UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-08940
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia | 13-3260245 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
6601 West Broad Street, Richmond, Virginia | 23230 | |
(Address of principal executive offices) | (Zip Code) |
804-274-2200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, $0.33 1/3 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ |
Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of June 30, 2011, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was approximately $55 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class |
Outstanding at January 31, 2012 | |
Common Stock, $0.33 1/3 par value | 2,045,667,279 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Document |
Parts Into Which Incorporated | |
Portions of the registrants annual report to stockholders for the year ended December 31, 2011 (the 2011 Annual Report) | Parts I, II, and IV | |
Portions of the registrants definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 17, 2012, to be filed with the Securities and Exchange Commission (SEC) on or about April 5, 2012. | Part III |
Item 1. | Business. |
(a) General Development of Business
General: Altria Group, Inc. is a holding company incorporated in the Commonwealth of Virginia in 1985. At December 31, 2011, 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 direct and indirect wholly-owned subsidiaries including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine; 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 27.0% economic and voting interest in SABMiller plc (SABMiller) at December 31, 2011, which is accounted for under the equity method of accounting.
As discussed in Note 3. UST Acquisition to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report, on January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST. As a result of the acquisition, UST became an indirect wholly-owned subsidiary of Altria Group, Inc.
On March 28, 2008, Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. (PMI) to Altria Group, Inc. stockholders in a tax-free distribution. On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft Foods Inc. (Kraft) on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. Following the respective distributions of PMI and Kraft, Altria Group, Inc. does not own any shares of PMI and Kraft stock. Altria Group, Inc. has reflected the results of PMI and Kraft prior to the respective distributions as discontinued operations. The PMI and Kraft spin-offs resulted in a net decrease to Altria Group, Inc.s total stockholders equity of $14.7 billion and $30.5 billion, respectively, on the respective distribution dates. Following the Kraft spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and Kraft shares would receive initially, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the Kraft spin-off. Similarly, following the PMI spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and PMI shares would receive initially, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the PMI spin-off.
On December 11, 2007, Altria Group, Inc. acquired all of the outstanding stock of Middleton for $2.9 billion in cash. The acquisition was financed with available cash.
Source of Funds: Because Altria Group, Inc. is a holding company, its principal sources of funds consist of cash received from its wholly-owned subsidiaries from the payment of dividends and distributions, and the payment of interest on intercompany loans. At December 31, 2011, Altria Group, Inc.s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller, if and when SABMiller pays such dividends.
(b) Financial Information About Segments
At December 31, 2011, Altria Group, Inc.s reportable segments were: cigarettes, smokeless products, cigars, wine and financial services. Net revenues and operating companies income (together with reconciliation to earnings before income taxes) attributable to each such segment for each of the last three years are set forth in Note 16. Segment Reporting to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report.
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Altria Group, Inc.s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (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 4. Goodwill and Other Intangible Assets, net to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report (Note 2).
The relative percentages of operating companies income attributable to each reportable segment were as follows:
2011 |
2010 |
2009 |
||||||||||
Cigarettes |
87.9 | % | 82.1 | % | 85.3 | % | ||||||
Smokeless products |
13.6 | 12.1 | 6.4 | |||||||||
Cigars |
2.6 | 2.5 | 3.0 | |||||||||
Wine |
1.4 | 0.9 | 0.7 | |||||||||
Financial services |
(5.5 | ) | 2.4 | 4.6 | ||||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||
Changes in the relative percentages above reflect the following:
| Asset Impairment, Exit, Implementation and Integration Costs: For a discussion of asset impairment, exit, implementation and integration costs and a breakdown of these costs by segment, see Note 5. Asset Impairment, Exit, Implementation and Integration Costs to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report (Note 5). |
| PMCC Leveraged Lease Charge: During 2011, Altria Group, Inc. recorded a one-time charge of $627 million related to the tax treatment of certain leveraged lease transactions entered into by PMCC (PMCC Leveraged Lease Charge). Included in this charge was a pre-tax charge of $490 million that was recorded as a decrease to PMCCs net revenues and operating companies income (see Note 8. Finance Assets, net to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report (Note 8); Note 15. Income Taxes to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report (Note 15); Note 19. Contingencies to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report (Note 19) and Item 3. Legal Proceedings (Item 3) for further discussion of matters related to this charge). |
| Tobacco and Health Judgments: During 2011, Altria Group, Inc. recorded pre-tax charges of $98 million excluding accrued interest, related to tobacco and health judgments in the Williams, Bullock and Scott cases. These charges are reflected in the cigarettes segment and are discussed further in Item 3 and Note 19. |
Beginning January 1, 2012, the chief operating decision maker is evaluating the combination of the former cigars and cigarettes segments as a single smokeable products segment, which is related to a cost reduction program announced in October 2011 (the 2011 Cost Reduction Program).
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Effective with the first quarter of 2012, Altria Group, Inc.s reportable segments will be smokeable products, smokeless products, wine and financial services. In addition, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA. For further discussion on the 2011 Cost Reduction Program, see Note 5.
(c) Narrative Description of Business
Portions of the information called for by this Item are hereby incorporated by reference to the paragraphs captioned Managements Discussion and Analysis of Financial Condition and Results of Operations Operating Results by Business Segment on pages 79 to 92 of the 2011 Annual Report and made a part hereof.
Tobacco Space
Altria Group, Inc.s tobacco operating companies include PM USA, USSTC and other subsidiaries of UST, and Middleton. In addition, Altria Group Distribution Company provides centralized sales, distribution and consumer engagement services for Altria Group, Inc.s tobacco operating companies.
Altria Group, Inc.s tobacco operating companies believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 30% of adult smokers are interested in spit-free smokeless alternatives to cigarettes.
Cigarettes: PM USA is the largest cigarette company in the United States, with total cigarette shipment volume in the United States of approximately 135.1 billion units in 2011, a decrease of approximately 4.0% from 2010. Marlboro, the principal cigarette brand of this company, has been the largest-selling cigarette brand in the United States for over 30 years.
Smokeless products: USSTC is the leading producer and marketer of moist smokeless tobacco products. The smokeless products segment includes the premium brands, Copenhagen and Skoal, value brands, Red Seal and Husky and Marlboro Snus, a PM USA spit-less smokeless tobacco product. Substantially all of the smokeless products are manufactured and sold to customers in the United States. Total smokeless products shipment volume was 734.6 million units in 2011, an increase of 1.4% from 2010.
Cigars: Middleton is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco to customers, substantially all of which are located in the United States. Total shipment volume for the cigars segment was 1,246 million units in 2011, which was unchanged from 2010. Black & Mild is the principal cigar brand of Middleton. In 2011, Middleton entered into a contract manufacturing arrangement to source the production of a portion of its cigars overseas. Middleton entered into this arrangement to access additional production capacity in an uncertain competitive environment and a tax environment that potentially benefits imported large cigars over those manufactured domestically.
Distribution, Competition and Raw Materials: Altria Group, Inc.s tobacco subsidiaries sell their tobacco products principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services.
The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, taste, price, product innovation, marketing, packaging and distribution constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price promotions and other discounts, including coupons, product promotions and allowances for new products.
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In June 2009, the President signed into law the Family Smoking Prevention and Tobacco Control Act (FSPTCA), which provides the United States Food and Drug Administration (FDA) with broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; the authority to require disclosures of related information; and the authority to enforce the FSPTCA and related regulations. The law also grants the FDA authority to extend its application, by regulation, to other tobacco products, including cigars. The FSPTCA imposes significant new restrictions on the sale, advertising and promotion of tobacco products. PM USA and a subsidiary of USSTC are subject to quarterly user fees as a result of this legislation, and the cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. PM USA, USSTC and other U.S. tobacco manufacturers have agreed to other marketing restrictions in the United States as part of the settlements of state health care cost recovery actions.
In the United States, under a contract growing program, PM USA purchases burley and flue-cured leaf tobaccos of various grades and styles directly from tobacco growers. Under the terms of this program, PM USA agrees to purchase the amount of tobacco specified in the grower contracts. PM USA also purchases a portion of its United States tobacco requirements through leaf merchants. In 2003, PM USA and certain other defendants reached an agreement with plaintiffs to settle a suit filed on behalf of a purported class of tobacco growers and quota-holders. The agreement includes a commitment by each settling manufacturer defendant, including PM USA, to purchase a certain percentage of its leaf requirements from U.S. tobacco growers over a period of at least ten years. These quantities are subject to adjustment in accordance with the terms of the settlement agreement.
Tobacco production in the United States was historically subject to government controls, including the production control programs administered by the United States Department of Agriculture (the USDA). In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (FETRA) was signed into law. PM USA, USSTC, and Middleton are all subject to obligations imposed by FETRA. FETRA eliminated the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out is approximately $9.5 billion and is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. The quota buy-out payments had offset PM USAs obligations to make payments to the National Tobacco Grower Settlement Trust (the NTGST), a trust fund established in 1999 by the major domestic tobacco product manufacturers to provide aid to tobacco growers and quota holders. PM USAs payment obligations under the NTGST expired on December 15, 2010.
In February 2011, PM USA filed a lawsuit in federal court challenging the USDAs method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above and used by the FDA to calculate the industrys FDA user fees. PM USA asserts in this litigation that the USDA violated FETRA and its own regulations by failing to apply the most current federal excise tax (FET) rates enacted by Congress which became effective in April 2009, in calculating the class share allocations. PM USA has filed administrative appeals of its FETRA assessments for fiscal year 2011 (all of which have been or are expected to be denied by the USDA) and has submitted a petition for rulemaking with USDA (which petition was denied by the USDA on November 16, 2011), in each case asserting that USDA erroneously failed to base the FETRA class share allocations on the current FET rates. PM USA is appealing the USDAs calculations methodology as well as the denial of the petition for rulemaking and the denial of its quarterly assessment challenges.
The quota buy-out did not have a material impact on Altria Group, Inc.s 2011 consolidated results, and Altria Group, Inc. does not currently anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2012 and beyond.
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USSTC purchases burley, dark fire-cured and air-cured tobaccos of various grades and styles from domestic tobacco growers under a contract growing program as well as from leaf merchants.
Middleton purchases burley and dark air-cured tobaccos of various grades and styles through leaf merchants. Middleton does not have a contract growing program.
Altria Group, Inc.s tobacco subsidiaries believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipated production requirements.
Wine
Altria Group, Inc. acquired UST and its premium wine business, Ste. Michelle, in January 2009. Ste. Michelle is a producer of premium varietal and blended table wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle and Columbia Crest, and owns wineries in or distributes wines from several other wine regions and foreign countries. Ste. Michelles total 2011 wine shipment volume of 7.3 million cases increased 9.6% from 2010.
Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stags Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon. In addition, Ste. Michelle distributes Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States.
Distribution, Competition and Raw Materials: A key element of Ste. Michelles strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers and a focus on improving product mix to higher-priced premium products.
Ste. Michelles business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelles sales occur through state-licensed distributors.
Federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelles wine business.
Ste. Michelle uses grapes harvested from its own vineyards or purchased from independent growers, as well as bulk wine purchased from other sources. Grape production can be adversely affected by weather and other forces that may limit production. At the present time, Ste. Michelle believes that there is a sufficient supply of grapes and bulk wine available in the market to satisfy its current and expected production requirements.
Financial Services
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, PMCCs operating companies income will fluctuate over time as investments mature or are sold. At December 31, 2011, PMCCs net finance receivables of approximately $3.5 billion in leveraged leases, which are included in finance assets, net, on Altria
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Group, Inc.s consolidated balance sheet, consisted of rents receivable ($10.7 billion) and the residual value of assets under lease ($1.3 billion), reduced by third-party nonrecourse debt ($6.8 billion) and unearned income ($1.7 billion). 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 accounting principles generally accepted in the United States of America, the third-party nonrecourse debt has been offset against the related rents receivable and has been presented on a net basis within finance assets, net, on Altria Group, Inc.s consolidated balance sheets. Finance assets, net, at December 31, 2011, also included net finance receivables for direct finance leases ($0.2 billion) and an allowance for losses ($0.2 billion).
At December 31, 2011, PMCCs investments in finance leases were principally comprised of the following investment categories: aircraft (30%), rail and surface transport (26%), electric power (25%), real estate (10%) and manufacturing (9%).
See Note 8, Note 15, Note 19 and Item 3 for a discussion of the Internal Revenue Services (IRS) disallowance of certain tax benefits pertaining to several PMCC leveraged lease transactions.
Other Matters
Customers: The largest customer of PM USA, USSTC and Middleton, McLane Company, Inc., accounted for approximately 27%, 27% and 26% of Altria Group, Inc.s consolidated net revenues for the years ended December 31, 2011, 2010 and 2009, respectively. These net revenues were reported in the cigarettes, smokeless products and cigars segments.
Sales to three distributors accounted for approximately 66%, 65% and 64% of net revenues for the wine segment for the years ended December 31, 2011, 2010 and 2009, respectively.
Employees: At December 31, 2011, Altria Group, Inc. and its subsidiaries employed approximately 9,900 people. As a result of the 2011 Cost Reduction Program, there will be a reduction of approximately 700 employees by February 29, 2012.
Executive Officers of Altria Group, Inc.: The disclosure regarding executive officers is set forth in Item 10 of this Form 10-K under the heading Executive Officers as of February 16, 2012.
Research and Development: The research and development expense for the years ended December 31, 2011, 2010 and 2009 are set forth in Note 18. Additional Information to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report.
Intellectual Property: Trademarks are of material importance to Altria Group, Inc. and its operating companies, and are protected by registration or otherwise. In addition, as of December 31, 2011, the portfolio of over 500 United States patents owned by Altria Group, Inc.s businesses, as a whole, was material to Altria Group, Inc. and its tobacco businesses. However, no one patent or group of related patents was material to Altria Group, Inc.s business or its tobacco businesses as of December 31, 2011. Altria Group, Inc.s businesses also have proprietary secrets, technology, know-how, processes and other intellectual property rights that are protected by appropriate confidentiality measures. Certain trade secrets are material to Altria Group, Inc. and its tobacco and wine businesses.
Environmental Regulation: Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the
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Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. As discussed in Note 2, 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. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation 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 results of operations, capital expenditures, financial position or cash flows.
(d) Financial Information About Geographic Areas
Substantially all of Altria Group, Inc.s net revenues are from sales generated in the United States for each of the last three fiscal years and substantially all of Altria Group, Inc.s long-lived assets are located in the United States.
(e) Available Information
Altria Group, Inc. is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Investors may read and copy any document that Altria Group, Inc. files, including this Annual Report on Form 10-K, at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Altria Group, Inc.s SEC filings.
Altria Group, Inc. makes available free of charge on or through its website (www.altria.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after Altria Group, Inc. electronically files such material with, or furnishes it to, the SEC. Investors can access Altria Group, Inc.s filings with the SEC by visiting www.altria.com/secfilings.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this report or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 1A. | Risk Factors |
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.
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We* may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, in reports to security holders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as strategy, expects, continues, plans, anticipates, believes, will, estimates, forecasts, intends, projects, goals, objectives, guidance, targets and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.s securities. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in the Business Environment sections preceding our discussion of operating results of our subsidiaries businesses in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
Tobacco-Related Litigation. Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states now limit the dollar amount of bonds or require no
* | This section uses the terms we, our and us when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context. |
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bond at all. Tobacco litigation plaintiffs, however, have challenged the constitutionality of Floridas bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. See Item 3, Note 19 and Exhibits 99.1 and 99.2 for a discussion of pending tobacco-related litigation.
Tobacco Regulation and Control Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action, including efforts aimed at reducing the incidence of tobacco use, restricting marketing and advertising, imposing regulations on packaging, warnings and disclosure of flavors or other ingredients, prohibiting the sale of tobacco products with certain characterizing flavors or other characteristics, limiting or prohibiting the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packing sizes, and seeking to hold them responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.
PM USA, USSTC and other Altria Group, Inc. subsidiaries are subject to regulation, and may become subject to additional regulation, by the FDA, as discussed in detail in Tobacco Space Business Environment FSPTCA and FDA Regulation in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report. We cannot predict how the FDA will implement and enforce its statutory authority, including by promulgating additional regulations and pursuing possible investigatory or enforcement actions.
Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels. Actions by the FDA or other federal, state or local governments or agencies may impact the consumer acceptability of tobacco products, limit adult consumer choices, delay or prevent the launch of new or modified tobacco products, restrict communications to adult consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, require the recall or removal of tobacco products from the marketplace or otherwise significantly increase the cost of doing business, all or any of which may have a material adverse impact on the results of operations or financial condition of Altria Group, Inc.
Excise Taxes. Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the state, federal and local levels. Tax increases are expected to continue to have an adverse impact on sales of our tobacco products due to lower
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consumption levels and to a potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an impact on the reported share performance of tobacco products of Altria Group, Inc.s tobacco subsidiaries. For further discussion, see Tobacco Space Business Environment Excise Taxes in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report.
Increased Competition in the United States Tobacco Categories. Each of Altria Group, Inc.s tobacco subsidiaries operates in highly competitive tobacco categories. Settlements of certain tobacco litigation in the United States have resulted in substantial cigarette price increases. PM USA faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and increased imports of foreign lowest priced brands. USSTC faces significant competition in the smokeless tobacco category, both from existing competitors and new entrants, and has experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.
Governmental Investigations. From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. We cannot predict whether new investigations may be commenced or the outcome of such investigations, and it is possible that our subsidiaries businesses could be materially affected by an unfavorable outcome of future investigations.
New Product Technologies. Altria Group, Inc.s subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and potentially outside the United States) products that meet their taste expectations and evolving preferences. Potential solutions being researched include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. These efforts may include arrangements with third parties. Moreover, these efforts may not succeed. If they do not succeed, but one or more of their competitors does, our subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of such products with claims of reduced risk to consumers or whether consumers purchase decisions would be affected by such claims, which could affect the commercial viability of any such products that might be developed.
Adjacency Strategy. Altria Group, Inc. and its subsidiaries have adjacency growth strategies involving moves and potential moves into complementary products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful. For a related discussion, see New Product Technologies above.
Tobacco Price, Availability and Quality. Any significant change in tobacco leaf prices, quality or availability could affect our tobacco subsidiaries profitability and business. For a discussion of factors that influence leaf prices, availability and quality, see Tobacco Space Business Environment Tobacco Price, Availability and Quality in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report.
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Tobacco Key Facilities; Supply Security. Altria Group, Inc.s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of significant suppliers. A natural or man-made disaster or other disruption that affects the manufacturing facilities of any of Altria Group, Inc.s tobacco subsidiaries or the facilities of any significant suppliers of any of Altria Group, Inc.s tobacco subsidiaries could adversely impact the operations of the affected subsidiaries. An extended interruption in operations experienced by one or more Altria Group, Inc. subsidiaries or significant suppliers could have a material adverse effect on the results of operations and financial condition of Altria Group, Inc.
Attracting and Retaining Talent. Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the decreasing social acceptance of tobacco usage. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, our tobacco subsidiaries may be unable to attract and retain the best talent.
Competition, Evolving Consumer Preferences and Economic Downturns. Each of our tobacco and wine subsidiaries is subject to intense competition, changes in consumer preferences and changes in economic conditions. To be successful, they must continue to:
| promote brand equity successfully; |
| anticipate and respond to new and evolving consumer preferences; |
| develop new products and markets within and potentially outside of the United States and to broaden brand portfolios in order to compete effectively with lower-priced products; |
| improve productivity; and |
| protect or enhance margins through cost savings and price increases. |
The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products. The volumes of our tobacco and wine subsidiaries could suffer accordingly.
Our finance subsidiary, PMCC, holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If parties to PMCCs leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.
Acquisitions. Altria Group, Inc. from time to time considers acquisitions. From time to time we may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or other event could impact our credit ratings or the outlook for those ratings. Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms, that we will realize any of the anticipated benefits from an acquisition or that acquisitions will be quickly accretive to earnings.
Capital Markets. Access to the capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the capital markets and any resulting tightening of credit availability, pricing and/or credit terms may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
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Exchange Rates. For purposes of financial reporting, the equity earnings attributable to Altria Group, Inc.s investment in SABMiller are translated into U.S. dollars from various local currencies based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar against these currencies, our reported equity earnings in SABMiller will be reduced because the local currencies will translate into fewer U.S. dollars.
Asset Impairment. We periodically calculate the fair value of our goodwill and intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. If an impairment is determined to exist, we will incur impairment losses, which will reduce our earnings. For further discussion, see Discussion and Analysis Critical Accounting Policies and Estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report.
IRS Challenges to PMCC Leases. The IRS has challenged and is expected to further challenge the tax treatment of certain of PMCCs leveraged leases. As discussed in Item 3 and Note 19, should Altria Group, Inc. not prevail in any one or more of these matters, Altria Group, Inc. will have to accelerate the payment of significant amounts of federal and state income tax and pay associated interest costs and penalties, if imposed. In the second quarter of 2011, Altria Group, Inc. recorded the PMCC Leveraged Lease Charge, which is discussed in Item 3, Note 8, Note 15 and Note 19. The PMCC Leveraged Lease Charge excludes potential penalties because Altria Group, Inc. believes that it met the applicable standards to avoid any associated penalties at the time it claimed the deductions on its tax returns.
Wine Competition; Grape Supply; Regulation and Excise Taxes. Ste. Michelles business is subject to significant competition, including from many large, well-established domestic and international companies. The adequacy of Ste. Michelles grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington state. Supply shortages related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelles sales. In addition, federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages, may have an adverse effect on Ste. Michelles wine business. For further discussion, see Wine Segment Business Environment in Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report.
Information Systems. Altria Group, Inc. and its subsidiaries use information systems to help manage business processes, collect and interpret business data and communicate internally and externally with employees, suppliers, customers and others. Many of these information systems are managed by third-party service providers. We have backup systems and business continuity plans in place and we take care to protect our systems and data from unauthorized access. Nevertheless, failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could result in loss of revenue, assets or personal or other sensitive data, cause damage to the reputation of our companies and their brands and result in legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.
Item 1B. | Unresolved Staff Comments. |
None.
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Item 2. | Properties. |
The property in Richmond, Virginia that serves as the headquarters facility for Altria Group, Inc., PM USA, USSTC and Middleton and certain other subsidiaries is under lease.
At December 31, 2011, the cigarettes segment utilized two tobacco manufacturing and processing facilities in the Richmond, Virginia area, both of which are owned and operated by PM USA. 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. In April 2011, PM USA completed the de-commissioning of the Cabarrus facility. In addition, PM USA owns a research and technology center in Richmond, Virginia that is leased to an affiliate, Altria Client Services Inc.
At December 31, 2011, the smokeless segment utilized four smokeless tobacco manufacturing and processing facilities located in Franklin Park, Illinois; Hopkinsville, Kentucky; Nashville, Tennessee; and Richmond, Virginia, all of which are owned and operated by a wholly-owned subsidiary of USSTC. USSTC ceased production at its York County, Virginia manufacturing facility in August 2011.
At December 31, 2011, the cigars segment utilized two manufacturing and processing facilities one in King of Prussia, Pennsylvania and one in Limerick, Pennsylvania, both of which are owned and operated by Middleton.
At December 31, 2011, the wine segment utilized 11 wine-making facilities seven in Washington State, three in California and one in Oregon. All of these facilities are owned and operated by Ste. Michelle, with the exception of a facility which is leased by Ste. Michelle in the state of Washington. In addition, in order to support the production of its wines, the wine segment utilized vineyards in Washington State, California and Oregon which are leased or owned by Ste. Michelle.
The plants and properties owned or leased and operated by Altria Group, Inc. and its subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs.
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Item 3. | Legal Proceedings. |
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states now limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Floridas bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed elsewhere in this Item 3. Legal Proceedings: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.
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Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation
Types and Number of Cases
Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits alleging that the uses of the terms Lights and Ultra Lights constitute deceptive and unfair trade practices, common law fraud, or violations of the Racketeer Influenced and Corrupt Organizations Act (RICO); and (v) other tobacco-related litigation described below. Plaintiffs theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and Lights/Ultra Lights cases are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of February 13, 2012, December 31, 2011 and December 31, 2010.
Type of Case |
Number of Cases Pending as of February 13, 2012 |
Number of Cases Pending as of December 31, 2011 |
Number of Cases Pending as of December 31, 2010 |
|||||||||
Individual Smoking and Health Cases (1) |
78 | 82 | 92 | |||||||||
Smoking and Health Class Actions and Aggregated Claims Litigation (2) |
7 | 7 | 11 | |||||||||
Health Care Cost Recovery Actions |
1 | 1 | 4 | |||||||||
Lights/Ultra Lights Class Actions |
18 | 17 | 27 | |||||||||
Tobacco Price Cases |
1 | 1 | 1 |
(1) | Does not include 2,586 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (ETS). The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Certain Broin plaintiffs have filed a motion seeking approximately $50 million in sanctions for alleged interference by R.J. Reynolds Tobacco Company (R.J. Reynolds) and PM USA with Lorillard, Inc.s acceptance of offers of settlement in the Broin progeny cases. In May 2011, the trial court denied this motion. Plaintiffs have appealed. |
Also, does not include approximately 6,544 individual smoking and health cases (3,306 state court cases and 3,238 federal court cases) brought by or on behalf of approximately 8,098 plaintiffs in Florida (4,861 state court plaintiffs and 3,237 federal court plaintiffs) following the decertification of the Engle case discussed below. It is possible that some of these cases are duplicates and that additional cases have been filed but not yet recorded on the courts dockets.
(2) | Includes as one case the 613 civil actions (of which 351 are actions against PM USA) that are to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals has ruled that the United States Constitution does not preclude a trial in two phases in this case. Under the current trial plan, issues related to defendants conduct and plaintiffs entitlement to punitive damages would be determined in the first phase. The second |
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phase would consist of individual trials to determine liability, if any, as well as compensatory and punitive damages, if any. Trial in the case began in October 2011, but ended in a mistrial in November 2011. The court has not yet scheduled a new trial. |
International Tobacco-Related Cases
As of February 13, 2012, PM USA is a named defendant in Israel in one Lights class action. PM USA is a named defendant in four health care cost recovery actions in Canada, three of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in six smoking and health class actions filed in various Canadian provinces. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Pending and Upcoming Tobacco-Related Trials
As of February 13, 2012, 50 Engle progeny cases and 2 individual smoking and health cases against PM USA are set for trial in 2012. Cases against other companies in the tobacco industry are also scheduled for trial in 2012. Trial dates are subject to change.
Trial Results
Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 51 smoking and health, Lights/Ultra Lights and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 34 of the 51 cases. These 34 cases were tried in Alaska (1), California (5), Florida (9), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (4), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (1). A motion for a new trial was granted in one of the cases in Florida.
Of the 17 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, fourteen have reached final resolution. A verdict against defendants in one health care cost recovery case (Blue Cross/Blue Shield) was reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported Lights class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December 2006. In December 2008, the plaintiff in Price filed a motion with the state trial court to vacate the judgment dismissing this case in light of the United States Supreme Courts decision in Good (see below for a discussion of developments in Good and Price).
As of February 13, 2012, twenty-seven Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Courts Engle decision. Fourteen verdicts were returned in favor of plaintiffs and thirteen verdicts were returned in favor of PM USA. See Smoking and Health Litigation Engle Progeny Trial Results below for a discussion of these verdicts.
After exhausting all appeals in those cases resulting in adverse verdicts (Engle progeny and non-Engle progeny), PM USA has paid judgments (and related costs and fees) totaling approximately $225 million and interest totaling approximately $134 million as of February 13, 2012. As described below, PM USA recorded provisions for Bullock and Williams in the fourth quarter of 2011 and paid the Williams judgment in January 2012.
Security for Judgments
To obtain stays of judgments pending current appeals, as of February 13, 2012, PM USA has posted various forms of security totaling approximately $63 million, the majority of which has been collateralized with cash deposits that are included in other assets on the consolidated balance sheets.
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Smoking and Health Litigation
Overview
Plaintiffs allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
Non-Engle Progeny Trial Results
Summarized below are the non-Engle progeny smoking and health cases that were pending during 2011 in which verdicts were returned in favor of plaintiffs. A chart listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation Engle Progeny Trial Results below.
D. Boeken: In August 2011, a California jury returned a verdict in favor of plaintiff, awarding $12.8 million in compensatory damages against PM USA. PM USAs motions for judgment notwithstanding the verdict and for a new trial were denied in October 2011. PM USA has filed a notice of appeal, and posted a bond in the amount of $12.8 million in November 2011.
Bullock: In October 2002, a California jury awarded against PM USA $850,000 in compensatory damages and $28 billion in punitive damages. In December 2002, the trial court reduced the punitive damages award to $28 million. In April 2006, the California Court of Appeal affirmed the $28 million punitive damages award. In August 2006, the California Supreme Court denied plaintiffs petition to overturn the trial courts reduction of the punitive damages award and granted PM USAs petition for review challenging the punitive damages award. In May 2007, the California Supreme Court transferred the case to the Second District of the California Court of Appeal with directions that the court vacate its 2006 decision and reconsider the case in light of the United States Supreme Courts decision in the Williams case discussed below. In January 2008, the California Court of Appeal reversed the judgment with respect to the $28 million punitive damages award, affirmed the judgment in all other respects, and remanded the case to the trial court to conduct a new trial on the amount of punitive damages. In March 2008, plaintiffs and PM USA appealed to the California Supreme Court. In April 2008, the California Supreme Court denied both petitions for review. In July 2008, $43.3 million of escrow funds were returned to PM USA. The case was remanded to the superior court for a new trial on the amount of punitive damages, if any. In August 2009, the jury returned a verdict, and in December 2009, the superior court entered a judgment, awarding plaintiff $13.8 million in punitive damages, plus costs. In December 2009, PM USA filed a motion for judgment notwithstanding the verdict seeking a reduction of the punitive damages award, which motion was denied in January 2010. PM USA noticed an appeal in February 2010 and posted an appeal bond of approximately $14.7 million. In August 2011, the California Court of Appeal affirmed the final judgment entered in favor of the plaintiffs. In November 2011, the California Supreme Court denied PM USAs petition for review. In the fourth quarter of 2011, PM USA recorded a pre-tax provision of $14 million related to damages and costs and $3 million related to interest. As of December 31, 2011, PM USA recorded a total pre-tax provision of $14.7 million related to damages and costs and $4.1 million related to interest. These
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amounts were included in other accrued liabilities on Altria Group, Inc.s consolidated balance sheet at December 31, 2011.
Schwarz: In March 2002, an Oregon jury awarded against PM USA $168,500 in compensatory damages and $150 million in punitive damages. In May 2002, the trial court reduced the punitive damages award to $100 million. In October 2002, PM USA posted an appeal bond of approximately $58.3 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals decision reversing and remanding the case for a new trial on punitive damages. In June 2010, the Oregon Supreme Court affirmed the court of appeals decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. In December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately $500,000 in costs. In January 2011, the trial court issued an order releasing PM USAs appeal bond. In March 2011, PM USA filed a claim against the plaintiff for its costs and disbursements on appeal, plus interest. Trial on the amount of punitive damages began on January 30, 2012.
Williams: In March of 1999, an Oregon jury awarded against PM USA $800,000 in compensatory damages (capped statutorily at $500,000), $21,500 in medical expenses, and $79.5 million in punitive damages. The trial court reduced the punitive damages award to approximately $32 million, and PM USA and plaintiff appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In October 2003, the United States Supreme Court set aside the Oregon appellate courts ruling and directed the Oregon court to reconsider the case in light of the 2003 State Farm decision by the United States Supreme Court, which limited punitive damages. In June 2004, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In February 2006, the Oregon Supreme Court affirmed the Court of Appeals decision. The United States Supreme Court granted PM USAs petition for writ of certiorari in May 2006. In February 2007, the United States Supreme Court vacated the $79.5 million punitive damages award and remanded the case to the Oregon Supreme Court for further proceedings consistent with its decision. In January 2008, the Oregon Supreme Court affirmed the Oregon Court of Appeals June 2004 decision, which in turn, upheld the jurys compensatory damages award and reinstated the jurys award of $79.5 million in punitive damages. After the United States Supreme Court declined to issue a writ of certiorari, PM USA paid $61.1 million to the plaintiff, representing the compensatory damages award, forty percent of the punitive damages award and accrued interest. Although Oregon state law requires that sixty percent of any punitive damages award be paid to the state, the Oregon trial court ruled in February 2010 that, as a result of the Master Settlement Agreement (MSA), the state is not entitled to collect its sixty percent share of the punitive damages award. In June 2010, the trial court further held that, under the Oregon statute, PM USA is not required to pay the sixty percent share to plaintiff. Both the plaintiff in Williams and the state appealed these rulings to the Oregon Court of Appeals. In December 2010, on its own motion, the Oregon Court of Appeals certified the appeals to the Oregon Supreme Court, and the Oregon Supreme Court accepted certification. In December 2011, the Oregon Supreme Court reversed the trial court and ruled that PM USA was required to pay the state the sixty percent portion of the punitive damages award. PM USAs petition for rehearing before the Oregon Supreme Court was denied in January 2012. In the fourth quarter of 2011, PM USA recorded a pre-tax provision of approximately $48 million related to damages and costs and $54 million related to interest. These amounts were included in other accrued liabilities on Altria Group, Inc.s consolidated balance sheet at December 31, 2011. In January 2012, PM USA paid an amount of approximately $102 million in satisfaction of the judgment and associated costs and interest.
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See Scott Class Action below for a discussion of the verdict and post-trial developments in the Scott class action and Federal Government Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America healthcare cost recovery case.
Engle Class Action
In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified, and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiffs claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Courts order.
In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Third District Court of Appeal denied defendants
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motion. In May 2007, defendants motion for a partial stay of the mandate pending the completion of appellate review was denied by the Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. In October 2007, the United States Supreme Court denied defendants petition. In November 2007, the United States Supreme Court denied defendants petition for rehearing from the denial of their petition for writ of certiorari.
In February 2008, the trial court decertified the class except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Courts mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and will receive no credit at this time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.
In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.
The deadline for filing Engle progeny cases, as required by the Florida Supreme Courts decision, expired in January 2008. As of February 13, 2012, approximately 6,544 cases (3,306 state court cases and 3,238 federal court cases) were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 8,098 plaintiffs, (4,861 state court plaintiffs and 3,237 federal court plaintiffs). It is possible that some of these cases are duplicates. Some of these cases have been removed from various Florida state courts to the federal district courts in Florida, while others were filed in federal court.
Federal Engle Progeny Cases
Three federal district courts (in the Merlob, B. Brown and Burr cases) ruled in 2008 that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs claims, and two of those rulings (B. Brown and Burr) were certified by the trial court for interlocutory review. The certification in both cases was granted by the United States Court of Appeals for the Eleventh Circuit and the appeals were consolidated. In February 2009, the appeal in Burr was dismissed for lack of prosecution. In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates the defendants due process rights. Rather, plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made. In the Burr case, PM USA filed a motion seeking a ruling from the district court regarding the preclusive effect of the Engle findings pursuant to the Eleventh Circuits decision in B. Brown. In May 2011, the district court denied that motion without prejudice on procedural grounds.
In the Waggoner case, the United States District Court for the Middle District of Florida (Jacksonville) ruled in December 2011 that application of the Engle findings to establish the wrongful conduct elements of plaintiffs claims consistent with Martin or J. Brown did not violate defendants due process rights. The court ruled, however, that plaintiffs must establish legal causation to establish liability. With respect to punitive damages, the district court held that plaintiffs could rely on the findings in support of their punitive damages claims but that in addition plaintiffs must demonstrate specific conduct by specific defendants, independent of the Engle findings, that satisfies the standards for awards of punitive damages. PM USA and the other defendants sought appellate review of the due
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process ruling. On February 7, 2012, the district court denied the motion for interlocutory appeal, but did apply the ruling to all active pending federal Engle progeny cases. As a result, the ruling can be appealed after an adverse verdict.
Engle progeny cases pending in the federal district courts in the Middle District of Florida asserting individual claims by or on behalf of approximately 3,200 plaintiffs remain stayed. There are currently 31 active cases pending in federal court. Discovery is proceeding in these cases and the first trial began on February 7, 2012.
Florida Bond Cap Statute
In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) have challenged the constitutionality of the bond cap statute. The Florida Attorney General has intervened in these cases in defense of the constitutionality of the statute.
Trial court rulings have been rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs bond cap statute challenges in those cases. The plaintiffs have appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and Alexander. The Florida Supreme Court has granted review of the Hall decision.
No federal court has yet to address the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
Engle Progeny Trial Results
As of February 13, 2012, twenty-seven Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Fourteen verdicts (see Hess, Barbanell, F. Campbell, Naugle, Douglas, R. Cohen, Putney, Kayton (formerly Tate), Piendle, Hatziyannakis, Huish, Tullo, Allen and Hallgren descriptions in the table below) were returned in favor of plaintiffs and thirteen verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Frazier, C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious and Szymanski). The jury in the Weingart case returned a verdict against PM USA awarding no damages, but in September 2011, the trial court granted an additur. For a further discussion of this case, see the verdict chart below. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of February 13, 2012.
In Lukacs, a case that was tried to verdict before the Florida Supreme Court Engle decision, the Florida Third District Court of Appeal in March 2010 affirmed per curiam the trial court decision without issuing an opinion. Under Florida procedure, further review of a per curiam affirmance without opinion by the Florida Supreme Court is generally prohibited. Subsequently in 2010, after defendants petition for rehearing with the Court of Appeal was denied, defendants paid the judgment.
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The chart below lists the verdicts and post-trial developments in the Engle progeny cases that were pending during 2011 and 2012 in which verdicts were returned in favor of plaintiffs.
