                                

Diluted earnings per share:

            

Continuing operations

   $ 1.87         $ 1.54         $ 1.48   

Discontinued operations

               0.88   
                                

Net earnings attributable to Altria Group, Inc.

   $ 1.87         $ 1.54         $ 2.36   
                                

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,    2010        2009  

Assets

       

Consumer products

       

Cash and cash equivalents

   $ 2,314         $ 1,871   

Receivables (less allowance of $3 in 2009)

     85           96   

Inventories:

       

Leaf tobacco

     960           993   

Other raw materials

     160           157   

Work in process

     299           293   

Finished product

     384           367   
                     
     1,803           1,810   

Deferred income taxes

     1,165           1,336   

Other current assets

     614           660   
                     

Total current assets

     5,981           5,773   

Property, plant and equipment, at cost:

       

Land and land improvements

     291           366   

Buildings and building equipment

     1,292           1,909   

Machinery and equipment

     3,473           3,649   

Construction in progress

     94           220   
                     
     5,150           6,144   

Less accumulated depreciation

     2,770           3,460   
                     
     2,380           2,684   

Goodwill

     5,174           5,174   

Other intangible assets, net

     12,118           12,138   

Investment in SABMiller

     5,367           4,980   

Other assets

     1,851           1,097   
                     

Total consumer products assets

     32,871           31,846   

Financial services

       

Finance assets, net

     4,502           4,803   

Other assets

     29           28   
                     

Total financial services assets

     4,531           4,831   
                     

Total Assets

   $ 37,402         $ 36,677   
                     

See notes to consolidated financial statements.

 

20


Table of Contents
at December 31,    2010        2009  

Liabilities

       

Consumer products

       

Current portion of long-term debt

   $         $ 775   

Accounts payable

     529           494   

Accrued liabilities:

       

Marketing

     447           467   

Taxes, except income taxes

     231           318   

Employment costs

     232           239   

Settlement charges

     3,535           3,635   

Other

     1,069           1,354   

Dividends payable

     797           710   
                     

Total current liabilities

     6,840           7,992   

Long-term debt

     12,194           11,185   

Deferred income taxes

     4,618           4,383   

Accrued pension costs

     1,191           1,157   

Accrued postretirement health care costs

     2,402           2,326   

Other liabilities

     949           1,248   
                     

Total consumer products liabilities

     28,194           28,291   

Financial services

       

Deferred income taxes

     3,880           4,180   

Other liabilities

     101           102   
                     

Total financial services liabilities

     3,981           4,282   
                     

Total liabilities

     32,175           32,573   

Contingencies (Note 21)

       

Redeemable noncontrolling interest

     32           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

     5,751           5,997   

Earnings reinvested in the business

     23,459           22,599   

Accumulated other comprehensive losses

     (1,484        (1,561

Cost of repurchased stock (717,221,651 shares in 2010 and
729,932,673 shares in 2009)

     (23,469        (23,901
                     

Total stockholders’ equity attributable to Altria Group, Inc.

     5,192           4,069   

Noncontrolling interests

     3           3   
                     

Total stockholders’ equity

     5,195           4,072   
                     

Total Liabilities and Stockholders’ Equity

   $ 37,402         $ 36,677   
                     

 

21


Table of Contents

Consolidated Statements of Cash Flows

(in millions of dollars)

 

 

for the years ended December 31,    2010        2009        2008  

Cash Provided by (Used in) Operating Activities

            

Earnings from continuing operations

  — Consumer products                      $    3,819         $ 3,054         $ 3,065   
  — Financial services      88           154           25   

Earnings from discontinued operations, net of income taxes

               1,901   
                                

Net earnings

     3,907           3,208           4,991   

Impact of earnings from discontinued operations, net of income taxes

               (1,901

Adjustments to reconcile net earnings to operating cash flows:

            

Consumer products

            

Depreciation and amortization

     276           291           215   

Deferred income tax provision

     408           499           121   

Earnings from equity investment in SABMiller

     (628        (600        (467

Dividends from SABMiller

     303           254           249   

Asset impairment and exit costs, net of cash paid

     (188        (22        197   

IRS payment related to LILO and SILO transactions

     (945          

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

     15           (7        (84

Inventories

     7           51           185   

Accounts payable

     48           (25        (162

Income taxes

     (53        130           (201

Accrued liabilities and other current assets

     (221        218           (27

Accrued settlement charges

     (100        (346        5   

Pension plan contributions

     (30        (37        (45

Pension provisions and postretirement, net

     185           193           192   

Other

     96           232           139   

Financial services

            

Deferred income tax benefit

     (284        (456        (259

Allowance for losses

          15           100   

Other

     (29        (155        (22
                                

Net cash provided by operating activities, continuing operations

     2,767           3,443           3,215   

Net cash provided by operating activities, discontinued operations

               1,666   
                                

Net cash provided by operating activities

     2,767           3,443           4,881   
                                

See notes to consolidated financial statements.

 

22


Table of Contents
for the years ended December 31,    2010        2009        2008  

Cash Provided by (Used in) Investing Activities

            

Consumer products

            

Capital expenditures

   $ (168      $ (273      $ (241

Acquisition of UST, net of acquired cash

          (10,244     

Proceeds from sale of corporate headquarters building

               525   

Other

     115           (31        110   

Financial services

            

Investments in finance assets

          (9        (1

Proceeds from finance assets

     312           793           403   
                                

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

     259           (9,764        796   

Net cash used in investing activities, discontinued
operations

               (317
                                

Net cash provided by (used in) investing activities

     259           (9,764        479   
                                

Cash Provided by (Used in) Financing Activities

            

Consumer products

            

Net repayment of short-term borrowings

          (205     

Long-term debt issued

     1,007           4,221           6,738   

Long-term debt repaid

     (775        (375        (4,057

Financial services

            

Long-term debt repaid

          (500     

Repurchase of common stock

               (1,166

Dividends paid on common stock

     (2,958        (2,693        (4,428

Issuance of common stock

     104           89           89   

PMI dividends paid to Altria Group, Inc.

               3,019   

Financing fees and debt issuance costs

     (6        (177        (93

Tender and consent fees related to the early extinguishment of debt

               (371

Changes in amounts due to/from PMI

               (664

Other

     45           (84        (4
                                

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

     (2,583        276           (937

Net cash used in financing activities, discontinued
operations

               (1,648
                                

Net cash (used in) provided by financing activities

     (2,583        276           (2,585
                                

Effect of exchange rate changes on cash and cash equivalents:

            

Discontinued operations

                         (126
                                

Cash and cash equivalents, continuing operations:

            

Increase (decrease)

     443           (6,045        3,074   

Balance at beginning of year

     1,871           7,916           4,842   
                                

Balance at end of year

   $ 2,314         $ 1,871         $ 7,916   
                                    

Cash paid, continuing operations:    Interest

  — Consumer products                  $ 1,084         $ 904         $ 208   
                                    
  — Financial services    $         $ 38         $ 38   
                                    

                     Income taxes

   $ 1,884         $ 1,606         $ 1,837   
                                    

 

 

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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, 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 PMI

        (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 (a)

        3,206            3,206        1        3,207   

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   

Comprehensive earnings:

               

Net earnings (a)

        3,905            3,905        1        3,906   

Other comprehensive earnings, net of income taxes:

               

Currency translation adjustments

          1          1          1   

Change in net loss and prior service cost

          35          35          35   

Ownership share of SABMiller other comprehensive earnings

          41          41          41   
                                                                 

Total other comprehensive earnings

              77          77   
                                                                 

Total comprehensive earnings

              3,982        1        3,983   
                                                                 

Exercise of stock options and other stock award activity

      (246         432            186   

Cash dividends declared ($1.46 per share)

        (3,045             (3,045

Other

                (1     (1
                                                                 

Balances, December 31, 2010

  $ 935      $ 5,751      $ 23,459      $ (1,484   $ (23,469     $ 3      $ 5,195   
                                                                 

(a) Net earnings attributable to noncontrolling interests for the years ended December 31, 2010 and 2009 exclude $1 million due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in the consolidated balance sheets at December 31, 2010 and 2009, respectively. See Note 21.

See notes to consolidated financial statements.

 

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Notes to Consolidated Financial Statements

 

Note 1.

 

 

Background and Basis of Presentation:

n     Background: At December 31, 2010, 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 27.1% economic and voting interest in SABMiller plc (“SABMiller”) at December 31, 2010. Altria Group, Inc.’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller, if and when SABMiller pays cash dividends on their stock.

UST Acquisition: As discussed in Note 3. UST Acquisition, 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.

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 statement of earnings and the consolidated statement of cash flows for the year ended December 31, 2008. 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

 

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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.

Dividends and Share Repurchases: 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.

On February 24, 2010, Altria Group, Inc.’s Board of Directors approved a 2.9% increase in the quarterly dividend to $0.35 per common share from $0.34 per common share. On August 27, 2010, Altria Group, Inc.’s Board of Directors approved an additional 8.6% increase in the quarterly dividend to $0.38 per common share, resulting in an aggregate quarterly dividend rate increase of 11.8% since the beginning of 2010. The current annualized dividend rate is $1.52 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of Altria Group, Inc.’s Board of Directors.

In January 2011, Altria Group, Inc.’s Board of Directors authorized a new $1.0 billion one-year share repurchase program. Share repurchases under this program depend upon marketplace conditions and other factors. The share repurchase program remains 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 pursuant to its $4.0 billion (2008 to 2010) share repurchase program. No shares were repurchased during 2010 or 2009 under this share repurchase program, which was suspended in September 2009. The new share repurchase program replaces the suspended program.

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 for 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.

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.

The 2009 reduction of a Kraft Foods Inc. (“Kraft”) tax-related receivable has been reclassified to conform with the current year’s presentation.

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 25 years, and buildings and building improvements over periods up to 50 years.

 

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Definite-lived intangible assets are amortized over their estimated useful lives. Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. Goodwill impairment 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 2010, 2009 and 2008, Altria Group, Inc. completed its annual review of goodwill and indefinite-lived intangible assets, and no impairment 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.

Compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated financial position, results of operations or cash flows (see Note 21. Contingencies — Environmental Regulation).

n    Fair Value Measurements: Altria Group, Inc. measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Altria Group, Inc. uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs used to measure fair value are:

 

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of substantially all of Altria Group, Inc.’s pension assets is based on observable inputs, including readily available quoted market prices, which meet the definition of a Level 1 or Level 2 input. For the fair value disclosure of the pension plan assets, see Note 18. Benefit Plans.

Altria Group, Inc. assesses the fair value of any derivative financial instruments using internally developed models that use, as their basis, readily observable future amounts, such as cash flows, earnings, and the current market expectations of those future amounts. As discussed in Note 20. Financial Instruments, at December 31, 2010, Altria Group, Inc. had no derivative financial instruments remaining.

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 a decrease of $11 million to PMCC’s net revenues and results of operations in 2010. There were no adjustments in 2009 and 2008.

PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC ceases recording income (“non-accrual status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible. There were no rents receivable on non-accrual status at December 31, 2010.

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

 

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statements of earnings and are 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 21. Contingencies for a further discussion of guarantees.

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 value 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.

Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is 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.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of earnings.

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 consumer engagement programs, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives, event marketing and volume-based incentives. Consumer engagement programs 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, consumer engagement programs 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 net revenues. Shipping and handling costs are classified as part of cost of sales.

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.

 

 

UST Acquisition:

On January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST. The transaction was valued at approximately $11.7 billion, which represented a purchase price of $10.4 billion and approximately $1.3 billion of UST debt, which together with acquisition-related costs and payments of approximately $0.6 billion (consisting primarily of financing fees, the funding of UST’s non-qualified pension plans, investment banking fees and the early retirement of UST’s revolving credit facility), represented 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. also 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.

UST’s financial position and results of operations have been consolidated with Altria Group, Inc. as of January 6, 2009. 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

 

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December 31, 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   
          

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 financing 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, and anticipated annual synergies of approximately $300 million resulting primarily from 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, 2010, 2009 and 2008, Altria Group, Inc. incurred pre-tax acquisition-related charges, as well as restructuring and integration costs, consisting of the following:

 

     For the Years Ended    
December 31,    
 
(in millions)    2010     2009     2008  

Asset impairment and exit costs

   $ 6      $ 202      $   

Integration costs

     18        49     

Inventory adjustments

     22        36     

Financing fees

       91        58   

Transaction costs

       60     
                          

Total

   $ 46      $ 438      $ 58   
                          

 

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Total acquisition-related charges, as well as restructuring and integration costs incurred since the September 8, 2008 announcement of the acquisition, were $542 million as of December 31, 2010. Pre-tax charges and costs related to the acquisition of UST are substantially complete.