Date |
Plaintiff |
Verdict |
Post-Trial Developments | |||
January 2012 | Hallgren | On January 26, 2012, a Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants. | On February 3 and February 6, 2012, the defendants filed various post-trial motions, including motions for judgment notwithstanding the verdict and for a new trial. | |||
July 2011 | Weingart | A Palm Beach County jury returned a verdict in the amount of zero damages and allocated 3% of the fault to each of the defendants (PM USA, R.J. Reynolds and Lorillard Tobacco Company). | In September 2011, the trial court granted plaintiffs motion for additur or a new trial, concluding that an additur of $150,000 is required for plaintiffs pain and suffering. The trial court has entered final judgment and, since PM USA was allocated 3% of the fault, its portion of the damages would be $4,500. PM USA has filed its notice of appeal, and posted a bond in the amount of $5,000 in November 2011. | |||
April 2011 | Allen | A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of $6 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of $900,000). The jury also awarded $17 million in punitive damages against each of the defendants. | In May 2011, the defendants filed various post-trial motions, and the trial court entered final judgment. Argument was heard in June 2011. In October 2011, the trial court granted the defendants motion for remittitur, reducing the punitive damages award against PM USA to $2.7 million, and denied defendants remaining post-trial motions. PM USA filed a notice of appeal, and posted a bond in the amount of $1,250,000 in November 2011. |
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Date |
Plaintiff |
Verdict |
Post-Trial Developments | |||
April 2011 | Tullo | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard Tobacco Company and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45% of the fault to PM USA (an amount of $2,025,000). | In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal and posted a $2 million bond. | |||
February 2011 | Huish | An Alachua County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $750,000 in compensatory damages and allocated 25% of the fault to PM USA (an amount of $187,500). The jury also awarded $1.5 million in punitive damages against PM USA. | In March 2011, the trial court entered final judgment. PM USA filed post-trial motions, which were denied in April 2011. In May 2011, PM USA filed its notice of appeal and posted a $1.7 million appeal bond. Argument on the merits of the appeal is scheduled for March 21, 2012. | |||
February 2011 | Hatziyannakis | A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $270,000 in compensatory damages and allocated 32% of the fault to PM USA (an amount of approximately $86,000). | In April 2011, the trial court denied PM USAs post-trial motions for a new trial and to set aside the verdict. In June 2011, PM USA filed its notice of appeal and posted an $86,000 appeal bond. | |||
August 2010 | Piendle | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $4 million in compensatory damages and allocated 27.5% of the fault to PM USA (an amount of approximately $1.1 million). The jury also awarded $90,000 in punitive damages against PM USA. | In September 2010, the trial court entered final judgment. In January 2011, the trial court denied the parties post-trial motions. PM USA filed its notice of appeal and posted a $1.2 million appeal bond. |
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Date |
Plaintiff |
Verdict |
Post-Trial Developments | |||
July 2010 | Kayton (formerly Tate) | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5 million appeal bond. | |||
April 2010 | Putney | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment. PM USA filed its notice of appeal and posted a $1.6 million appeal bond. | |||
March 2010 | R. Cohen | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant. | In July 2010, the trial court entered final judgment and, in August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million appeal bond. | |||
March 2010 | Douglas | A Hillsborough County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded $5 million in compensatory damages. Punitive damages were dismissed prior to trial. The jury allocated 18% of the fault to PM USA, resulting in an award of $900,000. | In June 2010, PM USA filed its notice of appeal and posted a $900,000 appeal bond. In September 2010, the plaintiff filed with the trial court a challenge to the constitutionality of the Florida bond cap statute but withdrew the challenge in August 2011. Argument on the merits of the appeal was heard in October 2011. |
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Date |
Plaintiff |
Verdict |
Post-Trial Developments | |||
November 2009 | Naugle | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA. | In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages. In April 2010, PM USA filed its notice of appeal and posted a $5 million appeal bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical error. The case remains on appeal. Argument on the merits of the appeal is scheduled for February 21, 2012. | |||
August 2009 | F. Campbell | An Escambia County jury returned a verdict in favor of the plaintiff and against R.J. Reynolds, PM USA and Liggett Group. The jury awarded $7.8 million in compensatory damages. In September 2009, the trial court entered final judgment and awarded the plaintiff $156,000 in damages against PM USA due to the jury allocating only 2% of the fault to PM USA. | In January 2010, defendants filed their notice of appeal, and PM USA posted a $156,000 appeal bond. In March 2011, the Florida First District Court of Appeal affirmed per curiam (with citation) the trial courts decision without issuing an opinion. PM USAs motion to certify the Court of Appeals decision to the Florida Supreme Court as a matter of public importance was denied in May 2011. In June 2011, PM USA filed a petition for discretionary review with the Florida Supreme Court. In July 2011, the Florida Supreme Court declined to hear PM USAs petition. In December 2011, PM USA and Liggett Group filed a joint petition for a writ of certiorari with the United States Supreme Court and R.J. Reynolds filed a separate petition for a writ of certiorari. As of December 31, 2011, PM USA has recorded a provision of approximately $242,000 for compensatory damages, costs and interest. |
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Date |
Plaintiff |
Verdict |
Post-Trial Developments | |||
August 2009 | Barbanell | A Broward County jury returned a verdict in favor of the plaintiff, awarding $5.3 million in compensatory damages. The judge had previously dismissed the punitive damages claim. In September 2009, the trial court entered final judgment and awarded plaintiff $1.95 million in actual damages. The judgment reduced the jurys $5.3 million award of compensatory damages due to the jury allocating 36.5% of the fault to PM USA. | A notice of appeal was filed by PM USA in September 2009, and PM USA posted a $1.95 million appeal bond. Argument on the merits of the appeal was heard in September 2011. | |||
February 2009 | Hess | A Broward County jury found in favor of plaintiffs and against PM USA. The jury awarded $3 million in compensatory damages and $5 million in punitive damages. In June 2009, the trial court entered final judgment and awarded plaintiffs $1,260,000 in actual damages and $5 million in punitive damages. The judgment reduced the jurys $3 million award of compensatory damages due to the jury allocating 42% of the fault to PM USA. | PM USA noticed an appeal to the Fourth District Court of Appeal in July 2009. Argument was heard in March 2011. |
Appeals of Engle Progeny Verdicts
Plaintiffs in various Engle progeny cases have appealed adverse rulings or verdicts, and in some cases, PM USA has cross-appealed. PM USAs appeals of adverse verdicts are discussed in the chart above.
Since the remand of B. Brown (discussed above under the heading Federal Engle Progeny Cases), the Eleventh Circuits ruling on Florida state law is currently superseded by two state appellate rulings in Martin, an Engle progeny case against R.J. Reynolds in Escambia County, and J. Brown, an Engle progeny case against R.J. Reynolds in Broward County. In Martin, the Florida First District Court of Appeal rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs burden of proof. R.J. Reynolds had sought Florida Supreme Court review in that case but, in July 2011, the Florida Supreme Court declined to hear the appeal. In December 2011, petitions for certiorari were filed with the United States Supreme Court by R.J. Reynolds in Campbell, Martin, Gray and Hall and by PM USA and Liggett Group in Campbell.
In J. Brown, the Florida Fourth District Court of Appeal also rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs burden of proof. However, the Fourth District expressly disagreed with the First Districts Martin decision by ruling that
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Engle progeny plaintiffs must prove legal causation on their claims. In addition, the J. Brown court expressed concerns that using the Engle findings to reduce plaintiffs burden may violate defendants due process rights. In October 2011, the Fourth District denied R.J. Reynolds motion to certify J. Brown to the Florida Supreme Court for review. R.J. Reynolds is seeking review of the case by the Florida Supreme Court.
As noted above in Federal Engle Progeny Cases, there has been no federal appellate review of the federal due process issues raised by the use of findings from the original Engle trial in Engle progeny cases.
Because of the substantial period of time required for the federal and state appellate processes, it is possible that PM USA may have to pay certain outstanding judgments in the Engle progeny cases before the final adjudication of these issues by the Florida Supreme Court or the United States Supreme Court.
Other Smoking and Health Class Actions
Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 59 smoking and health class actions involving PM USA in Arkansas (1), California (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).
PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in six actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan and British Columbia. In Saskatchewan and British Columbia, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases including chronic obstructive pulmonary disease, emphysema, heart disease or cancer after smoking defendants cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants cigarettes. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Scott Class Action
In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs sought creation of a fund to pay for medical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants, including PM USA, in connection with plaintiffs medical monitoring claims, but also found that plaintiffs could benefit from smoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knew about smoking and diseases and marketed their products to minors. In May 2004, in the second phase of the trial, the jury awarded plaintiffs approximately $590 million against all defendants jointly and severally, to fund a 10-year smoking cessation program. Defendants appealed.
In April 2010, the Louisiana Fourth Circuit Court of Appeal issued a decision that affirmed in part prior decisions ordering the defendants to fund a statewide 10-year smoking cessation program. After conducting its own independent review of the record, the Court of Appeal made its own factual findings
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with respect to liability and the amount owed, lowering the amount of the judgment to approximately $241 million, plus interest commencing July 21, 2008, the date of entry of the amended judgment. In addition, the Court of Appeal declined plaintiffs cross appeal requests for a medical monitoring program and reinstatement of other components of the smoking cessation program. The Court of Appeal specifically reserved to the defendants the right to assert claims to any unspent or unused surplus funds at the termination of the smoking cessation program. In June 2010, defendants and plaintiffs filed separate writ of certiorari applications with the Louisiana Supreme Court. The Louisiana Supreme Court denied both sides applications. In September 2010, upon defendants application, the United States Supreme Court granted a stay of the judgment pending the defendants filing and the Courts disposition of the defendants petition for a writ of certiorari. In June 2011, the United States Supreme Court denied the defendants petition. As of March 31, 2011, PM USA recorded a provision of $26 million in connection with the case and additional provisions of approximately $3.7 million related to accrued interest. In the second quarter of 2011, after the June 2011 United States Supreme Court denial of defendants petition for a writ of certiorari, PM USA recorded an additional provision of approximately $36 million related to the judgment and approximately $5 million related to interest.
In August 2011, PM USA paid its share of the judgment in an amount of approximately $70 million. The defendants payments have been deposited into a court-supervised fund that is intended to pay for smoking cessation programs. In October 2011, plaintiffs counsel filed a motion for an award of attorneys fees and costs. Plaintiffs counsel seek additional fees from defendants ranging from $91 million to $642 million. Additionally, plaintiffs counsel request an award of approximately $13 million in costs. As of December 31, 2011, PM USA had recorded a provision of approximately $1.3 million for costs, but is opposing plaintiffs counsels request for additional costs and for fees. Argument on whether defendants can be held liable for attorneys fees occurred on February 3, 2012.
Other Medical Monitoring Class Actions
In addition to the Scott class action discussed above, two purported medical monitoring class actions are pending against PM USA. These two cases were brought in New York (Caronia, filed in January 2006 in the United States District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in December 2006 in the United States District Court for the District of Massachusetts) on behalf of each states respective residents who: are age 50 or older; have smoked the Marlboro brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by a physician for suspected lung cancer. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a court-supervised program providing members of the purported class Low Dose CT Scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases do not seek punitive damages. A case brought in California (Xavier) was dismissed in July 2011, and a case brought in Florida (Gargano) was voluntarily dismissed with prejudice in August 2011.
In Caronia, in February 2010, the district court granted in part PM USAs summary judgment motion, dismissing plaintiffs strict liability and negligence claims and certain other claims, granted plaintiffs leave to amend their complaint to allege a medical monitoring cause of action and requested further briefing on PM USAs summary judgment motion as to plaintiffs implied warranty claim and, if plaintiffs amend their complaint, their medical monitoring claim. In March 2010, plaintiffs filed their amended complaint and PM USA moved to dismiss the implied warranty and medical monitoring claims. In January 2011, the district court granted PM USAs motion, dismissed plaintiffs claims and declared plaintiffs motion for class certification moot in light of the dismissal of the case. The plaintiffs have appealed that decision to the United States Court of Appeals for the Second Circuit. Argument has been set for March 1, 2012.
In Donovan, the Supreme Judicial Court of Massachusetts, in answering questions certified to it by the district court, held in October 2009 that under certain circumstances state law recognizes a claim
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by individual smokers for medical monitoring despite the absence of an actual injury. The court also ruled that whether or not the case is barred by the applicable statute of limitations is a factual issue to be determined by the trial court. The case was remanded to federal court for further proceedings. In June 2010, the district court granted in part the plaintiffs motion for class certification, certifying the class as to plaintiffs claims for breach of implied warranty and violation of the Massachusetts Consumer Protection Act, but denying certification as to plaintiffs negligence claim. In July 2010, PM USA petitioned the United States Court of Appeals for the First Circuit for appellate review of the class certification decision. The petition was denied in September 2010. As a remedy, plaintiffs have proposed a 28-year medical monitoring program with an approximate cost of $190 million. In April 2011, plaintiffs moved to amend their class certification to extend the cut-off date for individuals to satisfy the class membership criteria from December 14, 2006 to August 1, 2011. The district court granted this motion in May 2011. Trial has been postponed. In June 2011, plaintiffs filed various motions for summary judgment and to strike affirmative defenses. In October 2011, PM USA filed a motion for class decertification. Argument occurred on January 27, 2012.
Evolving medical standards and practices could have an impact on the defense of medical monitoring claims. For example, the first publication of the findings of the National Cancer Institutes National Lung Screening Trial (NLST) in June 2011 reported a 20% reduction in lung cancer deaths among certain long term smokers receiving Low Dose CT Scanning for lung cancer. Since then, various public health organizations have begun to develop new lung cancer screening guidelines. Also, a number of hospitals have advertised the availability of screening programs.
Health Care Cost Recovery Litigation
Overview
In the health care cost recovery litigation, governmental entities and non-governmental plaintiffs seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
The claims asserted include the claim that cigarette manufacturers were unjustly enriched by plaintiffs payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, unclean hands (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to set off any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by standing in the shoes of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.
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Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs appeals from the cases decided by five circuit courts of appeals.
In April 2011, in the health care cost recovery case brought against PM USA and other defendants by the City of St. Louis, Missouri and approximately 40 Missouri hospitals, the jury returned a verdict in favor of the defendants on all counts. In June 2011, the litigation was concluded in a consent judgment pursuant to which the plaintiffs waived all rights to appeal in exchange for the defendants waiver of any claim for costs.
Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer (MSP) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases were brought in New York (2), Florida (2) and Massachusetts (1). All were dismissed by federal courts.
In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (1, recently dismissed), the Marshall Islands (dismissed), and Canada (4), and other entities have stated that they are considering filing such actions. In the case in Israel (Clalit), in July 2011, the Israel Supreme Court reversed the trial courts decision denying defendants motion to dismiss and dismissed the case. In August 2011, plaintiff filed a motion for rehearing with the Israel Supreme Court, which the court denied on January 26, 2012. This litigation has concluded.
In September 2005, in the first of the four health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USAs and other defendants challenge to the British Columbia courts exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. In December 2009, the Court of Appeals of British Columbia ruled that certain defendants can proceed against the Federal Government of Canada as third parties on the theory that the Federal Government of Canada negligently misrepresented to defendants the efficacy of a low tar tobacco variety that the Federal Government of Canada developed and licensed to defendants. In May 2010, the Supreme Court of Canada granted leave to the Federal Government of Canada to appeal this decision and leave to defendants to cross-appeal the Court of Appeals decision to dismiss claims against the Federal Government of Canada based on other theories of liability. In July 2011, the Supreme Court of Canada dismissed the third-party claims against the Federal Government of Canada.
During 2008, the Province of New Brunswick, Canada, proclaimed into law previously adopted legislation allowing reimbursement claims to be brought against cigarette manufacturers, and it filed suit shortly thereafter. In September 2009, the Province of Ontario, Canada, filed suit against a number of cigarette manufacturers based on previously adopted legislation nearly identical in substance to the New Brunswick health care cost recovery legislation. In February 2011, the Province of Newfoundland and Labrador filed a case substantially similar to the ones brought by New Brunswick and Ontario.
PM USA is named as a defendant in the British Columbia case, while Altria Group, Inc. and PM USA are named as defendants in the New Brunswick, Ontario and Newfoundland cases. Several other provinces and territories in Canada have enacted similar legislation or are in the process of enacting
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similar legislation. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
Settlements of Health Care Cost Recovery Litigation
In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the State Settlement Agreements). The State Settlement Agreements require that the original participating manufacturers make substantial annual payments of approximately $9.4 billion each year, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the original participating manufacturers are required to pay settling plaintiffs attorneys fees, subject to an annual cap of $500 million. For the years ended December 31, 2011, 2010 and 2009, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements and the Fair and Equitable Tobacco Reform Act of 2004 (FETRA) was approximately $4.8 billion, $4.8 billion and $5.0 billion, respectively.
The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.
Possible Adjustments in MSA Payments for 2003 to 2010
Pursuant to the provisions of the MSA, domestic tobacco product manufacturers, including PM USA, who are original signatories to the MSA (the Original Participating Manufacturers or OPMs) are participating in proceedings that may result in downward adjustments to the amounts paid by the OPMs and the other MSA-participating manufacturers to the states and territories that are parties to the MSA for each of the years 2003 to 2010. The proceedings relate to an MSA payment adjustment (the NPM Adjustment) based on the collective loss of market share for the relevant year by all participating manufacturers who are subject to the payment obligations and marketing restrictions of the MSA to non-participating manufacturers (NPMs) who are not subject to such obligations and restrictions.
As part of these proceedings, an independent economic consulting firm jointly selected by the MSA parties or otherwise selected pursuant to the MSAs provisions is required to determine whether the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a significant factor, each state may avoid a downward adjustment to its share of the participating manufacturers annual payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Any potential downward adjustment would then be reallocated to any states that do not establish such diligent enforcement. PM USA believes that the MSAs arbitration clause requires a state to submit its claim to have diligently enforced a qualifying escrow statute to binding arbitration before a panel of three former federal judges in the manner provided for in the MSA. A number of states have taken the position that this claim should be decided in state court on a state-by-state basis.
An independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for each of the years 2003 2005. A different independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share
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for the year 2006. Following the firms determination for 2006, the OPMs and the states agreed that the states would not contest that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for the years 2007, 2008 and 2009. Accordingly, the OPMs and the states have agreed that no significant factor determination by an independent economic consulting firm will be necessary with respect to the participating manufacturers collective loss of market share for the years 2007, 2008 and 2009 (the significant factor agreement). This agreement became effective for 2007, 2008 and 2009 on February 1, 2010, 2011 and 2012, respectively. The MSAs Independent Auditor has determined that the participating manufacturers collectively lost market share for 2010. Subsequent to that determination, the OPMs and the states have agreed to extend the significant factor agreement to apply to such collective loss of market share for 2010, as well as to any collective loss of market share that the participating manufacturers experience for 2011-2012. This agreement will become effective for 2010 on February 1, 2013. If the Independent Auditor determines that the participating manufacturers collectively lost market share for 2011 or 2012, this agreement will become effective for 2011 on February 1, 2014 and for 2012 on February 1, 2015.
Following the significant factor determination with respect to 2003, thirty-eight states filed declaratory judgment actions in state courts seeking a declaration that the state diligently enforced its escrow statute during 2003. The OPMs and other MSA-participating manufacturers responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in eleven MSA states and territories that did not file declaratory judgment actions. Courts in all but one of the forty-six MSA states and the District of Columbia and Puerto Rico have ruled that the question of whether a state diligently enforced its escrow statute during 2003 is subject to arbitration. Several of these rulings may be subject to further review. One state court (in State of Montana) has ruled that the diligent enforcement claims of that state may be litigated in state court, rather than in arbitration. In January 2010, the OPMs filed a petition for a writ of certiorari in the United States Supreme Court seeking further review of the Montana decision holding that a states diligent enforcement claims may be litigated in state court, rather than in arbitration. The petition was denied in June 2010. Following the denial of this petition, Montana renewed an action in its state court seeking a declaratory judgment that it diligently enforced its escrow statute during 2003 and other relief. The case is now proceeding in the trial court.
PM USA, the other OPMs and approximately twenty-five other MSA-participating manufacturers have entered into an agreement regarding arbitration with forty-five MSA states concerning the 2003 NPM Adjustment, including the states claims of diligent enforcement for 2003. The agreement further provides for a partial liability reduction for the 2003 NPM Adjustment for states that entered into the agreement by January 30, 2009 and are determined in the arbitration not to have diligently enforced a qualifying escrow statute during 2003. Based on the number of states that entered into the agreement by January 30, 2009 (forty-five), the partial liability reduction for those states is 20%. The partial liability reduction would reduce the amount of PM USAs 2003 NPM Adjustment by up to a corresponding percentage. The selection of the arbitration panel for the 2003 NPM Adjustment was completed in July 2010, and the arbitration is currently ongoing. Proceedings to determine state diligent enforcement claims for the years 2004 through 2010 have not yet been scheduled.
Once a significant factor determination in favor of the participating manufacturers for a particular year has been made by an economic consulting firm, or the states agreement not to contest significant factor for a particular year has become effective, PM USA has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into a disputed payments account or withhold it altogether. PM USA has made its full MSA payment due in each year from 2006 2010 to the states (subject to a right to recoup the NPM Adjustment amount in the form of a credit against future MSA payments), even though it had the right to deduct the disputed amounts of the 2003 2007 NPM Adjustments, as described above, from such MSA payments. PM USA paid its share of the amount of the disputed 2008 NPM Adjustment shown below into the MSAs disputed payments account in
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connection with its MSA payment due in 2011. The approximate maximum principal amounts of PM USAs share of the disputed NPM Adjustment for the years 2003 through 2010, as currently calculated by the MSAs Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which PM USA believes it would be entitled in the manner provided in the MSA):
Year for which NPM Adjustment calculated |
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||
Year in which deduction for NPM Adjustment may be taken |
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||||||||
PM USAs Approximate Share of Disputed NPM Adjustment |
$ | 337 | $ | 388 | $ | 181 | $ | 154 | $ | 207 | $ | 267 | $ | 211 | $ | 209 | ||||||||||||||||
The foregoing amounts may be recalculated by the Independent Auditor if it receives information that is different from or in addition to the information on which it based these calculations, including, among other things, if it receives revised sales volumes from any participating manufacturer. Disputes among the manufacturers could also reduce the foregoing amounts. The availability and the precise amount of any NPM Adjustment for 2003-2010 will not be finally determined until 2013 or thereafter. There is no certainty that the OPMs and other MSA-participating manufacturers will ultimately receive any adjustment as a result of these proceedings, and the amount of any adjustment received for a year could be less than the amount for that year listed above. If the OPMs do receive such an adjustment through these proceedings, the adjustment would be allocated among the OPMs pursuant to the MSAs provisions. It is expected that PM USA would receive its share of any adjustments for 2003 2007 in the form of a credit against future MSA payments and its share of any adjustment for 2008 in the form of a withdrawal from the disputed payments account.
PM USA intends to pursue vigorously the disputed NPM Adjustments for 2003-2010 through the proceedings described above. PM USA would be willing, however, to enter into a settlement of those disputed NPM Adjustments if it determined that such a settlement were in its best interests.
Other Disputes Related to MSA Payments
In addition to the disputed NPM Adjustments described above, MSA states and participating manufacturers, including PM USA, are conducting another arbitration to resolve certain other disputes related to the calculation of the participating manufacturers payments under the MSA. PM USA disputes the method by which ounces of roll your own tobacco have been converted to cigarettes for purposes of calculating the downward volume adjustments to its MSA payments. PM USA believes that, for the years 2004 2010, the use of an incorrect conversion method resulted in excess MSA payments by PM USA of approximately $85 million in the aggregate. If PM USA prevails on this issue, it would be entitled to a credit against future MSA payments in that amount, plus interest. In addition, PM USA seeks application of what it believes to be the correct method for years subsequent to 2010.
This arbitration will also resolve a dispute concerning whether the total domestic cigarette market and certain other calculations related to the participating manufacturers MSA payments should be determined based on the net number of cigarettes on which federal excise tax is paid, as is currently the case, or whether the adjusted gross number of cigarettes on which federal excise tax is paid is the correct methodology. PM USA anticipates that this arbitration will not be concluded until later in 2012 or thereafter.
No assurance can be given that PM USA will prevail in this arbitration.
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Other MSA-Related Litigation
PM USA was named as a defendant in an action (Vibo) brought in October 2008 in federal court in Kentucky by an MSA participating manufacturer that is not an OPM. Other defendants include various other participating manufacturers and the Attorneys General of all 52 states and territories that are parties to the MSA. The plaintiff alleged that certain of the MSAs payment provisions discriminate against it in favor of certain other participating manufacturers in violation of the federal antitrust laws and the United States Constitution. The plaintiff also sought injunctive relief, alteration of certain MSA payment provisions as applied to it, treble damages under the federal antitrust laws, and/or rescission of its joinder in the MSA. The plaintiff also filed a motion for a preliminary injunction enjoining the states from enforcing the allegedly discriminatory payment provisions against it during the pendency of the action. In January 2009, the district court dismissed the complaint and denied plaintiffs request for preliminary injunctive relief. In January 2010, the court entered final judgment dismissing the case. Plaintiff appealed this decision to the United States Court of Appeals for the Sixth Circuit. Argument was heard in October 2011.
Without naming PM USA or any other private party as a defendant, NPMs and/or their distributors or customers have filed several legal challenges to the MSA and related legislation. New York state officials and the Attorneys General for 18 other states are defendants in a lawsuit (King, formerly Pryor) filed in the United States District Court for the Southern District of New York in which plaintiffs allege that the MSA and/or related legislation violates federal antitrust laws and the Commerce Clause of the United States Constitution. The United States Court of Appeals for the Second Circuit has held that the allegations in that lawsuit, if proven, establish a basis for relief on antitrust and Commerce Clause grounds and that the trial courts in New York have personal jurisdiction sufficient to enjoin other states officials from enforcing their MSA-related legislation. On remand, the trial court held that plaintiffs are unlikely to succeed on the merits and refused to enjoin the enforcement of New Yorks allocable share amendment to the MSAs Model Escrow Statute. That decision was affirmed by the United States Court of Appeals for the Second Circuit. In March 2011, the trial court granted summary judgment on all claims for the New York state officials. Plaintiffs filed a motion to modify the judgment, which the trial court denied on January 30, 2012. The matter is now on appeal before the Second Circuit. In October, November and December 2011, plaintiffs voluntarily dismissed six states from the case.
In addition to the King decision above, the United States Courts of Appeals for the Second, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have affirmed dismissals or grants of summary judgment in favor of state officials in seven other cases asserting antitrust and constitutional challenges to the allocable share amendment legislation in those states.
In January 2011, an international arbitration tribunal rejected claims brought against the United States challenging MSA-related legislation in various states under the North American Free Trade Agreement.
Federal Governments Lawsuit
In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria Group, Inc. asserting claims under three federal statutes, namely the Medical Care Recovery Act (MCRA), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits which arose from defendants
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allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal governments future costs of providing health care resulting from defendants alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the governments MCRA and MSP claims, but permitted discovery to proceed on the governments claims for relief under the civil provisions of RICO.
The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate remedy. In May 2004, the trial court issued an order denying defendants motion for partial summary judgment limiting the disgorgement remedy. In February 2005, a panel of the United States Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of RICO and entered summary judgment in favor of defendants with respect to the disgorgement claim. In July 2005, the government petitioned the United States Supreme Court for further review of the Court of Appeals ruling that disgorgement is not an available remedy, and in October 2005, the Supreme Court denied the petition.
In June 2005, the government filed with the trial court its proposed final judgment seeking remedies of approximately $14 billion, including $10 billion over a five-year period to fund a national smoking cessation program and $4 billion over a ten-year period to fund a public education and counter-marketing campaign. Further, the governments proposed remedy would have required defendants to pay additional monies to these programs if targeted reductions in the smoking rate of those under 21 are not achieved according to a prescribed timetable. The governments proposed remedies also included a series of measures and restrictions applicable to cigarette business operations including, but not limited to, restrictions on advertising and marketing, potential measures with respect to certain price promotional activities and research and development, disclosure requirements for certain confidential data and implementation of a monitoring system with potential broad powers over cigarette operations.
In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in 7 of the 8 sub-schemes to defraud that the government had alleged. Specifically, the court found that:
| defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking; |
| defendants hid from the public that cigarette smoking and nicotine are addictive; |
| defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction; |
| defendants falsely marketed and promoted low tar/light cigarettes as less harmful than full-flavor cigarettes; |
| defendants falsely denied that they intentionally marketed to youth; |
| defendants publicly and falsely denied that ETS is hazardous to non-smokers; and |
| defendants suppressed scientific research. |
The court did not impose monetary penalties on the defendants, but ordered the following relief: (i) an injunction against committing any act of racketeering relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses
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information concerning cigarettes; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including lights, ultra lights and low tar, which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of corrective statements in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking low tar or light cigarettes, defendants manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission (FTC) for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the governments costs in bringing the action.
The defendants appealed and, in May 2009, a three judge panel of the Court of Appeals for the District of Columbia Circuit issued a per curiam decision largely affirming the trial courts judgment against defendants and in favor of the government. Although the panel largely affirmed the remedial order that was issued by the trial court, it vacated the following aspects of the order:
| its application to defendants subsidiaries; |
| the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application; |
| its point-of-sale display provisions; and |
| its application to Brown & Williamson Holdings. |
The Court of Appeals panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly.
Furthermore, the Court of Appeals panel rejected all of the governments and intervenors cross appeal arguments and refused to broaden the remedial order entered by the trial court. The Court of Appeals panel also left undisturbed its prior holding that the government cannot obtain disgorgement as a permissible remedy under RICO.
In July 2009, defendants filed petitions for a rehearing before the panel and for a rehearing by the entire Court of Appeals. Defendants also filed a motion to vacate portions of the trial courts judgment on the grounds of mootness because of the passage of the Family Smoking Prevention and Tobacco Control Act (FSPTCA), granting the United States Food and Drug Administration (the FDA) broad authority over the regulation of tobacco products. In September 2009, the Court of Appeals entered three per curiam rulings. Two of them denied defendants petitions for panel rehearing or for rehearing en banc. In the third per curiam decision, the Court of Appeals denied defendants suggestion of mootness and motion for partial vacatur. In February 2010, PM USA and Altria Group, Inc. filed their certiorari petitions with the United States Supreme Court. In addition, the federal government and the intervenors filed their own certiorari petitions, asking the court to reverse an earlier Court of Appeals decision and hold that civil RICO allows the trial court to order disgorgement as well as other equitable relief, such as smoking cessation remedies, designed to redress continuing consequences of prior RICO violations. In June 2010, the United States Supreme Court denied all of the parties petitions. In July 2010, the Court of Appeals issued its mandate lifting the stay of the trial courts judgment and
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remanding the case to the trial court. As a result of the mandate, except for those matters remanded to the trial court for further proceedings, defendants are now subject to the injunction discussed above and the other elements of the trial courts judgment.
In February 2011, the government submitted its proposed corrective statements and the trial court referred issues relating to a document repository to a special master. The defendants filed a response to the governments proposed corrective statements and filed a motion to vacate the trial courts injunction in light of the FSPTCA, which motion was denied in June 2011. The defendants have appealed the trial courts ruling to the United States Court of Appeals for the District of Columbia Circuit. Argument is scheduled for April 20, 2012.
Apart from the matters on appeal, two issues remain pending before the district court: (i) the substance of the court-ordered corrective statements and (ii) the requirements related to point-of-sale signage. In November 2011, the district court ordered the parties to submit their views on whether the district court should delay its order on these issues while other courts decide more recent cases challenging the FDAs new rules imposing certain tobacco marketing restrictions and graphic warnings. The parties complied with the district courts requests, and defendants asked the court to defer resolution of these issues until these other cases are fully resolved. On January 26, 2012, the district court ruled that it would not delay its decision until after the resolution of the cases challenging the FDAs new rules. The district court has not addressed the content of the corrective communications or the requirements related to point-of-sale signage.
In December 2011, the parties to the lawsuit entered into an agreement as to the issues concerning the document repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million into the district court.
Lights/Ultra Lights Cases
Overview
Plaintiffs in certain pending matters seek certification of their cases as class actions and allege, among other things, that the uses of the terms Lights and/or Ultra Lights constitute deceptive and unfair trade practices, common law fraud, or RICO violations, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury, and damages, the statute of limitations, express preemption by the Federal Cigarette Labeling and Advertising Act (FCLAA) and implied preemption by the policies and directives of the FTC, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. As of February 13, 2012, a total of eighteen such cases were pending in the United States. Four of these cases were pending in a multidistrict litigation proceeding in a single U.S. federal court as discussed below. The other cases were pending in various U.S. state courts. In addition, a purported Lights class action is pending against PM USA in Israel. Other entities have stated that they are considering filing such actions against Altria Group, Inc. and PM USA.
In the one Lights case pending in Israel (El-Roy), hearings on plaintiffs motion for class certification were held in November and December 2008, and an additional hearing on class certification was held in November 2011. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
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The Good Case
In May 2006, a federal trial court in Maine granted PM USAs motion for summary judgment in Good, a purported Lights class action, on the grounds that plaintiffs claims are preempted by the FCLAA and dismissed the case. In August 2007, the United States Court of Appeals for the First Circuit vacated the district courts grant of PM USAs motion for summary judgment on federal preemption grounds and remanded the case to district court. The district court stayed the case pending the United States Supreme Courts ruling on defendants petition for writ of certiorari with the United States Supreme Court, which was granted in January 2008. The case was stayed pending the United States Supreme Courts decision. In December 2008, the United States Supreme Court ruled that plaintiffs claims are not barred by federal preemption. Although the Court rejected the argument that the FTCs actions were so extensive with respect to the descriptors that the state law claims were barred as a matter of federal law, the Courts decision was limited: it did not address the ultimate merits of plaintiffs claim, the viability of the action as a class action, or other state law issues. The case was returned to the federal court in Maine and consolidated with other federal cases in the multidistrict litigation proceeding discussed below. In June 2011, the plaintiffs voluntarily dismissed the case without prejudice after the district court denied plaintiffs motion for class certification.
Federal Multidistrict Proceeding
Since the December 2008 United States Supreme Court decision in Good, and through February 13, 2012, twenty-four purported Lights class actions were served upon PM USA and, in certain cases, Altria Group, Inc. These cases were filed in 14 states, the U.S. Virgin Islands and the District of Columbia. All of these cases either were filed in federal court or were removed to federal court by PM USA.
A number of purported Lights class actions were transferred and consolidated by the Judicial Panel on Multidistrict Litigation (JPMDL) before the United States District Court for the District of Maine for pretrial proceedings (MDL proceeding). These cases, and the states in which each originated, included: Biundo (Illinois), Cabbat (Hawaii), Calistro (U.S. Virgin Islands), Corse (Tennessee), Domaingue (New York), Good (Maine), Haubrich (Pennsylvania), McClure (Tennessee), Mirick (Mississippi), Mulford (New Mexico), Parsons (District of Columbia), Phillips (Ohio), Slater (District of Columbia), Tang (New York), Tyrer (California), Williams (Arkansas) and Wyatt (Wisconsin).
In November 2010, the district court in the MDL proceeding denied plaintiffs motion for class certification in four cases, covering the jurisdictions of California, the District of Columbia, Illinois and Maine. These jurisdictions were selected by the parties as sample cases, with two selected by plaintiffs and two selected by defendants. Plaintiffs sought appellate review of this decision but, in February 2011, the United States Court of Appeals for the First Circuit denied plaintiffs petition for leave to appeal. In June 2011, plaintiffs in twelve cases voluntarily dismissed without prejudice their cases, and in August 2011, plaintiff in McClure voluntarily dismissed the case without prejudice. In December 2011, the district court approved the request of the plaintiffs in the remaining four cases (Phillips, Tang, Wyatt and Cabbat) to recommend to the JPMDL that their cases be transferred back to the courts in which the suits originated. The question of the transfer, which defendants oppose, is now before the JPMDL.
Lights Cases Dismissed, Not Certified or Ordered De-Certified
To date, in addition to the district court in the MDL proceeding, 15 courts in 16 Lights cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA.
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Trial courts in Arizona, Illinois, Kansas, New Jersey, New Mexico, Oregon, Tennessee and Washington have refused to grant class certification or have dismissed plaintiffs class action allegations. Plaintiffs voluntarily dismissed a case in Michigan after a trial court dismissed the claims plaintiffs asserted under the Michigan Unfair Trade and Consumer Protection Act.
Several appellate courts have issued rulings that either affirmed rulings in favor of Altria Group, Inc. and/or PM USA or reversed rulings entered in favor of plaintiffs. In Florida, an intermediate appellate court overturned an order by a trial court that granted class certification in Hines. The Florida Supreme Court denied review in January 2008. The Supreme Court of Illinois has overturned a judgment that awarded damages to a certified class in the Price case. See The Price Case below for further discussion. In Louisiana, the United States Court of Appeals for the Fifth Circuit dismissed a purported Lights class action brought in Louisiana federal court (Sullivan) on the grounds that plaintiffs claims were preempted by the FCLAA. In New York, the United States Court of Appeals for the Second Circuit overturned a decision by a New York trial court in Schwab that denied defendants summary judgment motions and granted plaintiffs motion for certification of a nationwide class of all United States residents that purchased cigarettes in the United States that were labeled Light or Lights. In July 2010, plaintiffs in Schwab voluntarily dismissed the case with prejudice. In Ohio, the Ohio Supreme Court overturned class certifications in the Marrone and Phillips cases. Plaintiffs voluntarily dismissed without prejudice both cases in August 2009. The Supreme Court of Washington denied a motion for interlocutory review filed by the plaintiffs in the Davies case that sought review of an order by the trial court that refused to certify a class. Plaintiffs subsequently voluntarily dismissed the Davies case with prejudice.
In Oregon (Pearson), a state court denied plaintiffs motion for interlocutory review of the trial courts refusal to certify a class. In February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the district court granted PM USAs motion based on express preemption under the FCLAA, and plaintiffs appealed this dismissal and the class certification denial to the Oregon Court of Appeals. Argument was held in April 2010.
In Cleary, which was pending in an Illinois federal court, the district court dismissed plaintiffs Lights claims against one defendant and denied plaintiffs request to remand the case to state court. In September 2009, the court issued its ruling on PM USAs and the remaining defendants motion for summary judgment as to all Lights claims. The court granted the motion as to all defendants except PM USA. As to PM USA, the court granted the motion as to all Lights and other low tar brands other than Marlboro Lights. As to Marlboro Lights, the court ordered briefing on why the 2002 state court order dismissing the Marlboro Lights claims should not be vacated based upon Good. In January 2010, the court vacated the previous dismissal. In February 2010, the court granted summary judgment in favor of defendants as to all claims except for the Marlboro Lights claims, based on the statute of limitations and deficiencies relating to the named plaintiffs. In June 2010, the court granted summary judgment in favor of all defendants on all remaining claims, dismissing the case. In July 2010, plaintiffs filed a motion for reconsideration with the district court, which was denied. In August 2010, plaintiffs filed an appeal with the United States Court of Appeals for the Seventh Circuit. In August 2011, the Seventh Circuit affirmed the trial courts dismissal of the case. Plaintiffs petition for rehearing was denied by the Seventh Circuit in November 2011.
Other Developments
In December 2009, the state trial court in the Carroll (formerly known as Holmes) case (pending in Delaware), denied PM USAs motion for summary judgment based on an exemption provision in the Delaware Consumer Fraud Act. In January 2011, the trial court allowed the plaintiffs to file an amended complaint substituting class representatives and naming Altria Group, Inc. and PMI as additional defendants. In July 2011, the parties stipulated to the dismissal without prejudice of Altria Group, Inc.
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and PMI. The stipulation is signed by the parties but not yet approved by the trial court. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
In June 2007, the United States Supreme Court reversed the lower court rulings in the Watson case that denied plaintiffs motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants contention that the case must be tried in federal court under the federal officer statute. The case was removed to federal court in Arkansas and the case was transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the Watson case to Arkansas state court. In December 2011, the plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice.
The Price Case
Trial in the Price case commenced in state court in Illinois in January 2003, and in March 2003, the judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $3 billion in punitive damages against PM USA. In December 2005, the Illinois Supreme Court reversed the trial courts judgment in favor of the plaintiffs. In November 2006, the United States Supreme Court denied plaintiffs petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County enforced the Illinois Supreme Courts mandate and dismissed the case with prejudice.
In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment that was entered in favor of PM USA. Specifically, plaintiffs sought to vacate the judgment entered by the trial court on remand from the 2005 Illinois Supreme Court decision overturning the verdict on the ground that the United States Supreme Courts December 2008 decision in Good demonstrated that the Illinois Supreme Courts decision was inaccurate. PM USA filed a motion to dismiss plaintiffs petition and, in February 2009, the trial court granted PM USAs motion on the basis that the petition was not timely filed. In March 2009, the Price plaintiffs filed a notice of appeal with the Fifth Judicial District of the Appellate Court of Illinois. In February 2011, the intermediate appellate court ruled that the petition was timely filed and reversed the trial courts dismissal of the plaintiffs petition and, in September 2011, the Illinois Supreme Court declined PM USAs petition for review. As a result, the case has returned to the trial court for proceedings on whether the court should grant the plaintiffs petition to reopen the prior judgment.
In June 2009, the plaintiff in an individual smoker lawsuit (Kelly) brought on behalf of an alleged smoker of Lights cigarettes in Madison County, Illinois state court filed a motion seeking a declaration that his claims under the Illinois Consumer Fraud Act are not (1) barred by the exemption in that statute based on his assertion that the Illinois Supreme Courts decision in Price is no longer good law in light of the decisions by the United States Supreme Court in Good and Watson, and (2) preempted in light of the United States Supreme Courts decision in Good. In September 2009, the court granted plaintiffs motion as to federal preemption, but denied it with respect to the state statutory exemption.
State Trial Court Class Certifications
State trial courts have certified classes against PM USA in Massachusetts (Aspinall), Minnesota (Curtis), Missouri (Larsen) and New Hampshire (Lawrence). Significant developments in these cases include:
| Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USAs motion for summary judgment and granted plaintiffs motion for summary judgment on the defenses of federal preemption and a state law exemption to Massachusetts consumer protection statute. On |
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motion of the parties, the trial court subsequently reported its decision to deny summary judgment to the appeals court for review and stayed further proceedings pending completion of the appellate review. In December 2008, subsequent to the United States Supreme Courts decision in Good, the Massachusetts Supreme Judicial Court issued an order requesting that the parties advise the court within 30 days whether the Good decision is dispositive of federal preemption issues pending on appeal. In January 2009, PM USA notified the Massachusetts Supreme Judicial Court that Good is dispositive of the federal preemption issues on appeal, but requested further briefing on the state law statutory exemption issue. In March 2009, the Massachusetts Supreme Judicial Court affirmed the order denying summary judgment to PM USA and granting the plaintiffs cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). Argument on plaintiffs motion was held in July 2011. |
| Curtis: In April 2005, the Minnesota Supreme Court denied PM USAs petition for interlocutory review of the trial courts class certification order. In October 2009, the trial court denied plaintiffs motion for partial summary judgment, filed in February 2009, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). In October 2009, the trial court granted PM USAs motion for partial summary judgment as to all consumer protection counts and, in December 2009, dismissed the case in its entirety. In December 2010, the Minnesota Court of Appeals reversed the trial courts dismissal of the case and affirmed the trial courts prior certification of the class under Minnesotas consumer protection statutes. The Court of Appeals also affirmed the trial courts denial of the plaintiffs motion for partial summary judgment claiming collateral estoppel from the findings in the case brought by the Department of Justice. PM USAs petition for review with the Minnesota Supreme Court was granted in March 2011. Argument on the petition was heard in September 2011. |
| Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs motion for reconsideration of the period during which potential class members can qualify to become part of the class. The class period remains 1995 2003. In June 2010, PM USAs motion for partial summary judgment regarding plaintiffs request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). The plaintiffs motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs claims. In August 2011, the trial court granted PM USAs motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that Marlboro Lights are more dangerous than Marlboro Reds. The trial court denied PM USAs remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011 the court declared a mistrial after the jury failed to reach a verdict. The court has scheduled a new trial to begin on January 21, 2013. |
| Lawrence: In November 2010, the trial court certified a class consisting of all persons who purchased Marlboro Lights cigarettes in the state of New Hampshire at any time from the date the brand was introduced into commerce until the date trial in the case begins. PM USAs motion for reconsideration of this decision was denied in January 2011. In September 2011, the New Hampshire Supreme Court accepted review of the class certification decision. |
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Certain Other Tobacco-Related Litigation
Tobacco Price Case: As of February 13, 2012, one case remains pending in Kansas (Smith) in which plaintiffs allege that defendants, including PM USA and Altria Group, Inc., conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs motion for class certification has been granted. The trial court heard oral argument on defendants motions for summary judgment on January 18, 2012. Trial has been set for July 16, 2012.
Case Under the California Business and Professions Code: In June 1997, a lawsuit (Brown) was filed in California state court alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs claims that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2004, the trial court granted defendants motion for summary judgment as to plaintiffs claims attacking defendants cigarette advertising and promotion and denied defendants motion for summary judgment on plaintiffs claims based on allegedly false affirmative statements. In March 2005, the court granted defendants motion to decertify the class based on a California law, which inter alia limits the ability to bring a lawsuit to only those plaintiffs who have suffered injury in fact and lost money or property as a result of defendants alleged statutory violations (Proposition 64).
In September 2006, an intermediate appellate court affirmed the trial courts order decertifying the class. In May 2009, the California Supreme Court reversed the trial court decision that was affirmed by the appellate court and remanded the case to the trial court. In March 2010, the trial court granted reconsideration of its September 2004 order granting partial summary judgment to defendants with respect to plaintiffs Lights claims on the basis of judicial decisions issued since its order was issued, including the United States Supreme Courts ruling in Good, thereby reinstating plaintiffs Lights claims. Since the trial courts prior ruling decertifying the class was reversed on appeal by the California Supreme Court, the parties and the court are treating all claims currently being asserted by the plaintiffs as certified, subject, however, to defendants challenge to the class representatives standing to assert their claims. The class is defined as people who, at the time they were residents of California, smoked in California one or more cigarettes between June 10, 1993 and April 23, 2001, and who were exposed to defendants marketing and advertising activities in California.
In July 2010, plaintiffs filed a motion seeking collateral estoppel effect from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). In September 2010, plaintiffs filed a motion for preliminary resolution of legal issues regarding restitutionary relief. The trial court denied both of plaintiffs motions in November 2010. In November 2010, defendants filed a motion seeking a determination that Brown class members who were also part of the class in Daniels (a previously disclosed consumer fraud case in which the California Supreme Court affirmed summary judgment in PM USAs favor based on preemption and First Amendment grounds) are precluded by the Daniels judgment from recovering in Brown. This motion was denied in December 2010. Defendants sought review of this decision before the Fourth District Court of Appeal but were denied review in March 2011. On January 9, 2012, defendants filed motions for a determination that the class representatives lack standing and are not typical or adequate to represent the class and to decertify the class. Argument is scheduled for May 2, 2012. Trial is currently scheduled for October 5, 2012.
Ignition Propensity Cases: PM USA is currently a defendant in two wrongful death actions in which plaintiffs contend that fires caused by cigarettes led to other individuals deaths. In one case pending in federal court in Massachusetts (Sarro), the district court in August 2009 granted in part PM USAs motion to dismiss, but ruled that two claims unrelated to product design could go forward. In November
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2010, PM USA filed a motion for summary judgment. Argument was heard in March 2011. In a Kentucky case (Walker), the federal district court denied plaintiffs motion to remand the case to state court and dismissed plaintiffs claims in February 2009. Plaintiffs subsequently filed a notice of appeal. In October 2011, the United States Court of Appeals for the Sixth Circuit (the Sixth Circuit) reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky state court. The Sixth Circuit did not address the merits of the district courts dismissal order. Defendants petition for rehearing with the Sixth Circuit was denied in December 2011.
False Claims Act Case: PM USA and Altria Group, Inc. were served on January 27, 2012 in a qui tam action filed in the United States District Court for the District of Columbia (United States ex rel. Oliver) alleging violation of the False Claims Act in connection with sales of cigarettes to the U.S. military for resale on U.S. military bases overseas. The claimant is an individual who contends that PM USA included the per-carton cost of Master Settlement Agreement payments in the list price charged to government agencies that purchased cigarettes from PM USA in the United States for resale on overseas military bases, and that non-military civilian customers overseas allegedly received lower pricing on cigarettes sold in those overseas markets than the government agencies. The United States declined to intervene in the action on September 13, 2011.
Argentine Grower Case: In Hupan, et al. v. Alliance One International, et al., filed in Delaware state court on February 14, 2012, PM USA and Altria Group, Inc. are named along with multiple other defendants by the parents of eight minor Argentine children born between 1996 and 2008 with alleged birth defects. Plaintiffs allege that they grew tobacco in Argentina under contract with Tabacos Norte S.A., an alleged subsidiary of Philip Morris International Inc., beginning in the 1980s and that they and their infant children were exposed directly and in utero to hazardous herbicides and pesticides used in the production and cultivation of tobacco. Plaintiffs seek compensatory and punitive damages against all defendants under U.S. and Argentine law.
UST Litigation
Claims related to smokeless tobacco products generally fall within the following categories:
First, UST and/or its tobacco subsidiaries has been named in certain health care cost reimbursement/third-party recoupment/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities.
Second, UST and/or its tobacco subsidiaries has been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers, and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are five individuals alleging use of USSTCs smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.
Third, UST and/or its tobacco subsidiaries has been named in a number of other individual tobacco and health suits. Plaintiffs allegations of liability in these cases are based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction, and breach of consumer protection statutes. Plaintiffs seek various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. USSTC is currently named in one such action in Florida (Vassallo).
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Certain Other Actions
IRS Challenges to PMCC Leases
Background. The IRS has concluded its examination of Altria Group, Inc.s consolidated federal income tax returns for the years 1996 through 2003, and for each year has disallowed tax benefits pertaining to certain leveraged lease transactions entered into by PMCC (referred to by the IRS as lease-in/lease-out (LILO) and sale-in/lease-out (SILO) transactions). For financial reporting purposes, PMCC accounted for LILO and SILO transactions as leveraged lease transactions under the guidance in Accounting Standards Codification (ASC) 840, Leases (ASC 840). For income tax purposes, PMCC treated these transactions as leases under case law and applicable IRS administrative guidance for the 1996 through 2009 tax years.
Refund Claims and Litigation. Altria Group, Inc. believes that its tax treatment of PMCCs LILO and SILO transactions on federal and state income tax returns for the 1996 through 2009 tax years was proper and complied with applicable tax laws in effect during the relevant periods. Altria Group, Inc. has contested the disallowances for the 1996 through 2003 tax years, filed claims for refunds of federal income tax and associated interest paid and pursued or is pursuing refund litigation in federal court with respect to certain of the refund claims, as discussed below.
In October 2006, Altria Group, Inc. filed a complaint in the United States District Court for the Southern District of New York to claim a refund on a portion of these federal income tax payments and associated interest for the years 1996 and 1997, attributable to LILO and SILO transactions entered into during those years. In July 2009, the jury returned a unanimous verdict in favor of the IRS and, in April 2010, after denying Altria Group, Inc.s post-trial motions, the district court entered final judgment in favor of the IRS. Altria Group, Inc. filed an appeal with the United States Court of Appeals for the Second Circuit in June 2010. In September 2011, the Second Circuit affirmed the district court decision in favor of the IRS. Altria Group, Inc. has elected not to pursue further judicial review of its refund claim for the 1996 and 1997 transactions.
In March 2008, Altria Group, Inc. filed a second complaint in the United States District Court for the Southern District of New York seeking a refund of the federal income tax payments and associated interest for the years 1998 and 1999 attributable to the disallowance of tax benefits claimed in those years with respect to the LILO and SILO transactions subject to the jury verdict and with respect to the additional LILO and SILO transactions entered into in 1998 and 1999. In May 2009, the district court granted a stay pending the decision by the United States Court of Appeals for the Second Circuit in the appeal involving the 1996 and 1997 transactions. Following Altria Group, Inc.s decision not to pursue further judicial review of its refund claim regarding the 1996 and 1997 transactions, the case for the 1998 and 1999 years has been reactivated.
In March 2011, Altria Group, Inc. filed claims for a refund with the IRS for the years 2000 through 2003 of the tax and associated interest paid with respect to the LILO and SILO transactions that PMCC entered into during the 1996-2003 years. The IRS disallowed the claims in July 2011, and Altria Group, Inc. intends to commence litigation in federal court.
In a closing agreement entered into in May 2010, Altria Group, Inc. and the IRS agreed that, with the exception of the LILO and SILO transactions, the tax treatment reported by Altria Group, Inc. on its consolidated federal income tax returns for the 2000-2003 years, as amended by the agreed-upon adjustments in the closing agreement, is appropriate and final. The IRS may not assess against Altria Group, Inc. any further taxes or additions to tax (including penalties) with respect to these years.
As a prerequisite to commencing in federal court the refund litigation described above following the IRS disallowance of tax benefits of the LILO and SILO transactions for the 1996-1999 audit cycle, in 2006 Altria Group, Inc. paid approximately $150 million related to disallowed tax benefits and
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associated interest. Similarly, following the IRS disallowance of tax benefits of the LILO and SILO transactions for the 2000-2003 audit cycle, also described above, in 2010, Altria Group, Inc. paid approximately $945 million in disallowed tax benefits and associated interest in order to pursue its legal challenge to the disallowances in federal court.
Payments to the IRS. As indicated in Refund Claims and Litigation above, Altria Group, Inc. has paid a total of approximately $1.1 billion in federal income tax payments and interest with respect to the LILO and SILO transactions for the 1996 through 2003 tax years. The tax component of this amount represents an acceleration of taxes that Altria Group, Inc. would have otherwise paid over the later stages of the LILO and SILO transactions. Altria Group, Inc. treated the amounts paid to the IRS for these years as deposits for financial reporting purposes pending the ultimate outcomes of the litigation. Altria Group, Inc. included such amounts in Other assets on its consolidated balance sheets and did not include such amounts in the supplemental disclosure of cash paid for income taxes on the consolidated statement of cash flows. As a result of its decision not to pursue further judicial review of its refund claims for the 1996 and 1997 transactions, Altria Group, Inc.s consolidated balance sheet at December 31, 2011 reflects reductions in both Other assets and tax liabilities of approximately $362 million, which is the amount of taxes and interest that Altria Group, Inc. has previously paid related to the 1996 and 1997 transactions for the 1996 through 2003 tax years. This payment has 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, 2011. The impact of these payments on Altria Group, Inc.s earnings has previously been recorded on its financial statements, as discussed below. If Altria Group, Inc. were to prevail in the current and/or anticipated refund litigation, it would receive a refund of the remaining amounts paid to the IRS plus interest. If the IRSs position with respect to the LILO and SILO transactions is ultimately sustained, Altria Group, Inc. would further reduce its tax liabilities and the asset discussed above.
Anticipated Future Disallowances and Additional Payments to the IRS. Altria Group, Inc. further expects the IRS and impacted states to disallow income tax benefits claimed in years 2004 through 2009 related to the LILO and SILO transactions that PMCC entered into from 1996 through 2003. The disallowance of federal and state income tax benefits for the 2004 through 2009 tax years and associated interest through the 2011 tax year would result in additional payments of approximately $600 million, excluding potential penalties. The tax component of this amount represents an acceleration of taxes that Altria Group, Inc. would have otherwise paid over the later stages of the LILO and SILO transactions. This amount is net of federal and state income taxes paid on gains associated with sales of leased assets from January 1, 2008 through December 31, 2011 and excludes additional taxes paid in 2011 for the 2010 and 2011 tax years as a result of the decision discussed below not to claim tax benefits for the 2010 and future tax years. Although the initial amount payable may be greater than $600 million, such taxes paid on gains associated with sales of leased assets will be subsequently recovered no later than the closing of the audits for the cycles in which the sales have occurred. The payments of disallowed tax benefits, if any, would depend upon the timing and outcome of future IRS audits and any related administrative challenges or litigation. The IRS is currently auditing the 2004-2006 tax years.
2010 and Future Tax Years. Altria Group, Inc. did not claim tax benefits pertaining to PMCCs LILO and SILO transactions on its federal and state income tax returns for 2010 and, at this time, does not intend to claim such tax benefits in future years. Altria Group, Inc., however, intends to preserve its right to file amended returns for these years claiming the tax benefits pertaining to PMCCs LILO and SILO transactions if Altria Group, Inc. is successful in the current and/or anticipated litigation discussed above.
Second Quarter 2011 Earnings Charge. Altria Group, Inc. has continually re-evaluated the likelihood of sustaining its tax position on PMCCs LILO and SILO transactions, as required by ASC 740, Income Taxes (ASC 740). In the second quarter of 2011, in accordance with ASC 840 and ASC 740, Altria Group, Inc. recorded a one-time charge of $627 million against its 2011 reported
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earnings related to the tax treatment of the LILO and SILO transactions that PMCC entered into between 1996 and 2003. Altria Group, Inc.s decision to record the charge was based on the Federal Circuits April 2011 adverse decision in Wells Fargo & Co. v. United States, involving SILO transactions entered into by another taxpayer. Altria Group, Inc. concluded that the decision introduced incremental risk to its tax analysis and, as a result, that it was no longer more likely than not that it would prevail in its defense of its tax position on PMCCs LILO and SILO transactions.
The charge of $627 million reflects the re-characterization of PMCCs LILO and SILO transactions as loans (as opposed to leases) for income tax purposes, which changes the timing of income recognition for tax purposes over the term of the deemed loan. This change, in turn, impacts the income of the leases recorded pursuant to leveraged lease accounting (ASC 840) resulting in a lowering of the cumulative income from the transactions that had been recorded from inception of the transactions to the date of the charge. This earnings charge is incremental to $146 million recorded as a reduction to stockholders equity upon the adoption of new accounting standards for leases (FAS 13-2) and for uncertainty in income taxes (FIN 48) on January 1, 2007, and approximately $95 million recorded to the statements of earnings from January 1, 2007 through March 31, 2011. In quantifying the reduction in cumulative leveraged lease income to include in the second quarter 2011 earnings charge, Altria Group, Inc. was required to make assumptions regarding a potential settlement of these matters with the IRS. To the extent the assumptions change, there may be additional impact on Altria Group, Inc.s earnings but Altria Group, Inc. does not expect such impact, if any, to be significant.
Approximately 50% of the $627 million charge represents the effects of re-characterization of the transactions as loans and the resulting reduction in cumulative leveraged lease income described above. This reduction in income will be recaptured over the remaining terms of the respective transactions. The remaining portion of the charge primarily represents a permanent charge for interest on tax underpayments. The charge does not include potential penalties as Altria Group, Inc. believes that it met the applicable standards to avoid any associated penalties at the time it claimed the deductions on its tax returns.
As of December 31, 2011, the LILO and SILO transactions represented approximately 30% of the Net Finance Assets of PMCCs lease portfolio. PMCC has not entered into any LILO or SILO transactions since 2003.
Kraft Thrift Plan Cases: Four participants in the Kraft Foods Global, Inc. Thrift Plan (Kraft Thrift Plan), a defined contribution plan, filed a class action complaint (George II) on behalf of all participants and beneficiaries of the Kraft Thrift Plan in July 2008 in the United States District Court for the Northern District of Illinois alleging breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). Named defendants in this action include Altria Corporate Services, Inc. (now Altria Client Services Inc.) and certain company committees that allegedly had a relationship to the Kraft Thrift Plan. Plaintiffs request, among other remedies, that defendants restore to the Kraft Thrift Plan all losses improperly incurred.
In December 2009, the court granted in part and denied in part defendants motion to dismiss plaintiffs complaint. In addition to dismissing certain claims made by plaintiffs for equitable relief under ERISA as to all defendants, the court dismissed claims alleging excessive administrative fees and mismanagement of company stock funds as to one of the Altria Group, Inc. defendants. In February 2010, the court granted a joint stipulation dismissing the fee and stock fund claims without prejudice as to the remaining defendants, including Altria Corporate Services, Inc. Accordingly, the only claim remaining at this time in George II relates to the alleged negligence of plan fiduciaries for including the Growth Equity Fund and Balanced Fund as Kraft Thrift Plan investment options. Plaintiffs filed a motion for class certification in March 2010, which the court granted in August 2010. Defendants filed a motion
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for summary judgment in January 2011, and plaintiffs filed a motion for partial summary judgment. In March 2011, defendants filed a motion to vacate the class certification in light of recent federal judicial precedent. In July 2011, the court granted defendants summary judgment motion in part, finding that claims for periods prior to July 2, 2002 were time barred, and that the defendants properly monitored the funds. The court also denied plaintiffs motion for partial summary judgment. Remaining in the case are claims after July 2, 2002 relating to whether it was prudent to retain actively managed investments (Growth Equity Fund and Balanced Fund) in the Kraft Thrift Plan after 1999. In July 2011, the court also granted defendants motion to vacate the class certification, and allowed plaintiffs leave to file a new motion for class certification in light of recent precedent and the courts summary judgment findings. Plaintiffs motion to certify the class is pending before the court.
In August 2011, Altria Client Services, Inc. and a company committee that allegedly had a relationship to the Kraft Thrift Plan were added as defendants in another class action previously brought by the same plaintiffs in 2006 (George I), in which plaintiffs allege defendants breached their fiduciary duties under ERISA by offering company stock funds in a unitized format and by allegedly overpaying for recordkeeping services.
The parties have reached a proposed class-wide settlement. The proposed settlement, which does not require any payment by the Altria Group, Inc. defendants, is subject to court approval, which is pending. Under the terms of a Distribution Agreement between Altria Group, Inc. and Kraft, the Altria Group, Inc. defendants may be entitled to indemnity against any liabilities incurred in connection with these cases.
California Wage and Hour Case
In September 2011, two former sales representatives employed in California by Altria Group Distribution Company (AGDC) filed a putative class action in the United States District Court for the Northern District of California, under Californias wage and hour laws. The named plaintiffs seek to represent a class of all former sales representatives who worked for AGDC in California at any time since September 2007. The plaintiffs seek overtime pay, recovery of certain wages, reimbursement of business expenses and other non-monetary relief and penalties. In November 2011, the plaintiffs amended their complaint to add an additional claim for penalties under Californias Private Attorney General Act. On January 6, 2012, AGDC moved to dismiss certain of plaintiffs claims and to transfer the case from the Northern District of California to the Central District of California.
Environmental Regulation
Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. 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. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may
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undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation 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 results of operations, capital expenditures, financial position or cash flows.
Guarantees
In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, 2011, subsidiaries of Altria Group, Inc. were also contingently liable for $29 million of guarantees related to their own performance, consisting primarily of surety bonds. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.s liquidity.
Under the terms of a distribution agreement between Altria Group, Inc. and PMI, entered into as a result of Altria Group, Inc.s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, 2011 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 20. Condensed Consolidating Financial Information to Altria Group, Inc.s consolidated financial statements, which is incorporated herein by reference to the 2011 Annual Report, PM USA has issued guarantees relating to Altria Group, Inc.s obligations under its outstanding debt securities, borrowings under its 5-year revolving credit agreement and amounts outstanding under its commercial paper program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of Stags Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC (Michelle-Antinori), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California (Antinori). In connection with the acquisition of Stags Leap Wine Cellars, Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinoris initial investment of $27 million. The put arrangement became exercisable on September 11, 2010 and has no expiration date. As of December 31, 2011, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized in the consolidated balance sheet for the put arrangement.
The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section in the consolidated balance sheets at December 31, 2011 and 2010.
Item 4. | Mine Safety Disclosures |
Not applicable.
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Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The principal stock exchange on which Altria Group, Inc.s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange. At January 31, 2012, there were approximately 86,000 holders of record of Altria Group, Inc.s common stock.
In January 2011, Altria Group, Inc.s Board of Directors authorized a $1.0 billion one-year share repurchase program. Altria Group, Inc. completed this share repurchase program during the third quarter of 2011. Under this program, Altria Group, Inc. repurchased a total of 37.6 million shares of its common stock at an average price of $26.62 per share.
In October 2011, Altria Group, Inc.s Board of Directors authorized a new $1.0 billion share repurchase program, which Altria Group, Inc. intends to complete by the end of 2012. During the fourth quarter of 2011, Altria Group, Inc. repurchased 11.7 million shares of its common stock at an aggregate cost of approximately $327 million, and an average price of $27.84 per share, under this share repurchase program. Share repurchases under the new program will depend upon marketplace conditions and other factors, and the program remains subject to the discretion of Altria Group, Inc.s Board of Directors.
During 2011, Altria Group, Inc. repurchased a total of 49.3 million shares of its common stock under the two programs at an aggregate cost of approximately $1.3 billion, and an average price of $26.91 per share.
Altria Group, Inc.s share repurchase activity for each of the three months in the period ended December 31, 2011, was as follows:
Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
||||||||||||
October 1, 2011 October 31, 2011 |
480,000 | $ | 27.75 | 480,000 | $ | 986,679,664 | ||||||||||
November 1, 2011 November 30, 2011 |
8,640,000 | $ | 27.49 | 9,120,000 | $ | 749,174,032 | ||||||||||
December 1, 2011 December 31, 2011 |
2,776,512 | $ | 29.03 | 11,760,000 | $ | 672,584,392 | ||||||||||
For the Quarter Ended December 31, 2011 | 11,896,512 | $ | 27.86 | |||||||||||||
(1) | The total number of shares purchased include (i) shares purchased under Altria Group, Inc.s October 2011 $1.0 billion share repurchase program (which totaled 480,000 shares in October, 8,640,000 shares in November and 2,640,000 shares in December) and (ii) shares tendered to Altria Group, Inc. by employees who vested in restricted and deferred stock and used shares to pay all, or a portion of the related taxes, and forfeitures of restricted stock for which consideration was paid in connection with termination of employment of certain employees (which totaled 136,512 shares in December). |
(2) | Aggregate number of shares repurchased under the then-applicable share repurchase program as of the end of the period presented. |
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The other information called for by this Item is hereby incorporated by reference to the paragraph captioned Quarterly Financial Data (Unaudited) on page 70 of the 2011 Annual Report and made a part hereof.
Item 6. | Selected Financial Data. |
The information called for by this Item is hereby incorporated by reference to the information with respect to 2007-2011 appearing under the caption Selected Financial Data Five Year Review on page 10 of the 2011 Annual Report and made a part hereof.
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The information called for by this Item is hereby incorporated by reference to the paragraphs captioned Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 71 to 99 of the 2011 Annual Report and made a part hereof.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The information called for by this Item is hereby incorporated by reference to the paragraphs in Managements Discussion and Analysis of Financial Condition and Results of Operations captioned Market Risk on pages 95 to 96 of the 2011 Annual Report and made a part hereof.
Item 8. | Financial Statements and Supplementary Data. |
The information called for by this Item is hereby incorporated by reference to the 2011 Annual Report as set forth under the caption Quarterly Financial Data (Unaudited) on page 70 and in the Index to Consolidated Financial Statements and Schedules (see Item 15) and made a part hereof.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.s management, including Altria Group, Inc.s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, Altria Group, Inc.s Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.s disclosure controls and procedures are effective. There have been no changes in Altria Group, Inc.s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Altria Group, Inc.s internal control over financial reporting.
See pages 100 to 101 of Exhibit 13 for the Report of Independent Registered Public Accounting Firm and the Report of Management on Internal Control over Financial Reporting included in the 2011 Annual Report and incorporated herein by reference.
Item 9B. | Other Information. |
None.
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Except for the information relating to the executive officers set forth in Item 10, and the information relating to equity compensation plans set forth in Item 12, the information called for by Items 10-14 is hereby incorporated by reference to Altria Group, Inc.s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 17, 2012 that will be filed with the SEC on or about April 6, 2012 (the proxy statement), and, except as indicated therein, made a part hereof.
Item 10. | Directors, Executive Officers and Corporate Governance. |
Executive Officers as of February 16, 2012:
Name |
Office |
Age |
||||
Martin J. Barrington |
Vice Chairman | 58 | ||||
David R. Beran |
Vice Chairman | 57 | ||||
Nancy E. Brennan |
Senior Vice President, Marketing, Altria Client Services Inc. | 59 | ||||
William F. Gifford, Jr. |
President and Chief Executive Officer, Philip Morris USA Inc. | 41 | ||||
Louanna O. Heuhsen |
Vice President, Corporate Governance and Associate General Counsel | 61 | ||||
Craig A. Johnson |
President and Chief Executive Officer, Altria Group Distribution Company | 59 | ||||
Denise F. Keane |
Executive Vice President and General Counsel | 59 | ||||
Salvatore Mancuso |
Vice President and Treasurer, Finance and Strategy | 46 | ||||
John R. Nelson |
Executive Vice President and Chief Technology Officer | 59 | ||||
Peter P. Paoli |
President and Chief Executive Officer, U.S. Smokeless Tobacco Company LLC | 54 | ||||
W. Hildebrandt Surgner, Jr. |
Corporate Secretary and Senior Assistant General Counsel | 46 | ||||
Michael E. Szymanczyk |
Chairman of the Board and Chief Executive Officer | 63 | ||||
Linda M. Warren |
Vice President and Controller | 63 | ||||
Howard A. Willard III |
Executive Vice President and Chief Financial Officer | 48 |
All of the above-mentioned officers have been employed by Altria Group, Inc. or its subsidiaries in various capacities during the past five years, except for Ms. Heuhsen, who joined in 2008 after serving as a partner in the law firm of Hunton & Williams LLP. On December 14, 2011, Altria Group, Inc. announced that Ms. Warren will retire effective February 24, 2012, and that Ivan Feldman has been appointed to replace her effective upon her retirement. Mr. Feldman, age 45, currently serves as Vice President and Assistant Controller, Financial Reporting, Altria Client Services Inc., a position he has held since 2008. Since June 2000, he has been continuously employed by Altria Client Services Inc. in positions overseeing financial reporting and analysis.
On January 27, 2011, Altria Group, Inc. announced that Mr. Szymanczyk will retire as Chairman and Chief Executive Officer and that Mr. Barrington has been appointed to serve as Chairman and CEO, such changes to be effective upon the conclusion of the Annual Meeting of Shareholders on May 17, 2012. Mr. Barrington was also elected to Altria Group, Inc.s Board of Directors effective January 26, 2012. Additionally, Mr. Beran was appointed to serve as President and Chief Operating Officer, effective upon the conclusion of the Annual Meeting of Shareholders.
In addition, Ms. Brennan has announced her retirement as Senior Vice President, Marketing, Altria Client Services Inc., effective April 1, 2012.
51
Codes of Conduct and Corporate Governance
Altria Group, Inc. has adopted the Altria Code of Conduct for Compliance and Integrity, which complies with requirements set forth in Item 406 of Regulation S-K. This Code of Conduct applies to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Altria Group, Inc. has also adopted a code of business conduct and ethics that applies to the members of its Board of Directors. These documents are available free of charge on Altria Group, Inc.s website at www.altria.com.
In addition, Altria Group, Inc. has adopted corporate governance guidelines and charters for its Audit, Compensation and Nominating, Corporate Governance and Social Responsibility Committees and the other committees of the Board of Directors. All of these documents are available free of charge on Altria Group, Inc.s website at www.altria.com. Any waiver granted by Altria Group, Inc. to its principal executive officer, principal financial officer or controller under the Code of Conduct, or certain amendments to the Code of Conduct, will be disclosed on Altria Group, Inc.s website at www.altria.com.
The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this Report or incorporated into any other filings Altria Group, Inc. makes with the SEC.
Item 11. | Executive Compensation. |
Refer to Compensation Committee Matters and Compensation of Directors sections of the proxy statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under Altria Group, Inc.s equity compensation plans at December 31, 2011, were as follows:
Number of Shares to be Issued upon Exercise of Outstanding Options and Vesting of Deferred Stock (a) |
Weighted Average Exercise Price of Outstanding Options (b) |
Number
of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (c) |
||||||||||
Equity compensation plans approved by stockholders (1) |
282,663 | (2) | $ | 12.48 | 48,539,554 | (3) | ||||||
(1) | The following plans have been approved by Altria Group, Inc. shareholders and have shares referenced in column (a) or column (c): the 2000 Stock Compensation Plan for Non-Employee Directors, the 2005 Performance Incentive Plan, the 2010 Performance Incentive Plan, and the Stock Compensation Plan for Non-Employee Directors. |
(2) | Includes 4,590 stock options and 278,073 shares of deferred stock. |
(3) | Includes 47,880,823 shares available under the 2010 Performance Incentive Plan and 658,731 shares available under the Stock Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a). |
Refer to Ownership of Equity Securities section of the proxy statement.
52
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Refer to Related Person Transactions and Code of Conduct and Independence of Nominees sections of the proxy statement.
Item 14. | Principal Accounting Fees and Services. |
Refer to Audit Committee Matters section of the proxy statement.
53
Item 15. | Exhibits and Financial Statement Schedules. |
(a) | Index to Consolidated Financial Statements and Schedules |
Reference |
||||||||
Form 10-K Annual Report Page |
2011 Annual Report Page |
|||||||
Data incorporated by reference to Altria Group, Inc.s 2011 Annual Report: |
||||||||
Consolidated Statements of Earnings for the years ended December 31, 2011, 2010 and 2009 |
| 11 | ||||||
Consolidated Balance Sheets at December 31, 2011 and 2010 |
| 12 - 13 | ||||||
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 |
| 14 - 15 | ||||||
Consolidated Statements of Stockholders Equity for the years ended December 31, 2011, 2010 and 2009 |
| 16 | ||||||
Notes to Consolidated Financial Statements |
| 17 - 70 | ||||||
Report of Independent Registered Public Accounting Firm |
| 100 | ||||||
Report of Management on Internal Control Over Financial Reporting |
| 101 | ||||||
Data submitted herein: |
||||||||
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule |
S-1 | |||||||
Financial Statement Schedule Valuation and Qualifying Accounts |
S-2 |
Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable.
(b) | The following exhibits are filed as part of this Report: |
2.1 | Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc., dated as of January 31, 2007. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 31, 2007 (File No. 1-08940). | |||
2.2 | Distribution Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 30, 2008 (File No. 1-08940). | |||
2.3 | Agreement and Plan of Merger by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of September 7, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on September 8, 2008 (File No. 1-08940). | |||
2.4 | Amendment No. 1 to the Agreement and Plan of Merger, dated as of September 7, 2008, by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of October 2, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on October 3, 2008 (File No. 1-08940). | |||
3.1 | Articles of Amendment to the Restated Articles of Incorporation of Altria Group, Inc. and Restated Articles of Incorporation of Altria Group, Inc. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940). |
54
3.2 | Amended and Restated By-laws of Altria Group, Inc. effective January 26, 2012 (incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940). | |||
4.1 | Indenture between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of December 2, 1996. Incorporated by reference to Altria Group, Inc.s Registration Statement on Form S-3/A filed on January 29, 1998 (No. 333-35143). | |||
4.2 | First Supplemental Indenture to Indenture, dated as of December 2, 1996, between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of February 13, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on February 15, 2008 (File No. 1-08940). | |||
4.3 | Indenture among Altria Group, Inc., as Issuer, Philip Morris USA Inc., as Guarantor, and Deutsche Bank Trust Company Americas, as Trustee, dated as of November 4, 2008. Incorporated by reference to Altria Group, Inc.s Registration Statement on Form S-3 filed on November 4, 2008 (No. 333-155009). | |||
4.4 | 3-Year Revolving Credit Agreement among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, Barclays Capital, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Goldman Sachs Credit Partners L.P., as Syndication Agents and Banco Santander, S.A., New York Branch, The Bank of Nova Scotia, HSBC Bank USA, National Association, Morgan Stanley Senior Funding, Inc. and The Royal Bank of Scotland plc, as Documentation Agents, dated as of November 20, 2009. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on November 23, 2009 (File No. 1-08940). | |||
4.5 | 5-Year Revolving Credit Agreement among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, Barclays Capital, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs Bank USA, The Bank of Nova Scotia and The Royal Bank of Scotland plc, as Syndication Agents and Sovereign Bank, HSBC Bank USA, National Association, Morgan Stanley Senior Funding, Inc., Wells Fargo Bank, National Association and U.S. Bank National Association, as Documentation Agents, dated as of June 30, 2011. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940). | |||
4.6 | The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request. | |||
10.1 | Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940). | |||
10.2 | Settlement Agreement related to settlement of Florida health care cost recovery action, dated August 25, 1997. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on September 3, 1997 (File No. 1-08940). | |||
10.3 | Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940). |
55
10.4 | Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). | |||
10.5 | Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940). | |||
10.6 | Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). | |||
10.7 | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940). | |||
10.8 | Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Florida health care cost recovery action, dated as of September 11, 1998. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 1-08940). | |||
10.9 | Master Settlement Agreement relating to state health care cost recovery and other claims, dated as of November 23, 1998. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on November 25, 1998, as amended by Form 8-K/A filed on December 24, 1998 (File No. 1-08940). | |||
10.10 | Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters, dated as of May 7, 2001. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on May 8, 2001 (File No. 1-08940). | |||
10.11 | Stock Purchase Agreement by and among Altria Group, Inc., Bradford Holdings, Inc. and John Middleton, Inc., dated as of October 31, 2007. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended September 30, 2007 (File No. 1-08940). | |||
10.12 | Employee Matters Agreement by and between Altria Group, Inc. and Kraft Foods Inc., dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). | |||
10.13 | Tax Sharing Agreement by and between Altria Group, Inc. and Kraft Foods Inc., dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). | |||
10.14 | Transition Services Agreement by and between Altria Corporate Services, Inc. and Kraft Foods Inc., dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940). | |||
10.15 | Intellectual Property Agreement by and between Philip Morris International Inc. and Philip Morris USA Inc., dated as of January 1, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). | |||
10.16 | Employee Matters Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). |
56
10.17 | Tax Sharing Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). | |||
10.18 | Transition Services Agreement by and between Altria Corporate Services, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940). | |||
10.19 | 364-Day Revolving Credit Agreement among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, Barclays Capital, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Goldman Sachs Credit Partners L.P., as Syndication Agents and Banco Santander, S.A., New York Branch, The Bank of Nova Scotia, HSBC Bank USA, National Association, Morgan Stanley Senior Funding, Inc. and The Royal Bank of Scotland plc, as Documentation Agents, dated as of November 17, 2010. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on November 17, 2010 (File No. 1-08940). | |||
10.20 | Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 3-Year Revolving Credit Agreement, dated as of November 20, 2009, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of November 20, 2009. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on November 23, 2009 (File No. 1-08940). | |||
10.21 | Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 364-Day Revolving Credit Agreement, dated as of November 17, 2010, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of November 17, 2010. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on November 17, 2010 (File No. 1-08940). | |||
10.22 | Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 5-Year Revolving Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of June 30, 2011. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940). | |||
10.23 | Financial Counseling Program. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* | |||
10.24 | Benefit Equalization Plan, effective September 2, 1974, as amended.* | |||
10.25 | Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).* | |||
10.26 | Form of Supplemental Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-08940).* | |||
10.27 | Automobile Policy. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).* | |||
10.28 | Supplemental Management Employees Retirement Plan of Altria Group, Inc., effective as of October 1, 1987, as amended. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-08940).* | |||
10.29 | Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996, as amended effective August 31, 2007. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* |
57
10.30 | Grantor Trust Agreement by and between Altria Client Services Inc. and Wells Fargo Bank, National Association, dated February 23, 2011. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).* | |||
10.31 | Long-Term Disability Benefit Equalization Plan, effective as of January 1, 1989, as amended. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 1-08940).* | |||
10.32 | Survivor Income Benefit Equalization Plan, effective as of January 1, 1985, as amended and in effect as of January 1, 2010. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (File No. 1-08940).* | |||
10.33 | 2000 Performance Incentive Plan, effective on May 1, 2000. Incorporated by reference to Altria Group, Inc.s definitive proxy statement filed on March 10, 2000 (File No. 1-08940).* | |||
10.34 | 2000 Stock Compensation Plan for Non-Employee Directors, as amended and restated as of March 1, 2003. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).* | |||
10.35 | 2005 Performance Incentive Plan, effective on May 1, 2005. Incorporated by reference to Altria Group, Inc.s definitive proxy statement filed on March 14, 2005 (File No. 1-08940).* | |||
10.36 | Deferred Fee Plan for Non-Employee Directors, as amended and restated effective April 24, 2008. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-08940).* | |||
10.37 | Stock Compensation Plan for Non-Employee Directors, as amended and restated effective February 24, 2010. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended March 31, 2010 (File No. 1-08940).* | |||
10.38 | 2010 Performance Incentive Plan, effective on May 20, 2010. Incorporated by reference to Altria Group, Inc.s definitive proxy statement filed on April 9, 2010 (File No. 1-08940).* | |||
10.39 | Kraft Foods Inc. Supplemental Benefits Plan I (including First Amendment adding Supplement A), as amended and restated effective as of January 1, 1996. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 1-08940).* | |||
10.40 | Agreement among Altria Group, Inc., PM USA and Michael E. Szymanczyk, dated as of May 15, 2002. Incorporated by reference to Altria Group, Inc.s Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File No. 1-08940).* | |||
10.41 | Form of Indemnity Agreement. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on October 30, 2006 (File No. 1-08940). | |||
10.42 | Form of Deferred Stock Agreement, dated as of January 31, 2007. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on February 2, 2007 (File No. 1-08940).* | |||
10.43 | Form of Deferred Stock Agreement, dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on February 5, 2008 (File No. 1-08940).* | |||
10.44 | Form of Restricted Stock Agreement, dated as of April 23, 2008. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on April 29, 2008 (File No. 1-08940).* | |||
10.45 | Form of Restricted Stock Agreement, dated as of January 27, 2009. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 29, 2009 (File No. 1-08940).* |
58
10.46 | Form of Restricted Stock Agreement, dated as of December 31, 2009. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* | |||
10.47 | Form of Restricted Stock Agreement, dated as of January 26, 2010. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 28, 2010 (File No. 1-08940).* | |||
10.48 | Form of Restricted Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* | |||
10.49 | Form of Deferred Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* | |||
10.50 | Form of Executive Confidentiality and Non-Competition Agreement. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).* | |||
10.51 | Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, dated January 28, 2009. Incorporated by reference to Altria Group, Inc.s Current Report on Form 8-K filed on January 29, 2009 (File No. 1-08940).* | |||
10.52 | First Amendment to the Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, dated November 12, 2009. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).* | |||
10.53 | Second Amendment to the Time Sharing Agreement between Altria Client Services Inc. and Michael E. Szymanczyk, effective October 14, 2010. Incorporated by reference to Altria Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).* | |||
12 | Statements regarding computation of ratios. | |||
13 | Pages 9 to 101 of the 2011 Annual Report, but only to the extent set forth in Items 1, 5-8, 9A, and 15 hereof. With the exception of the aforementioned information incorporated by reference in this Annual Report on Form 10-K, the 2011 Annual Report is not to be deemed filed as part of this Report. | |||
21 | Subsidiaries of Altria Group, Inc. | |||
23 | Consent of independent registered public accounting firm. | |||
24 | Powers of attorney. | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
59
99.1 | Certain Litigation Matters. | |||
99.2 | Trial Schedule for Certain Cases. | |||
99.3 | Definitions of Terms Related to Financial Covenants Included in Altria Group, Inc.s 5-Year Revolving Credit Agreement dated as of June 30, 2011. | |||
101.INS | XBRL Instance Document. | |||
101.SCH | XBRL Taxonomy Extension Schema. | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
* | Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate. |
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Altria Group, Inc. | ||
By: |
/s/ MICHAEL E. SZYMANCZYK | |
(Michael E. Szymanczyk Chairman of the Board and Chief Executive Officer) |
Date: February 16, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
Signature |
Title |
Date | ||||
/s/ MICHAEL E. SZYMANCZYK (Michael E. Szymanczyk) |
Director, Chairman of the Board and Chief Executive Officer |
February 16, 2012 | ||||
/s/ HOWARD A. WILLARD III (Howard A. Willard III) |
Executive Vice President and Chief Financial Officer |
February 16, 2012 | ||||
/s/ LINDA M. WARREN (Linda M. Warren) |
Vice President and Controller | February 16, 2012 | ||||
* ELIZABETH E. BAILEY, GERALD L. BALILES, MARTIN J. BARRINGTON JOHN T. CASTEEN III, DINYAR S. DEVITRE, THOMAS F. FARRELL II, THOMAS W. JONES, W. LEO KIELY III GEORGE MUÑOZ, NABIL Y. SAKKAB |
Directors |
*By: |
/s/ MICHAEL E. SZYMANCZYK (MICHAEL E. SZYMANCZYK ATTORNEY-IN-FACT) |
February 16, 2012 |
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Altria Group, Inc.:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated January 27, 2012 appearing in the 2011 Annual Report to Shareholders of Altria Group, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 27, 2012
S-1
ALTRIA GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2011, 2010, and 2009
(in millions)
Col. A |
Col. B |
Col. C |
Col. D |
Col. E |
||||||||||||||||
Additions |
||||||||||||||||||||
Description |
Balance at Beginning of Period |
Charged to Costs and Expenses |
Charged to Other Accounts |
Deductions |
Balance at End of Period |
|||||||||||||||
(a) | (b) | |||||||||||||||||||
2011: |
||||||||||||||||||||
CONSUMER PRODUCTS: |
||||||||||||||||||||
Allowance for discounts |
$ | | $ | 602 | $ | | $ | 602 | $ | | ||||||||||
Allowance for returned goods |
46 | 102 | | 94 | 54 | |||||||||||||||
$ | 46 | $ | 704 | $ | | $ | 696 | $ | 54 | |||||||||||
FINANCIAL SERVICES: |
||||||||||||||||||||
Allowances for losses |
$ | 202 | $ | 25 | $ | | $ | | $ | 227 | ||||||||||
2010: |
||||||||||||||||||||
CONSUMER PRODUCTS: |
||||||||||||||||||||
Allowance for discounts |
$ | | $ | 606 | $ | | $ | 606 | $ | | ||||||||||
Allowance for doubtful accounts |
3 | | | 3 | | |||||||||||||||
Allowance for returned goods |
47 | 86 | | 87 | 46 | |||||||||||||||
$ | 50 | $ | 692 | $ | | $ | 696 | $ | 46 | |||||||||||
FINANCIAL SERVICES: |
||||||||||||||||||||
Allowances for losses |
$ | 266 | $ | | $ | | $ | 64 | $ | 202 | ||||||||||
2009: |
||||||||||||||||||||
CONSUMER PRODUCTS: |
||||||||||||||||||||
Allowance for discounts |
$ | | $ | 593 | $ | | $ | 593 | $ | | ||||||||||
Allowance for doubtful accounts |
3 | | | | 3 | |||||||||||||||
Allowance for returned goods |
4 | 104 | 15 | 76 | 47 | |||||||||||||||
$ | 7 | $ | 697 | $ | 15 | $ | 669 | $ | 50 | |||||||||||
FINANCIAL SERVICES: |
||||||||||||||||||||
Allowances for losses |
$ | 304 | $ | 15 | $ | | $ | 53 | $ | 266 | ||||||||||
Notes:
(a) | Related to the acquisition of UST LLC |
(b) | Represents charges for which allowances were created |
S-2
Exhibit 10.24
BENEFIT EQUALIZATION PLAN
Effective September 2, 1974
(As amended and in effect as of November 1, 2011)
BENEFIT EQUALIZATION PLAN
TABLE OF CONTENTS
Page | ||||||
ARTICLE I |
DEFINITIONS | 3 | ||||
ARTICLE II |
BENEFIT EQUALIZATION RETIREMENT ALLOWANCES, BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCES AND BENEFIT EQUALIZATION COMBINED ALLOWANCES | 18 | ||||
ARTICLE III |
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE | 32 | ||||
ARTICLE IV |
THE ADMINISTRATOR | 33 | ||||
ARTICLE V |
AMENDMENT AND DISCONTINUANCE OF THE PLAN | 34 | ||||
ARTICLE VI |
FORMS; COMMUNICATIONS | 35 | ||||
ARTICLE VII |
INTERPRETATION OF PROVISIONS | 36 | ||||
ARTICLE VIII |
CHANGE IN CONTROL PROVISIONS | 37 | ||||
EXHIBIT A: |
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT | 40 | ||||
APPENDIX 1: |
TP EMPLOYEES | 41 | ||||
APPENDIX 2: |
TAX ASSUMPTIONS | 42 | ||||
APPENDIX 3: |
CALCULATION OF BENEFIT SECULAR TRUST AND EXECUTIVE TRUST ARRANGEMENT PARTICIPANT | 43 |
i
BENEFIT EQUALIZATION PLAN
INTRODUCTION
The Benefit Equalization Plan governs the rights of an Employee whose benefit under the Retirement Plan or the Profit-Sharing Plan, or both Qualified Plans, is subject to one or more of the Statutory Limitations, or to the nondiscrimination requirements of Section 401(a)(4) of the Code and the coverage requirements of Section 410(b) of the Code.