Note 4.

 

 

Divestiture:

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.

Summarized financial information for the discontinued operations of PMI for the year ended December 31, 2008 was as follows:

 

(in millions)   2008  

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  
         

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,

2010

   

December 31,

2009

          

December 31,

2010

   

December 31,

2009

 

Cigarettes

  $      $        $ 261      $ 272   

Smokeless products

    5,023        5,023          8,843        8,845   

Cigars

    77        77          2,744        2,750   

Wine

    74        74          270        271   
                                         

Total

  $ 5,174      $ 5,174        $ 12,118      $ 12,138   
                                         

Goodwill relates to the January 2009 acquisition of UST (see Note 3. UST Acquisition) and the December 2007 acquisition of Middleton.

Other intangible assets consisted of the following:

 

    December 31, 2010           December 31, 2009  
(in millions)  

Gross

Carrying
Amount

    Accumulated
Amortization
           Gross
Carrying
Amount
    Accumulated
Amortization
 

Indefinite-lived intangible assets

  $ 11,701          $ 11,701     

Definite-lived intangible assets

    464      $ 47          464      $ 27   
                                         

Total other intangible assets

  $ 12,165      $ 47        $ 12,165      $ 27   
                                         

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, which consist primarily of customer relationships and certain cigarette trademarks, are amortized over periods up to 25 years. Pre-tax amortization expense for definite-lived intangible assets during the years ended December 31, 2010, 2009 and 2008, was $20 million, $20 million and $7 million, respectively. 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.

The changes in goodwill and gross carrying amount of other intangible assets for the years ended December 31, 2010 and 2009 were as follows:

 

    2010           2009  
(in millions)   Goodwill    

Other

Intangible

Assets

           Goodwill    

Other

Intangible

Assets

 

Balance at beginning of year

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

Changes due to:

         

Acquisition of UST

          5,097        9,119   
                                         

Balance at end of year

  $ 5,174      $ 12,165        $ 5,174      $ 12,165   
                                         

 

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Note 6.

 

 

Asset Impairment, Exit, Implementation and Integration Costs:

Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2010, 2009 and 2008 consisted of the following:

 

       For the Year Ended December 31, 2010  
(in millions)  

Asset Impairment

and Exit Costs

   

Implementation

Costs

   

Integration

Costs

    Total  

Cigarettes

  $ 24      $ 75      $      $ 99   

Smokeless products

    6          16        22   

Cigars

        2        2   

Wine

        2        2   

General corporate

    6            6   
                                 

Total

  $ 36      $ 75      $ 20      $ 131   
                                 
    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   
                                 

 

The movement in the severance liability and details of asset impairment and exit costs for Altria Group, Inc. for the years ended December 31, 2010 and 2009 was as follows:

 

(in millions)    Severance     Other     Total  

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   

Charges, net

     (11     47        36   

Cash spent

     (191     (36     (227

Other

       (11     (11
                          

Severance liability balance, December 31, 2010

   $ 26      $      $ 26   
                          

Other charges in the table above primarily include other employee termination benefits including pension and postretirement. Charges, net in the table above include the reversal of $13 million of severance costs associated with the Manufacturing Optimization Program in 2010.

The pre-tax asset impairment, exit, implementation, and integration costs shown above are primarily a result of the programs discussed below.

n     Integration and Restructuring Program: Altria Group, Inc. has substantially completed a restructuring program that commenced in December 2008, and was expanded in August 2009. Pursuant to this program, Altria Group, Inc. restructured corporate, manufacturing, and sales and marketing services functions in connection with the integration of UST and its focus on optimizing company-wide cost structures in light of ongoing declines in U.S. cigarette volumes.

 

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As a result of this restructuring program, pre-tax asset impairment, exit and integration costs for the years ended December 31, 2010 and 2009 consisted of the following:

 

     For the Year Ended December 31, 2010  
(in millions)   

Asset
Impairment

and Exit
Costs

    

Integration

Costs

     Total  

Smokeless products

   $ 6       $ 16       $ 22   

Wine

        2         2   

General corporate

     4            4   
                            

Total

   $ 10       $ 18       $ 28   
                            

 

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

Asset
Impairment

and Exit
Costs

    

Integration

Costs

     Total  

Cigarettes

   $ 18       $       $ 18   

Smokeless products

     193         43         236   

Wine

     3         6         9   

Financial services

     4            4   

General corporate

     61            61   
                            

Total

   $ 279       $ 49       $ 328   
                            

For the year ended December 31, 2008, pre-tax exit costs of $126 million was recorded for the program in the cigarettes segment ($48 million), financial services segment ($2 million) and general corporate ($76 million).

These 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. The pre-tax integration costs were included in marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings for the years ended December 31, 2010 and 2009. Total pre-tax charges incurred since the inception of the program through December 31, 2010 were $482 million. Cash payments related to the program of $111 million and $221 million were made during the years ended December 31, 2010 and 2009, respectively, for a total of $332 million since inception. Cash payments related to this program are substantially complete.

n    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. This program has been completed. During the years ended December 31, 2010, 2009 and 2008, Altria Group, Inc. incurred pre-tax charges of $2 million, $30 million and $219 million, respectively, for this program. Total pre-tax charges incurred since the inception of this restructuring were $251 million as of December 31, 2010. These charges consisted primarily of employee separation costs. Cash payments related to this restructuring of $7 million, $65 million and $136 million were made during the years ended December 31, 2010, 2009 and 2008, respectively, for a total of $208 million since inception. Cash payments related to this program are substantially complete.

For the year ended December 31, 2008, general corporate exit costs also included $55 million of investment banking and legal fees associated with the PMI spin-off.

n    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 federal excise tax (“FET”) increase enacted in early 2009. During 2010, PM USA substantially completed the de-commissioning of the Cabarrus facility and expects to fully complete the de-commissioning in early 2011.

In October 2010, PM USA entered into an agreement for the sale of the Cabarrus facility and land. In November 2010, the prospective purchaser exercised its right to terminate the agreement. The future sale of the Cabarrus facility and land will not have a material impact on the financial results of Altria Group, Inc.