The Plan was amended as of January 1, 2010, to include the participation of salaried employees of UST LLC and its affiliates who were participants in the UST LLC Retirement Income Plan for Salaried Employees (the substantive terms of which are now in Part V of the Retirement Plan as a result of the merger of the assets and liabilities of that plan with and into the assets and liabilities of the Retirement Plan after the close of business on December 31, 2009). In addition, effective as of January 1, 2010, the liabilities of the UST Inc. Benefit Restoration Plan, UST Inc. Excess Retirement Benefit Plan and UST Inc. Officers Supplemental Retirement Plan with respect to the limitations applicable to plans qualified under Section 401(a) of the Code (e.g., Sections 401(a)(17) and 415 of the Code) have been merged into and assumed by the Plan.
The Plan as hereinafter set forth shall be effective with respect to Employees who incur a Separation from Service on or after November 1, 2011, except as otherwise provided herein. The rights of a person whose Separation from Service or date of becoming an Inactive Participant is before November 1, 2011, shall be governed by the provisions of the plan (or the plan, the liabilities of which have been assumed by this Plan, in which such former employee participated on the date of his termination of employment) as in effect on his Separation from Service or date of becoming an Inactive Participant, as the case may be, except to the extent that the Administrator has determined in his sole discretion to administer the Plan in good faith compliance with Section 409A of the Code and any then published guidance so as to not subject any Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance to Section 409A of the Code.
The Plan is comprised of four separate plans, programs or arrangements. Each plan shall be treated as a separate plan, program or arrangement from the other plans. One of the plans provides benefits to a Retired Employee (or his Spouse or other Beneficiary) solely in excess of the Section 415 Limitations; the second plan provides benefits to a Retired Employee (or his Spouse or other Beneficiary) attributable solely to the Compensation Limitation; the third plan provides benefits to a Retired Employee (or his Spouse or other Beneficiary) because payment of the benefit from one or both of the Qualified Plans could result in a failure to meet the nondiscrimination requirements of Section 401(a)(4) of the Code or the coverage requirements of Section 410(b) of the Code; and the fourth plan provides benefits to a TP Employee who resumed active participation in the Plan, effective January 1, 2008.
Notwithstanding anything to the contrary in the provisions of this Plan, (1) no amounts shall be deemed credited or accrued under the Plan after December 31, 2004, to the extent the Administrator determines that the accrual, crediting or payment of such amounts under the terms of the Plan or related arrangements would risk subjecting Plan participants to taxation or
1
penalties under Section 409A of the Code, and (2) the Plan terms applicable to any amounts determined by the Administrator to be deferred compensation subject to the requirements of such Section 409A may be modified by the Administrator to the extent it deems necessary or appropriate to ensure compliance with such requirements. The Administrator may take any such action with respect to some participants but not others as it in its sole discretion deems appropriate under the circumstances.
2
ARTICLE I
DEFINITIONS
The following terms as used herein and in the Preamble shall have the meanings set forth below. Any capitalized term used herein or in the Preamble and not defined below shall have the meaning set forth in the Retirement Plan or the Profit-Sharing Plan, as the context may require.
(a) Actuarial Equivalent shall mean a benefit which is at least equivalent in value to the benefit otherwise payable pursuant to the terms of the Plan, based on the actuarial principles and assumptions set forth in Exhibit I to the Retirement Plan.
(b) After-Tax BEP Combined Allowance shall mean the amount by which (i) the TP Employees Gross After-Tax BEP Combined Allowance exceeds (ii) his Trust Account TP Value.
(c) Allowance or Allowances shall mean a Benefit Equalization Retirement Allowance, determined under ARTICLE IIA of the Plan, a Benefit Equalization Profit-Sharing Allowance, determined under ARTICLE IIB of the Plan and a Benefit Equalization Combined Allowance determined under ARTICLE IIC of the Plan.
(d) Assumed Trust Account TP shall mean the assumed trust account established pursuant to a TP Employees Supplemental Enrollment Agreement.
(e) Beneficiary shall mean:
(i) In the case of a Retired Employee who is to receive all or a portion of his Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance after his Separation from Service in a Single Sum Payment pursuant to ARTICLE IIE(1)(a), IIE(1)(b) or IIE(1)(c)(ii) of the Plan, but who dies after his Separation from Service and before such Single Sum Payment is made, the Beneficiary of such Single Sum Payment shall be the Spouse to whom he was married on the date of death; provided, however, that if the Retired Employee is not married on the date of his death, the Beneficiary of such Single Sum Payment shall be the Retired Employees estate.
(ii) In the case of a Grandfathered Employee who is a Secular Trust Participant who has elected pursuant to ARTICLE IIE(3) of the Plan to receive, after his Separation from Service, that portion of his Benefit Equalization Combined Allowance equal to the Grandfathered Benefit Equalization Retirement Allowance in the form of an Optional Payment described in ARTICLE I(dd)(i)(2) or (3) of the Plan, the person or persons designated by the Grandfathered Employee to receive (or who, pursuant to the terms of such Optional Payment, will receive) after his death a benefit according to the option elected by the Grandfathered Employee.
(iii) In the case of an Employee or Retired Employee who has been credited with a Benefit Equalization Profit-Sharing Allowance and who dies prior to the payment of such Benefit Equalization Profit-Sharing Allowance (or prior to the payment of the then remaining balance of such Benefit Equalization Profit-Sharing Allowance in the case of a Grandfathered
3
Employee who has elected pursuant to ARTICLE IIF(3) of the Plan to receive that portion of his Benefit Equalization Profit-Sharing Allowance equal to the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment described in ARTICLE I(dd)(ii) of the Plan), the Beneficiary of such Benefit Equalization Profit-Sharing Allowance (or remaining balance thereof) shall be the beneficiary or beneficiaries of such former Employee who is or are to receive the balance in such former Employees account under the Profit-Sharing Plan.
Notwithstanding the foregoing provisions of this Article I(e), if the value of the Trust Account TP is greater than the TP Employees Gross After-Tax BEP Combined Allowance, then the Beneficiary of any such excess shall be the beneficiary as determined pursuant to the terms of the Trust Account TP.
(f) Benefit Equalization Combined Allowance shall mean the benefit determined under ARTICLE IIC of the Plan and payable at the times and in the form set forth in ARTICLE IIE of the Plan. The Benefit Equalization Combined Allowance shall be comprised of the Grandfathered Benefit Equalization Retirement Allowance, if any, and the remaining portion of such Allowance.
(g) Benefit Equalization Joint and Survivor Allowance shall mean the total amount that would be payable during a twelve (12) month period as a reduced Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance to a Retired Employee for life and after his death the amount payable to his Spouse for life equal to one-half of the reduced Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance payable to the Retired Employee (regardless of whether such form of benefit was available to such Retired Employee and his Spouse), or in such other amount as described in ARTICLE IIC(2) of the Plan, which together shall be the Actuarial Equivalent of the Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance of the Retired Employee.
(h) Benefit Equalization Profit-Sharing Allowance or Profit-Sharing Allowance shall mean:
(i) with respect to Allowances other than a Benefit Equalization Combined Allowance, the benefit determined under ARTICLE IIB of the Plan and payable at the times and in the forms set forth in ARTICLE IIF of the Plan; and
(ii) with respect to a Benefit Equalization Profit-Sharing Allowance that is a portion of the Benefit Equalization Combined Allowance, the benefit determined under ARTICLE IIC of the Plan and payable at the times and in the forms set forth in ARTICLE IIF of the Plan.
The Benefit Equalization Profit-Sharing Allowance shall be comprised of the Grandfathered Benefit Equalization Profit-Sharing Allowance, if any, and the remaining portion of such Allowance. The Benefit Equalization Profit-Sharing Allowance shall not include a UST Employees UST Plan Benefit.
(i) Benefit Equalization Retirement Allowance shall mean the benefit determined under ARTICLE IIA of the Plan and payable at the times and in the forms set forth in
4
ARTICLE IIF of the Plan. The Benefit Equalization Retirement Allowance shall be comprised of the Grandfathered Benefit Equalization Retirement Allowance, if any, and the remaining portion of such Allowance. The Benefit Equalization Retirement Allowance shall not include a UST Employees UST Plan Benefit.
(j) Benefit Equalization Survivor Allowance shall mean the benefit payable to:
(i) the Spouse of a Deceased Employee; and
(ii) the Spouse of a deceased Retired Employee;
in an amount equal to one-half of the reduced Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance which would have been payable in the form of a Benefit Equalization Joint and Survivor Allowance to the Deceased Employee or deceased Retired Employee (regardless of whether such form of benefit was available to such Deceased Employee or deceased Retired Employee), or in such other amount as described in ARTICLE IIC(2) of the Plan.
(k) BEP Benefit Commencement Date shall mean the date on which the benefit to which the recipient is entitled is paid or commences to be paid pursuant to the application filed in accordance with ARTICLE IIG of the Plan, or if no such application is filed, in accordance with the terms of the Plan as determined in the sole discretion of the Administrator. All such Allowances not paid in a Single Sum Payment are paid in arrears so that the actual date of payment shall be the first day of the calendar month next succeeding the BEP Benefit Commencement Date.
(1) (i) Except as provided in clauses (ii), (iii), (iv) and (v) of this ARTICLE I(k)(1) of the Plan, the BEP Benefit Commencement Date of the Benefit Equalization Retirement Allowance and Benefit Equalization Combined Allowance shall be the Payment Date, but not later than the Latest Payment Date.
(ii) (A) Except as provided in clauses (B) and (C) of this ARTICLE I(k)(1)(ii) of the Plan, the BEP Benefit Commencement Date of that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable in the form of an Optional Payment pursuant to an election under ARTICLE IIE(3) of the Plan to a Grandfathered Retired Employee shall be the Benefit Commencement Date of the Grandfathered Retired Employees Full, Deferred or Early Retirement Allowance under the Retirement Plan.
(B) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable in the form of an Optional Payment with respect to a Grandfathered Retired Employee who voluntarily retires within the one (1) year period following the date of the filing of his application for an Optional Payment with the Administrator pursuant to ARTICLE IIE(3) of the Plan, or whose employment is terminated for misconduct (as determined by the Management Committee) within such one (1) year period, shall be the first day of the month following the expiration of the one (1) year period following the date of the filing of his application for an Optional Payment.
5
(C) The BEP Benefit Commencement Date of the benefit payable pursuant to ARTICLE IIE(3)(f) of the Plan to the Beneficiary of a Grandfathered Retired Employee who died after his Date of Retirement and prior to his BEP Benefit Commencement Date shall be the first day of the month following the death of the deceased Grandfathered Retired Employee.
(iii) The BEP Benefit Commencement Date of (A) that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable to a Retired TP Employee and (B) that portion of a Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable to a Grandfathered Retired Employee, who in each case is only eligible for a Vested Retirement Allowance at his Separation from Service, shall be the Benefit Commencement Date of the Retired Employees Vested Retirement Allowance under the Retirement Plan.
(iv) The BEP Benefit Commencement Date of any Benefit Equalization Retirement Allowance described in ARTICLE IIA(1)(e) of the Plan and of any Benefit Equalization Combined Allowance described in ARTICLE IIC(1)(e) of the Plan shall be the benefit commencement date of such Allowance as set forth in the General Release Agreement; provided, however, that if no time of payment is specified, the BEP Benefit Commencement Date shall be the Payment Date, but no later than the 15th day of the third month following the end of the Employees Participating Company first taxable year in which the right is no longer subject to a substantial risk of forfeiture; provided, however, that no such Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance shall change either the time or form of payment of the Allowance (including a Grandfathered Benefit Equalization Retirement Allowance) otherwise payable pursuant to the terms of the Plan.
(v) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance that is payable in the form of an Optional Payment pursuant to an election under ARTICLE IIF(3) of the Plan to a TP Employee shall be the date specified in the application.
(2) (i) (A) Except as provided in clause (B) of this ARTICLE I(k)(2)(i) of the Plan, the BEP Benefit Commencement Date of the Benefit Equalization Profit-Sharing Allowance (other than the Benefit Equalization Profit-Sharing Allowance of a TP Employee which shall be paid as part of the Benefit Equalization Combined Allowance pursuant to ARTICLE I(k)(1) of the Plan) shall be the Payment Date, but not later than the Latest Payment Date.
(B) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance that is payable in the form of an Optional Payment pursuant to an election under ARTICLE IIF(3) of the Plan to a Grandfathered Retired Employee shall be the date specified in the application.
6
(3) (i) (A) Except as provided in clause (B) of this ARTICLE I(k)(3)(i), the BEP Benefit Commencement Date of the Benefit Equalization Survivor Allowance payable to the Spouse of a Deceased Employee or deceased Retired Employee shall be the Survivor Allowance Payment Date, but not later than the Survivor Allowance Latest Payment Date.
(B) The BEP Benefit Commencement Date of that portion of the Benefit Equalization Survivor Allowance that is derived from (i) the Grandfathered Benefit Equalization Retirement Allowance portion of the Benefit Equalization Combined Allowance or (ii) the Grandfathered Benefit Equalization Retirement Allowance that is payable to:
(1) the Spouse of a Grandfathered Deceased Employee; or
(2) the Spouse of a deceased Grandfathered Retired Employee,
shall, in each case, be the Benefit Commencement Date of the Survivor Allowance payable to such Spouse under the Retirement Plan, provided that the Spouse may elect in accordance with the provisions of Paragraphs G2.05(c) and (d)(2) of Part I of the Retirement Plan, as applicable to the Spouse, that the BEP Benefit Commencement Date be the first day of any month thereafter, but not later than the later of (i) the first day of the second calendar month following the month in which the Grandfathered Deceased Employee or deceased Grandfathered Retired Employee died (or if his date of birth was on the first day of a calendar month, the first day of the calendar month next following the calendar month in which the Grandfathered Deceased Employee or deceased Grandfathered Retired Employee died), or (ii) the date that would have been the Grandfathered Deceased Employees or deceased Grandfathered Retired Employees Unreduced Early Retirement Benefit Commencement Date.
(l) Change in Circumstance shall mean, with respect to a Grandfathered Employee or Grandfathered Retired Employee who is a Secular Trust Participant:
(i) the marriage of the Grandfathered Employee or Grandfathered Retired Employee;
(ii) the divorce of the Grandfathered Employee or Grandfathered Retired Employee from his Spouse (determined in accordance with applicable state law), provided:
(1) | such Spouse was the Beneficiary who is to receive an Optional Payment, or |
(2) | the Grandfathered Employee or Grandfathered Retired Employee elected pursuant to ARTICLE IIE(3) of the Plan to receive an Optional Payment pursuant to ARTICLE I(dd)(i) of the Plan; |
7
(iii) the death of the Beneficiary designated by the Grandfathered Employee or Grandfathered Retired Employee to receive an Optional Payment after the death of the Grandfathered Retired Employee; or
(iv) a medical condition of the Beneficiary, based on medical evidence satisfactory to the Administrator, which is expected to result in the death of the Beneficiary within five (5) years of the filing of an application for change in Optional Payment method pursuant to ARTICLE IIE(3) or ARTICLE IIF(3) hereof.
(m) Code means the Internal Revenue Code of 1986, as amended from time to time.
(n) Company shall mean Altria Client Services Inc. Altria Client Services Inc. is the sponsor of the Plan.
(o) Compensation shall have the same meaning as in the applicable Part of the Retirement Plan, except that in computing the Retirement Allowance and Benefit Equalization Retirement Allowance of an Employee in salary bands A and B who was not age fifty-five (55) or older at December 31, 2006, Compensation for Plan years on and after January 1, 2007, shall mean the lesser of his (i) base salary, plus annual incentive award, and (ii) base salary, plus annual incentive award at a business rating of 100 and individual performance rating of Exceeds.
(p) Compensation Limitation shall mean the limitation of Section 401(a)(17) of the Code on the annual compensation of an Employee which may be taken into account under the Qualified Plans.
(q) Earned and Vested shall mean, when referring to an Allowance or any portion of an Allowance, an amount that, as of January 1, 2005, is not subject to a substantial risk of forfeiture (as defined in Treasury Regulation Section 1.83-3(c)) or a requirement to perform future services.
(r) Employee shall mean any person employed by a Participating Company who has accrued a benefit under the Retirement Plan or the Profit-Sharing Plan, but whose entire accrued benefit, if computed without regard to the Statutory Limitations, cannot be paid under the Retirement Plan or the Profit-Sharing Plan, or either of such Qualified Plans, as a result of the Statutory Limitations, provided that an Employee shall not include a TP Employee, but only with respect to those calendar years in which he was a participant in such arrangement. An Employee shall include a UST Employee but only with respect to any benefit earned under the Profit-Sharing Plan on or after January 1, 2010, and disregarding any part of the UST Employees UST Plan Benefit earned on and after such date.
(s) ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
(t) Grandfathered Benefit Equalization Joint and Survivor Allowance shall mean the total amount that would be payable during a twelve (12) month period as a reduced
8
Grandfathered Benefit Equalization Retirement Allowance to a Grandfathered Retired Employee for life and after his death the amount payable to his Spouse for life equal to one-half of the reduced Grandfathered Benefit Equalization Retirement Allowance payable to the Grandfathered Retired Employee, which together shall be the Actuarial Equivalent of (i) that portion of the Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance, or (ii) that portion of the Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance of the Retired Grandfathered Employee.
(u) Grandfathered Benefit Equalization Optional Payment Allowance shall mean, with respect a Grandfathered Retired Employee who is a Secular Trust Participant, the total amount of the Grandfathered Benefit Equalization Retirement Allowance payable during a twelve (12) month period in accordance with one of the payment methods described in Paragraph G2.04(d) of Part I of the Retirement Plan and designated by the Grandfathered Retired Employee in his application for an Optional Payment under ARTICLE IIE(3) of the Plan, pursuant to which the Grandfathered Retired Employee receives for life after his Date of Retirement a reduced Grandfathered Benefit Equalization Retirement Allowance in equal monthly payments for life and after his death after his Date of Retirement his Beneficiary receives for life a benefit in equal monthly payments according to the option elected by the Grandfathered Retired Employee, which together shall be the Actuarial Equivalent of the Grandfathered Benefit Equalization Retirement Allowance payable in equal monthly payments for the life of the Grandfathered Retired Employee after his Date of Retirement.
(v) Grandfathered Benefit Equalization Profit-Sharing Allowance shall mean (i) that portion of a Grandfathered Retired Employees Benefit Equalization Combined Allowance that is the Benefit Equalization Profit-Sharing Allowance, or (ii) that portion of a Grandfathered Retired Employees Benefit Equalization Profit-Sharing Allowance that is the Benefit Equalization Profit-Sharing Allowance, in each case as of December 31, 2004, the right to which is Earned and Vested as of December 31, 2004, plus any future contributions to the account, the right to which was Earned and Vested as of December 31, 2004, but only to the extent such contributions are actually made, plus earnings (whether actual or notional) attributable to such Grandfathered Benefit Equalization Profit-Sharing Allowance as of December 31, 2004, or to such income.
(w) Grandfathered Benefit Equalization Retirement Allowance shall mean the present value of (i) that portion of the Benefit Equalization Combined Allowance, or (ii) that portion of the Benefit Equalization Retirement Allowance, in each case earned to December 31, 2004, to which the Grandfathered Employee or Retired Grandfathered Employee would have been entitled under the Plan if he had voluntarily terminated services without cause on or before December 31, 2004, and received payment of such benefit on the earliest permissible date following termination of employment in the form with the greatest value, expressed for purposes of this calculation as a single life annuity commencing at age 65; provided, however, that for any subsequent year such Grandfathered Benefit Equalization Retirement Allowance may increase to equal the present value of such portion of his benefit the Grandfathered Employee or Grandfathered Retired Employee actually becomes entitled to, in the form and at the time actually paid, determined in accordance with the terms of the Plan (including applicable Statutory Limitations) as in effect on October 3, 2004, without regard to any further services
9
rendered by the Grandfathered Employee or Grandfathered Retired Employee after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than an election with respect to the time and form of an available benefit).
In computing that portion of the Benefit Equalization Combined Allowance or Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced (but is not eligible for a Full or Deferred Retirement Allowance) under the Retirement Plan as of the Grandfathered Employees Separation from Service, or, in the discretion of the Administrator, the end of the Grandfathered Employees policy severance, such Grandfathered Benefit Equalization Retirement Allowance shall be the Actuarial Equivalent of that portion of the Grandfathered Employees Benefit Equalization Combined Allowance or Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance, computed as though such benefit were payable under the terms of the Retirement Plan in the form of a Retirement Allowance commencing on the first day of the month coincident with or next following the Grandfathered Employees Separation from Service or, in the discretion of the Administrator, the end of the Grandfathered Employees policy severance; provided, however, that solely for purposes of determining the early retirement factor to be applied in determining the Actuarial Equivalent of such benefit, the earliest date on which the Grandfathered Employee shall be treated as being entitled to an unreduced benefit under the Retirement Plan for purposes of Exhibit 1 to the Retirement Plan shall be the earliest date on which the Grandfathered Employee would have been entitled to an unreduced benefit if the Grandfathered Employee had voluntarily terminated employment on December 31, 2004.
(x) Grandfathered Deceased Employee shall mean a Grandfathered Employee who died while he was an Employee at a time when he had a nonforfeitable right to any portion of his Benefit Equalization Retirement Allowance.
(y) Grandfathered Employee shall mean:
(i) an Employee who is entitled to that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance that was Earned and Vested; or
(ii) an Employee who is entitled to that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance,
and who, in either instance, is a participant in the executive trust or is a Secular Trust Participant.
(z) Grandfathered Retired Employee shall mean:
(i) a Grandfathered Employee who has retired and is eligible for that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance that was Earned and Vested; and
10
(ii) a Grandfathered Employee who has retired and is eligible for that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance.
(aa) Gross After-Tax BEP Combined Allowance shall be equal to the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2), but disregarding any withholding for the TP Employees share of employment taxes, were withheld on the sum of (i) that portion of the TP Employees Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Retirement Allowance and (ii) that portion of the TP Employees Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Profit-Sharing Allowance.
(bb) Latest Payment Date shall mean the later of:
(i) December 31st of the year in which the Payment Date occurs, and
(ii) the fifteenth day of the third month following the Payment Date.
(cc) Optional Payment shall mean:
(i) the following optional forms in which that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Retired Employee who is a Secular Trust Participant may be paid:
(1) | in equal monthly payments for the life of the Grandfathered Retired Employee; |
(2) | a Grandfathered Benefit Equalization Joint and Survivor Allowance; or |
(3) | a Grandfathered Benefit Equalization Optional Payment Allowance; and |
(ii) in the case of that portion of a Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance of a Grandfathered Employee or Grandfathered Retired Employee, any of the methods of distribution permitted under ARTICLE VI of the Profit-Sharing Plan (other than a Single Sum Payment payable at the BEP Benefit Commencement Date described in ARTICLE I(k)(2)(i)(A) of the Plan) and in the event the Grandfathered Employee or Grandfathered Retired Employee dies before distribution of that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance is made, commences to be made or is fully distributed, to his Beneficiary in accordance with the method of distribution designated by such Grandfathered Employee or Grandfathered Retired Employee; provided however, that payment to a Beneficiary who is not the Spouse of the Grandfathered Employee or Grandfathered Retired Employee shall be made no
11
later than one (1) year following the death of the Grandfathered Employee or Grandfathered Retired Employee.
Any election to receive an Optional Payment with respect to any Allowance or Allowances under the Plan shall be independent of any election with respect to benefits payable under the Retirement Plan, the Profit-Sharing Plan, or any other plan of a member of the Controlled Group.
(dd) Payment Date shall mean:
(i) With respect to payment of a benefit under the Plan other than a UST Plan Benefit, the first day of the third calendar month following the month in which the Employee Separates from Service; and
(ii) In all cases of a payment due under the Plan with respect to a UST Plan Benefit on behalf of a UST Employee that would have been payable pursuant to Part V of the Retirement Plan but for the Statutory Limitations or for any other reason but that are payable pursuant to the provisions of the Plan, the Payment Date shall mean the first of the month following the latest of::
(A) | January 31, 2009, |
(B) | the UST Employees Separation from Service, or |
(C) | the UST Employees attainment of age fifty-five (55); |
if the UST Employee dies after the Payment Date but before actual payment is made, the Payment Date shall be the day following the date of death, but no later than December 31st of the year in which the UST Employee dies.
Notwithstanding the foregoing, in all cases of a Separation from Service other than on account of death, the Payment Date in the case of a Specified Employee shall be the first day of the seventh calendar month following the date that such Specified Employee Separates from Service.
(iii) With respect to a payment under the Plan to an individual other than the Employee pursuant to the terms of a domestic relations order (as defined in Section 414(p)(1)(B) of the Code, the Payment Date shall be the date necessary to fulfill such domestic relations order.
(ee) Plan shall mean the Benefit Equalization Plan described herein and in any amendments hereto.
(ff) Profit-Sharing Plan shall mean the Deferred Profit-Sharing Plan for Salaried Employees, effective January 1, 1956, and as amended from time to time.
(gg) Qualified Plans shall mean the Retirement Plan and the Profit-Sharing Plan.
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(hh) Retired Employee shall mean a former Employee who is eligible for or in receipt of, an Allowance. A Retired Employee shall cease to be such when he has received all of the Allowances payable to him under the Plan.
(ii) Retired TP Employee shall mean a former TP Employee who is eligible for or in receipt of, an Allowance pursuant to ARTICLE IIC of the Plan. A Retired TP Employee shall cease to be such when he has received all of the Allowances payable to him under the Plan.
(jj) Retirement Plan shall mean Parts I and II of the Altria Retirement Plan, effective as of September 1, 1978, and as amended from time to time.
(kk) Section 415 Limitations shall mean:
(i) in the case of the Retirement Plan, the limitations on benefits applicable to defined benefit plans set forth in Section 415 of the Code and the Treasury Regulations promulgated thereunder, and
(ii) in the case of the Profit-Sharing Plan, the limitations on contributions applicable to defined contribution plans set forth in Section 415 of the Code and the Treasury Regulations promulgated thereunder.
(ll) Secular Trust Participant shall mean a Grandfathered Employee who signed an enrollment agreement to participate in the secular trust arrangement.
(mm) Separation from Service, Separates from Service or Separated from Service shall each have the same meaning as the term separation from service in Treasury Regulation Section 1.409A-1(h)(1); provided, however, that with respect to the payment of any Grandfathered Allowance that is not subject to Section 409A of the Code, such terms shall mean the date that the Employee terminated his services as an Employee with his Participating Company and each other member of the Controlled Group.
(nn) Single Sum Payment shall mean payment of a benefit or portion of a benefit in a single payment to a Retired Employee, or to the Spouse or other Beneficiary of an Employee, Deceased Employee or deceased Retired Employee. A Single Sum Payment shall be (i) the Actuarial Equivalent of all or that portion of the Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Retired Employee, and (ii) the Actuarial Equivalent of the (or portion of the) Benefit Equalization Survivor Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Spouse of the Deceased Employee or deceased Retired Employee, in each case using the actuarial principles and assumptions set forth in EXHIBIT A to the Plan; provided, however, that a Single Sum Payment with respect to a Grandfathered Employee who is a Secular Trust Participant shall equal the greater of (i) the amount determined pursuant to the foregoing provisions of this ARTICLE I(oo) and (ii) the amount required to purchase a single life annuity (or, for purposes of a secular trust participant, a Benefit Equalization Joint and Survivor Allowance) equal to the benefit otherwise identified under the Plan from a licensed commercial insurance company, as determined in the sole discretion of the Administrator.
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(i) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Retirement Allowance (including payments with respect to benefits earned under the UST Plans), except with respect to:
(1) that portion of the Benefit Equalization Retirement Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service; and
(2) that portion of the Benefit Equalization Retirement Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who is a Secular Trust Participant who has timely elected to receive after his Date of Retirement that portion of his Benefit Equalization Retirement Allowance equal to the Grandfathered Benefit Equalization Retirement Allowance in the form of an Optional Payment pursuant to ARTICLE IIE(3)(a) of the Plan and which election does not cease to be of any force and effect pursuant to ARTICLE IIE(3)(d) of the Plan.
(ii) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Combined Allowance, except with respect to:
(1) that portion of the Benefit Equalization Combined Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service; and
(2) that portion of the Benefit Equalization Combined Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who has timely elected to receive after his Date of Retirement that portion of his Benefit Equalization Combined Allowance equal to the Grandfathered Benefit Equalization Retirement Allowance in the form of an Optional Payment pursuant to ARTICLE IIE(3)(a) of the Plan and which election does not cease to be of any force and effect pursuant to ARTICLE IIE(3)(d) of the Plan.
(iii) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Survivor Allowance, except with respect to that portion of the Benefit Equalization Survivor Allowance derived solely from that portion of the Benefit Equalization Combined Allowance or Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable to the Spouse of a Grandfathered Deceased Employee or the Spouse of a deceased Grandfathered Retired Employee.
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(iv) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Profit-Sharing Allowance, except with respect to that portion of the Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance payable to a Grandfathered Retired Employee who is a Secular Trust Participant who has timely elected to receive after his Date of Retirement that portion of his Benefit Equalization Profit-Sharing Allowance equal to the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment pursuant to ARTICLE IIF(3) of the Plan.
(oo) Specified Employee shall have the meaning given in Treasury Regulation Section 1.409A-1(i).
(pp) Statutory Limitations shall mean:
(i) the Section 415 Limitations, and
(ii) the Compensation Limitation.
(qq) Supplemental Enrollment Agreement shall mean the most recent of any Supplemental Employee Grantor Trust Enrollment Agreements and Supplemental Cash Enrollment Agreements between a TP Employee and a Participating Company or their affiliates or predecessors.
(rr) Survivor Allowance Latest Payment Date shall mean the later of:
(i) December 31st of the year in which the Survivor Allowance Payment Date occurs, or
(ii) the fifteenth day of the third month following the Survivor Allowance Payment Date.
(ss) Survivor Allowance Payment Date shall mean the first day of the third calendar month following the month in which the Deceased Employee or deceased Retired Employee died.
(tt) TP Employee shall mean an Employee identified in Appendix 1, as a result of his participation in the target payment program for the calendar years 2005 through 2007.
(uu) Trust Account TP shall mean the trust subaccount established pursuant to a Employees Supplemental Enrollment Agreement and to which target payments have been credited.
(vv) Trust Account TP Value shall mean,
(i) with respect to a TP Employee for whom a Trust Account TP has been established, the sum of the amounts credited to the TP Employees Assumed Trust Account TP and Trust Account TP as of the earlier of the date:
15
(1) on which the TP Employees Trust Account TP is terminated and distributed in accordance with the procedures established by the Administrator,
(2) that is 60 days after the TP Employees Separation from Service, or
(3) on which a Change in Control occurs, and
(ii) with respect to a TP Employee for whom a Trust Account TP has not been established, the amounts credited to the TP Employees Assumed Trust Account TP as of the earlier of the date:
(1) of the TP Employees Separation from Service, or
(2) on which a Change in Control occurs,
in each case, reduced by the estimated amount of any taxes that would be attributable to income or assumed income from these accounts assuming liquidation of the accounts as of the applicable determination date set out above, but which have not been paid or deducted from these accounts, calculated using the income tax rate assumptions set forth in Appendix 2 and disregarding any withholding for the TP Employees share of employment taxes.
(ww) UST Plan Benefit shall mean the benefit earned by a UST Employee under the terms of the UST Plans as in effect on December 31, 2009, (including the provisions of the UST LLC Retirement Income Plan for Salaried Employees that ceased the earning of any service used to compute the amount of a UST Employees benefits as of December 31, 2009), including any increase in such benefit as a result of Compensation paid after December 31, 2009, and vesting service completed after December 31, 2009, that is used to determine if the UST Employee is eligible for any early retirement subsidy.
(xx) UST Employee shall mean an Employee who has accrued a UST Plan Benefit.
(yy) UST Plans shall mean:
(i) the UST Inc. Benefit Restoration Plan, as amended and in effect immediately prior to the merger of that portion of its liabilities allocable to benefits that were payable from the Benefit Restoration Plan solely as a result of the limitations on compensation under Section 401(a)(17) of the Code into the liabilities of the Plan;
(ii) the UST Inc. Excess Retirement Benefit Plan, as amended and in effect immediately prior to the merger of its liabilities into the liabilities of the Plan; and
(iii) the UST Inc. Officers Supplemental Retirement Plan, as amended and in effect immediately prior to the merger of its liabilities into the liabilities of the Plan.
16
The masculine pronoun shall include the feminine pronoun unless the context clearly requires otherwise.
17
ARTICLE II
BENEFIT EQUALIZATION RETIREMENT ALLOWANCES, BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCES AND BENEFIT EQUALIZATION COMBINED ALLOWANCES
A. | Benefit Equalization Retirement Allowances and other benefits payable under this Plan with respect to a Retired Employee who was not a TP Employee shall be as follows: |
(1) (a) Subject to the provisions of subparagraphs (b), (c), and (d) of this ARTICLE IIA(1), the Benefit Equalization Retirement Allowance with respect to a Retired Employee who was not a TP Employee shall equal the sum of (i) and (ii) below:
(i) the amount by which the Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, if computed without regard to the Statutory Limitations, exceeds the amount of the Retirement Allowance actually payable under the Retirement Plan, plus
(ii) in the case of a Retired Employee who is eligible to receive an enhanced benefit under the Qualified Plan (such as a benefit payable pursuant to a voluntary early retirement program or a shutdown benefit), but whose additional accrued benefit resulting solely from participation in such program or benefit may not be paid from the Qualified Plan because of the nondiscrimination requirements of Section 401(a)(4) of the Code, or the coverage requirements of Section 410(b) of the Code, the amount of such additional accrued benefit payable to such Retired Employee solely as a result of his participation in such program or benefit.
(b) In no event shall any increase in a Grandfathered Employees Benefit Equalization Retirement Allowance resulting from an amendment to the Retirement Plan to add or remove a subsidized benefit, change the time and form of payment of the Benefit Equalization Retirement Allowance earned prior to the date of such amendment.
(c) In the event that all or any portion of the Benefit Equalization Retirement Allowance with respect to the Retired Employee described in ARTICLE IIA(1)(a) of the Plan is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIE prior to the Retired Employees Benefit Commencement Date under the Retirement Plan, the amount of such Benefit Equalization Retirement Allowance shall equal the amount by which the Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, if computed without regard to the Statutory Limitations, is reasonably estimated by the Administrator to exceed the amount of the Retirement Allowance which is projected by the Administrator to be actually payable under the Retirement Plan.
(d) In the event that all or any portion of the Benefit Equalization Retirement Allowance with respect to a Retired Employee described in ARTICLE IIA(1)(a) of the Plan is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIE prior to the date the Retired Employee shall have specified on his application for
18
retirement as the Benefit Commencement Date of his Retirement Allowance under the Retirement Plan, the Single Sum Payment shall be calculated based on the assumption that the Retired Employee elected to receive a Retirement Allowance at his Unreduced Early Retirement Benefit Commencement Date or Unreduced Vested Retirement Benefit Commencement Date, as applicable to the Retired Employee.
(e) If, as a result of the execution of a General Release Agreement (and not revoking it), (A) an Employee first obtains a legally binding right to payment of an increase in his Benefit Equalization Retirement Allowance, (B) as of the first date the Employee obtains a legally binding right to such increase it is subject to a substantial risk of forfeiture (within the meaning of Treasury Regulation Section 1.409A-1(d)), then the amount of such increase in the Benefit Equalization Retirement Allowance with respect to such Employee shall be the amount as set forth in the General Release Agreement and shall be payable at the BEP Benefit Commencement Date specified in ARTICLE I(k)(1)(iv) of the Plan provided, however that no such increase in an Employees Benefit Equalization Allowance shall change either the time or form of payment of the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Employee otherwise payable pursuant to the terms of the Plan. The provisions of this paragraph are in lieu of, and not in addition to, the benefits provided pursuant to the provisions of ARTICLE IIA(1)(a)(ii) of the Plan.
(2) The Spouse of
(a) a Deceased Employee (other than a TP Employee), or
(b) a deceased Retired Employee (other than a deceased Retired TP Employee and a Grandfathered Retired Employee who is a Secular Trust Participant who made an election for a Grandfathered Benefit Equalization Optional Payment Allowance and designated a Beneficiary other than his Spouse) who has died after his Date of Retirement and before his BEP Benefit Commencement Date, or
(c) a Grandfathered Retired Employee who is a Secular Trust Participant whose request for an Optional Payment pursuant to ARTICLE I(dd)(i)(2) or (3) of the Plan with respect to that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Allowance has been granted by the Administrator, but who has died after his Date of Retirement and before his BEP Benefit Commencement Date,
shall, in each case, be eligible to receive a Benefit Equalization Survivor Allowance.
B. | Benefit Equalization Profit-Sharing Allowances payable under this Plan shall be as follows: |
(1) The Benefit Equalization Profit-Sharing Allowance with respect to an Employee who is not a TP Employee or a Match-Eligible Employee shall equal the amounts which would have been credited, but were not credited to his Company Account as a result of the Statutory Limitations.
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(2) The Benefit Equalization Profit-Sharing Allowance with respect to an Employee who is a Match-Eligible Employee, but who is not a TP Employee shall equal the sum of (a) and (b) below:
(a) the amounts which would have been credited, but were not credited to his Company Account as a result of the Statutory Limitations, plus
(b) the amount of Company Match Contributions that could not be made to the Profit-Sharing Plan for a calendar year as a result of the Statutory Limitations, assuming that the Match-Eligible Employee elected to make Salary Reduction Contributions, After-Tax Contributions, or a combination of Salary Reduction Contributions and After-Tax Contributions of three percent (3%) of such Match-Eligible Employees Compensation for such Plan Year.
In order to be eligible for a Benefit Equalization Profit-Sharing Allowance for a Plan Year, the Match-Eligible Employee must have made the maximum dollar amount of Elective Contributions (including Catch-up Contributions, if applicable to the Match-Eligible Employee) for such Plan Year, as described in Section 402(g)(1) of the Code. Any Benefit Equalization Profit-Sharing Allowance shall be reduced to the extent necessary to reflect Company Match Contributions made with respect to After-Tax Contributions to the Profit-Sharing Plan.
(3) The amounts credited pursuant to ARTICLE IIB(2)(a) shall be deemed credited on the same date as the Company Contribution is made to the Profit-Sharing Plan. The amounts credited pursuant to ARTICLE IIB(2)(b) shall be deemed credited on January 1 immediately succeeding the calendar year for which such Company Match Contributions could not be made to the Profit-Sharing Plan. All such amounts shall be deemed to have been invested in Part C of the Fund (as defined in the Profit-Sharing Plan) and valued in accordance with the provisions of the Profit-Sharing Plan.
C. | Benefit Equalization Combined Allowances payable under this Plan shall be as follows: |
(1) (a) Subject to the provisions of subparagraphs (b), (c), and (d) of this ARTICLE IIC of the Plan, the Benefit Equalization Combined Allowance of a TP Employee shall be equal to the sum of clauses (i) and (ii) and subject to the proviso in clause (iii):
(i) the amount by which the Full, Deferred, Early or Vested Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, expressed in the form of a Retirement Allowance, if computed without regard to the Statutory Limitations, exceeds the amount of the Full, Deferred, Early or Vested Retirement Allowance actually payable under the Retirement Plan, expressed in the form of a Retirement Allowance.
(A) In computing the amount under ARTICLE IIC(1)(a)(i) with respect to a TP Employee who is eligible for a Full, Deferred or Vested Retirement Allowance, but is not eligible for an Early Retirement Allowance as of the TP Employees Separation from
20
Service or, if later, the end of the TP Employees policy severance, such Full, Deferred or Vested Allowance shall equal the Actuarial Equivalent of the TP Employees Benefit Equalization Combined Allowance (assuming that it is payable in monthly payments for the lifetime of the TP Employee), computed as though such Allowance were payable under the terms of the Retirement Plan as a Retirement Allowance at the later of age sixty-five (65), the age of the TP Employee at his Separation from Service or, if later, the end of the TP Employees policy severance.
(B) In computing the amount under ARTICLE IIC(1)(a)(i) with respect to a TP Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced, but is not eligible for a Full, Deferred or Vested Retirement Allowance, as of the TP Employees Separation from Service or, if later, the end of the TP Employees policy severance, such Early Retirement Allowance shall be the Actuarial Equivalent of the TP Employees Benefit Equalization Combined Allowance (assuming that it is payable in monthly payments for the lifetime of the Employee), computed as though such Allowance were payable under the terms of the Retirement Plan as a Retirement Allowance commencing on the first day of the month coincident with or next following the Employees Separation from Service, or, if later, at the end of the Employees policy severance. If such Allowance is to be paid in a Single Sum Payment, such Early Retirement Allowance shall equal the present value of such Allowance that would be payable to the former TP Employee as of the first day of the month coincident with or next following the Employees Separation from Service, or, if later, at the end of the Employees policy severance date, determined as of the first day of the month following the month in which the former TP Employee Separated from Service (or died, in the case of a payment to the Spouse of the deceased TP Employee); plus
(ii) the amount which would have been credited, but were not credited to his Company Account as a result of the Statutory Limitations; plus, in the case of a Match-Eligible Employee, the amount of Company Match Contributions that could not be made to the Profit-Sharing Plan for a calendar year as a result of the Statutory Limitations, assuming that the Match-Eligible Employee elected to make Salary Reduction Contributions, After-Tax Contributions, or a combination of Salary Reduction Contributions and After-Tax Contributions of three percent (3%) of such Match-Eligible Employees Compensation for such Plan Year (in order to be eligible for such a credit, a Match-Eligible Employee must have made the maximum dollar amount of Elective Contributions (including Catch-up Contributions, if applicable to the Match-Eligible Employee) for such Plan Year, as described in Section 402(g)(1) of the Code. Any Allowance shall be reduced to the extent necessary to reflect
21
Company Match Contributions made with respect to After-Tax Contributions to the Profit-Sharing Plan); and
(iii) provided, however, that, that portion of a TP Employees Benefit Equalization Combined Allowance which is not his Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance shall equal the amount of the TP Employees After-Tax BEP Combined Allowance converted to a pre-tax amount. Such pre-tax amount shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2), but disregarding any withholding for the TP Employees share of employment taxes, to equal the After-Tax BEP Combined Allowance.
(iv) Sample calculations of a TP Employees Benefit Equalization Combined Allowance are set forth in Appendix 3.
(b) In no event shall any increase in a TP Employees Benefit Equalization Combined Allowance resulting from an amendment to the Retirement Plan to add or remove a subsidized benefit, change the time and form of payment of the Benefit Equalization Combined Allowance earned prior to the date of such amendment.
(c) In the event that all or any portion of the Benefit Equalization Combined Allowance with respect to the Grandfathered Retired Employee described in ARTICLE IIC(1)(a) of the Plan is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIE(1)(b) of the Plan prior to the TP Employees Benefit Commencement Date under the Retirement Plan, the amount of such Benefit Equalization Combined Allowance shall equal the amount by which the Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, if computed without regard to the Statutory Limitations, is reasonably estimated by the Administrator to exceed the amount of the Retirement Allowance which is projected by the Administrator to be actually payable under the Retirement Plan.
(d) In the event that all or any portion of the Benefit Equalization Combined Allowance with respect to a Retired TP Employee described in ARTICLE IIC(1)(a) of the Plan is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIE(1)(b) of the Plan prior to the date the Retired TP Employee shall have specified on his application for retirement as the Benefit Commencement Date of his Retirement Allowance under the Retirement Plan, the Single Sum Payment shall be calculated based on the assumption that the Retired TP Employee elected to receive a Retirement Allowance at his Unreduced Early Retirement Benefit Commencement Date or Unreduced Vested Retirement Benefit Commencement Date, as applicable to the Retired TP Employee.
(e) If, as a result of the execution of a General Release Agreement (and not revoking it), (A) a TP Employee first obtains a legally binding right to payment of an
22
increase in his Benefit Equalization Combined Allowance, (B) as of the first date the TP Employee obtains a legally binding right to such increase it is subject to a substantial risk of forfeiture (within the meaning of Treasury Regulation Section 1.409A-1(d)), then the amount of such increase in the Benefit Equalization Combined Allowance with respect to such TP Employee shall be the amount as set forth in the General Release Agreement and shall be payable at the BEP Benefit Commencement Date specified in ARTICLE I(k)(1)(iv) of the Plan, provided, however that no such increase in a TP Employees Benefit Equalization Combined Allowance shall change either the time or form of payment of that portion of the TP Employees Benefit Equalization Combined Allowance allocable to the Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance otherwise payable pursuant to the terms of the Plan.
(2) The Spouse of a TP Employee or deceased Grandfathered Retired Employee who dies before his Benefit Equalization Combined Allowance is paid shall be eligible to receive that portion of the Grandfathered Employees or deceased Grandfathered Retired Employees Benefit Equalization Combined Allowance that is the Benefit Equalization Survivor Allowance, provided that, with respect to that portion of his Benefit Equalization Combined Allowance allocable to his Grandfathered Benefit Equalization Retirement Allowance, the deceased Grandfathered Retired Employee did not make an election for a Grandfathered Benefit Equalization Optional Payment Allowance and designated a Beneficiary other than his Spouse; and, provided, further, that with respect to that portion of his Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Retirement Allowance, such Benefit Equalization Survivor Allowance shall be the amount calculated as follows:
(a) Determine the amount, if any, by which (i) the Grandfathered Employees Trust Account TP Value exceeds (ii) the amount calculated under ARTICLE IIC(3)(a) below.
(b) If the TP Employee dies before terminating employment with the Controlled Group, determine one half of the amount that would be that portion of the Grandfathered Employees Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Retirement Allowance if (i) the TP Employee had survived and had a Separation from Service on his date of death and (ii) the term Benefit Equalization Joint and Survivor Allowance were substituted for the term Retirement Allowance in each place that such term appears in ARTICLE IIA(1)(a) of the Plan.
(c) Determine the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2, but disregarding any withholding for the Grandfathered Employees share of employment taxes) were withheld on the amount determined under ARTICLE IIC(2)(b).
(d) If the TP Employee dies after terminating employment with the Controlled Group but before his BEP Benefit Commencement Date, determine the amount that would remain if income taxes (determined as if withholding for federal, state
23
and local income taxes were effected at the rates specified in Appendix 2), but disregarding any withholding for the Grandfathered Employees share of employment taxes, were withheld on that portion of the Grandfathered Employees Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Retirement Allowance.
(e) The portion of the Benefit Equalization Survivor Allowance that is not the Grandfathered Benefit Equalization Retirement Allowance shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2, but disregarding any withholding for the Grandfathered Employees share of employment taxes) to equal:
(i) If the TP Employee dies before terminating employment with the Controlled Group, the amount by which (i) the amount determined under ARTICLE IIC(2)(c) of the Plan exceeds (ii) the remaining Trust Account TP Value, if any, determined under ARTICLE IIC(2)(a) of the Plan; or
(ii) If the TP Employee dies after terminating employment with the Controlled Group but before his BEP Benefit Commencement Date, the amount by which (i) the amount determined under ARTICLE IIC(2)(d) of the Plan exceeds (ii) the remaining Trust Account TP Value, if any, determined under ARTICLE IIC(2)(a) of the Plan.
(3) If a Grandfathered Employee dies before his Benefit Equalization Combined Allowance has been paid, the Grandfathered Employees Beneficiary shall be eligible to receive that portion of his Benefit Equalization Combined Allowance allocable to his Benefit Equalization Profit-Sharing Allowance; provided that the portion of such Allowance that is not the Grandfathered Benefit Equalization Profit-Sharing Allowance shall be in an amount calculated as follows:
(a) Determine the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2, but disregarding any withholding for the Grandfathered Employees share of employment taxes) were withheld on that portion of the Grandfathered Employees Benefit Equalization Profit-Sharing Allowance that is not the Grandfathered Benefit Equalization Profit-Sharing Allowance.
(b) Determine the amount, if any, by which (i) the amount determined under ARTICLE IIC(3)(a) exceeds (ii) the Grandfathered Employees Trust Account TP Value.
(c) The portion of such Benefit Equalization Profit-Sharing Allowance that is not the Grandfathered Benefit Equalization Profit-Sharing Allowance payable under this ARTICLE IIC(3) shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2, but disregarding any
24
withholding for the Grandfathered Employees share of employment taxes) to equal the amount, if any, determined under ARTICLE IIC(3)(b).
(4) The Beneficiary of a Grandfathered Retired Employee whose request for an Optional Payment in the form of a Grandfathered Benefit Equalization Optional Payment Allowance has been granted by the Administrator, but who dies after his Date of Retirement and prior to his BEP Benefit Commencement Date shall be eligible to receive that portion of the Grandfathered Benefit Equalization Optional Payment Allowance elected by the Grandfathered Retired Employee which is payable after the death of the Grandfathered Retired Employee.
(5) The Spouse of a Grandfathered Retired Employee whose request for an Optional Payment pursuant to clauses (2) or (3) of ARTICLE I(dd)(i) of the Plan with respect to that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Allowance has been granted by the Administrator, but who dies after his Date of Retirement and prior to his BEP Benefit Commencement Date, shall be eligible to receive a Benefit Equalization Survivor Allowance.
D. | UST Plan Benefit payable under this Plan shall be as follows: |
(1) The UST Plan Benefit of a UST Employee who is not a UST Supplemental Retirement Participant shall be paid in a Single Sum Payment on the Payment Date specified in ARTICLE I(ee)(ii)(1).
(2) The UST Plan Benefit of a UST Supplemental Retirement Participant shall be paid in a Single Sum Payment on the Payment Date specified in ARTICLE I(ee)(ii)(2).
E. | BEP Benefit Commencement Date and termination of Benefit Equalization Combined Allowances and Benefit Equalization Retirement Allowances payable in the form of an Optional Payment: |
(1) (a) The Benefit Equalization Retirement Allowance payable pursuant to ARTICLE IIA(1)(a) of the Plan shall be distributed in a Single Sum Payment on the BEP Benefit Commencement Date specified in ARTICLE I(k)(1)(i). If a Retired Employee described in ARTICLE IIA(1)(a) dies after his Date of Retirement and before payment of his Benefit Equalization Retirement Allowance is paid in a Single Sum Payment, his Beneficiary shall receive a Single Sum Payment on the Benefit Commencement Date specified in ARTICLE I(k)(1)(i).
(b) Except as provided in ARTICLE IIE(1)(c) below, the Benefit Equalization Combined Allowance payable pursuant to ARTICLE IIC(1) of the Plan shall be distributed to a Grandfathered Retired Employee who is eligible for an Early, Full or Deferred Retirement Allowance in a Single Sum Payment on the Benefit Commencement Date specified in ARTICLE I(k)(1)(i). If the Grandfathered Retired Employee dies after his Date of Retirement and before payment of his Benefit Equalization Combined Allowance is paid in a Single Sum Payment, his Beneficiary shall receive a Single Sum Payment on the Benefit Commencement Date specified in ARTICLE I(k)(1)(i) of the Plan.
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(c) The Benefit Equalization Combined Allowance payable pursuant to ARTICLE IIC(1) of the Plan shall be distributed to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service, as follows:
(i) that portion of the Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Allowance shall be distributed in accordance with the Grandfathered Retired Employees BEP Benefit Commencement Date described in ARTICLE I(k)(1)(iii) of the Plan and shall be paid in the same form of Optional Payment which the Grandfathered Retired Employees Vested Retirement Allowance is paid from the Retirement Plan; and
(ii) that portion of the Benefit Equalization Combined Allowance that is not the Grandfathered Benefit Equalization Allowance shall be distributed to the Retired Employee in a Single Sum Payment on the Benefit Commencement Date specified in ARTICLE I(k)(1)(i) of the Plan.
(2) If any Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance payable in a Single Sum Payment is paid after the Payment Date, interest (at a rate determined in the sole discretion of the Administrator) from the date the Retired Employee Separated from Service to the last day of the month preceding the month in which payment is made, shall be added to the amount of the Benefit Equalization Retirement Allowance otherwise payable to the Retired Employee (or Spouse).
(3) (a) A Grandfathered Retired Employee who is a Secular Trust Participant who is eligible to retire on a Full, Deferred or Early Retirement Allowance at his Separation from Service may make application to the Administrator to receive an Optional Payment with respect to that portion of his Benefit Equalization Combined Allowance allocable to his Grandfathered Benefit Equalization Retirement Allowance in lieu of the Single Sum Payment otherwise payable after his Date of Retirement. The application for an Optional Payment shall specify:
(i) the form in which such Optional Payment is to be paid;
(ii) the Beneficiary, if any, who will receive benefits after the death of the Grandfathered Retired Employee; and
(iii) the BEP Benefit Commencement Date.
(b) In the case of a Grandfathered Retired Employee who eighteen (18) months prior to attaining the age of sixty-five (65) years could be compulsorily retired by his Participating Company upon attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any application for an Optional Payment must be filed with the Administrator more than one (1) year preceding the date the Grandfathered Retired Employee attains the age of sixty-five (65) years.
(c) The Administrator may grant or deny any such application in its sole and absolute discretion. Except as provided in Subparagraphs (d)(i) and (f) of this
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ARTICLE IIE, a Grandfathered Retired Employee shall not receive that portion of his Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance in the form of a Single Sum Payment after the Administrator has granted the Grandfathered Retired Employee application for an Optional Payment. In the event the Grandfathered Retired Employee incurs a Change in Circumstance on or after the date of the filing of the application for an Optional Payment and prior to his BEP Benefit Commencement Date, the Grandfathered Retired Employee may file an application with the Administrator within ninety (90) days of the Change in Circumstance, but in no event later than his BEP Benefit Commencement Date, to change the form of Optional Payment, or to change the Beneficiary who is to receive a benefit after the death of the Grandfathered Retired Employee in accordance with the Optional Payment method originally filed with the Administrator.
(d) An application for an Optional Payment shall be of no force and effect if:
(i) the Grandfathered Retired Employee does not retire on a Full, Deferred or Early Retirement Allowance;
(ii) the Grandfathered Retired Employee incurs a disability at any time before the date his Optional Payment commences to be made which causes him to be eligible for benefits under the Long-Term Disability Plan for Salaried Employees; or
(iii) the Grandfathered Retired Employee is retired for ill health or disability under Paragraph S2.03(b) of Part II of the Retirement Plan.
(e) In the event the application for an Optional Payment is of no force and effect as a result of an event described in clauses (ii) or (iii) of ARTICLE IIE(3)(d) of the Plan, payment of that portion of the Grandfathered Retired Employees Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance shall be made in a Single Sum Payment pursuant to ARTICLE I(k)(1) of the Plan on the Payment Date, but not later than the Latest Payment Date, but otherwise such application for an Optional Payment shall be effective on the Grandfathered Retired Employees Date of Retirement on a Full, Deferred or Early Retirement Allowance and the Grandfathered Retired Employees benefits shall commence on the BEP Benefit Commencement Date specified in ARTICLE I(k)(1)(ii)(A) of the Plan; provided, however, that if within the one (1) year period following the date of the filing of the application with the Administrator the Grandfathered Retired Employee voluntarily retires or his employment is terminated for misconduct (as determined by the Administrator) by any member of the Controlled Group, the Optional Payment shall be reduced by one percent (1%) for each month (or portion of a month) by which the month in which the Grandfathered Retired Employees termination of employment precedes the first anniversary of the filing of the application with the Administrator and his benefits shall commence in the BEP Benefit Commencement Date specified in ARTICLE I(k)(1)(ii)(B) of the Plan.
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(f) If a Grandfathered Retired Employee whose request for an Optional Payment in the form of a Grandfathered Benefit Equalization Optional Payment Allowance has been granted by the Administrator dies after his Date of Retirement and prior to his BEP Benefit Commencement Date, his Beneficiary shall be eligible to receive that portion of the Grandfathered Benefit Equalization Optional Payment Allowance elected by the Grandfathered Retired Employee which is payable after the death of the Grandfathered Retired Employee.
(g) Notwithstanding the preceding provisions of this Paragraph E,
(i) the Administrator may cause the distribution of that portion of the Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance to any group of similarly situated Grandfathered Retired Employees (or their Spouses or other Beneficiaries) in a Single Sum Payment or as an Optional Payment; and
(ii) the Administrator shall distribute that portion of an Employees Benefit Equalization Combined Allowance that is the Grandfathered Benefit Equalization Retirement Allowance in a Single Sum Payment if such portion of the Benefit Equalization Combined Allowance payable in equal monthly payments is not more than $250 per month.
(4) The Benefit Equalization Survivor Allowance payable pursuant to ARTICLE IIA(2)(a) and ARTICLE IIC(2) of the Plan shall be paid in a Single Sum Payment on the BEP Benefit Commencement Date described in ARTICLE I(k)(3)(i)(A) provided, however, that the portion of the Benefit Equalization Survivor Allowance that is derived from the Grandfathered Benefit Equalization Retirement Allowance shall be paid on the BEP Benefit Commencement Date described in ARTICLE I(k)(3)(i)(B).
F. | Commencement and termination of Benefit Equalization Profit-Sharing Allowances: |
(1) The Benefit Equalization Profit-Sharing Allowance payable pursuant to ARTICLE IIB(1) of the Plan shall be distributed to the Retired Employee in a Single Sum Payment on the Payment Date, but not later than the Latest Payment Date, unless, solely in the case of a Grandfathered Retired Employee, the Administrator has approved his election to have distribution of that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance made in accordance with ARTICLE IIF(3) of the Plan.
(2) If an Employee or Retired Employee dies before his Single Sum Payment has been paid and without having the approval by the Administrator for payment of that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment, the Single Sum Payment otherwise payable to the Employee or Retired Employee shall be paid to his Beneficiary on the Payment Date, but not later than the Latest Payment Date.
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(3) (a) A Grandfathered Employee who is a Secular Trust Participant may make an application to the Administrator to receive an Optional Payment with respect to that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in lieu of the Single Sum Payment otherwise payable to him on the Benefit Commencement Date specified in ARTICLE I(k)(2) after he becomes a Grandfathered Retired Employee. The application for an Optional Payment shall specify:
(i) the form in which such Optional Payment is to be paid; and
(ii) the Beneficiary who will receive the balance of that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance after the death of the Grandfathered Employee or Grandfathered Retired Employee.
(b) In the case of a Grandfathered Employee who eighteen (18) months prior to attaining the age of sixty-five (65) years could be compulsorily retired by his Participating Company upon attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any application for an Optional Payment must be filed with the Administrator more than one (1) year preceding the date the Grandfathered Employee attains the age of sixty-five (65) years.
(c) The Administrator may grant or deny any such application in its sole and absolute discretion. A Grandfathered Employee shall not receive that portion of his Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of a Single Sum Payment after the Administrator has granted the Grandfathered Employees application for an Optional Payment. In the event the Grandfathered Employee or Grandfathered Retired Employee has elected to receive his Optional Payment over the joint life expectancies of he and his Beneficiary and incurs a Change in Circumstance described in ARTICLE I(l)(ii), ARTICLE I(l)(iii), or ARTICLE I(l)(iv) of the Plan on or after the date of the filing of the application and prior to the date his Optional Payment commences to be paid, the Grandfathered Employee or Grandfathered Retired Employee may file an application with the Administrator within ninety (90) days of the Change in Circumstance, but in no event later than the date his Optional Payment is scheduled to commence to be paid to designate a new Beneficiary or elect to receive his Optional Payment over the life expectancy of the Grandfathered Employee or Grandfathered Retired Employee.
(d) If within the one (1) year period following the date of the filing of the application for an Optional Payment with the Administrator, the Grandfathered Employee voluntarily retires (other than for ill health or disability under Paragraph S2.03(b) of Part II of the Retirement Plan), voluntarily terminates his employment with his Participating Company (other than for a disability which causes him to be eligible for benefits under the Long-Term Disability Plan for Salaried Employees), or his employment is terminated for misconduct (as determined by the Administrator) by any member of the Controlled
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Group, the Optional Payment shall be reduced in the same manner as specified in ARTICLE IIE(3)(e) hereof.
(e) If a Grandfathered Retired Employee dies after he Separates from Service and prior to the date his Grandfathered Benefit Equalization Profit-Sharing Allowance is paid or commences to be paid, payment shall be made to his Beneficiary commencing in the form and on the date specified in the application.
(4) Notwithstanding the preceding provisions of this Paragraph F:
(a) the Administrator may cause the distribution of that portion of the Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance to any group of similarly situated Beneficiaries in a Single Sum Payment or as an Optional Payment; and
(b) the Administrator shall distribute a Grandfathered Employees or Grandfathered Retired Employees Benefit Equalization Profit-Sharing Allowance in a Single Sum Payment if the value of such Benefit Equalization Profit-Sharing Allowance is not more than $10,000.
(c) The Administrator may accelerate the payment of all or any portion of a Benefit Equalization Profit-Sharing Allowance (other than the Benefit Equalization Profit-Sharing Allowance of a Grandfathered Employee) to an individual other than the Retired Employee to the extent necessary to fulfill a domestic relations order (as defined in Section 414(p)(1)(B) of the Code).
G. | Application or Notification for Payment of Allowances: |
An application for retirement pursuant to Paragraph G2.07 of Part I and Paragraph S2.07 of Part II of the Retirement Plan shall be deemed notification to the Administrator of the BEP Benefit Commencement Date of a Benefit Equalization Retirement Allowance, Benefit Equalization Combined Allowance (or other benefit) in accordance with the terms of this Plan. In the event a Grandfathered Employee shall not have elected an Optional Payment method with respect to his Grandfathered Benefit Equalization Retirement Allowance, any such notification shall specify the Beneficiary to whom payment of the Single Sum Payment shall be made in the event the Employee dies after his Date of Retirement and prior to his BEP Benefit Commencement Date.
An Employee or Retired Employee (or Beneficiary) shall make application to the Administrator (or his delegate) for distribution of Benefit Equalization Profit-Sharing Allowance under this Plan.
H. | Allocation of Payments: |
(1) The Administrator may use any reasonable method, as determined in his sole discretion, to designate amounts paid under the Plan to a TP Employee (or Spouse or other Beneficiary) as a Benefit Equalization Retirement Allowance (other than that portion that is the Grandfathered Benefit Equalization Retirement Allowance) and Benefit Equalization Profit-
30
Sharing Allowance (other than that portion that is the Grandfathered Benefit Equalization Profit-Sharing Allowance) and to allocate benefits among the plans, programs and arrangements that constitute the Plan as described herein.
(2) The Administrator may make payment of all or a portion of a Benefit Equalization Profit-Sharing Allowance to an individual other than the Retired Employee to the extent necessary to fulfill a domestic relations order (as defined in Section 414(p)(1)(B) of the Code) and the amount of the Allowance payable to the Retired Employee shall be reduced to the extent necessary to reflect such payment.
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ARTICLE III
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
Individual accounts shall be established for the benefit of each Employee and Retired Employee (or Beneficiary) under the Plan. Any benefits payable from an individual account shall be payable solely to the Employee, Retired Employee (or Beneficiary) for whom such account was established. The Plan shall be unfunded. All benefits intended to be provided under the Plan shall be paid from time to time from the general assets of the Employees or Retired Employees Participating Company and paid in accordance with the provisions of the Plan; provided, however, that the Participating Companies reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements. In no event shall any such trust or trusts be outside of the United States. The contributions by each Participating Company on behalf of its Employees and Retired Employees to the individual accounts established pursuant to the provisions of the Plan, whether in trust or otherwise, shall be in an amount which such Participating Company, with the advice of an actuary, determines to be sufficient to provide for the payment of the benefits under the Plan.
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ARTICLE IV
THE ADMINISTRATOR
The general administration of the Plan shall be vested in the Administrator.
All powers, rights, duties and responsibilities assigned to the Administrator under the Retirement Plan applicable to this Plan shall be the powers, rights, duties and responsibilities of the Administrator under the terms of this Plan, except that the Administrator shall not be a fiduciary (within the meaning of Section 3(21) of ERISA) with respect to any portion or all of the Plan which is intended to be exempt from the requirements of ERISA pursuant to Section 4(b)(5) of ERISA or which is described in Section 401(a)(1) of ERISA and exempt from the requirements of Part 4 of Title I of ERISA.
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ARTICLE V
AMENDMENT AND
DISCONTINUANCE OF THE PLAN
The Board may, from time to time, and at any time, amend the Plan; provided, however, that authority to amend the Plan is delegated to the following committees or individuals where approval of the Plan amendment or amendments by the shareholders of Altria Group, Inc. is not required: (1) to the Corporate Employee Benefit Committee, if the amendment (or amendments) will not increase the annual cost of the Plan by $10,000,000 and (2) to the Administrator, if the amendment (or amendments) will not increase the annual cost of the Plan by $500,000.
Any amendment to the Plan may effect a substantial change in the Plan and may include (but shall not be limited to) any change deemed by the Company to be necessary or desirable to obtain tax benefits under any existing or future laws or rules or regulations thereunder; provided, however, that no such amendment shall deprive any Employee, Retired Employee (or Beneficiary) of any Allowances accrued at the time of such amendment.
The Plan may be discontinued at any time by the Board; provided, however, that such discontinuance shall not deprive any Employee, Retired Employee (or Beneficiary) of any Allowances accrued at the time of such discontinuance.
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ARTICLE VI
FORMS; COMMUNICATIONS
The Administrator shall provide such appropriate forms as it may deem expedient in the administration of the Plan and no action to be taken under the Plan (for which a form is so provided) shall be valid unless upon such form. Any Plan communication may be made by electronic medium to the extent allowed by applicable law. The Administrator may adopt reasonable procedures to enable an Employee or Retired Employee to make an election using electronic medium (including an interactive telephone system and a website on the Intranet).
All communications concerning the Plan shall be in writing addressed to the Administrator at such address as may from time to time be designated. No communication shall be effective for any purpose unless received by the Administrator.
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ARTICLE VII
INTERPRETATION OF PROVISIONS
The Administrator shall have the full power and authority to grant or deny requests for payment of a Benefit Equalization Retirement Allowance or Benefit Equalization Combined Allowance in accordance with a form of distribution authorized under the Retirement Plan and to grant or deny requests for payment of a Benefit Equalization Profit-Sharing Allowance in accordance with a form of distribution authorized under the Profit-Sharing Plan to the extent permitted under Section 409A of the Code. The Management Committee for Employee Benefits shall have the full power and authority to grant or deny requests for payment of a Benefit Equalization Retirement Allowance, Benefit Equalization Combined Allowance or Benefit Equalization Profit-Sharing Allowance by the Administrator.
The Administrator shall have full power and authority with respect to all other matters arising in the administration, interpretation and application of the Plan, including discretionary authority to construe plan terms and provisions, to determine all questions that arise under the Plan such as the eligibility of any employee of a Participating Company to participate under the Plan; to determine the amount of any benefit to which any person is entitled to under the Plan; to make factual determinations and to remedy any ambiguities, inconsistencies or omissions of any kind.
The Plan is intended to comply with the applicable requirements of Section 409A of the Code. Accordingly, where applicable, this Plan shall at all times be construed and administered in a manner consistent with the requirements of Section 409A of the Code and applicable regulations without any diminution in the value of benefits.
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ARTICLE VIII
CHANGE IN CONTROL PROVISIONS
A. | In the event of a Change in Control, each Employee shall be fully vested in his Allowances and any other benefits accrued through the date of the Change in Control (Accrued Benefits). Each Employee (or his Beneficiary) shall, upon the Change in Control, be entitled to a lump sum in cash, payable within thirty (30) days of the Change in Control, equal to the Actuarial Equivalent of his Accrued Benefits, determined using actuarial assumptions no less favorable than those used under the Supplemental Management Employees Retirement Plan immediately prior to the Change in Control. |
B. | Definition of Change in Control. |
(1) Change in Control shall mean the happening of any of the following events with respect to a Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, and amended (the Exchange Act)) (a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Altria Group, Inc. (the Outstanding Company Common Stock) or (ii) the combined voting power of the then outstanding voting securities of Altria Group, Inc. entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from Altria Group, Inc., (ii) any acquisition by Altria Group, Inc., (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Altria Group, Inc. or any corporation controlled by Altria Group, Inc. or (iv) any acquisition by any corporation pursuant to a transaction described in clauses (i), (ii) and (iii) of paragraph (3) of this Section B; or
(b) Individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Altria Group, Inc.s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of Altria Group, Inc. of a reorganization, merger, share exchange or consolidation (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company
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Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Altria Group, Inc. through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of Altria Group, Inc. or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of Altria Group, Inc. of (i) a complete liquidation or dissolution of Altria Group, Inc. or (ii) the sale or other disposition of all or substantially all of the assets of Altria Group, Inc., other than to a corporation, with respect to which following such sale or other disposition, (A) more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of Altria Group, Inc. or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of Altria Group, Inc. or were elected, appointed or nominated by the Board.
(2) Change in Control shall mean the happening of any of the events specified in Treasury Regulation Section 1.409A- 3(i)(5)(v), (vi) and (vii) with respect to a Benefit
38
Equalization Retirement Allowance, Benefit Equalization Profit-Sharing Allowance and that portion of a Benefit Equalization Combined Allowance that is not a Grandfathered Benefit Equalization Retirement Allowance and that portion of a Benefit Equalization Combined Allowance that is not a Grandfathered Benefit Equalization Profit-Sharing Allowance. For purposes of determining if a Change in Control has occurred, the Change in Control event must relate to a corporation identified in Treasury Regulation Section 1.409A- 3(i)(5)(ii), provided, however, that (i) the spin-off of the shares of Philip Morris International Inc. to the shareholders of Altria Group, Inc. shall not be considered to be a Change in Control and (ii) any change in the Incumbent Board coincident with such spin-off shall not be considered to be a Change in Control.
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EXHIBIT A
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT
Applicable Interest Rate: Prior to the amendments to the Code by the Pension Protection Act of 2006, P.L. 109-280, the Applicable Interest Rate meant the average of the monthly rate of interest specified in Section 417(e)(3)(A)(ii)(II) of the Code, published for 24 months preceding the Employees Date of Retirement, less 1/2 of 1%.
After the amendment of the Code by the Pension Protection Act of 2006, the Applicable Interest Rates are three tiered segment rates where rate 1 applies to benefits paid in the first five years, rate 2 applies to benefits paid for the next 15 years, and rate 3 applies to benefits paid thereafter. The IRS will publish the segment rates monthly similar to the way the 30-year Treasury rates are published.
Applicable Mortality Assumption: Prior to the amendments to the Code by the Pension Protection Act of 2006, the Applicable Mortality Table meant the mortality table specified in Section 417(e)(3)(A)(ii)(I) of the Code and Treasury Regulations Section 1.417(e)-1(c)(2) (currently the table prescribed in Revenue Ruling 2001-62).
The Pension Protection Act of 2006 allows Plan sponsors to transition to the new 417(e)(3) interest rates over the next five years based on the following schedule:
2008: | 20% of segment rates and 80% of 30-year Treasury rates | |
2009: | 40% of segment rates and 60% of 30-year Treasury rates | |
2010: | 60% of segment rates and 40% of 30-year Treasury rates | |
2011: | 80% of segment rates and 20% of 30-year Treasury rates | |
2012: | 100% of segment rates |
Using the 24-month averaging method as defined by the Plan, lump sums calculated during 2008 and 2009 will be based on an interest rate that incorporates some months using the pure 30-year treasury rate and the remaining months using the segment rates (to reflect the phase-in described above). For example, the February 2008 lump sum interest rate would be calculated using 23 months of the 30-year treasury rate and one month of the segment rates with phase-in.
Note that the 24-month averaging less 1/2 of 1% methodology is to be applied to all three tiers of the segment rates. The lump sum factors are then determined using the three tiered approach required by the Pension Protection Act of 2006.
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT UNDER UST PLANS
Mortality Table prescribed by the Secretary of the Treasury under Section 417(e)(3)(A)(ii)(I) of the Code, as in effect on the date the Participant terminates employment, and the annual rate of interest on 30-year Treasury Securities as specified by the Commissioner of Internal Revenue for the second full month preceding the month in which the Participant Separates from Service.
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APPENDIX 1
TP EMPLOYEES
(1) | Martin Barrington |
(2) | Timothy Beane |
(3) | Kevin P. Benner |
(4) | David R. Beran |
(5) | Nancy Brennan |
(6) | Peter C. Faust |
(7) | Christopher L. Irving |
(8) | Craig A. Johnson |
(9) | Denise Keane |
(10) | Douglas B. Levene |
(11) | Henry P. Long, Jr. |
(12) | John J. Mulligan |
(13) | John R. Nelson, Jr. |
(14) | Peter P. Paoli |
(15) | Daniel W. Riegel |
(16) | Nancy S. Rights |
(17) | Alex T. Russo |
(18) | Brain Schuyler |
(19) | Steven P. Seagriff |
(20) | John M. Spera |
(21) | Michael E. Syzmanczyk |
(22) | Linda Warren |
(23) | Ross M. Webster |
(24) | Howard A. Willard |
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APPENDIX 2
TAX ASSUMPTIONS
Federal income tax rate: The highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Internal Revenue Code).