As a result of this consolidation program, which commenced in 2007, PM USA expects to incur total pre-tax charges of approximately $800 million, which consist of employee separation costs of $325 million, accelerated depreciation of $275 million and other charges of $200 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Total pre-tax charges incurred for the program through December 31, 2010 of $824 million, which are reflected in the cigarettes segment, do not reflect estimated gains from the future sales of land and buildings.

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

 

     For the Years Ended December 31,  
(in millions)    2010      2009      2008  

Asset impairment and exit costs

   $ 24       $ 97       $ 49   

Implementation costs

     75         139         69   
                            

Total

   $ 99       $ 236       $ 118   
                            

        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, 2010, 2009 and 2008, respectively.

Cash payments related to the program of $128 million, $210 million and $85 million were made during the years ended December 31, 2010, 2009 and 2008, respectively, for total cash payments of $434 million since inception, which do not reflect estimated proceeds on future sales of land and buildings. Cash payments related to this program are substantially complete.

 

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Note 7.

 

 

 

Inventories:

The cost of approximately 71% and 75% of inventories in 2010 and 2009, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.7 billion and $0.8 billion lower than the current cost of inventories at December 31, 2010 and 2009, respectively.

 

Note 8.

 

 

 

Investment in SABMiller:

At December 31, 2010, Altria Group, Inc. held a 27.1% economic and voting interest in SABMiller. Altria Group, Inc.’s investment in SABMiller is being accounted for under the equity method.

Pre-tax earnings from Altria Group, Inc.’s equity investment in SABMiller consisted of the following:

 

     For the Years Ended December 31,  
(in millions)    2010     2009     2008  

Equity earnings

   $ 578      $ 407      $ 467   

Gains resulting from issuances of common stock by SABMiller

     50        193     
                          
   $ 628      $ 600      $ 467   
                          

Summary financial data of SABMiller is as follows:

 

     At December 31,  
(in millions)    2010     2009  

Current assets

   $ 4,518      $ 4,495   
                  

Long-term assets

   $ 34,744      $ 33,841   
                  

Current liabilities

   $ 6,625      $ 5,307   
                  

Long-term liabilities

   $ 11,270      $ 13,199   
                  

Non-controlling interests

   $ 766      $ 672   
                  

 

     For the Years Ended December 31,  
(in millions)    2010     2009     2008  

Net revenues

   $ 18,981      $ 17,020      $ 20,466   
                          

Operating profit

   $ 2,821      $ 2,173      $ 2,854   
                          

Net earnings

   $ 2,133      $ 1,473      $ 1,635   
                          

The fair value, based on market quotes, of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2010, was $15.1 billion, as compared with its carrying value of $5.4 billion. 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.

 

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 2010, 2009 and 2008, proceeds from asset sales, lease maturities and bankruptcy recoveries totaled $312 million, $793 million and $403 million, respectively, and gains included in operating companies income totaled $72 million, $257 million and $87 million, respectively.

At December 31, 2010, finance assets, net, of $4,502 million were comprised of investments in finance leases of $4,704 million, reduced by the allowance for losses of $202 million. At December 31, 2009, finance assets, net, of $4,803 million were comprised of investments in finance leases of $5,069 million, reduced by the allowance for losses of $266 million.

 

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

 

    Leveraged Leases           Direct Finance Leases           Total  
(in millions)   2010     2009            2010     2009            2010     2009  

Rents receivable, net

  $ 4,659      $ 5,137        $ 207      $ 274        $ 4,866      $ 5,411   

Unguaranteed residual values

    1,327        1,411          87        87          1,414        1,498   

Unearned income

    (1,573     (1,816       (3     (23       (1,576     (1,839

Deferred investment tax credits

      (1               (1
                                                                 

Investments in finance leases

    4,413        4,731          291        338          4,704        5,069   

Deferred income taxes

    (3,830     (4,126       (130     (155       (3,960     (4,281
                                                                 

Net investments in finance leases

  $ 583      $ 605        $ 161      $ 183        $ 744      $ 788   
                                                                 

 

 

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For leveraged leases, rents receivable, net, represent unpaid rents, net of principal and interest payments on third-party nonrecourse debt. PMCC’s rights to rents receivable are subordinate to the third-party nonrecourse debtholders, and the leased equipment is pledged as collateral to the debtholders. The repayment of the nonrecourse debt is collateralized by lease payments receivable 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 $8.3 billion and $9.2 billion at December 31, 2010 and 2009, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 2010 and 2009.

At December 31, 2010, PMCC’s investments in finance leases were principally comprised of the following investment categories: rail and surface transport (30%), aircraft (25%), electric power (24%), real estate (12%) and manufacturing (9%). Investments located outside the United States, which are all U.S. dollar-denominated, represent 23% and 22% of PMCC’s investments in finance leases at December 31, 2010 and 2009, respectively.

Rents receivable in excess of debt service requirements on third-party nonrecourse debt related to leveraged leases and rents receivable from direct finance leases at December 31, 2010, were as follows:

 

(in millions)    Leveraged
Leases
    Direct
Finance
Leases
    Total  

2011

   $ 82      $ 45      $ 127   

2012

     130        45        175   

2013

     174        45        219   

2014

     259        45        304   

2015

     405          405   

Thereafter

     3,609        27        3,636   
                          

Total

   $ 4,659      $ 207      $ 4,866   
                          

Included in net revenues for the years ended December 31, 2010, 2009 and 2008, were leveraged lease revenues of $160 million, $341 million and $210 million, respectively, and direct finance lease revenues of $1 million, $7 million and $5 million, respectively. Income tax expense on leveraged lease revenues for the years ended December 31, 2010, 2009 and 2008, was $58 million, $119 million and $72 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, 2010, 2009 and 2008.

PMCC maintains an allowance for losses, which provides for estimated losses on its investments in finance leases. PMCC’s portfolio consists of leveraged and direct finance leases to a diverse base of lessees participating in a wide variety of industries. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses.

Quantitative factors that indicate potential default are tied most directly to public debt ratings. PMCC monitors all publicly available information on its obligors, including financial statements and credit rating agency reports. Qualitative factors that indicate the likelihood of recovery if default were to occur include, but are not limited to, underlying collateral value, other forms of credit support, and legal/structural considerations impacting each lease. Using all available information, PMCC calculates potential losses for each lease in its portfolio based on its default and recovery assumption for each lease. The aggregate of these potential losses forms a range of potential losses which is used as a guideline to determine the adequacy of PMCC’s allowance for losses.