State income tax rate: Except with respect to additional benefits attributable to the provisions of a Grandfathered Employees Designation of Participation, the highest adjusted marginal state income tax rate based on a Grandfathered Employees state of residence on the date of the Grandfathered Employees Separation from Service. With respect to those additional benefits that are attributable to the provisions of a Grandfathered Employees Designation of Participation, the highest marginal state income tax rate based on the state in which the Grandfathered Employee is or was employed by a Participating Company on the date of his Separation from Service.
Local income tax rate: Except with respect to additional benefits attributable to the provisions of a Grandfathered Employees Designation of Participation, the highest adjusted marginal local income tax rate (taking into account the Grandfathered Employees resident or nonresident status) based on the Grandfathered Employees locality of residence on the date of the Grandfathered Employees Separation from Service. With respect to those additional benefits that are attributable to the provisions of a Grandfathered Employees Designation of Participation, the highest marginal state income tax rate (taking into account the Grandfathered Employees resident or nonresident status) based on the locality in which the Grandfathered Employee is or was employed by a Participating Company on the date of his Separation from Service.
Exception: In the case of a Grandfathered Employee who is an expatriate actively employed by a Participating Company and subject to United States taxation for all purposes, income taxes shall generally be computed as follows: expatriate taxes will be calculated assuming the highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase-out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Code). The applicable state and local tax rates will be adjusted to reflect a Grandfathered Employees expatriate status to the extent appropriate.
Capital gains: The ordinary income or capital gains character of items of trust investment income or deemed investment income shall be taken into account as relevant.
The above principles shall generally be applied in determining tax-rate assumptions for the relevant purpose, but the Administrator shall have the authority in its discretion to alter the assumptions made as deemed appropriate to take into account particular facts and circumstances.
42
APPENDIX 3
CALCULATION OF BENEFIT
EXECUTIVE TRUST ARRANGEMENT PARTICIPANT
1. Calculate Pension benefit payable in form of single life annuity as of Normal Retirement Date, based on benefit earned to:
| December 31, 2004 (Grandfathered Benefit) |
| December 31, 2007 (End of Target Payment Program) |
| Date of retirement/termination |
2. As of each of the above three dates allocate benefits between the qualified plan and the BEP
a. Determine Qualified Plan Benefit payable at Normal Retirement Date
b. Determine entire (Unlimited) benefit payable at Normal Retirement Date
c. Determine portion payable from BEP (Subtract 2a from 2b)
d. Apply early retirement factor
| For terminations prior to age 55, use age 55 factor (.40) |
| For terminations on or after age 55, use expected retirement age |
| Use early retirement factor for Grandfathered Benefit based on age on 12/31/04 |
e. Determine BEP benefit at Benefit Commencement Date
| For terminations prior to age 55, assume age 55 |
| For terminations on or after age 55, use expected retirement age |
3. Calculate top-up payment for Grandfathered Benefits from funding account
a. Determine applicable early retirement factor (using employees age on 12/31/04 and assuming, in the case of an employee under age 55 at termination, that he/she will elect to receive benefits at age 55)
b. Calculate Grandfathered Benefit with early retirement factor growth (each Item 1 times 3a)
c. Calculate lump sum value payable at age 55 on a before-tax and after-tax basis
d. Ascertain Grandfathered Deferred Profit-Sharing BEP balance (deemed to be distributed at termination of employment)
| Use balance as of most recent year end |
| Add any contributions (Company and Company-Match), plus earnings |
| Ascertain after-tax value |
e. Calculate top-up payment for Grandfathered Benefit from funding account
| Ascertain estimated funding account balance at termination of employment (after-tax) |
| Subtract funding account assets used to satisfy Grandfathered DPS BEP (Item 3d) |
43
| Determine if any top-up payment needed to satisfy any remaining Grandfathered DPS BEP liability (after-tax) |
| Balance of any funding account assets to be used for future Grandfathered Pension BEP (assumed to be at age 55) |
| Balance as of date of termination and projected to age 55 |
| Determined on pre-tax and after-tax basis |
| Ascertain pre-tax and after-tax lump sum value of Grandfathered Pension BEP at age 55 |
| Subtract 3(e)(iv) (after-tax) from 3c (after-tax) |
4. Ascertain Post 2004 BEP Pension and DPS Plan Benefit
| As of December 31, 2004 ($0) |
| As of date of termination |
| Compute as annuity and pre-tax and after-tax lump sum values |
a. Estimate Post 2004 DPS BEP Account as of date of termination
| Total hypothetical BEP DPS contributions made via target payments in 2006, 2007 and 2008 and add earnings |
| Convert to after-tax amount |
| Add post-target payment DPS BEP contributions and convert to after-tax amount |
| Total 4(a)(ii) and 4(a)(iii) to determine Post 2004 DPS BEP Account |
b. Determine total Post 2004 BEP Pension and DPS Plan Benefit as of date of termination for top-up payment
| Sum of 4(ii) and 4(a)(iv) equals 4(b) |
| Ascertain estimated target payment account balance (after-tax) |
| Subtract 4(b)(ii) from 4(b)(i) to ascertain estimated top-up payment |
44
EXECUTIVE TRUST ARRANGEMENT
Your Estimated Retirement Benefits Under the BEP
Assuming Projected Plan Interest Rate and Current Federal Tax Rate (35%)
Name: | Assumed Retirement Date: | |
Date of Birth: | Assumed Retirement Age: | |
Date of Hire: | Final Average Earnings: | |
Normal Retirement Age: |
1. | Your Estimated Retirement Benefits at your Assumed Retirement Age: |
Your total pension benefit is determined at your Normal Retirement Age (Age 65), without regard to any IRS limits. Your benefits are pre-tax amounts. | ||||
Annual Annuities | ||||
1a.) Total Pension Benefit unreduced for early commencement |
$ | |||
Your Retirement Plan (i.e., tax qualified pension plan) benefit is determined reflecting IRS limits |
||||
1b.) Retirement Plan Benefit at age 65 |
$ | |||
The difference between your total pension benefit and your Retirement Plan benefit |
||||
1c.) Total BEP Pension Benefit at age 65 = 1a.) - 1b.) |
$ | |||
If you retire at the Assumed Retirement Age, your benefits may be reduced for early commencement |
||||
1d.) Adjustment for early benefit commencement |
% | |||
1e.) Total BEP Pension Benefit at Assumed Retirement Age = 1c.) x 1d.) |
$ | |||
|
|
2. | Your Estimated Grandfathered BEP Benefits |
Your Grandfathered BEP Benefits were accrued as of 12/31/2004 prior to a law change and are only payable as a lump sum. The annuity is shown for illustrative purposes only. Your Funding Payment account balance offsets the after-tax value of your Grandfathered BEP Benefits. | ||||||||||||
Annual Annuities | Lump Sums | |||||||||||
Pre-tax | After-tax | |||||||||||
2f.) Grandfathered BEP Pension Benefit at Assumed Retirement Age |
$ | $ | $ | |||||||||
2g.) Grandfathered BEP DPS Balance - reflects estimated earnings through your Assumed Retirement Date |
$ | $ | ||||||||||
|
|
|
|
|||||||||
In order to compare your benefits to the amounts that you have already received, your total Grandfathered BEP Benefit is shown only as an after-tax amount. |
||||||||||||
2h.) Total Grandfathered BEP Benefit = 2f.) + 2g.) |
$ | |||||||||||
If you have a trust, your Funding Payment trust account balance will be distributed to you after your termination of employment. |
||||||||||||
2i.) Estimated Funding Payment Asset Balance at Assumed Retirement Age |
$ | |||||||||||
The difference between your after-tax Grandfathered BEP Benefit and your Funding Payment Asset Balance will be paid to you from Company assets. This payment will include an amount to cover the taxes that you will owe on the payment. |
||||||||||||
2j.) Estimated Grandfathered BEP Payment at Assumed Retirement Age = 2h.) - 2i.) |
$ | $ |
3. | Your Estimated BEP Benefits |
Your Ongoing BEP Benefits reflect all of your service for pension purposes and DPS contributions for service after 12/31/2004 but also take into account the amounts paid to you as Target Payments. These benefits are offset by your Grandfathered BEP Benefits. This amount is only payable as a lump sum. The annuity is shown for illustrative purposes only. | ||||||||||||
Annual Annuities | Lump Sums | |||||||||||
Pre-tax | After-tax | |||||||||||
3k.) Ongoing BEP Pension Benefit at Assumed Retirement Age = 1e.) - 2f.) |
$ | $ | $ | |||||||||
3l.) Ongoing BEP DPS Balance for Post-2004 Accruals - reflects estimated earnings and contributions through your Assumed Retirement Date (includes amounts in your Target Payments received in lieu of BEP DPS contributions) |
$ | $ | ||||||||||
|
|
|
|
|||||||||
In order to compare this amount to your Target Payments, it is shown only as an after-tax amount. |
||||||||||||
3m.) Total = 3k.) + 3l.) |
$ | |||||||||||
If you have a trust, your Target Payment trust account balance will be distributed to you after your termination of employment. |
||||||||||||
3n.) Estimated Target Payment Asset Balance at Assumed Retirement Age |
$ | |||||||||||
The difference between your after-tax Total and your Target Payment Asset Balance will be your Ongoing BEP Benefit, which will be paid to you from Company assets. This payment will include an amount to cover the taxes that you will owe on the payment. |
||||||||||||
3o.) Estimated Ongoing BEP Benefit at Assumed Retirement Age = 3m.) - 3n.) |
$ | $ |
45
4. | Your Estimated Total Payments |
Your estimated total Company Payment includes the sum of your Grandfathered BEP Payment and your Ongoing BEP Benefit. | ||||||||
Lump Sums | ||||||||
Pre-tax | After-tax | |||||||
4p.) Estimated Total Company Payment = 2j.) + 3o.) |
$ | $ | ||||||
|
|
|||||||
If you have a trust, you will also receive a distribution of your trust account balances after your termination of employment. Since you paid taxes on the payments when they were deposited into your trust, your trust balances are on an after-tax basis. |
||||||||
4q.) Estimated Asset Balance at Assumed Retirement Date = 2i.) + 3n.) [Note: Only your trust balances, if any, will be distributed to you. Any assumed assets that are included in this amount will not be distributed to you.] |
$ | |||||||
|
|
|||||||
So, the total amount after taxes for retirement is 4p.) + 4q.) |
$ |
Assumptions:
| Actual monthly pay history through [date] as provided by Altria. Current 2011 base rate is equal to $ and is assumed to be constant for the remainder of the projection period. Actual IC earned in 2010 and paid in 2011 is $ as provided by Altria. IC is projected to remain constant each February during the projection period. |
| Estimated lump sum value of the Grandfathered BEP Benefit is based on the greater of: (1) the lump sum value based on interest rates projected to the assumed retirement date assuming current corporate bonds remain level in future months (seg rate 1/ seg rate 2/ seg rate 3) reflecting the 50 basis point reduction in published rates using Altrias current BEP lump sum basis, and (2) the lump sum value based on the 12/31/2004 lump sum basis including an interest rate of 4.4842%. The lump sum value of the Grandfathered BEP Benefit reflects the basis as described in (1). The lump sum for ongoing BEP Benefits reflects the basis as described in (1). Caution should be used when evaluating lump sums and understand that they could be significantly higher or lower depending on movements in the capital markets. |
| Actual BEP DPS balance as of [date] with 6% annual rate of return on BEP DPS contributions to assumed retirement date. |
| Actual ETA asset balances as of [date] with 3% annual after-tax rate of return to assumed retirement date. |
| Future BEP DPS contribution rate = 15%. |
| Tax rate = 38.74%. Your pre-tax Total Company Payment at your actual retirement date will be subject to the income tax withholding rates in effect at that time, as well as the applicable FICA tax rates which are scheduled to increase by 0.9% in 2013. |
Note:
Estimated benefits and payments are determined based on the assumptions described above. Actual results may vary based on actual experience. Does not constitute a guarantee of employment. The Company reserves the right to change the plans and programs in the future.
October 2011
46
A Summary of Your Payments
Since you joined the ETA, you have received Funding Payments and Target Payments.
$1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0
$625,500 $395,100 $72,400 $486,500
Total After-Tax Amount Payable at Assumed Retirement Age
Funding Payment Asset Balance
Grandfathered BEP Payment
Target Payment Asset Balance
Ongoing BEP Benefit
Your total after-tax Grandfathered BEP amount is paid through a combination of your Funding Payment assets and your Grandfathered BEP payment.
Your Ongoing BEP Benefit. When you receive your $625,500 estimated Ongoing BEP Benefit, you will receive an additional $395,700 to cover the income taxes you will owe on this payment.
Target Payments previously paid to you. Your Target Payment assets are comprised of your Target Payment trust $395,000) and assumed account balances. Your trust account will be distributed to you upon your termination/retirement.
Your Grandfathered BEP payment. When you receive your $72,400 estimated Grandfathered BEP payment, you will receive an additional $45,900 to cover the income taxes you will owe on this payment.
Funding Payments previously paid to you. Your Funding Payment assets are comprised of your Funding Payment trust ($387,000) and assumed account balances. Your trust account will be distributed to you upon your termination/retirement.
SECULAR TRUST PROGRAM
Your Estimated Retirement Benefits Under the BEP
Assuming Projected Plan Interest Rate and Current Federal Tax Rate (35%)
Name: | Assumed Retirement Date: | |
Date of Birth: | Assumed Retirement Age: | |
Date of Hire: | Final Average Earnings: | |
Normal Retirement Age: |
1. | Your Estimated Retirement Benefits at your Assumed Retirement Age: |
Your total pension benefit is determined at your Normal Retirement Age (Age 65), without regard to any IRS limits. Your benefits are pre-tax amounts. | ||||
Annual Annuities | ||||
1a.) Total Pension Benefit unreduced for early commencement |
$ | |||
Your Retirement Plan (i.e., tax qualified pension plan) benefit is determined reflecting IRS limits |
||||
1b.) Retirement Plan Benefit at age 65 |
$ | |||
The difference between your total pension benefit and your Retirement Plan benefit |
||||
1c.) Total BEP Pension Benefit at age 65 = 1a.) - 1b.) |
$ | |||
If you retire at the Assumed Retirement Age, your benefits may be reduced for early commencement |
||||
1d.) Adjustment for early benefit commencement |
% | |||
1e.) Total BEP Pension Benefit at Assumed Retirement Age = 1c.) x 1d.) |
$ | |||
|
|
2. | Your Estimated Grandfathered BEP Benefits |
Your Grandfathered BEP Benefits were accrued as of 12/31/2004 prior to a law change and are payable as either a lump sum or monthly annuity. For purposes of this illustration, it is assumed that you will take a lump sum of your Grandfathered BEP Benefits. Your Funding Payment account balance offsets the after-tax value of your Grandfathered BEP Benefits. | ||||||||||||
Annual Annuities | Lump Sums | |||||||||||
Pre-tax | After-tax | |||||||||||
2f.) Grandfathered BEP Pension Benefit at Assumed Retirement Age |
$ | $ | $ | |||||||||
2g.) Grandfathered BEP DPS Balance - reflects estimated earnings through your Assumed Retirement Date |
$ | $ | ||||||||||
|
|
|
|
|||||||||
In order to compare your benefits to the amounts that you have already received, your total Grandfathered BEP benefit is shown only as an after-tax amount. |
||||||||||||
2h.) Total Grandfathered BEP Benefit = 2f.) + 2g.) |
$ | |||||||||||
If you have a trust, your Funding Payment trust account balance will be distributed to you after your termination of employment. |
||||||||||||
2i.) Estimated Funding Payment Asset Balance at Assumed Retirement Age |
$ | |||||||||||
The difference between your after-tax Grandfathered BEP Benefit and your Funding Payment Asset Balance will be paid to you from Company assets. This payment will include an amount to cover the taxes that you will owe on the payment. |
||||||||||||
2j.) Estimated Grandfathered BEP Payment at Assumed Retirement Age = 2h.) - 2i.) |
$ | $ |
3. | Your Estimated BEP Benefits |
Your Ongoing BEP Benefits reflect all of your service for pension purposes and DPS contributions for service after 12/31/2004 but also take into account the amounts paid to you as Target Payments. These benefits are offset by your Grandfathered BEP Benefits. This amount is only payable as a lump sum. The annuity is shown for illustrative purposes only. | ||||||
Annual Annuities | Lump Sums | |||||
Pre-tax | After-tax | |||||
3k.) Ongoing BEP Pension Benefit at Assumed Retirement Age = 1e.) - 2f.) |
$ | $ | $ | |||
3l.) Ongoing BEP DPS Balance for Post-2004 Accruals - reflects estimated earnings and contributions through your Assumed Retirement Date (includes amounts in your Target Payments received in lieu of BEP DPS contributions) |
$ | $ | ||||
|
| |||||
In order to compare this amount to your Target Payments, it is shown only as an after-tax amount. |
||||||
3m.) Total = 3k.) + 3l.) |
$ | |||||
If you have a trust, your Target Payment trust account balance will be distributed to you after your termination of employment. |
||||||
3n.) Estimated Target Payment Asset Balance at Assumed Retirement Age |
$ | |||||
The difference between your after-tax Total and your Target Payment Asset Balance will be your Ongoing BEP Benefit, which will be paid to you from Company assets. This payment will include an amount to cover the taxes that you will owe on the payment. |
||||||
3o.) Estimated Ongoing BEP Benefit at Assumed Retirement Age = 3m.) - 3n.) |
$ | $ |
47
4. | Your Estimated Total Payments |
Your estimated total Company Payment includes the sum of your Grandfathered BEP Payment and your Ongoing BEP Benefit | ||||||||
Lump Sums | ||||||||
Pre-tax | After-tax | |||||||
4p.) Estimated Total Company Payment - 2j.) + 3o.) |
$ | $ | ||||||
|
|
|||||||
If you have a trust, you will also receive a distribution of your trust account balances after your termination of employment. Since you paid taxes on the payments when they were deposited into your trust, your trust balances are on an after-tax basis. |
||||||||
4q.) Estimated Asset Balance at Assumed Retirement Date = 2i.) + 3n.) [Note: Only your trust balances, if any, will be distributed to you. Any assumed assets that are included in this amount will not be distributed to you.] |
$ | |||||||
|
|
|||||||
So, the total amount after taxes for retirement is 4p.) + 4q.) |
$ |
Assumptions:
| No future salary increases. Reflects limited IC for certain years as applicable. |
| Estimated lump sum value of the Grandfathered BEP Benefit is based on the greater of: (1) the lump sum value based on interest rates projected to the assumed retirement date assuming current corporate bonds remain level in future months (seg rate 1 / seg rate 2 / seg rate 3) reflecting the 50 basis point reduction in published rates using Altrias current BEP lump sum basis, and (2) the lump sum value based on the 12/31/2004 lump sum basis including an interest rate of 4.4842%. The lump sum value of the Grandfathered BEP Benefit reflects the basis as described in (2). The lump sum for ongoing BEP Benefits reflects the estimated value of annuity purchase. |
| Actual BEP DPS balance as of [date] with 6% annual rate of return on BEP DPS contributions for the remainder of 2010 and beyond. |
| Actual Secular Trust asset balances as of [date] with 3% annual year after-tax rate of return for the remainder of 2010 and beyond. |
| Future BEP DPS contribution rate = 15%. |
| Tax rate = 38.74%. Your pre-tax Total Company Payment at your actual retirement date will be subject to the income tax withholding rates in effect at that time, as well as the applicable FICA tax rates which are scheduled to increase by 0.9% in 2013. |
Note:
Estimated benefits and payments are determined based on the assumptions described above. Actual results may vary based on actual experience. Does not constitute a guarantee of employment. The Company reserves the right to change the plans and programs in the future.
October 2011
48
A Summary of Your Payments
Since you joined the Secular Trust, you have received Funding Payments and Target
$7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0
$2,700,100 $2,071,100 $892,200 $762,400
Total After-Tax Amount Payable at Assumed Retirement Age
Funding Payment Asset Balance
Grandfathered BEP Payment
Target Payment Asset Balance
Ongoing BEP Benefit
Your total after-tax Grandfathered BEP amount is paid through a combination of your Funding Payment assets and your Grandfathered BEP payment.
Your Ongoing BEP Benefit. When you receive your $2,700,100 estimated Ongoing BEP Benefit, you will receive an additional $1,707,400 to cover the income taxes you will owe on this payment.
Target Payments previously paid to you. Your Target Payment assets are comprised of your Target Payment trust ($1,971,200) and assumed account balances. Your trust account will be distributed to you upon your termination/retirement.
Your Grandfathered BEP payment. When you receive your $892,200 estimated Grandfathered BEP payment, you will receive an additional $564,200 to cover the income taxes you will owe on this payment.
Funding Payments previously paid to you. Your Funding Payment assets are comprised of your Funding Payment trust ($761,400) and assumed account balances. Your trust account will be distributed to you upon your termination/retirement.
Exhibit 12
ALTRIA GROUP, INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
For the Years Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Earnings from continuing operations before income taxes |
$ | 5,582 | $ | 5,723 | $ | 4,877 | $ | 4,789 | $ | 4,678 | ||||||||||
Add (deduct): |
||||||||||||||||||||
Equity in net earnings of less than 50% owned affiliates |
(741 | ) | (631 | ) | (601 | ) | (471 | ) | (516 | ) | ||||||||||
Dividends from less than 50% owned affiliates |
374 | 303 | 254 | 249 | 224 | |||||||||||||||
Fixed charges |
1,254 | 1,152 | 1,249 | 529 | 888 | |||||||||||||||
Interest capitalized, net of amortization |
(2 | ) | 26 | 5 | (9 | ) | (5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings available for fixed charges |
$ | 6,467 | $ | 6,573 | $ | 5,784 | $ | 5,087 | $ | 5,269 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fixed charges: |
||||||||||||||||||||
Interest incurred (A): |
||||||||||||||||||||
Consumer products |
$ | 1,233 | $ | 1,133 | $ | 1,210 | $ | 451 | $ | 697 | ||||||||||
Financial services |
20 | 38 | 54 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
1,233 | 1,133 | 1,230 | 489 | 751 | ||||||||||||||||
Portion of rent expense deemed to represent interest factor |
21 | 19 | 19 | 40 | 137 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fixed charges |
$ | 1,254 | $ | 1,152 | $ | 1,249 | $ | 529 | $ | 888 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of earnings to fixed charges (B) |
5.2 | 5.7 | 4.6 | 9.6 | 5.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
(A) | Altria Group, Inc. includes interest relating to uncertain tax positions in its provision for income taxes, therefore such amounts are not included in fixed charges in the computation. |
(B) | Computation includes interest incurred and the portion of rent expense deemed to represent the interest factor from the discontinued operations of Philip Morris International Inc. and Kraft Foods Inc. in fixed charges. Excluding these amounts from fixed charges, the ratio of earnings to fixed charges from continuing operations would have been 12.5 and 9.5 for the years ended December 31, 2008 and 2007, respectively. |
Exhibit 13
Financial Review
page 10 | ||
page 11 | ||
page 12 | ||
page 14 | ||
page 16 | ||
page 17 | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
page 71 | |
page 100 | ||
Report of Management on Internal Control Over Financial Reporting |
page 101 |
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 5 |
page 21 | |
Benefit Plans Note 17 includes a discussion of pension plans |
page 33 | |
Contingencies Note 19 includes a discussion of the litigation environment |
page 39 | |
page 23 | ||
page 20 | ||
page 29 | ||
page 23 | ||
page 26 | ||
page 31 |
9 |
Selected Financial Data Five-Year Review
(in millions of dollars, except per share and employee data)
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net revenues |
$ | 23,800 | $ | 24,363 | $ | 23,556 | $ | 19,356 | $ | 18,664 | ||||||||||
Cost of sales |
7,680 | 7,704 | 7,990 | 8,270 | 7,827 | |||||||||||||||
Excise taxes on products |
7,181 | 7,471 | 6,732 | 3,399 | 3,452 | |||||||||||||||
Operating income |
6,068 | 6,228 | 5,462 | 4,882 | 4,373 | |||||||||||||||
Interest and other debt expense, net |
1,216 | 1,133 | 1,185 | 167 | 205 | |||||||||||||||
Earnings from equity investment in SABMiller |
730 | 628 | 600 | 467 | 510 | |||||||||||||||
Earnings from continuing operations before income taxes |
5,582 | 5,723 | 4,877 | 4,789 | 4,678 | |||||||||||||||
Pre-tax profit margin from continuing operations |
23.5% | 23.5% | 20.7% | 24.7% | 25.1% | |||||||||||||||
Provision for income taxes |
2,189 | 1,816 | 1,669 | 1,699 | 1,547 | |||||||||||||||
Earnings from continuing operations |
3,393 | 3,907 | 3,208 | 3,090 | 3,131 | |||||||||||||||
Earnings from discontinued operations, net of income taxes |
1,901 | 7,006 | ||||||||||||||||||
Net earnings |
3,393 | 3,907 | 3,208 | 4,991 | 10,137 | |||||||||||||||
Net earnings attributable to Altria Group, Inc. |
3,390 | 3,905 | 3,206 | 4,930 | 9,786 | |||||||||||||||
Basic EPS continuing operations |
1.64 | 1.87 | 1.55 | 1.49 | 1.49 | |||||||||||||||
discontinued operations |
0.88 | 3.15 | ||||||||||||||||||
net earnings attributable to Altria Group, Inc. |
1.64 | 1.87 | 1.55 | 2.37 | 4.64 | |||||||||||||||
Diluted EPS continuing operations |
1.64 | 1.87 | 1.54 | 1.48 | 1.48 | |||||||||||||||
discontinued operations |
0.88 | 3.14 | ||||||||||||||||||
net earnings attributable to Altria Group, Inc. |
1.64 | 1.87 | 1.54 | 2.36 | 4.62 | |||||||||||||||
Dividends declared per share |
1.58 | 1.46 | 1.32 | 1.68 | 3.05 | |||||||||||||||
Weighted average shares (millions) Basic |
2,064 | 2,077 | 2,066 | 2,075 | 2,101 | |||||||||||||||
Weighted average shares (millions) Diluted |
2,064 | 2,079 | 2,071 | 2,084 | 2,113 | |||||||||||||||
Capital expenditures |
105 | 168 | 273 | 241 | 386 | |||||||||||||||
Depreciation |
233 | 256 | 271 | 208 | 232 | |||||||||||||||
Property, plant and equipment, net (consumer products) |
2,216 | 2,380 | 2,684 | 2,199 | 2,422 | |||||||||||||||
Inventories (consumer products) |
1,779 | 1,803 | 1,810 | 1,069 | 1,254 | |||||||||||||||
Total assets |
36,962 | 37,402 | 36,677 | 27,215 | 57,746 | |||||||||||||||
Total long-term debt |
13,089 | 12,194 | 11,185 | 7,339 | 2,385 | |||||||||||||||
Total debt consumer products |
13,689 | 12,194 | 11,960 | 6,974 | 4,239 | |||||||||||||||
financial services |
500 | 500 | ||||||||||||||||||
Total stockholders equity |
3,683 | 5,195 | 4,072 | 2,828 | 19,320 | |||||||||||||||
Common dividends declared as a % of Basic EPS |
96.3% | 78.1% | 85.2% | 70.9% | 65.7% | |||||||||||||||
Common dividends declared as a % of Diluted EPS |
96.3% | 78.1% | 85.7% | 71.2% | 66.0% | |||||||||||||||
Book value per common share outstanding |
1.80 | 2.49 | 1.96 | 1.37 | 9.17 | |||||||||||||||
Market price per common share high/low |
30.40-23.20 | 26.22-19.14 | 20.47-14.50 | 79.59-14.34 | 90.50-63.13 | |||||||||||||||
Closing price per common share at year end |
29.65 | 24.62 | 19.63 | 15.06 | 75.58 | |||||||||||||||
Price/earnings ratio at year end Basic |
18 | 13 | 13 | 6 | 16 | |||||||||||||||
Price/earnings ratio at year end Diluted |
18 | 13 | 13 | 6 | 16 | |||||||||||||||
Number of common shares outstanding at year end (millions) |
2,044 | 2,089 | 2,076 | 2,061 | 2,108 | |||||||||||||||
Approximate number of employees |
9,900 | 10,000 | 10,000 | 10,400 | 84,000 | |||||||||||||||
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.
The Selected Financial Data reflect the results of Altria Group, Inc.'s former subsidiaries Philip Morris International Inc. (PMI) and Kraft Foods Inc. (Kraft) as discontinued operations prior to the respective spin-offs of PMI on March 28, 2008 and Kraft on March 30, 2007.
10 |
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
for the years ended December 31, | 2011 | 2010 | 2009 | |||||||||
Net revenues |
$ | 23,800 | $ | 24,363 | $ | 23,556 | ||||||
Cost of sales |
7,680 | 7,704 | 7,990 | |||||||||
Excise taxes on products |
7,181 | 7,471 | 6,732 | |||||||||
Gross profit |
8,939 | 9,188 | 8,834 | |||||||||
Marketing, administration and research costs |
2,643 | 2,735 | 2,843 | |||||||||
Changes to Kraft and PMI tax-related receivables |
(14 | ) | 169 | 88 | ||||||||
Asset impairment and exit costs |
222 | 36 | 421 | |||||||||
Amortization of intangibles |
20 | 20 | 20 | |||||||||
Operating income |
6,068 | 6,228 | 5,462 | |||||||||
Interest and other debt expense, net |
1,216 | 1,133 | 1,185 | |||||||||
Earnings from equity investment in SABMiller |
(730 | ) | (628 | ) | (600 | ) | ||||||
Earnings before income taxes |
5,582 | 5,723 | 4,877 | |||||||||
Provision for income taxes |
2,189 | 1,816 | 1,669 | |||||||||
Net earnings |
3,393 | 3,907 | 3,208 | |||||||||
Net earnings attributable to noncontrolling interests |
(3 | ) | (2 | ) | (2 | ) | ||||||
Net earnings attributable to Altria Group, Inc. |
$ | 3,390 | $ | 3,905 | $ | 3,206 | ||||||
Per share data: |
||||||||||||
Basic earnings per share attributable to Altria Group, Inc. |
$ | 1.64 | $ | 1.87 | $ | 1.55 | ||||||
Diluted earnings per share attributable to Altria Group, Inc. |
$ | 1.64 | $ | 1.87 | $ | 1.54 | ||||||
See notes to consolidated financial statements.
11 |
(in millions of dollars, except share and per share data)
at December 31, | 2011 | 2010 | ||||||
Assets |
||||||||
Consumer products |
||||||||
Cash and cash equivalents |
$ | 3,270 | $ | 2,314 | ||||
Receivables |
268 | 85 | ||||||
Inventories: |
||||||||
Leaf tobacco |
934 | 960 | ||||||
Other raw materials |
170 | 160 | ||||||
Work in process |
316 | 299 | ||||||
Finished product |
359 | 384 | ||||||
1,779 | 1,803 | |||||||
Deferred income taxes |
1,207 | 1,165 | ||||||
Other current assets |
607 | 614 | ||||||
Total current assets |
7,131 | 5,981 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land and land improvements |
290 | 291 | ||||||
Buildings and building equipment |
1,271 | 1,292 | ||||||
Machinery and equipment |
3,097 | 3,473 | ||||||
Construction in progress |
70 | 94 | ||||||
4,728 | 5,150 | |||||||
Less accumulated depreciation |
2,512 | 2,770 | ||||||
2,216 | 2,380 | |||||||
Goodwill |
5,174 | 5,174 | ||||||
Other intangible assets, net |
12,098 | 12,118 | ||||||
Investment in SABMiller |
5,509 | 5,367 | ||||||
Other assets |
1,257 | 1,851 | ||||||
Total consumer products assets |
33,385 | 32,871 | ||||||
Financial services |
||||||||
Finance assets, net |
3,559 | 4,502 | ||||||
Other assets |
18 | 29 | ||||||
Total financial services assets |
3,577 | 4,531 | ||||||
Total Assets |
$ | 36,962 | $ | 37,402 | ||||
See notes to consolidated financial statements.
12 |
at December 31, | 2011 | 2010 | ||||||
Liabilities |
||||||||
Consumer products |
||||||||
Current portion of long-term debt |
$ 600 | $ | ||||||
Accounts payable |
503 | 529 | ||||||
Accrued liabilities: |
||||||||
Marketing |
430 | 447 | ||||||
Taxes, except income taxes |
220 | 231 | ||||||
Employment costs |
225 | 232 | ||||||
Settlement charges |
3,513 | 3,535 | ||||||
Other |
1,311 | 1,069 | ||||||
Dividends payable |
841 | 797 | ||||||
Total current liabilities |
7,643 | 6,840 | ||||||
Long-term debt |
13,089 | 12,194 | ||||||
Deferred income taxes |
4,751 | 4,618 | ||||||
Accrued pension costs |
1,662 | 1,191 | ||||||
Accrued postretirement health care costs |
2,359 | 2,402 | ||||||
Other liabilities |
602 | 949 | ||||||
Total consumer products liabilities |
30,106 | 28,194 | ||||||
Financial services |
||||||||
Deferred income taxes |
2,811 | 3,880 | ||||||
Other liabilities |
330 | 101 | ||||||
Total financial services liabilities |
3,141 | 3,981 | ||||||
Total liabilities |
33,247 | 32,175 | ||||||
Contingencies (Note 19) |
||||||||
Redeemable noncontrolling interest |
32 | 32 | ||||||
Stockholders Equity |
||||||||
Common stock, par value $0.33 1/3 per share |
935 | 935 | ||||||
Additional paid-in capital |
5,674 | 5,751 | ||||||
Earnings reinvested in the business |
23,583 | 23,459 | ||||||
Accumulated other comprehensive losses |
(1,887 | ) | (1,484 | ) | ||||
Cost of repurchased stock |
(24,625 | ) | (23,469 | ) | ||||
Total stockholders equity attributable to Altria Group, Inc. |
3,680 | 5,192 | ||||||
Noncontrolling interests |
3 | 3 | ||||||
Total stockholders equity |
3,683 | 5,195 | ||||||
Total Liabilities and Stockholders Equity |
$36,962 | $37,402 | ||||||
13 |
Consolidated Statements of Cash Flows
(in millions of dollars)
for the years ended December 31, | 2011 | 2010 | 2009 | |||||||||||
Cash Provided by (Used in) Operating Activities |
||||||||||||||
Net earnings (loss) |
Consumer products | $ | 3,905 | $ | 3,819 | $ | 3,054 | |||||||
Financial services | (512 | ) | 88 | 154 | ||||||||||
Net earnings |
3,393 | 3,907 | 3,208 | |||||||||||
Adjustments to reconcile net earnings to operating cash flows: |
||||||||||||||
Consumer products |
||||||||||||||
Depreciation and amortization |
253 | 276 | 291 | |||||||||||
Deferred income tax provision |
382 | 408 | 499 | |||||||||||
Earnings from equity investment in SABMiller |
(730 | ) | (628 | ) | (600 | ) | ||||||||
Dividends from SABMiller |
357 | 303 | 254 | |||||||||||
Asset impairment and exit costs, net of cash paid |
179 | (188 | ) | (22 | ) | |||||||||
IRS payment related to LILO and SILO transactions |
(945 | ) | ||||||||||||
Cash effects of changes, net of the effects from acquisition of UST: |
||||||||||||||
Receivables, net |
(19 | ) | 15 | (7 | ) | |||||||||
Inventories |
24 | 7 | 51 | |||||||||||
Accounts payable |
(60 | ) | 48 | (25 | ) | |||||||||
Income taxes |
(151 | ) | (53 | ) | 130 | |||||||||
Accrued liabilities and other current assets |
21 | (221 | ) | 218 | ||||||||||
Accrued settlement charges |
(22 | ) | (100 | ) | (346 | ) | ||||||||
Pension plan contributions |
(240 | ) | (30 | ) | (37 | ) | ||||||||
Pension provisions and postretirement, net |
243 | 185 | 193 | |||||||||||
Other |
47 | 96 | 232 | |||||||||||
Financial services |
||||||||||||||
Deferred income tax benefit |
(825 | ) | (284 | ) | (456 | ) | ||||||||
PMCC Leveraged Lease Charge |
490 | |||||||||||||
Net increase to allowance for losses |
25 | 15 | ||||||||||||
Other |
246 | (29 | ) | (155 | ) | |||||||||
Net cash provided by operating activities |
3,613 | 2,767 | 3,443 | |||||||||||
See notes to consolidated financial statements.
14 |
for the years ended December 31, | 2011 | 2010 | 2009 | |||||||||||
Cash Provided by (Used in) Investing Activities |
||||||||||||||
Consumer products |
||||||||||||||
Capital expenditures |
$ (105 | ) | $ | (168 | ) | $ | (273 | ) | ||||||
Acquisition of UST, net of acquired cash |
(10,244 | ) | ||||||||||||
Other |
2 | 115 | (31 | ) | ||||||||||
Financial services |
||||||||||||||
Investments in finance assets |
(9 | ) | ||||||||||||
Proceeds from finance assets |
490 | 312 | 793 | |||||||||||
Net cash provided by (used in) investing activities |
387 | 259 | (9,764 | ) | ||||||||||
Cash Provided by (Used in) Financing Activities |
||||||||||||||
Consumer products |
||||||||||||||
Net repayment of short-term borrowings |
(205 | ) | ||||||||||||
Long-term debt issued |
1,494 | 1,007 | 4,221 | |||||||||||
Long-term debt repaid |
(775 | ) | (375 | ) | ||||||||||
Financial services |
||||||||||||||
Long-term debt repaid |
(500 | ) | ||||||||||||
Repurchases of common stock |
(1,327 | ) | ||||||||||||
Dividends paid on common stock |
(3,222 | ) | (2,958 | ) | (2,693 | ) | ||||||||
Issuances of common stock |
29 | 104 | 89 | |||||||||||
Financing fees and debt issuance costs |
(24 | ) | (6 | ) | (177 | ) | ||||||||
Other |
6 | 45 | (84 | ) | ||||||||||
Net cash (used in) provided by financing activities |
(3,044 | ) | (2,583 | ) | 276 | |||||||||
Cash and cash equivalents: |
||||||||||||||
Increase (Decrease) |
956 | 443 | (6,045 | ) | ||||||||||
Balance at beginning of year |
2,314 | 1,871 | 7,916 | |||||||||||
Balance at end of year |
$3,270 | $2,314 | $ 1,871 | |||||||||||
Cash paid: Interest |
Consumer products | $1,154 | $1,084 | $ 904 | ||||||||||
Financial services | $ | $ | $ 38 | |||||||||||
Income taxes |
$2,865 | $1,884 | $ 1,606 | |||||||||||
15 |
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 the Business |
Accumulated Other Comprehensive Losses |
Cost of Stock |
Comprehensive Earnings |
Non- controlling Interests |
Total Stockholders Equity |
|||||||||||||||||||||||||
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 deferred income taxes: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
3 | 3 | 3 | |||||||||||||||||||||||||||||
Changes in net loss and prior service cost |
375 | 375 | 375 | |||||||||||||||||||||||||||||
Ownership share of SABMillers 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 deferred income taxes: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
1 | 1 | 1 | |||||||||||||||||||||||||||||
Changes in net loss and prior service cost |
35 | 35 | 35 | |||||||||||||||||||||||||||||
Ownership share of SABMillers 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 | |||||||||||||||||||||||
Comprehensive earnings: |
||||||||||||||||||||||||||||||||
Net earnings (a) |
3,390 | 3,390 | 1 | 3,391 | ||||||||||||||||||||||||||||
Other comprehensive earnings, net of deferred income taxes: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
(2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||||||
Changes in net loss and prior service cost |
(251 | ) | (251 | ) | (251 | ) | ||||||||||||||||||||||||||
Ownership share of SABMillers other comprehensive losses |
(150 | ) | (150 | ) | (150 | ) | ||||||||||||||||||||||||||
Total other comprehensive losses |
(403 | ) | | (403 | ) | |||||||||||||||||||||||||||
Total comprehensive earnings |
2,987 | 1 | 2,988 | |||||||||||||||||||||||||||||
Exercise of stock options and other stock award activity |
(77 | ) | 171 | 94 | ||||||||||||||||||||||||||||
Cash dividends declared ($1.58 per share) |
(3,266 | ) | (3,266 | ) | ||||||||||||||||||||||||||||
Repurchases of common stock |
(1,327 | ) | (1,327 | ) | ||||||||||||||||||||||||||||
Other |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||
Balances, December 31, 2011 |
$ | 935 | $ | 5,674 | $ | 23,583 | $ | (1,887 | ) | $ | (24,625 | ) | $ | 3 | $3,683 | |||||||||||||||||
(a) Net earnings attributable to noncontrolling interests for the years ended December 31, 2011, 2010 and 2009 exclude $2 million, $1 million and $1 million, respectively, due to the redeemable noncontrolling interest related to Stags Leap Wine Cellars, which is reported in the mezzanine equity section in the consolidated balance sheets at December 31, 2011, 2010 and 2009, respectively. See Note 19.