PMCC has assessed its allowance for losses for its entire portfolio, and believes that the allowance for losses of $202 million is adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may have to increase its allowance for losses if such conditions worsen. All PMCC lessees were current on their lease payment obligations as of December 31, 2010.

The credit quality of PMCC’s investments in finance leases at December 31, 2010 and 2009 was as follows:

 

(in millions)    2010     2009  

Credit Rating by Standard & Poor’s/Moody’s:

    

“AAA/Aaa” to “A-/A3”

   $ 2,343      $ 2,336   

“BBB+/Baa1” to “BBB-/Baa3”

     1,148        1,424   

“BB+/Ba1” and Lower

     1,213        1,309   
                  

Total

   $ 4,704      $ 5,069   
                  

The activity in the allowance for losses on finance assets for the years ended December 31, 2010, 2009 and 2008 was as follows:

 

(in millions)    2010     2009     2008  

Balance at beginning of year

   $ 266      $ 304      $ 204  

Increase to provision

       15       100  

Amounts written-off

     (64     (53  
                          

Balance at end of year

   $ 202     $ 266      $ 304  
                          

PMCC leased, under several lease arrangements, various types of automotive manufacturing equipment to General Motors Corporation (“GM”), which filed for bankruptcy on June 1, 2009. As of the date of the bankruptcy filing, PMCC stopped recording income on its $214 million investment in finance leases from GM. During 2009, GM rejected one of the leases, which resulted in a $49 million write-off against PMCC’s allowance for losses, lowering the investment in finance leases balance from GM to $165 million. General Motors LLC (“New GM”), which is the successor of GM’s North American automobile business, agreed to assume nearly all the remaining leases under same terms as GM, except for a rebate of a portion of future rents. The assignment of the leases to New GM was approved by the bankruptcy court and became effective in March 2010. During the

 

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first quarter of 2010, GM rejected another lease that was not assigned to New GM. The impact of the rent rebates and the 2010 lease rejection resulted in a $64 million write-off against PMCC’s allowance for losses in the first quarter of 2010. In the first quarter of 2010, PMCC participated in a transaction pursuant to which the equipment related to the rejected leases was sold to New GM. These transactions resulted in an acceleration of deferred taxes of $34 million in 2010. As of December 31, 2010, PMCC’s investment in finance leases from New GM was $101 million.

During the second quarter of 2010, PMCC completed the replacement of Ambac Assurance Corporation (“Ambac”) in the one remaining lease transaction with indirect exposure to this credit support provider whose credit rating remained below investment grade. Ambac was replaced by a company rated “AA+/Aa1” by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”), respectively. PMCC has no remaining exposure to Ambac.

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

During 2009, PMCC increased its allowance for losses by $15 million based on management’s assessment of its portfolio, including its exposure to GM. 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.

See Note 21. Contingencies for a discussion of the Internal Revenue Service (“IRS”) disallowance of certain tax benefits pertaining to several PMCC leveraged lease transactions.

Note 10.

 

 

Short-Term Borrowings and Borrowing Arrangements:

At December 31, 2010 and 2009, Altria Group, Inc. had no short-term borrowings.

At December 31, 2010, 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   
                                 

At December 31, 2010, Altria Group, Inc. had in place 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”). Altria Group, Inc. entered into the 364-Day Agreement on November 17, 2010. This agreement provides for borrowings up to an aggregate principal amount of $0.6 billion and expires on November 16, 2011. The 364-Day Agreement replaced Altria Group, Inc.’s previous $0.6 billion senior unsecured 364-day revolving credit agreement, which was terminated effective November 17, 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, 2010 for the 364-Day-Agreement are 1.0% and 2.25%, respectively. The applicable minimum and maximum rates based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, 2010 for the 3-Year Agreement 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 are 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 consolidated EBITDA of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four-quarters basis. At December 31, 2010, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Revolving Credit Agreements, were 1.7 to 1.0 and 6.2 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Revolving Credit Agreements. The terms “consolidated EBITDA,” “debt” and “consolidated interest expense” as defined in the Revolving Credit Agreements include certain adjustments.

Any commercial paper issued by Altria Group, Inc. and borrowings under the Revolving Credit Agreements are fully and unconditionally guaranteed by PM USA (see Note 22. Condensed Consolidating Financial Information).

 

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Note 11.

 

 

Long-Term Debt:

At December 31, 2010 and 2009, Altria Group, Inc.’s long-term debt, all of which was consumer products debt, consisted of the following:

 

(in millions)    2010     2009  

Notes, 4.125% to 10.20% (average coupon interest rate 8.8%), due through 2039

   $ 12,152      $ 11,918   

Debenture, 7.75% due 2027

     42        42   
                  
     12,194        11,960   

Less current portion of long-term debt

       (775
                  
   $ 12,194      $ 11,185   
                  

Aggregate maturities of long-term debt are as follows:

 

(in millions)   

Altria

Group, Inc.

    UST    

Total
Long-Term

Debt

 

2012

     $  600      $ 600   

2013

   $ 1,459          1,459   

2014

     525          525   

2015

     1,000          1,000   

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, 2010, was $15.5 billion, as compared with its carrying value of $12.2 billion. 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.

During 2010, 2009 and 2008 the following long-term debt transactions occurred:

Altria Group, Inc. Senior Notes:

August 2010 and June 2010 Issuances

n  $1.0 billion (aggregate principal amount) of 4.125% senior unsecured long-term notes due September 2015, which consisted of $800 million issued in June 2010 and $200 million issued in August 2010. Interest on each issuance will be paid semiannually, with interest accruing from June 2010.

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.

December 2008 Issuance

n  $775 million at 7.125%, due 2010, interest payable semi-annually. In June 2010, these notes matured and were repaid.

November 2008 Issuance

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

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.

The net proceeds from the issuances of senior unsecured notes in 2010 were added to Altria Group, Inc.’s general funds, which may be used to meet working capital requirements, refinance debt or for general corporate purposes. The net proceeds from the issuances of senior unsecured long-term notes in November 2008 and December 2008 were used along with borrowings under the Bridge Facility (see Note 3. UST Acquisition) to fund the acquisition of UST. The net proceeds from the issuance 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. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes. With respect to the senior unsecured long-term notes from the February 2009 and November 2008 issuances, 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.

The obligations of Altria Group, Inc. under the notes are fully and unconditionally guaranteed by PM USA (see Note 22. Condensed Consolidating Financial Information).

UST Senior Notes: As discussed in Note 3. UST Acquisition, the purchase price for the acquisition of UST included approximately $1.3 billion of UST debt, of which $900 million was long-term debt and $240 million was current portion of long-term debt. At December 31, 2010 and 2009, UST’s senior notes consisted of the following:

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

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

 

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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.

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

Repayment of 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,                           
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   

Exercise of stock options and issuance of other stock awards

        12,711,022          12,711,022   
                                     

Balances,
December 31,
2010

  2,805,961,317       (717,221,651       2,088,739,666   
                                     

At December 31, 2010, 54,955,609 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. No shares of Serial Preferred Stock have been issued.

Note 13.

 

 

Stock Plans:

In 2010, Altria Group, Inc.’s Board of Directors adopted, and the stockholders approved, the Altria Group, Inc. 2010 Performance Incentive Plan (the “2010 Plan”). The 2010 Plan replaced the 2005 Performance Incentive Plan when it expired on May 1, 2010. Under the 2010 Plan, Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, 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 2010 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 Stock Compensation Plan for Non-Employee Directors (the “Directors Plan”). Shares available to be granted under the 2010 Plan and the Directors Plan at December 31, 2010, were 49,997,960 and 716,708, respectively.

Certain modifications were made to stock options, restricted stock and deferred stock as a result of the PMI spin-off in 2008, as discussed in Note 1. Background and Basis of Presentation.

Altria Group, Inc. has not granted stock options to employees since 2002.

Stock Option Plan

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

 

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Altria Group, Inc. stock option activity was as follows for the year ended December 31, 2010:

 

   

Shares

Subject

to Option

 

Weighted

Average

Exercise
Price

  Average
Remaining
Contractual
Term
    Aggregate
Intrinsic Value
 
   

Balance at December 31, 2009

  12,401,903   $10.74    

Options exercised

   (9,707,570)     10.69    

Options
canceled

        (18,740)       7.53    

Balance/Exercisable at December 31, 2010

    2,675,593     10.95     3 months        $37 million   
   

The aggregate intrinsic value shown in the table above was based on the December 31, 2010 closing price for Altria Group, Inc.’s common stock of $24.62. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was $110 million, $87 million and $119 million, respectively.

Restricted and Deferred Stock

Altria Group, Inc. may grant shares of restricted stock and deferred stock to eligible employees. These shares include nonforfeitable rights to dividends or dividend equivalents during the vesting period but may not be sold, assigned, pledged or otherwise encumbered. 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 shares of restricted stock and deferred stock 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, 2010, 2009 and 2008 of $44 million, $61 million and $38 million, respectively. The deferred tax benefit recorded related to this compensation expense was $16 million, $24 million and $15 million for the years ended December 31, 2010, 2009 and 2008, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $74 million at December 31, 2010 and is expected to be recognized over a weighted-average period of approximately 2 years.

Altria Group, Inc. restricted stock and deferred stock activity was as follows for the year ended December 31, 2010:

 

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

Balance at December 31, 2009

    8,215,081      $ 28.88   

Granted

    2,646,080        19.90   

Vested

    (1,694,518     64.34   

Forfeited

    (401,045     20.13   
                 

Balance at December 31, 2010

    8,765,598        19.72   
                 

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.

The weighted-average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, 2010, 2009 and 2008 was $53 million, $95 million and $56 million, respectively, or $19.90, $16.71 and $22.98 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, 2010, 2009 and 2008 was $33 million, $46 million and $140 million, respectively.

Note 14.

 

 

Earnings per Share:

Basic and diluted earnings per share (“EPS”) from continuing and discontinued operations were calculated using the following:

 

     For the Years Ended December 31,  
(in millions)    2010            2009            2008  

Earnings from continuing operations

   $ 3,905        $ 3,206        $ 3,090   

Earnings from discontinued operations

             1,840   
                                          

Net earnings attributable to Altria Group, Inc.

     3,905          3,206          4,930   

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

     (15       (11       (13
                                          

Earnings for basic EPS

     3,890          3,195          4,917   

Add: Undistributed earnings attributable to unvested restricted and deferred shares

     3          2          4   

Less: Undistributed earnings reallocated to unvested restricted and deferred shares

     (3       (2       (4
                                          

Earnings for diluted EPS

   $ 3,890        $ 3,195       $ 4,917  
                                          

Weighted-average shares for basic EPS

     2,077          2,066          2,075   

Add: Incremental shares from stock options

     2          5          9   
                                          

Weighted-average shares for diluted EPS

     2,079          2,071          2,084   
                                          

For the 2010 and 2008 computations, there were no antidilutive stock options. 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.

 

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Note 15.

 

 

Accumulated Other Comprehensive Earnings (Losses):

The following table sets forth the changes in each component of accumulated other comprehensive earnings (losses), net of income taxes, 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, 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

Period Change

     1         35            41         77   
                                              

Balances, December 31, 2010

   $ 4       $ (1,811    $       $ 323       $ (1,484
                                              

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, 2010, 2009 and 2008:

 

(in millions)   2010      2009     2008  

Earnings from continuing operations before income taxes:

      

United States

  $ 5,709       $ 4,868      $ 4,789   

Outside United States

    14         9     
                          

Total

  $ 5,723       $ 4,877      $ 4,789   
                          

Provision for income taxes:

      

Current:

      

Federal

  $ 1,430       $ 1,512      $ 1,486   

State and local

    258         111        351   

Outside United States

    4         3     
                          
    1,692         1,626        1,837   
                          

Deferred:

      

Federal

    120         (14     (95

State and local

    4         57        (43
                          
    124         43        (138
                          

Total provision for income taxes

  $ 1,816       $ 1,669      $ 1,699   
                          

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 2004 and forward, with years 2004 to 2006 currently under examination by the IRS as part of a routine audit conducted in the ordinary course of business. State jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Certain of Altria Group, Inc.’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2010, 2009 and 2008 was as follows:

 

(in millions)    2010     2009     2008  

Balance at beginning of year

   $ 601      $ 669      $ 615   

Additions based on tax positions related to the current year

     21        15        50   

Additions for tax positions of prior years

     30        34        70   

Reductions for tax positions due to lapse of statutes of limitations

     (58     (22  

Reductions for tax positions of prior years

     (164     (87     (10

Settlements

     (31     (8     (2

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

         (54
                          

Balance at end of year

   $ 399      $ 601      $ 669  
                          

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, 2010 and 2009, were as follows:

 

(in millions)    2010     2009  

Unrecognized tax benefits — Altria Group, Inc.