See notes to consolidated financial statements.
16 |
Notes to Consolidated Financial Statements
Note 1.
Background and Basis of Presentation:
n Background: At December 31, 2011, 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 direct and indirect wholly-owned subsidiaries including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine; 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 27.0% economic and voting interest in SABMiller plc (SABMiller) at December 31, 2011, which is accounted for under the equity method of accounting. Altria Group, Inc.s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller, if and when SABMiller pays such dividends. At December 31, 2011, Altria Group, Inc.s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
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. As a result of the acquisition, UST has become an indirect wholly-owned subsidiary of Altria Group, Inc.
Dividends and Share Repurchases: In August 2011, Altria Group, Inc.s Board of Directors approved a 7.9% increase in the quarterly dividend rate to $0.41 per common share versus the previous rate of $0.38 per common share. The current annualized dividend rate is $1.64 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 $1.0 billion one-year share repurchase program. Altria Group, Inc. completed this share repurchase program during the third quarter of 2011. Under this program, Altria Group, Inc. repurchased a total of 37.6 million shares of its common stock at an average price of $26.62 per share.
In October 2011, Altria Group, Inc.s Board of Directors authorized a new $1.0 billion share repurchase program, which Altria Group, Inc. intends to complete by the end of 2012. During the fourth quarter of 2011, Altria Group, Inc. repurchased 11.7 million shares of its common stock at an aggregate cost of approximately $327 million, and an average price of $27.84 per share, under this share repurchase program. Share repurchases under the new program will depend upon marketplace conditions and other factors, and the program remains subject to the discretion of Altria Group, Inc.s Board of Directors.
During 2011, Altria Group, Inc. repurchased a total of 49.3 million shares of its common stock under the two programs at an aggregate cost of approximately $1.3 billion, and an average price of $26.91 per share.
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 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.
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, impairment testing and asset valuation: Property, plant and equipment are stated at historical costs 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. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
17 |
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.
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 2011, 2010 and 2009, 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 19. 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 17. Benefit Plans.
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 PMCCs 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 PMCCs management. This review 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 PMCCs net revenues and results of operations in 2010. There were no adjustments in 2011 and 2009.
PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC stops 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.
n Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 19. Contingencies for a further discussion of guarantees.
18 |
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 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 Litigation contingencies and costs: Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs on the consolidated statements of earnings.
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.
n New accounting standards: In September 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance to simplify how entities test goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. Altria Group, Inc. performed a quantitative impairment test for its 2011 annual review of goodwill under the existing guidance and will evaluate performing a qualitative assessment in 2012.
In June and December 2011, the FASB issued authoritative guidance that will eliminate the option of presenting components of other comprehensive earnings as part of the statement of stockholders equity. The guidance will instead require the reporting of other comprehensive earnings in a single continuous statement of comprehensive earnings or in a separate statement immediately following the statement of earnings. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011; however, early adoption is permitted. Altria Group, Inc. intends to comply with the new reporting requirements beginning in the first quarter of 2012.
In May 2011, the FASB issued authoritative guidance relating to fair value measurement and disclosure requirements. The new guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The adoption of this guidance will not have a significant impact on Altria Group, Inc.s existing fair value measurements or disclosures.
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 USTs non-qualified pension plans, investment banking fees and the early retirement of
19 |
USTs 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. 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.
USTs 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 December 31, 2009.
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, 2011, 2010 and 2009, 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) | 2011 | 2010 | 2009 | |||||||||
Asset impairment and exit costs |
$ | (4 | ) | $ | 6 | $ | 202 | |||||
Integration costs |
3 | 18 | 49 | |||||||||
Inventory adjustments |
6 | 22 | 36 | |||||||||
Financing fees |
91 | |||||||||||
Transaction costs |
60 | |||||||||||
Total |
$ | 5 | $ | 46 | $ | 438 | ||||||
Total acquisition-related charges, as well as restructuring and integration costs incurred since the September 8, 2008 announcement of the acquisition, were $547 million as of December 31, 2011. As of December 31, 2011, pre-tax charges and costs related to the acquisition of UST have been completed.
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, 2011 |
December 31, 2010 |
December 31, 2011 |
December 31, 2010 |
||||||||||||||
Cigarettes |
$ | | $ | | $ | 250 | $ | 261 | ||||||||||
Smokeless products |
5,023 | 5,023 | 8,841 | 8,843 | ||||||||||||||
Cigars |
77 | 77 | 2,738 | 2,744 | ||||||||||||||
Wine |
74 | 74 | 269 | 270 | ||||||||||||||
Total |
$ | 5,174 | $ | 5,174 | $ | 12,098 | $ | 12,118 | ||||||||||
Goodwill relates to the January 2009 acquisition of UST (see Note 3. UST Acquisition) and the December 2007 acquisition of Middleton.
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Other intangible assets consisted of the following:
December 31, 2011 | December 31, 2010 | |||||||||||||||||
(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 | $ | 67 | 464 | $ | 47 | ||||||||||||
Total other intangible assets |
$ | 12,165 | $ | 67 | $ | 12,165 | $ | 47 | ||||||||||
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 each of the years ended December 31, 2011, 2010 and 2009, was $20 million. 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.
There were no changes in goodwill and the gross carrying amount of other intangible assets for the years ended December 31, 2011 and 2010.
Asset Impairment, Exit, Implementation and Integration Costs:
Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
For the Year Ended December 31, 2011 | ||||||||||||||||||
(in millions) | Asset Impairment and Exit Costs |
Implementation Costs |
Integration Costs |
Total | ||||||||||||||
Cigarettes |
$ | 178 | $ | 1 | $ | | $ | 179 | ||||||||||
Smokeless products |
32 | 3 | 35 | |||||||||||||||
Cigars |
4 | 4 | ||||||||||||||||
General corporate |
8 | 8 | ||||||||||||||||
Total |
$ | 222 | $ | 1 | $ | 3 | $ | 226 | ||||||||||
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 | ||||||||||
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The movement in the severance liability and details of asset impairment and exit costs for Altria Group, Inc. for the years ended December 31, 2011 and 2010 was as follows:
(in millions) | Severance | Other | Total | |||||||||
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 | |||||||||
Charges, net |
154 | 68 | 222 | |||||||||
Cash spent |
(24 | ) | (20 | ) | (44 | ) | ||||||
Other |
(48 | ) | (48 | ) | ||||||||
Severance liability balance, December 31, 2011 |
$156 | $ | $156 | |||||||||
Other charges in the table above primarily include other employee termination benefits, including pension and postretirement, and asset impairments. Charges, net in the table above include the reversal in 2011 of lease exit costs ($4 million) associated with the UST integration, and the reversal in 2010 of severance costs ($13 million) associated with the Manufacturing Optimization Program.
The pre-tax asset impairment, exit, implementation, and integration costs shown above are primarily a result of the programs discussed below.
n 2011 Cost Reduction Program: In October 2011, Altria Group, Inc. announced a new cost reduction program (the 2011 Cost Reduction Program) for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.s objective to reduce cigarette-related infrastructure ahead of PM USAs cigarette volume declines. As a result of this program, Altria Group, Inc. expects to incur total pre-tax charges of approximately $300 million (concluding in 2012), which is lower than the original estimate of $375 million due primarily to lower-than-expected employee separation costs. The estimated charges include employee separation costs of approximately $220 million and other charges of approximately $80 million, which include lease termination and asset impairments. Substantially all of these charges will result in cash expenditures.
For the year ended December 31, 2011, total pre-tax asset impairment and exit costs of $223 million were recorded for this program in the cigarettes segment ($175 million), smokeless products segment ($36 million), cigars segment ($4 million) and general corporate ($8 million). In addition, pre-tax implementation costs of $1 million were recorded in the cigarettes segment for total pre-tax charges of $224 million related to this program. The pre-tax implementation costs were included in marketing, administration and research costs on Altria Group, Inc.s consolidated statement of earnings for the year ended December 31, 2011. Cash payments related to this program of $9 million were made during the year ended December 31, 2011.
In connection with the 2011 Cost Reduction Program, Altria Group, Inc. has reorganized its tobacco operating companies and, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA. In addition, beginning in 2012, Altria Group, Inc. has revised its reportable segments (see Note 16. Segment Reporting).
n Integration and Restructuring Program: Altria Group, Inc. has 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.
As part of this program, Altria Group, Inc. recorded a reversal of $4 million for pre-tax asset impairment and exit costs, and a pre-tax charge of $3 million for integration costs in the smokeless products segment for the year ended December 31, 2011. 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 and Exit |
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 and Exit |
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 | ||||||
These charges are primarily related to employee separation costs, lease exit costs, relocation of employees, asset impairment 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, 2011, 2010 and 2009. Total pre-tax charges incurred since the inception of the program through December 31, 2011 were $481 million. Cash payments related to the program of $20 million, $111 million and $221 million were made during the years ended December 31, 2011, 2010 and 2009, respectively, for a total of $352 million since inception. Cash payments related to this program have been completed.
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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 increase enacted in early 2009. In April 2011, PM USA completed the de-commissioning of the Cabarrus facility.
PM USA continues to market for sale the Cabarrus facility and land. The future sale of the Cabarrus facility and land is not expected to have a material impact on the financial results of Altria Group, Inc.
As a result of this 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, 2011 of $827 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) | 2011 | 2010 | 2009 | |||||||||
Asset impairment and exit costs |
$ | 3 | $ | 24 | $ | 97 | ||||||
Implementation costs |
75 | 139 | ||||||||||
Total |
$ | 3 | $ | 99 | $ | 236 | ||||||
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 and 2009, respectively.
Cash payments related to the program of $16 million, $128 million and $210 million were made during the years ended December 31, 2011, 2010 and 2009, respectively, for total cash payments of $450 million since inception. Cash payments related to this program have been completed.
Note 6.
Inventories:
The cost of approximately 70% and 71% of inventories in 2011 and 2010, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.6 billion and $0.7 billion lower than the current cost of inventories at December 31, 2011 and 2010, respectively.
Investment in SABMiller:
At December 31, 2011, Altria Group, Inc. held a 27.0% 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) | 2011 | 2010 | 2009 | |||||||||
Equity earnings |
$ | 703 | $ | 578 | $ | 407 | ||||||
Gains resulting from issuances of common stock by SABMiller |
27 | 50 | 193 | |||||||||
$ | 730 | $ | 628 | $ | 600 | |||||||
Summary financial data of SABMiller is as follows:
At December 31, | ||||||||
(in millions) | 2011 | 2010 | ||||||
Current assets |
$ | 5,967 | $ | 4,518 | ||||
Long-term assets |
$ | 46,438 | $ | 34,744 | ||||
Current liabilities |
$ | 7,591 | $ | 6,625 | ||||
Long-term liabilities |
$ | 22,521 | $ | 11,270 | ||||
Non-controlling interests |
$ | 1,013 | $ | 766 | ||||
For the Years Ended December 31, | ||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Net revenues |
$ | 20,780 | $ | 18,981 | $ | 17,020 | ||||||
Operating profit |
$ | 3,603 | $ | 2,821 | $ | 2,173 | ||||||
Net earnings |
$ | 2,596 | $ | 2,133 | $ | 1,473 | ||||||
The fair value, based on unadjusted quoted prices in active markets, of Altria Group, Inc.s equity investment in SABMiller at December 31, 2011, was $15.2 billion, as compared with its carrying value of $5.5 billion. The fair value, based on unadjusted quoted prices in active markets, 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.
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, PMCCs operating companies income will fluctuate over time as investments mature or are sold. During 2011, 2010 and 2009, proceeds from asset management activities totaled $490 million, $312 million and $793 million, respectively, and gains included in operating companies income totaled $107 million, $72 million and $257 million, respectively.
23 |
At December 31, 2011, finance assets, net, of $3,559 million were comprised of investments in finance leases of $3,786 million, reduced by the allowance for losses of $227 million. 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.
During the second quarter of 2011, Altria Group, Inc. recorded a one-time charge of $627 million related to the tax treatment of certain leveraged lease transactions entered into by PMCC (the PMCC Leveraged Lease Charge). Approximately 50% of the charge ($315 million), which does not include potential penalties, represents a reduction in cumulative lease earnings recorded to date that will be recaptured over the remainder of the affected lease terms. The remaining portion of the charge ($312 million) primarily represents a permanent charge for interest on tax underpayments. The one-time charge was recorded in Altria Group, Inc.s consolidated statement of earnings for the year ended December 31, 2011 as follows:
(in millions) | Net Revenues |
Provision for Income Taxes |
Total | |||||||||
Reduction to cumulative lease earnings |
$ | 490 | $ | (175 | ) | $ | 315 | |||||
Interest on tax underpayments |
312 | 312 | ||||||||||
Total |
$ | 490 | $ | 137 | $ | 627 | ||||||
See Note 15. Income Taxes and Note 19. Contingencies for further discussion of matters related to this charge.
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) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||
Rents receivable, net |
$ | 3,926 | $ | 4,659 | $ | 162 | $ | 207 | $ | 4,088 | $ | 4,866 | ||||||||||||||||
Unguaranteed residual values |
1,306 | 1,327 | 86 | 87 | 1,392 | 1,414 | ||||||||||||||||||||||
Unearned income |
(1,692 | ) | (1,573 | ) | (2 | ) | (3 | ) | (1,694 | ) | (1,576 | ) | ||||||||||||||||
Investments in finance leases |
3,540 | 4,413 | 246 | 291 | 3,786 | 4,704 | ||||||||||||||||||||||
Deferred income taxes |
(2,793 | ) | (3,830 | ) | (107 | ) | (130 | ) | (2,900 | ) | (3,960 | ) | ||||||||||||||||
Net investments in finance leases |
$ | 747 | $ | 583 | $ | 139 | $ | 161 | $ | 886 | $ | 744 | ||||||||||||||||
For leveraged leases, rents receivable, net, represent unpaid rents, net of principal and interest payments on third-party nonrecourse debt. PMCCs 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 $6.8 billion and $8.3 billion at December 31, 2011 and 2010, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 2011 and 2010.
At December 31, 2011, PMCCs investments in finance leases were principally comprised of the following investment categories: aircraft (30%), rail and surface transport (26%), electric power (25%), real estate (10%) and manufacturing (9%). Investments located outside the United States, which are all U.S. dollar-denominated, represented 13% and 23% of PMCCs investments in finance leases at December 31, 2011 and 2010, 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, 2011 were as follows:
(in millions) | Leveraged Leases |
Direct Leases |
Total | |||||||||
2012 |
$ | 108 | $ | 45 | $ | 153 | ||||||
2013 |
158 | 45 | 203 | |||||||||
2014 |
243 | 45 | 288 | |||||||||
2015 |
335 | 335 | ||||||||||
2016 |
149 | 149 | ||||||||||
Thereafter |
2,933 | 27 | 2,960 | |||||||||
Total |
$ | 3,926 | $ | 162 | $ | 4,088 | ||||||
Included in net revenues for the years ended December 31, 2011, 2010 and 2009, were leveraged lease revenues of $(314) million, which includes a reduction to cumulative lease earnings of $490 million as a result of the PMCC Leveraged Lease Charge, $160 million and $341 million, respectively, and direct finance lease revenues of $1 million, $1 million and $7 million, respectively. Income tax (benefit) expense, excluding interest on tax underpayments, on leveraged lease revenues for the years ended December 31, 2011, 2010 and 2009, was $(112) million, $58 million and $119 million, respectively.
24 |
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, 2011, 2010 and 2009.
PMCC maintains an allowance for losses, which provides for estimated losses on its investments in finance leases. PMCCs 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 PMCCs allowance for losses.
PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. PMCC believes that, as of December 31, 2011, the allowance for losses of $227 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.
The activity in the allowance for losses on finance assets for the years ended December 31, 2011, 2010 and 2009 was as follows:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Balance at beginning of year |
$ | 202 | $ | 266 | $ | 304 | ||||||
Increase to allowance |
25 | 15 | ||||||||||
Amounts written-off |
(64 | ) | (53 | ) | ||||||||
Balance at end of year |
$ | 227 | $ | 202 | $ | 266 | ||||||
PMCC leases 28 aircraft to American Airlines, Inc. (American), which filed for bankruptcy on November 29, 2011. As of the date of the bankruptcy filing, PMCC stopped recording income on its $140 million investment in finance leases from American. The leases could be rejected, restructured or, where applicable, foreclosed upon by the debtholders which would result in a write-off of the related investment in finance lease balance against PMCCs allowance for losses. Should foreclosure occur, PMCC would be subject to an acceleration of deferred taxes of approximately $22 million. After assessing its allowance for losses, including the impact of the American bankruptcy filing, PMCC increased the allowance for losses by $60 million during the fourth quarter of 2011. With the exception of American, all PMCC lessees were current on their lease payment obligations as of December 31, 2011.
During the third quarter of 2011, PMCC determined that its allowance for losses exceeded the amount required based on its assessment of the credit quality of the leasing portfolio at that time including reductions in exposure to below investment grade lessees. As a result, the allowance for losses was reduced by $35 million.
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 PMCCs 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 GMs 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 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 PMCCs 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, 2011 and 2010, PMCCs investment in finance leases from New GM was $101 million.
During 2009, PMCC increased its allowance for losses by $15 million based on managements assessment of its portfolio, including its exposure to GM.
The credit quality of PMCCs investments in finance leases as assigned by Standard & Poors Rating Services (Standard & Poors) and Moodys Investor Service, Inc. (Moodys) at December 31, 2011 and 2010 was as follows:
(in millions) | 2011 | 2010 | ||||||
Credit Rating by Standard & Poors/Moodys: |
||||||||
AAA/Aaa to A-/A3 |
$ | 1,570 | $ | 2,343 | ||||
BBB+/Baa1 to BBB-/Baa3 |
1,080 | 1,148 | ||||||
BB+/Ba1 and Lower |
1,136 | 1,213 | ||||||
Total |
$ | 3,786 | $ | 4,704 | ||||
25 |
Note 9.
Short-Term Borrowings and Borrowing Arrangements:
At December 31, 2011 and December 31, 2010, Altria Group, Inc. had no short-term borrowings. The credit line available to Altria Group, Inc. at December 31, 2011 was $3.0 billion.
On June 30, 2011, Altria Group, Inc. entered into a senior unsecured 5-year revolving credit agreement (the Credit Agreement). The Credit Agreement provides for borrowings up to an aggregate principal amount of $3.0 billion and expires on June 30, 2016. The Credit Agreement replaced Altria Group, Inc.s $0.6 billion senior unsecured 364-day revolving credit agreement, which was to expire on November 16, 2011 (the 364-Day Agreement), and Altria Group, Inc.s $2.4 billion senior unsecured 3-year revolving credit agreement, which was to expire on November 20, 2012 (together with the 364-Day Agreement, the Terminated Agreements). The Terminated Agreements were terminated effective June 30, 2011. Pricing for interest and fees under the Credit Agreement 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 Credit Agreement are expected to 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 & Poors and Moodys. The applicable minimum and maximum rates based on Altria Group, Inc.s long-term senior unsecured debt ratings at December 31, 2011 for borrowings under the Credit Agreement are 0.75% and 1.75%, respectively. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral.
The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.s commercial paper issuances. As in the Terminated Agreements, the Credit Agreement requires 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, 2011, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.9 to 1.0 and 6.4 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms consolidated EBITDA, debt and consolidated interest expense, as defined in the Credit Agreement, include certain adjustments.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA (see Note 20. Condensed Consolidating Financial Information).
Long-Term Debt:
At December 31, 2011 and 2010, Altria Group, Inc.s long-term debt, all of which was consumer products debt, consisted of the following:
(in millions) | 2011 | 2010 | ||||||
Notes, 4.125% to 10.20%, interest payable semi-annually |
$ | 13,647 | $ | 12,152 | ||||
Debenture, 7.75% due 2027, interest payable semi-annually |
42 | 42 | ||||||
13,689 | 12,194 | |||||||
Less current portion of long-term debt |
600 | |||||||
$ | 13,089 | $ | 12,194 | |||||
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 |
4,542 | 4,542 | ||||||||||
Altria Group, Inc.s estimate of the fair value of its debt is based on observable market information from a third party pricing source. The aggregate fair value of Altria Group, Inc.s total long-term debt at December 31, 2011, was $17.7 billion, as compared with its carrying value of $13.7 billion. The aggregate fair value 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.
n Altria Group, Inc. Senior Notes: On May 5, 2011, Altria Group, Inc. issued $1.5 billion (aggregate principal amount) of 4.75% senior unsecured long-term notes due May 5, 2021, with interest payable semi-annually. The net proceeds from the issuances of these senior unsecured notes were added to Altria Group, Inc.s general funds and used for general corporate purposes.
The notes of Altria Group, Inc. are senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.s existing and future senior unsecured indebtedness. With respect to $12,725 million (aggregate principal amount) of Altria Group, Inc.s senior unsecured long-term notes that were issued from 2008 to 2011, 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 Moodys, Standard & Poors and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be
26 |
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 $10,225 million (aggregate principal amount) of senior unsecured long-term notes issued in 2008 and 2009, 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 Moodys or Standard & Poors 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 guaranteed by PM USA (see Note 20. Condensed Consolidating Financial Information).
n UST Senior Notes: As discussed in Note 3. UST Acquisition, the purchase price for the acquisition of UST included $900 million (aggregate principal amount) of long-term debt consisting of notes that are senior unsecured obligations and rank equally in right of payment with all of USTs existing and future senior unsecured and unsubordinated indebtedness. With respect to $300 million (aggregate principal amount) of the UST 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 Moodys and Standard & Poors 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.
Note 11.
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,
|
2,805,961,317 | (744,589,733 | ) | 2,061,371,584 | ||||||||||||
Exercise of stock |
14,657,060 | 14,657,060 | ||||||||||||||
Balances, |
2,805,961,317 | (729,932,673 | ) | 2,076,028,644 | ||||||||||||
Exercise of stock |
12,711,022 | 12,711,022 | ||||||||||||||
Balances, |
2,805,961,317 | (717,221,651 | ) | 2,088,739,666 | ||||||||||||
Exercise of stock |
5,004,502 | 5,004,502 | ||||||||||||||
Repurchases of |
(49,324,883 | ) | (49,324,883 | ) | ||||||||||||
Balances, |
2,805,961,317 | (761,542,032 | ) | 2,044,419,285 | ||||||||||||
At December 31, 2011, 48,822,217 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 12.
Stock Plans:
Under the Altria Group, Inc. 2010 Performance Incentive Plan (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, 2011, were 47,880,823 and 658,731 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 for the years ended December 31, 2011, 2010 and 2009 of $47 million, $44 million and $61 million, respectively. The deferred tax benefit recorded related to this compensation expense was $18 million, $16 million and $24 million for the years ended December 31, 2011, 2010 and 2009, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $67 million at December 31, 2011 and is expected to be recognized over a weighted-average period of approximately 2 years.
Altria Group, Inc.s restricted stock and deferred stock activity was as follows for the year ended December 31, 2011:
Number of Shares |
Weighted-Average Grant Date Fair Value |
|||||||
Balance at December 31, 2010 |
8,765,598 | $ | 19.72 | |||||
Granted |
2,216,160 | 24.34 | ||||||
Vested |
(2,259,327 | ) | 22.41 | |||||
Forfeited |
(312,015 | ) | 20.84 | |||||
Balance at December 31, 2011 |
8,410,416 | 20.17 | ||||||
27 |
The weighted-average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, 2011, 2010 and 2009 was $54 million, $53 million and $95 million, respectively, or $24.34, $19.90 and $16.71 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, 2011, 2010 and 2009 was $56 million, $33 million and $46 million, respectively.
Stock Option Plan
Altria Group, Inc. has not granted stock options to employees since 2002.
Altria Group, Inc. stock option activity was as follows for the year ended December 31, 2011:
Shares Subject to |
Weighted- Exercise |
Average Remaining Term |
Aggregate Value |
|||||||||||||
Balance at December 31, 2010 |
2,675,593 | $ | 10.95 | |||||||||||||
Options exercised |
(2,637,038 | ) | 10.95 | |||||||||||||
Options canceled |
(33,965 | ) | 10.23 | |||||||||||||
Balance/Exercisable at December 31, 2011 |
4,590 | 12.48 | 4 months | $ | 79 thousand | |||||||||||
The aggregate intrinsic value shown in the table above was based on the December 31, 2011 closing price for Altria Group, Inc.s common stock of $29.65. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $37 million, $110 million and $87 million, respectively.
Note 13.
Earnings per Share:
Basic and diluted earnings per share (EPS) were calculated using the following:
For the Years Ended December 31, | ||||||||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 3,390 | $ | 3,905 | $ | 3,206 | ||||||||||||
Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares |
(13 | ) | (15 | ) | (11 | ) | ||||||||||||
Earnings for basic and diluted EPS |
$ | 3,377 | $ | 3,890 | $ | 3,195 | ||||||||||||
Weighted-average shares for basic EPS |
2,064 | 2,077 | 2,066 | |||||||||||||||
Add: Incremental shares from stock options |
2 | 5 | ||||||||||||||||
Weighted-average shares for diluted EPS |
2,064 | 2,079 | 2,071 | |||||||||||||||
For the 2011 and 2010 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.
28 |
Note 14.
Accumulated Other Comprehensive Losses:
The following table sets forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:
(in millions) | Currency Translation Adjustments |
Changes in Net Loss and Prior Service Cost |
Ownership Share of SABMillers Other |
Accumulated Other |
||||||||||||
Balances, December 31, 2008 |
$ | | $ | (2,221 | ) | $ | 40 | $ | (2,181 | ) | ||||||
Period change, before income taxes |
3 | 611 | 372 | 986 | ||||||||||||
Deferred income taxes |
(236 | ) | (130 | ) | (366 | ) | ||||||||||
Balances, December 31, 2009 |
3 | (1,846 | ) | 282 | (1,561 | ) | ||||||||||
Period change, before income taxes |
1 | 58 | 63 | 122 | ||||||||||||
Deferred income taxes |
(23 | ) | (22 | ) | (45 | ) | ||||||||||
Balances, December 31, 2010 |
4 | (1,811 | ) | 323 | (1,484 | ) | ||||||||||
Period change, before income taxes |
(2 | ) | (415 | ) | (231 | ) | (648 | ) | ||||||||
Deferred income taxes |
164 | 81 | 245 | |||||||||||||
Balances, December 31, 2011 |
$ | 2 | $ | (2,062 | ) | $ | 173 | $ | (1,887 | ) | ||||||
Income Taxes:
Earnings before income taxes, and provision for income taxes consisted of the following for the years ended December 31, 2011, 2010 and 2009:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Earnings before income taxes: |
||||||||||||
United States |
$ | 5,568 | $ | 5,709 | $ | 4,868 | ||||||
Outside United States |
14 | 14 | 9 | |||||||||
Total |
$ | 5,582 | $ | 5,723 | $ | 4,877 | ||||||
Provision for income taxes: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | 2,353 | $ | 1,430 | $ | 1,512 | ||||||
State and local |
275 | 258 | 111 | |||||||||
Outside United States |
4 | 4 | 3 | |||||||||
2,632 | 1,692 | 1,626 | ||||||||||
Deferred: |
||||||||||||
Federal |
(458 | ) | 120 | (14 | ) | |||||||
State and local |
15 | 4 | 57 | |||||||||
(443 | ) | 124 | 43 | |||||||||
Total provision for income taxes |
$ | 2,189 | $ | 1,816 | $ | 1,669 | ||||||
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 Internal Revenue Service (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 4 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, 2011, 2010 and 2009 was as follows:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Balance at beginning of year |
$ | 399 | $ | 601 | $ | 669 | ||||||
Additions based on tax positions related to the current year |
22 | 21 | 15 | |||||||||
Additions for tax positions of prior years |
71 | 30 | 34 | |||||||||
Reductions for tax positions due to lapse of statutes of limitations |
(39 | ) | (58 | ) | (22 | ) | ||||||
Reductions for tax positions of prior years |
(67 | ) | (164 | ) | (87 | ) | ||||||
Settlements |
(5 | ) | (31 | ) | (8 | ) | ||||||
Balance at end of year |
$ | 381 | $ | 399 | $ | 601 | ||||||
29 |
Unrecognized tax benefits and Altria Group, Inc.s consolidated liability for tax contingencies at December 31, 2011 and 2010, were as follows:
(in millions) | 2011 | 2010 | ||||||
Unrecognized tax benefits Altria Group, Inc. |
$ | 191 | $ | 220 | ||||
Unrecognized tax benefits Kraft |
112 | 101 | ||||||
Unrecognized tax benefits PMI |
78 | 78 | ||||||
Unrecognized tax benefits |
381 | 399 | ||||||
Accrued interest and penalties |
618 | 261 | ||||||
Tax credits and other indirect benefits |
(211 | ) | (85 | ) | ||||
Liability for tax contingencies |
$ | 788 | $ | 575 | ||||
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2011 was $350 million, along with $31 million affecting deferred taxes. However, the impact on net earnings at December 31, 2011 would be $160 million, as a result of receivables from Altria Group, Inc.s former subsidiaries Kraft Foods Inc. (Kraft) and Philip Morris International Inc. (PMI) of $112 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, 2010 was $360 million, along with $39 million affecting deferred taxes. However, the impact on net earnings at December 31, 2010 would be $181 million, as a result of receivables from Kraft and PMI of $101 million and $78 million, respectively, discussed below.
Under tax sharing agreements entered into in connection with the 2007 and 2008 spin-offs between Altria Group, Inc. and its former subsidiaries Kraft and PMI, respectively, Kraft and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Krafts and PMIs pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns. As a result, at December 31, 2011, Altria Group, Inc. continues to include the pre-spin-off federal income tax reserves of Kraft and PMI of $112 million and $78 million, respectively, in its liability for uncertain tax positions, and also includes corresponding receivables from Kraft and PMI of $112 million and $78 million, respectively, in its assets.
In the fourth quarter of 2011, the IRS, Kraft and Altria Group, Inc. executed a closing agreement that resolved certain Kraft tax matters arising out of the IRSs examination of Altria Group, Inc.s consolidated federal income tax returns for the years ended 2004-2006. As a result of this closing agreement in the fourth quarter of 2011, Altria Group, Inc. recorded an income tax benefit of $12 million attributable to the reversal of federal income tax reserves and associated interest related to the resolution of certain Kraft tax matters.
As discussed in Note 19. Contingencies, Altria Group, Inc. and the IRS executed a closing agreement during the second quarter of 2010 in connection with the IRSs 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. During the first quarter of 2011, Altria Group, Inc. filed claims for a refund of the approximately $945 million paid to the IRS. The IRS disallowed the claims during the third quarter of 2011. In addition, 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. 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 $12 million, $169 million and $88 million, for the years ended December 31, 2011, 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 for the years ended December 31, 2011, 2010, and 2009, respectively. In addition, during 2011, Altria Group, Inc. recorded an additional tax provision and associated interest of $26 million related to various tax matters for Kraft. This additional tax provision was offset by an increase to the corresponding receivable from Kraft, which was recorded as an increase to operating income on Altria Group, Inc.s consolidated statement of earnings for the year ended December 31, 2011. For the years ended December 31, 2011, 2010 and 2009, there was no impact on Altria Group, Inc.s net earnings associated with the Kraft and PMI tax matters discussed above.
Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2011, Altria Group, Inc. had $618 million of accrued interest and penalties, of which approximately $39 million and $21 million related to Kraft and PMI, respectively, for which Kraft and PMI are responsible under their respective tax sharing agreements. 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. The corresponding receivables from Kraft and PMI are included in assets on Altria Group, Inc.s consolidated balance sheets at December 31, 2011 and 2010.
For the years ended December 31, 2011, 2010 and 2009, Altria Group, Inc. recognized in its consolidated statements of earnings $496 million, $(69) million and $3 million, respectively, of gross interest expense (income) associated with uncertain tax positions, which in 2011 primarily relates to the PMCC Leveraged Lease Charge.
30 |
Altria Group, Inc. is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, since such timing is not entirely within the control of Altria Group, Inc. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $250 million, the majority of which would relate to the unrecognized tax benefits of Kraft and PMI, for which Altria Group, Inc. is indemnified.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2011, 2010 and 2009:
2011 | 2010 | 2009 | ||||||||||
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 |
3.8 | 3.7 | 2.4 | |||||||||
Uncertain tax positions |
5.5 | (2.3 | ) | (0.6 | ) | |||||||
SABMiller dividend benefit |
(2.0 | ) | (2.3 | ) | (2.4 | ) | ||||||
Domestic manufacturing deduction |
(2.4 | ) | (2.4 | ) | (1.5 | ) | ||||||
Other |
(0.7 | ) | 1.3 | |||||||||
Effective tax rate |
39.2 | % | 31.7 | % | 34.2 | % | ||||||
The tax provision in 2011 includes a $312 million charge that primarily represents a permanent charge for interest, net of income tax benefit, on tax underpayments, associated with the previously discussed PMCC Leveraged Lease Charge which was recorded during the second quarter of 2011 and is reflected in uncertain tax positions above. The tax provision in 2011 also includes tax benefits of $77 million primarily attributable to the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. 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 tax benefit of $53 million from the utilization of net operating losses in the third 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, 2011 and 2010:
(in millions) | 2011 | 2010 | ||||||
Deferred income tax assets: |
||||||||
Accrued postretirement and postemployment benefits |
$ | 1,087 | $ | 1,045 | ||||
Settlement charges |
1,382 | 1,393 | ||||||
Accrued pension costs |
458 | 395 | ||||||
Net operating losses and tax credit carryforwards |
96 | 87 | ||||||
Total deferred income tax assets |
3,023 | 2,920 | ||||||
Deferred income tax liabilities: |
||||||||
Property, plant and equipment |
(511 | ) | (425 | ) | ||||
Intangible assets |
(3,721 | ) | (3,655 | ) | ||||
Investment in SABMiller |
(1,803 | ) | (1,758 | ) | ||||
Other |
(251 | ) | (296 | ) | ||||
Total deferred income tax liabilities |
(6,286 | ) | (6,134 | ) | ||||
Valuation allowances |
(82 | ) | (39 | ) | ||||
Net deferred income tax liabilities |
$ | (3,345 | ) | $ | (3,253 | ) | ||
Financial services deferred income tax liabilities of $2,811 million and $3,880 million at December 31, 2011 and 2010, respectively, are not included in the table above. These amounts, which are primarily attributable to temporary differences relating to net investments in finance leases, are included in total financial services liabilities on Altria Group, Inc.s consolidated balance sheets at December 31, 2011 and 2010.
At December 31, 2011, Altria Group, Inc. had estimated state tax net operating losses of $1,267 million that, if unutilized, will expire in 2012 through 2031, state tax credit carryforwards of $78 million which, if unutilized, will expire in 2014 through 2017, and foreign tax credit carryforwards of $31 million which, if unutilized, will expire in 2020 through 2021. A valuation allowance is recorded against certain state net operating losses and tax credit carryforwards due to uncertainty regarding their utilization.
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/or 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.
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Altria Group, Inc.s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (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 4. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.
Segment data were as follows:
For the Years Ended December 31, | ||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Net revenues: |
||||||||||||
Cigarettes |
$ | 21,403 | $ | 21,631 | $ | 20,919 | ||||||
Smokeless products |
1,627 | 1,552 | 1,366 | |||||||||
Cigars |
567 | 560 | 520 | |||||||||
Wine |
516 | 459 | 403 | |||||||||
Financial services |
(313 | ) | 161 | 348 | ||||||||
Net revenues |
$ | 23,800 | $ | 24,363 | $ | 23,556 | ||||||
Earnings before income taxes: |
||||||||||||
Operating companies income (loss): |
||||||||||||
Cigarettes |
$ | 5,574 | $ | 5,451 | $ | 5,055 | ||||||
Smokeless products |
859 | 803 | 381 | |||||||||
Cigars |
163 | 167 | 176 | |||||||||
Wine |
91 | 61 | 43 | |||||||||
Financial services |
(349 | ) | 157 | 270 | ||||||||
Amortization of intangibles |
(20 | ) | (20 | ) | (20 | ) | ||||||
General corporate expenses |
(256 | ) | (216 | ) | (204 | ) | ||||||
Changes to Kraft and PMI tax-related receivables |
14 | (169 | ) | (88 | ) | |||||||
UST acquisition-related transaction costs |
(60 | ) | ||||||||||
Corporate asset impairment and exit costs |
(8 | ) | (6 | ) | (91 | ) | ||||||
Operating income |
6,068 | 6,228 | 5,462 | |||||||||
Interest and other debt expense, net |
(1,216 | ) | (1,133 | ) | (1,185 | ) | ||||||
Earnings from equity investment in SABMiller |
730 | 628 | 600 | |||||||||
Earnings before income taxes |
$ | 5,582 | $ | 5,723 | $ | 4,877 | ||||||
PM USA, USSTC and Middletons largest customer, McLane Company, Inc., accounted for approximately 27%, 27% and 26% of Altria Group, Inc.s consolidated net revenues for the years ended December 31, 2011, 2010 and 2009, respectively. These net revenues were reported in the cigarettes, smokeless products and cigars segments. Sales to three distributors accounted for approximately 66%, 65% and 64% of net revenues for the wine segment for the years ended December 31, 2011, 2010 and 2009, respectively.
Items affecting the comparability of net revenues and/or operating companies income (loss) for the segments were as follows:
n Asset impairment, exit, implementation and integration costs: See Note 5. Asset Impairment, Exit, Implementation and Integration Costs for a breakdown of these costs by segment.
n PMCC Leveraged Lease Charge: During 2011, Altria Group, Inc. recorded the PMCC Leveraged Lease Charge, which included a pre-tax charge of $490 million that was recorded as a decrease to PMCCs net revenues and operating companies income (see Note 8. Finance Assets, net, Note 15. Income Taxes and Note 19. Contingencies for further discussion of matters related to this charge).
n PMCC allowance for losses: During 2011, PMCC increased its allowance for losses by $25 million due primarily to Americans bankruptcy filing. During 2009, PMCC increased its allowance for losses by $15 million based on managements assessment of its portfolio including its exposure to GM. See Note 8. Finance Assets, net.
n Tobacco and health judgments: During 2011, Altria Group, Inc. recorded pre-tax charges of $98 million, excluding accrued interest, related to tobacco and health judgments in the Williams, Bullock and Scott cases. These charges are reflected in the cigarettes segment. During 2010, Altria Group, Inc. recorded pre-tax charges of $16 million, excluding accrued interest, related to certain tobacco and health judgments (including a settlement of $5 million) which are reflected in the cigarettes ($11 million) and smokeless products ($5 million) segments. See Note 19. Contingencies.
For the Years Ended December 31, | ||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Depreciation expense: |
||||||||||||
Cigarettes |
$ | 142 | $ | 164 | $ | 168 | ||||||
Smokeless products |
31 | 32 | 41 | |||||||||
Cigars |
3 | 3 | 2 | |||||||||
Wine |
25 | 23 | 22 | |||||||||
Corporate |
32 | 34 | 38 | |||||||||
Total depreciation expense |
$ | 233 | $ | 256 | $ | 271 | ||||||
Capital expenditures: |
||||||||||||
Cigarettes |
$ | 26 | $ | 54 | $ | 147 | ||||||
Smokeless products |
24 | 19 | 18 | |||||||||
Cigars |
20 | 16 | 4 | |||||||||
Wine |
25 | 22 | 24 | |||||||||
Corporate |
10 | 57 | 80 | |||||||||
Total capital expenditures |
$ | 105 | $ | 168 | $ | 273 | ||||||
Effective with the first quarter of 2012, Altria Group, Inc. will revise its reportable segments based on changes in the way in which Altria Group, Inc.s chief operating decision maker reviews the business. These changes relate to the restructuring associated with the 2011 Cost Reduction
32 |
Program (see Note 5. Asset Impairment, Exit, Implementation and Integration Costs), specifically the combination of the former cigars and cigarettes segments and evaluation of their operating results as a single smokeable products segment. Beginning in the first quarter of 2012, Altria Group, Inc.s reportable segments will be smokeable products, smokeless products, wine and financial services.