   $ 220      $ 283   

Unrecognized tax benefits — Kraft

     101        198   

Unrecognized tax benefits — PMI

     78        120   
                  

Unrecognized tax benefits

     399        601   

Accrued interest and penalties

     261        327   

Tax credits and other indirect benefits

     (85     (100
                  

Liability for tax contingencies

   $ 575      $ 828   
                  

 

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The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2010 was $360 million, along with $39 million affecting deferred taxes. However, the impact on net earnings from those unrecognized tax benefits that if recognized at December 31, 2010 would be $181 million, as a result of receivables from Altria Group, Inc.’s former subsidiaries Kraft and PMI of $101 million and $78 million, respectively, discussed below. 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 Kraft and PMI of $198 million and $120 million, respectively, discussed below.

Under the Tax Sharing Agreements entered into in connection with the spin-offs between Altria Group, Inc. and its former subsidiaries – Kraft and PMI, Kraft and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Kraft’s and PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns. As a result, at December 31, 2010, Altria Group, Inc. continues to include the pre-spin-off federal income tax reserves of Kraft and PMI of $101 million and $78 million, respectively, in its liability for uncertain tax positions, and also includes corresponding receivables from Kraft and PMI of $101 million and $78 million, respectively, in other assets.

As discussed in Note 21. Contingencies, Altria Group, Inc. and the IRS executed a closing agreement during the second quarter of 2010 in connection with the IRS’s examination of Altria Group, Inc.’s consolidated federal income tax returns for the years 2000-2003, which resolved various tax matters for Altria Group, Inc. and its subsidiaries, including its former subsidiaries - Kraft and PMI. As a result of the closing agreement, Altria Group, Inc. paid the IRS approximately $945 million of tax and associated interest during the third quarter of 2010 with respect to certain PMCC leveraged lease transactions, referred to by the IRS as lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions, entered into during the 1996-2003 years. Altria Group, Inc. intends to file a claim for refund of approximately $945 million in the first quarter of 2011. If the IRS disallows the claim, as anticipated, Altria Group, Inc. intends to commence litigation in federal court. Because Altria Group, Inc. intends to file a claim for refund, the payment of approximately $945 million is included in other assets on the consolidated balance sheet of Altria Group, Inc. at December 31, 2010 and has not been included in the supplemental disclosure of cash paid for income taxes on the consolidated statement of cash flows for the year ended December 31, 2010. Also, as a result of this closing agreement, in the second quarter of 2010, Altria Group, Inc. recorded (i) a $47 million income tax benefit primarily attributable to the reversal of tax reserves and associated interest related to Altria Group, Inc. and its current subsidiaries; and (ii) an income tax benefit of $169 million attributable to the reversal of federal income tax reserves and associated interest related to the resolution of certain Kraft and PMI tax matters.

In the third quarter of 2009, the IRS, Kraft, and Altria Group, Inc. (as former parent of, and as agent for, Kraft) executed a closing agreement that resolved certain Kraft tax matters arising out of the 2000-2003 IRS audit of Altria Group, Inc. As a result of this closing agreement, in the third quarter of 2009, Altria Group, Inc. recorded an income tax benefit of $88 million attributable to the reversal of federal income tax reserves and associated interest related to the resolution of certain Kraft tax matters.

The tax benefits of $169 million and $88 million for the years ended December 31, 2010 and 2009, respectively, were offset by a reduction to the corresponding receivables from Kraft and PMI, which were recorded as reductions to operating income on Altria Group, Inc.’s consolidated statements of earnings. As a result, there was no impact on Altria Group, Inc.’s net earnings associated with the resolution of the Kraft and PMI tax matters.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2010, Altria Group, Inc. had $261 million of accrued interest and penalties, of which approximately $32 million and $19 million related to Kraft and PMI, respectively, for which Kraft and PMI are responsible under their respective Tax Sharing Agreements. The receivables from Kraft and PMI are included in other assets. As of December 31, 2009, Altria Group, Inc. had $327 million of accrued interest and penalties, of which approximately $79 million and $39 million related to Kraft and PMI, respectively.

For the years ended December 31, 2010, 2009 and 2008, Altria Group, Inc. recognized in its consolidated statements of earnings $(69) million, $3 million and $41 million, respectively, of interest (income) expense associated with uncertain tax positions, which primarily relates to current year interest expense accruals offset by reversals due to resolution of tax matters.

It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits and interest of approximately $33 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, 2010, 2009 and 2008:

 

      2010      2009      2008  

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

     2.9         2.7         4.2   

Reversal of tax reserves no longer required

     (2.7      (1.7   

Domestic manufacturing deduction

     (2.4      (1.5      (1.6

SABMiller dividend benefit

     (2.3      (2.4      (2.1

Other

     1.2         2.1      
                            

Effective tax rate

     31.7      34.2      35.5
                            

 

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The tax provision in 2010 includes tax benefits of $216 million from the reversal of tax reserves and associated interest resulting from the execution of the 2010 closing agreement with the IRS discussed above. The tax provision in 2010 also includes tax benefits of $64 million from the reversal of tax reserves and associated interest following the resolution of several state audits and the expiration of statutes of limitations. 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 2009 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 effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 2010 and 2009:

 

(in millions)    2010     2009  

Deferred income tax assets:

    

Accrued postretirement and postemployment benefits

   $ 1,045      $  1,126   

Settlement charges

     1,393        1,428   

Accrued pension costs

     395        434   

Net operating losses and tax credit carryforwards

     87        113   
                  

Total deferred income tax assets

     2,920        3,101   
                  

Deferred income tax liabilities:

    

Property, plant and equipment

     (425     (503

Intangible assets

     (3,655     (3,579

Investment in SABMiller

     (1,758     (1,632

Other

     (296     (164
                  

Total deferred income tax liabilities

     (6,134     (5,878
                  

Valuation allowances

     (39     (76
                  

Net deferred income tax liabilities

   $ (3,253   $ (2,853
                  

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

At December 31, 2010, Altria Group, Inc. had estimated state tax net operating losses of $1,212 million that, if unutilized, will expire in 2011 through 2030 and state tax credit carryforwards of $82 million which, if unutilized, will expire in 2011 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 or on behalf of 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. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of 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.

 

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Segment data were as follows:

 

     For the Years Ended December 31,  
(in millions)    2010     2009     2008  

Net revenues:

      

Cigarettes

   $ 21,631      $ 20,919      $ 18,753   

Smokeless products

     1,552        1,366     

Cigars

     560        520        387   

Wine

     459        403     

Financial services

     161        348        216   
                          

Net revenues

   $ 24,363      $ 23,556      $ 19,356   
                          

Earnings from continuing operations before income taxes:

      

Operating companies income:

      

Cigarettes

   $ 5,451      $ 5,055      $ 4,866   

Smokeless products

     803        381     

Cigars

     167        176        164   

Wine

     61        43     

Financial services

     157        270        71   

Amortization of intangibles

     (20     (20     (7

Gain on sale of corporate headquarters building

         404   

General corporate expenses

     (216     (204     (266

Reduction of Kraft and PMI tax-related receivables

     (169     (88  

UST acquisition-related transaction costs

       (60  

Corporate asset impairment and exit costs

     (6     (91     (350
                          

Operating income

     6,228        5,462        4,882   

Interest and other debt expense, net

     (1,133     (1,185     (167

Loss on early extinguishment of debt

         (393

Earnings from equity investment in SABMiller

     628        600        467   
                          

Earnings from continuing operations before income taxes

   $ 5,723      $ 4,877      $ 4,789   
                          

PM USA, USSTC and Middleton’s largest customer, McLane Company, Inc., accounted for approximately 27%, 26% and 27% of Altria Group, Inc.’s consolidated net revenues for the years ended December 31, 2010, 2009 and 2008, respectively. These net revenues were reported in the cigarettes, smokeless products and cigars segments. Sales to three distributors accounted for approximately 65% and 64% of net revenues for the wine segment for the years ended December 31, 2010 and 2009, respectively.

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

n     UST Acquisition: In January 2009, Altria Group, Inc. acquired UST, the results of which are reflected in the smokeless products and wine segments. See Note 3. UST Acquisition.

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 year ended December 31, 2008, 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.

 

     For the Years Ended December 31,  
(in millions)    2010     2009     2008  

Depreciation expense:

      

Cigarettes

   $ 164      $ 168      $ 182   

Smokeless products

     32        41     

Cigars

     3        2        1   

Wine

     23        22     

Corporate

     34        38        25   
                          

Total depreciation expense

   $ 256      $ 271      $ 208   
                          

Capital expenditures:

      

Cigarettes

   $ 54      $ 147      $ 220   

Smokeless products

     19        18     

Cigars

     16        4        7   

Wine

     22        24     

Corporate

     57        80        14   
                          

Total capital expenditures

   $ 168      $ 273      $ 241   
                          

Note 18.

 

 

Benefit Plans:

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering substantially all employees of Altria Group, Inc. In certain subsidiaries, employees hired on or after a date specific to their employee group instead are eligible to participate in an enhanced defined contribution plan. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in an enhanced defined contribution plan. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.

 

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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.

Pension Plans

Obligations and Funded Status

The projected benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension plans at December 31, 2010 and 2009, were as follows:

 

(in millions)    2010     2009  

Projected benefit obligation at beginning of year

   $ 6,075      $ 5,342   

Service cost

     80        96   

Interest cost

     356        349   

Benefits paid

     (375     (460

Actuarial losses

     287        105   

Acquisition

       634   

Termination, settlement and curtailment

       9   

Other

     16     
                  

Projected benefit obligation at end of year

     6,439        6,075   
                  

Fair value of plan assets at beginning of year

     4,870        3,929   

Actual return on plan assets

     639        945   

Employer contributions

     30        37   

Funding of UST plans

     26        134   

Benefits paid

     (375     (460

Actuarial gains

     28        2   

Acquisition

       283   
                  

Fair value of plan assets at end of year

     5,218        4,870   
                  

Net pension liability recognized at December 31

   $ 1,221      $ 1,205   
                  

The net pension liability recognized in Altria Group, Inc.’s consolidated balance sheets at December 31, 2010 and 2009, was as follows:

 

(in millions)    2010      2009  

Other accrued liabilities

   $ 30       $ 48   

Accrued pension costs

     1,191         1,157   
                   
   $ 1,221       $ 1,205   
                   

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $6.1 billion and $5.7 billion at December 31, 2010 and 2009, respectively.

At December 31, 2010 and 2009, the accumulated benefit obligations were in excess of plan assets for all pension plans.

The following assumptions were used to determine Altria Group, Inc.’s benefit obligations under the plans at December 31:

 

      2010     2009 

Discount rate

   5.5%    5.9%

Rate of compensation increase

   4.0      4.5  
           

The discount rates for Altria Group, Inc.’s plans were developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the benefit obligations.

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following for the years ended December 31, 2010, 2009 and 2008:

 

(in millions)    2010     2009     2008  

Service cost

   $ 80      $ 96      $ 99   

Interest cost

     356        349        304   

Expected return on plan assets

     (421     (429     (428

Amortization:

      

Net loss

     126        119        59   

Prior service cost

     13        12        12   

Termination, settlement and curtailment

       12        97   
                          

Net periodic pension cost

   $ 154      $ 159      $ 143   
                          

During 2009 and 2008, termination, settlement and curtailment shown in the table above primarily reflect termination benefits related to Altria Group, Inc.’s restructuring programs. In 2009 these costs were partially offset by curtailment gains related to the restructuring of UST’s operations subsequent to the acquisition. For more information on Altria Group, Inc.’s restructuring programs, see Note 6. Asset Impairment, Exit, Implementation and Integration Costs.

The amounts included in termination, settlement and curtailment in the table above for the years ended December 31, 2009 and 2008 were comprised of the following changes:

 

(in millions)    2009      2008  

Benefit obligation

   $ 9       $ 50   

Other comprehensive earnings/losses:

     

Net losses

     3         45   

Prior service cost

        2   
                   
   $ 12       $ 97   
                   

For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2011 are $172 million and $14 million, respectively.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s net pension cost for the years ended December 31:

 

      2010     2009    2008 

Discount rate

   5.9%    6.1%   6.2%

Expected rate of return on plan assets

   8.0      8.0     8.0  

Rate of compensation increase

   4.5      4.5     4.5  
               

Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of pre-tax earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $108 million, $106 million and $128 million in 2010, 2009 and 2008, respectively.

 

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Plan