Benefit Plans:
Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.
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, 2011 and 2010, were as follows:
(in millions) | 2011 | 2010 | ||||||
Projected benefit obligation at beginning of year |
$ | 6,439 | $ | 6,075 | ||||
Service cost |
74 | 80 | ||||||
Interest cost |
351 | 356 | ||||||
Benefits paid |
(371 | ) | (375 | ) | ||||
Actuarial losses |
460 | 287 | ||||||
Termination |
39 | |||||||
Curtailment |
(22 | ) | ||||||
Other |
(5 | ) | 16 | |||||
Projected benefit obligation at end of year |
6,965 | 6,439 | ||||||
Fair value of plan assets at beginning of year |
5,218 | 4,870 | ||||||
Actual return on plan assets |
188 | 667 | ||||||
Employer contributions |
240 | 30 | ||||||
Funding of UST plans |
26 | |||||||
Benefits paid |
(371 | ) | (375 | ) | ||||
Fair value of plan assets at end of year |
5,275 | 5,218 | ||||||
Net pension liability recognized at December 31 |
$ | (1,690 | ) | $ | (1,221 | ) | ||
The net pension liability recognized in Altria Group, Inc.s consolidated balance sheets at December 31, 2011 and 2010, was as follows:
(in millions) | 2011 | 2010 | ||||||
Other accrued liabilities |
$ | (28 | ) | $ | (30 | ) | ||
Accrued pension costs |
(1,662 | ) | (1,191 | ) | ||||
$ | (1,690 | ) | $ | (1,221 | ) | |||
The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $6.6 billion and $6.1 billion at December 31, 2011 and 2010, respectively.
At December 31, 2011 and 2010, 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:
2011 | 2010 | |||||||
Discount rate |
5.0 | % | 5.5 | % | ||||
Rate of compensation increase |
4.0 | 4.0 | ||||||
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, 2011, 2010 and 2009:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Service cost |
$ | 74 | $ | 80 | $ | 96 | ||||||
Interest cost |
351 | 356 | 349 | |||||||||
Expected return on plan assets |
(422 | ) | (421 | ) | (429 | ) | ||||||
Amortization: |
||||||||||||
Net loss |
171 | 126 | 119 | |||||||||
Prior service cost |
14 | 13 | 12 | |||||||||
Termination, settlement and curtailment |
41 | 12 | ||||||||||
Net periodic pension cost |
$ | 229 | $ | 154 | $ | 159 | ||||||
During 2011 and 2009, termination, settlement and curtailment shown in the table above primarily reflect termination benefits, partially offset in 2009 by curtailment gains related to Altria Group, Inc.s restructuring programs. For more information on Altria Group, Inc.s restructuring programs, see Note 5. Asset Impairment, Exit, Implementation and Integration Costs.
33 |
The amounts included in termination, settlement and curtailment in the table above for the years ended December 31, 2011 and 2009 were comprised of the following changes:
(in millions) | 2011 | 2009 | ||||||
Benefit obligation |
$ | 39 | $ | 9 | ||||
Other comprehensive earnings/losses: |
||||||||
Net losses |
3 | |||||||
Prior service cost |
2 | |||||||
$ | 41 | $ | 12 | |||||
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 2012 are $224 million and $10 million, respectively.
The following weighted-average assumptions were used to determine Altria Group, Inc.s net pension cost for the years ended December 31:
2011 | 2010 | 2009 | ||||||||||
Discount rate |
5.5 | % | 5.9 | % | 6.1 | % | ||||||
Expected rate of return on plan assets |
8.0 | 8.0 | 8.0 | |||||||||
Rate of compensation increase |
4.0 | 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 earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $106 million, $108 million and $106 million in 2011, 2010 and 2009, respectively.
Plan Assets
Altria Group, Inc.s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. Accordingly, the composition of Altria Group, Inc.s plan assets at December 31, 2011 was broadly characterized as an allocation between equity securities (53%), corporate bonds (23%), U.S. Treasury and Foreign Government securities (17%) and all other types of investments (7%). Virtually all pension assets can be used to make monthly benefit payments.
Altria Group, Inc.s pension plans investment strategy is accomplished by investing in U.S. and international equity commingled funds which are intended to mirror indices such as the Standard & Poors 500 Index, Russell Small Cap Completeness Index, Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index, and MSCI Emerging Markets Index. Altria Group, Inc.s pension plans also invest in actively managed international equity securities of large, mid, and small cap companies located in the developed markets of Europe, Australasia, and the Far East, and actively managed long duration fixed income securities that primarily include investment grade corporate bonds of companies from diversified industries, U.S. Treasuries and Treasury Inflation Protected Securities. The below investment grade securities represent 10% of the fixed income holdings or 5% of total plan assets at December 31, 2011. The allocation to emerging markets represents 4% of the equity holdings or 2% of total plan assets at December 31, 2011. The allocation to real estate and private equity investments is immaterial.
Altria Group, Inc.s pension plans risk management practices include ongoing monitoring of the asset allocation, investment performance, investment managers compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.
Altria Group, Inc.s expected rate of return on pension plan assets is determined by the plan assets historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.
The fair values of Altria Group, Inc.s pension plan assets by asset category are as follows:
Investments at Fair Value as of December 31, 2011
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Common/collective trusts: |
||||||||||||||||
U.S. large cap |
$ | | $ | 1,482 | $ | | $ | 1,482 | ||||||||
U.S. small cap |
441 | 441 | ||||||||||||||
International developed markets |
152 | 152 | ||||||||||||||
International emerging markets |
100 | 100 | ||||||||||||||
Long duration fixed income |
585 | 585 | ||||||||||||||
U.S. and foreign government securities or their agencies: |
||||||||||||||||
U.S. government and agencies |
510 | 510 | ||||||||||||||
U.S. municipal bonds |
44 | 44 | ||||||||||||||
Foreign government and agencies |
204 | 204 | ||||||||||||||
Corporate debt instruments: |
||||||||||||||||
Above investment grade |
618 | 618 | ||||||||||||||
Below investment grade and no rating |
255 | 255 | ||||||||||||||
Common stock: |
||||||||||||||||
International equities |
550 | 550 | ||||||||||||||
U.S. equities |
21 | 21 | ||||||||||||||
Registered investment companies |
124 | 63 | 187 | |||||||||||||
U.S. and foreign cash and cash equivalents |
42 | 4 | 46 | |||||||||||||
Asset backed securities |
49 | 49 | ||||||||||||||
Other, net |
16 | 2 | 13 | 31 | ||||||||||||
Total investments at fair value, net |
$ | 753 | $ | 4,509 | $ | 13 | $ | 5,275 | ||||||||
34 |
Investments at Fair Value as of December 31, 2010
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Common/collective trusts: |
||||||||||||||||
U.S. large cap |
$ | | $ | 1,431 | $ | | $ | 1,431 | ||||||||
U.S. small cap |
533 | 533 | ||||||||||||||
International developed markets |
177 | 177 | ||||||||||||||
International emerging markets |
123 | 123 | ||||||||||||||
Long duration fixed income |
479 | 479 | ||||||||||||||
Other |
125 | 125 | ||||||||||||||
U.S. and foreign government securities or their agencies: |
||||||||||||||||
U.S. government and agencies |
440 | 440 | ||||||||||||||
U.S. municipal bonds |
32 | 32 | ||||||||||||||
Foreign government and agencies |
308 | 308 | ||||||||||||||
Corporate debt instruments: |
||||||||||||||||
Above investment grade |
488 | 488 | ||||||||||||||
Below investment grade and no rating |
178 | 178 | ||||||||||||||
Common stock: |
||||||||||||||||
International equities |
542 | 542 | ||||||||||||||
U.S. equities |
24 | 24 | ||||||||||||||
Registered investment companies |
152 | 62 | 214 | |||||||||||||
U.S. and foreign cash and cash equivalents |
38 | 6 | 44 | |||||||||||||
Asset backed securities |
48 | 48 | ||||||||||||||
Other, net |
8 | 11 | 13 | 32 | ||||||||||||
Total investments at fair value, net |
$ | 764 | $ | 4,441 | $ | 13 | $ | 5,218 | ||||||||
Level 3 holdings are immaterial to total plan assets at December 31, 2011 and 2010.
For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.
Following is a description of the valuation methodologies used for investments measured at fair value, including the general classification of such investments pursuant to the fair value hierarchy.
n Common/Collective Trusts: Common/collective trusts consist of pools of investments used by institutional investors to obtain exposure to equity and fixed income markets by investing in equity index funds which are intended to mirror indices such as Standard & Poors 500 Index, Russell Small Cap Completeness Index, State Street Global Advisors Fundamental Index, MSCI EAFE Index, MSCI Emerging Markets Index, and an actively managed long duration fixed income fund. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value (NAV) as provided by the investment account manager and are classified in level 2 of the fair value hierarchy. These common/collective trusts have defined redemption terms which vary from two day prior notice to semi-monthly openings for redemption. There are no other restrictions on redemption at December 31, 2011.
n U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities, investment grade municipal securities and unrated or non-investment grade municipal securities. Government securities, which are traded in a non-active over-the-counter market, are valued at a price which is based on a broker quote, and are classified in level 2 of the fair value hierarchy.
n Corporate Debt Instruments: Corporate debt instruments are valued at a price which is based on a compilation of primarily observable market information or a broker quote in a non-active over-the-counter market, and are classified in level 2 of the fair value hierarchy.
n Common Stocks: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date, and are classified in level 1 of the fair value hierarchy.
n Registered Investment Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in level 1 of the fair value hierarchy. Registered investment company funds which are designed specifically to meet Altria Group, Inc.s pension plans investment strategies but are not traded on an active market are valued based on the NAV of the underlying securities as provided by the investment account manager on the last business day of the period and are classified in level 2 of the fair value hierarchy. The registered investment company funds measured at NAV have daily liquidity and are not subject to any redemption restrictions at December 31, 2011.
n U.S. and Foreign Cash & Cash Equivalents: Cash and cash equivalents are valued at cost that approximates fair value, and are classified in level 1 of the fair value hierarchy. Cash collateral for forward contracts on U.S. Treasury notes, which approximates fair value, is classified in level 2 of the fair value hierarchy.
n Asset Backed Securities: Asset backed securities are fixed income securities such as mortgage backed securities and auto loans that are collateralized by pools of underlying assets that are unable to be sold individually. They are valued at a price which is based on a compilation of primarily observable market information or a broker quote in a non-active over-the-counter market, and are classified in level 2 of the fair value hierarchy.
Cash Flows
Altria Group, Inc. makes contributions to the extent that they are tax deductible, and to pay benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. On January 3, 2012, Altria Group, Inc. made a
35 |
voluntary $500 million contribution to its pension plans. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans of approximately $25 million to $50 million in 2012 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.
The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, 2011, are as follows:
(in millions) | ||||
2012 |
$ | 386 | ||
2013 |
393 | |||
2014 |
416 | |||
2015 |
412 | |||
2016 |
418 | |||
2017 - 2021 |
2,191 | |||
Postretirement Benefit Plans
Net postretirement health care costs consisted of the following for the years ended December 31, 2011, 2010 and 2009:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Service cost |
$ | 34 | $ | 29 | $ | 33 | ||||||
Interest cost |
139 | 135 | 125 | |||||||||
Amortization: |
||||||||||||
Net loss |
39 | 32 | 36 | |||||||||
Prior service credit |
(21 | ) | (21 | ) | (9 | ) | ||||||
Termination and curtailment |
(4 | ) | 40 | |||||||||
Net postretirement health care costs |
$ | 187 | $ | 175 | $ | 225 | ||||||
During 2011 and 2009, termination and curtailment shown in the table above primarily reflects termination benefits and curtailment gains/losses related to Altria Group, Inc.s restructuring programs. For further information on Altria Group, Inc.s restructuring programs, see Note 5. Asset Impairment, Exit, Implementation and Integration Costs.
The amounts included in termination and curtailment shown in the table above for the years ended December 31, 2011 and 2009 were comprised of the following changes:
(in millions) | 2011 | 2009 | ||||||
Accrued postretirement health care costs |
$ | 11 | $ | 40 | ||||
Other comprehensive earnings/losses: |
||||||||
Prior service credit |
(15 | ) | ||||||
$ | (4 | ) | $ | 40 | ||||
For the postretirement benefit plans, the estimated net loss and prior service credit that are expected to be amortized from accumulated other comprehensive losses into net postretirement health care costs during 2012 are $49 million and $(47) million, respectively.
The following assumptions were used to determine Altria Group, Inc.s net postretirement cost for the years ended December 31:
2011 | 2010 | 2009 | ||||||||||
Discount rate |
5.5 | % | 5.8 | % | 6.1 | % | ||||||
Health care cost trend rate |
8.0 | 7.5 | 8.0 | |||||||||
Altria Group, Inc.s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, 2011 and 2010, were as follows:
(in millions) | 2011 | 2010 | ||||||
Accrued postretirement health care costs at beginning of year |
$ | 2,548 | $ | 2,464 | ||||
Service cost |
34 | 29 | ||||||
Interest cost |
139 | 135 | ||||||
Benefits paid |
(136 | ) | (118 | ) | ||||
Plan amendments |
(282 | ) | (58 | ) | ||||
Assumption changes |
124 | |||||||
Actuarial losses/(gains) |
191 | (28 | ) | |||||
Termination and curtailment |
11 | |||||||
Accrued postretirement health care costs at end of year |
$ | 2,505 | $ | 2,548 | ||||
The current portion of Altria Group, Inc.s accrued postretirement health care costs of $146 million at December 31, 2011 and 2010, is included in other accrued liabilities on the consolidated balance sheets.
The Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2018, including the imposition of an excise tax on high cost health care plans effective 2018. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.s accumulated postretirement benefit obligation at December 31, 2011 and 2010. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, further adjustments to Altria Group, Inc.s accumulated postretirement benefit obligation may be necessary in the future.
The following assumptions were used to determine Altria Group, Inc.s postretirement benefit obligations at December 31:
2011 | 2010 | |||||||
Discount rate |
4.9 | % | 5.5 | % | ||||
Health care cost trend rate assumed for next year |
8.0 | 8.0 | ||||||
Ultimate trend rate |
5.0 | 5.0 | ||||||
Year that the rate reaches the ultimate trend rate |
2018 | 2017 | ||||||
36 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2011:
One-Percentage-Point Increase |
One-Percentage-Point Decrease |
|||||||
Effect on total of service and interest cost |
13.3% | (10.6)% | ||||||
Effect on postretirement benefit obligation |
7.9 | (6.7) | ||||||
Altria Group, Inc.s estimated future benefit payments for its postretirement health care plans at December 31, 2011, are as follows:
(in millions) | ||||
2012 |
$ | 146 | ||
2013 |
158 | |||
2014 |
167 | |||
2015 |
173 | |||
2016 |
176 | |||
2017-2021 |
851 | |||
Postemployment Benefit Plans
Altria Group, Inc. sponsors postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2011, 2010 and 2009:
(in millions) | 2011 | 2010 | 2009 | |||||||||
Service cost |
$ | 1 | $ | 1 | $ | 1 | ||||||
Interest cost |
2 | 1 | 1 | |||||||||
Amortization of net loss |
16 | 12 | 11 | |||||||||
Other |
121 | 5 | 178 | |||||||||
Net postemployment costs |
$ | 140 | $ | 19 | $ | 191 | ||||||
Other postemployment cost shown in the table above primarily reflects incremental severance costs related to Altria Group, Inc.s restructuring programs (see Note 5. Asset Impairment, Exit, Implementation and Integration Costs).
For the postemployment benefit plans, the estimated net loss that is expected to be amortized from accumulated other comprehensive losses into net postemployment costs during 2012 is approximately $18 million.
Altria Group, Inc.s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at December 31, 2011 and 2010, were as follows:
(in millions) | 2011 | 2010 | ||||||
Accrued postemployment costs at beginning of year |
$ | 151 | $ | 349 | ||||
Service cost |
1 | 1 | ||||||
Interest cost |
2 | 1 | ||||||
Benefits paid |
(48 | ) | (218 | ) | ||||
Actuarial losses and assumption changes |
43 | 13 | ||||||
Other |
121 | 5 | ||||||
Accrued postemployment costs at end of year |
$ | 270 | $ | 151 | ||||
The accrued postemployment costs were determined using a weighted-average discount rate of 2.8% and 3.8% in 2011 and 2010, respectively, an assumed weighted-average ultimate annual turnover rate of 1.0% in 2011 and 0.5% in 2010, assumed compensation cost increases of 4.0% in 2011 and 2010, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Comprehensive Earnings/Losses:
The amounts recorded in accumulated other comprehensive losses at December 31, 2011 consisted of the following:
(in millions) | Pensions | Post- retirement |
Post- employment |
Total | ||||||||||||
Net losses |
$ | (2,788 | ) | $ | (796 | ) | $ | (175 | ) | $ | (3,759 | ) | ||||
Prior service (cost) credit |
(46 | ) | 425 | 379 | ||||||||||||
Deferred income taxes |
1,104 | 146 | 68 | 1,318 | ||||||||||||
Amounts recorded in accumulated other comprehensive losses |
$ | (1,730 | ) | $ | (225 | ) | $ | (107 | ) | $ | (2,062 | ) | ||||
The amounts recorded in accumulated other comprehensive losses at December 31, 2010 consisted of the following:
(in millions) | Pensions | Post- retirement |
Post- employment |
Total | ||||||||||||
Net losses |
$ | (2,287 | ) | $ | (647 | ) | $ | (151 | ) | $ | (3,085 | ) | ||||
Prior service (cost) credit |
(62 | ) | 182 | 120 | ||||||||||||
Deferred income taxes |
914 | 180 | 60 | 1,154 | ||||||||||||
Amounts recorded in accumulated other comprehensive losses |
$ | (1,435 | ) | $ | (285 | ) | $ | (91 | ) | $ | (1,811 | ) | ||||
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The movements in other comprehensive earnings/losses during the year ended December 31, 2011 were as follows:
(in millions) | Pensions | Post- retirement |
Post- employment |
Total | ||||||||||||
Amounts transferred to earnings as components of net periodic benefit cost: |
||||||||||||||||
Amortization: |
||||||||||||||||
Net losses |
$ | 171 | $ | 39 | $ | 16 | $ | 226 | ||||||||
Prior service cost/credit |
14 | (21 | ) | (7 | ) | |||||||||||
Deferred income taxes |
(72 | ) | (7 | ) | (6 | ) | (85 | ) | ||||||||
113 | 11 | 10 | 134 | |||||||||||||
Other movements during the year: |
||||||||||||||||
Net losses |
(672 | ) | (188 | ) | (40 | ) | (900 | ) | ||||||||
Prior service cost/credit |
2 | 264 | 266 | |||||||||||||
Deferred income taxes |
262 | (27 | ) | 14 | 249 | |||||||||||
(408 | ) | 49 | (26 | ) | (385 | ) | ||||||||||
Total movements in other comprehensive earnings/losses |
$ | (295 | ) | $ | 60 | $ | (16 | ) | $ | (251 | ) | |||||
The movements in other comprehensive earnings/losses during the year ended December 31, 2010 were as follows:
(in millions) | Pensions | Post- retirement |
Post- employment |
Total | ||||||||||||
Amounts transferred to earnings as components of net periodic benefit cost: |
||||||||||||||||
Amortization: |
||||||||||||||||
Net losses |
$ | 126 | $ | 32 | $ | 12 | $ | 170 | ||||||||
Prior service cost/credit |
13 | (21 | ) | (8 | ) | |||||||||||
Deferred income taxes |
(55 | ) | (4 | ) | (4 | ) | (63 | ) | ||||||||
84 | 7 | 8 | 99 | |||||||||||||
Other movements during the year: |
||||||||||||||||
Net losses |
(41 | ) | (95 | ) | (10 | ) | (146 | ) | ||||||||
Prior service cost/credit |
(16 | ) | 58 | 42 | ||||||||||||
Deferred income taxes |
21 | 15 | 4 | 40 | ||||||||||||
(36 | ) | (22 | ) | (6 | ) | (64 | ) | |||||||||
Total movements in other comprehensive earnings/losses |
$ | 48 | $ | (15 | ) | $ | 2 | $ | 35 | |||||||
The movements in other comprehensive earnings/losses during the year ended December 31, 2009 were as follows:
(in millions) | Pensions | Post- retirement |
Post- employment |
Total | ||||||||||||
Amounts transferred to earnings as components of net periodic benefit cost: |
||||||||||||||||
Amortization: |
||||||||||||||||
Net losses |
$ | 119 | $ | 36 | $ | 11 | $ | 166 | ||||||||
Prior service cost/credit |
12 | (9 | ) | 3 | ||||||||||||
Other expense: |
||||||||||||||||
Net losses |
3 | 3 | ||||||||||||||
Deferred income taxes |
(52 | ) | (10 | ) | (4 | ) | (66 | ) | ||||||||
82 | 17 | 7 | 106 | |||||||||||||
Other movements during the year: |
||||||||||||||||
Net losses |
413 | (25 | ) | (24 | ) | 364 | ||||||||||
Prior service cost/credit |
75 | 75 | ||||||||||||||
Deferred income taxes |
(161 | ) | (19 | ) | 10 | (170 | ) | |||||||||
252 | 31 | (14 | ) | 269 | ||||||||||||
Total movements in other comprehensive earnings/losses |
$ | 334 | $ | 48 | $ | (7 | ) | $ | 375 | |||||||
Note 18.
Additional Information:
For the Years Ended December 31, | ||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Research and development expense |
$ | 128 | $ | 144 | $ | 177 | ||||||
Advertising expense |
$ | 5 | $ | 5 | $ | 6 | ||||||
Interest and other debt expense, net: |
||||||||||||
Interest expense |
$ | 1,220 | $ | 1,136 | $ | 1,189 | ||||||
Interest income |
(4 | ) | (3 | ) | (4 | ) | ||||||
$ | 1,216 | $ | 1,133 | $ | 1,185 | |||||||
Interest expense of financial services operations included in cost of sales |
$ | | $ | | $ | 20 | ||||||
Rent expense |
$ | 63 | $ | 58 | $ | 55 | ||||||
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Minimum rental commitments and sublease income under non-cancelable operating leases, including amounts associated with closed facilities primarily from the integration of UST (see Note 5. Asset Impairment, Exit, Implementation and Integration Costs), in effect at December 31, 2011, were as follows:
(in millions) | Rental Commitments |
Sublease Income |
||||||
2012 |
$ | 56 | $ | 2 | ||||
2013 |
46 | 3 | ||||||
2014 |
37 | 3 | ||||||
2015 |
25 | 4 | ||||||
2016 |
21 | 4 | ||||||
Thereafter |
110 | 29 | ||||||
$ | 295 | $ | 45 | |||||
Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 44 states now limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Floridas bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed elsewhere in this Note 19. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.
Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation
n Types and Number of Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits;
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(iv) class action suits alleging that the uses of the terms Lights and Ultra Lights constitute deceptive and unfair trade practices, common law fraud, or violations of the Racketeer Influenced and Corrupt Organizations Act (RICO); and (v) other tobacco-related litigation described below. Plaintiffs theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and Lights/Ultra Lights cases are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of December 31, 2011, December 31, 2010 and December 31, 2009.
Type of Case | Number of Cases Pending as of December 31, 2011 |
Number of Cases Pending as of December 31, 2010 |
Number of Cases Pending as of December 31, 2009 |
|||||||||
Individual Smoking and Health Cases (1) |
82 | 92 | 89 | |||||||||
Smoking and Health Class Actions and Aggregated Claims Litigation (2) |
7 | 11 | 7 | |||||||||
Health Care Cost Recovery Actions |
1 | 4 | 3 | |||||||||
Lights/Ultra Lights Class Actions |
18 | 27 | 28 | |||||||||
Tobacco Price Cases |
1 | 1 | 2 | |||||||||
(1) Does not include 2,586 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (ETS). The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Certain Broin plaintiffs have filed a motion seeking approximately $50 million in sanctions for alleged interference by R.J. Reynolds Tobacco Company (R.J. Reynolds) and PM USA with Lorillard, Inc.s acceptance of offers of settlement in the Broin progeny cases. In May 2011, the trial court denied this motion. Plaintiffs have appealed.
Also, does not include approximately 6,561 individual smoking and health cases (3,301 state court cases and 3,260 federal court cases) brought by or on behalf of approximately 8,126 plaintiffs in Florida (4,867 state court plaintiffs and 3,259 federal court plaintiffs) following the decertification of the Engle case discussed below. It is possible that some of these cases are duplicates and that additional cases have been filed but not yet recorded on the courts dockets.
(2) Includes as one case the 613 civil actions (of which 352 are actions against PM USA) that are to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals has ruled that the United States Constitution does not preclude a trial in two phases in this case. Under the current trial plan, issues related to defendants conduct and plaintiffs entitlement to punitive damages would be determined in the first phase. The second phase would consist of individual trials to determine liability, if any, as well as compensatory and punitive damages, if any. Trial in the case began in October 2011, but ended in a mistrial on November 8, 2011. The court has not yet scheduled a new trial.
n International Tobacco-Related Cases: As of December 31, 2011, PM USA is a named defendant in Israel in one Lights class action and one health care cost recovery action. PM USA is a named defendant in four health care cost recovery actions in Canada, three of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in six smoking and health class actions filed in various Canadian provinces. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
n Pending and Upcoming Tobacco-Related Trials: As of December 31, 2011, 45 Engle progeny cases and 2 individual smoking and health cases against PM USA are set for trial in 2012. Cases against other companies in the tobacco industry are also scheduled for trial in 2012. Trial dates are subject to change.
n Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 51 smoking and health, Lights/Ultra Lights and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 34 of the 51 cases. These 34 cases were tried in Alaska (1), California (5), Florida (9), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (4), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (1). A motion for a new trial was granted in one of the cases in Florida.
Of the 17 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, fourteen have reached final resolution. A verdict against defendants in one health care cost recovery case (Blue Cross/Blue Shield) was reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported Lights class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December 2006. In December 2008, the plaintiff in Price filed a motion with the state trial court to vacate the judgment dismissing this case in light of the United States Supreme Courts decision in Good (see below for a discussion of developments in Good and Price).
As of January 26, 2012, twenty-seven Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Courts Engle decision. Fourteen verdicts were returned in favor of plaintiffs and thirteen verdicts were returned in favor of PM USA. See Smoking and Health Litigation Engle Progeny Trial Results below for a discussion of these verdicts.
After exhausting all appeals in those cases resulting in adverse verdicts (Engle progeny and non-Engle progeny), PM USA has paid judgments (and related costs and fees) totaling approximately $177.1 million and interest totaling approximately $80.0 million as of December 31, 2011. As described below, PM USA recorded provisions for Bullock and Williams in the fourth quarter of 2011 and paid the Williams judgment on January 20, 2012.
n Security for Judgments: To obtain stays of judgments pending current appeals, as of December 31, 2011, PM USA has posted various forms of security totaling approximately $63 million, the majority of which has been collateralized with cash deposits that are included in other assets on the consolidated balance sheets.
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Smoking and Health Litigation
n Overview: Plaintiffs allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
n Non-Engle Progeny Trial Results: Summarized below are the non-Engle progeny smoking and health cases that were pending during 2011 in which verdicts were returned in favor of plaintiffs. A chart listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation Engle Progeny Trial Results below.
n D. Boeken: In August 2011, a California jury returned a verdict in favor of plaintiff, awarding $12.8 million in compensatory damages against PM USA. PM USAs motions for judgment notwithstanding the verdict and for a new trial were denied in October 2011. PM USA has filed a notice of appeal, and posted a bond in the amount of $12.8 million on November 4, 2011.
n Bullock: In October 2002, a California jury awarded against PM USA $850,000 in compensatory damages and $28 billion in punitive damages. In December 2002, the trial court reduced the punitive damages award to $28 million. In April 2006, the California Court of Appeal affirmed the $28 million punitive damages award. In August 2006, the California Supreme Court denied plaintiffs petition to overturn the trial courts reduction of the punitive damages award and granted PM USAs petition for review challenging the punitive damages award. In May 2007, the California Supreme Court transferred the case to the Second District of the California Court of Appeal with directions that the court vacate its 2006 decision and reconsider the case in light of the United States Supreme Courts decision in the Williams case discussed below. In January 2008, the California Court of Appeal reversed the judgment with respect to the $28 million punitive damages award, affirmed the judgment in all other respects, and remanded the case to the trial court to conduct a new trial on the amount of punitive damages. In March 2008, plaintiffs and PM USA appealed to the California Supreme Court. In April 2008, the California Supreme Court denied both petitions for review. In July 2008, $43.3 million of escrow funds were returned to PM USA. The case was remanded to the superior court for a new trial on the amount of punitive damages, if any. In August 2009, the jury returned a verdict, and in December 2009, the superior court entered a judgment, awarding plaintiff $13.8 million in punitive damages, plus costs. In December 2009, PM USA filed a motion for judgment notwithstanding the verdict seeking a reduction of the punitive damages award, which motion was denied in January 2010. PM USA noticed an appeal in February 2010 and posted an appeal bond of approximately $14.7 million. In August 2011, the California Court of Appeal affirmed the final judgment entered in favor of the plaintiffs. On November 30, 2011, the California Supreme Court denied PM USAs petition for review. In the fourth quarter of 2011, PM USA recorded a pre-tax provision of $14 million related to damages and costs and $3 million related to interest. As of December 31, 2011, PM USA recorded a total pre-tax provision of $14.7 million related to damages and costs and $4.1 million related to interest. These amounts are included in other accrued liabilities on Altria Group, Inc.s consolidated balance sheet at December 31, 2011.
n Schwarz: In March 2002, an Oregon jury awarded against PM USA $168,500 in compensatory damages and $150 million in punitive damages. In May 2002, the trial court reduced the punitive damages award to $100 million. In October 2002, PM USA posted an appeal bond of approximately $58.3 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals decision reversing and remanding the case for a new trial on punitive damages. In June 2010, the Oregon Supreme Court affirmed the court of appeals decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. In December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately $500,000 in costs. In January 2011, the trial court issued an order releasing PM USAs appeal bond. In March 2011, PM USA filed a claim against the plaintiff for its costs and disbursements on appeal, plus interest. Trial on the amount of punitive damages is set to begin on January 30, 2012.
n Williams: In March of 1999, an Oregon jury awarded against PM USA $800,000 in compensatory damages (capped statutorily at $500,000), $21,500 in medical expenses, and $79.5 million in punitive damages. The trial court reduced the punitive damages award to approximately $32 million, and PM USA and plaintiff appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In October 2003, the United States Supreme Court set aside the Oregon appellate courts ruling and directed the Oregon court to reconsider the case in light of the 2003 State Farm decision by the United States Supreme Court,
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which limited punitive damages. In June 2004, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In February 2006, the Oregon Supreme Court affirmed the Court of Appeals decision. The United States Supreme Court granted PM USAs petition for writ of certiorari in May 2006. In February 2007, the United States Supreme Court vacated the $79.5 million punitive damages award and remanded the case to the Oregon Supreme Court for further proceedings consistent with its decision. In January 2008, the Oregon Supreme Court affirmed the Oregon Court of Appeals June 2004 decision, which in turn, upheld the jurys compensatory damages award and reinstated the jurys award of $79.5 million in punitive damages. After the United States Supreme Court declined to issue a writ of certiorari, PM USA paid $61.1 million to the plaintiff, representing the compensatory damages award, forty percent of the punitive damages award and accrued interest. Although Oregon state law requires that sixty percent of any punitive damages award be paid to the state, the Oregon trial court ruled in February 2010 that, as a result of the Master Settlement Agreement (MSA), the state is not entitled to collect its sixty percent share of the punitive damages award. In June 2010, the trial court further held that, under the Oregon statute, PM USA is not required to pay the sixty percent share to plaintiff. Both the plaintiff in Williams and the state appealed these rulings to the Oregon Court of Appeals. In December 2010, on its own motion, the Oregon Court of Appeals certified the appeals to the Oregon Supreme Court, and the Oregon Supreme Court accepted certification. On December 2, 2011, the Oregon Supreme Court reversed the trial court and ruled that PM USA is required to pay the state the sixty percent portion of the punitive damages award. On December 16, 2011, PM USA filed a petition for rehearing before the Oregon Supreme Court, which the Oregon Supreme Court denied on January 12, 2012. In the fourth quarter of 2011, PM USA recorded a pre-tax provision of approximately $48 million related to damages and costs and $54 million related to interest. These amounts are included in other accrued liabilities on Altria Group, Inc.s consolidated balance sheet at December 31, 2011. On January 20, 2012, PM USA paid an amount of approximately $102 million in satisfaction of the judgment and associated costs and interest.
See Scott Class Action below for a discussion of the verdict and post-trial developments in the Scott class action and Federal Government Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America healthcare cost recovery case.
Engle Class Action
In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified, and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiffs claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Courts order.
In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed
42 |
above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Third District Court of Appeal denied defendants motion. In May 2007, defendants motion for a partial stay of the mandate pending the completion of appellate review was denied by the Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. In October 2007, the United States Supreme Court denied defendants petition. In November 2007, the United States Supreme Court denied defendants petition for rehearing from the denial of their petition for writ of certiorari.
In February 2008, the trial court decertified the class except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Courts mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and will receive no credit at this time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.
In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.
The deadline for filing Engle progeny cases, as required by the Florida Supreme Courts decision, expired in January 2008. As of December 31, 2011, approximately 6,561 cases (3,301 state court cases and 3,260 federal court cases) were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 8,126 plaintiffs (4,867 state court plaintiffs and 3,259 federal court plaintiffs). It is possible that some of these cases are duplicates. Some of these cases have been removed from various Florida state courts to the federal district courts in Florida, while others were filed in federal court.
Federal Engle Progeny Cases
Three federal district courts (in the Merlob, B. Brown and Burr cases) ruled in 2008 that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs claims, and two of those rulings (B. Brown and Burr) were certified by the trial court for interlocutory review. The certification in both cases was granted by the United States Court of Appeals for the Eleventh Circuit and the appeals were consolidated. In February 2009, the appeal in Burr was dismissed for lack of prosecution. In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates the defendants due process rights. Rather, plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made. In the Burr case, PM USA filed a motion seeking a ruling from the district court regarding the preclusive effect of the Engle findings pursuant to the Eleventh Circuits decision in B. Brown. In May 2011, the district court denied that motion without prejudice on procedural grounds.
In the Waggoner case, the United States District Court for the Middle District of Florida (Jacksonville) ruled on December 20, 2011 that application of the Engle findings to establish the wrongful conduct elements of plaintiffs claims consistent with Martin or J. Brown did not violate defendants due process rights. The court ruled, however, that plaintiffs must establish legal causation to establish liability. With respect to punitive damages, the district court held that plaintiffs could rely on the findings in support of their punitive damages claims but that in addition plaintiffs must demonstrate specific conduct by specific defendants, independent of the Engle findings, that satisfies the standards for awards of punitive damages. PM USA and the other defendants are seeking review of the due process ruling by the United States Court of Appeals for the Eleventh Circuit.
Engle progeny cases pending in the federal district courts in the Middle District of Florida asserting individual claims by or on behalf of approximately 3,200 plaintiffs remain stayed. There are currently 31 active cases pending in federal court. Discovery is proceeding in these cases and the first trial is set to begin on February 7, 2012.
Florida Bond Cap Statute
In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) have challenged the constitutionality of the bond cap statute. The Florida Attorney General has intervened in these cases in defense of the constitutionality of the statute.
Trial court rulings have been rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs bond cap statute challenges in those cases. The plaintiffs have appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and
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Alexander. The Florida Supreme Court has granted review of the Hall decision.
No federal court has yet to address the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
Engle Progeny Trial Results
As of January 26, 2012, twenty-seven Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Fourteen verdicts (see Hess, Barbanell, F. Campbell, Naugle, Douglas, R. Cohen, Putney, Kayton (formerly Tate), Piendle, Hatziyannakis, Huish, Tullo, Allen and Hallgren descriptions in the table below) were returned in favor of plaintiffs and thirteen verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Frazier, C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious and Szymanski). The jury in the Weingart case returned a verdict against PM USA awarding no damages, but in September 2011, the trial court granted an additur. For a further discussion of this case, see the verdict chart below. In addition, there have been a number of mistrials, only some of which have resulted in new trials as of January 26, 2012.
In Lukacs, a case that was tried to verdict before the Florida Supreme Court Engle decision, the Florida Third District Court of Appeal in March 2010 affirmed per curiam the trial court decision without issuing an opinion. Under Florida procedure, further review of a per curiam affirmance without opinion by the Florida Supreme Court is generally prohibited. Subsequently in 2010, after defendants petition for rehearing with the Court of Appeal was denied, defendants paid the judgment.
The chart below lists the verdicts and post-trial developments in the Engle progeny cases that were pending during 2011 and 2012 in which verdicts were returned in favor of plaintiffs.
Date | Plaintiff | Verdict | Post-Trial Developments | |||
January 2012 |
Hallgren | On January 26, 2012, a Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants. | ||||
July 2011 |
Weingart | A Palm Beach County jury returned a verdict in the amount of zero damages and allocated 3% of the fault to each of the defendants (PM USA, R.J. Reynolds and Lorillard Tobacco Company). | In September 2011, the trial court granted plaintiffs motion for additur or a new trial, concluding that an additur of $150,000 is required for plaintiffs pain and suffering. The trial court has entered final judgment and, since PM USA was allocated 3% of the fault, its portion of the damages would be $4,500. PM USA has filed its notice of appeal, and posted a bond in the amount of $5,000 on November 14, 2011. | |||
April 2011 |
Allen | A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of $6 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of $900,000). The jury also awarded $17 million in punitive damages against each of the defendants. | In May 2011, the defendants filed various post-trial motions, and the trial court entered final judgment. Argument was heard in June 2011. In October 2011, the trial court granted the defendants motion for remittitur, reducing the punitive damages award against PM USA to $2.7 million, and denied defendants remaining post-trial motions. PM USA filed a notice of appeal, and posted a bond in the amount of $1,250,000 on November 4, 2011. | |||
April 2011 |
Tullo | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard Tobacco Company and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45% of the fault to PM USA (an amount of $2,025,000). | In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal and posted a $2 million bond. | |||
February 2011 |
Huish | An Alachua County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $750,000 in compensatory damages and allocated 25% of the fault to PM USA (an amount of $187,500). The jury also awarded $1.5 million in punitive damages against PM USA. | In March 2011, the trial court entered final judgment. PM USA filed post-trial motions, which were denied in April 2011. In May 2011, PM USA filed its notice of appeal and posted a $1.7 million appeal bond. | |||
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Date | Plaintiff | Verdict | Post-Trial Developments | |||
February 2011 |
Hatziyannakis | A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $270,000 in compensatory damages and allocated 32% of the fault to PM USA (an amount of approximately $86,000). | In April 2011, the trial court denied PM USAs post-trial motions for a new trial and to set aside the verdict. In June 2011, PM USA filed its notice of appeal and posted an $86,000 appeal bond. | |||
August 2010 |
Piendle | A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $4 million in compensatory damages and allocated 27.5% of the fault to PM USA (an amount of approximately $1.1 million). The jury also awarded $90,000 in punitive damages against PM USA. | In September 2010, the trial court entered final judgment. In January 2011, the trial court denied the parties post-trial motions. PM USA filed its notice of appeal and posted a $1.2 million appeal bond. | |||
July 2010 |
Kayton (formerly Tate) |
A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5 million appeal bond. | |||
April 2010 |
Putney | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA. | In August 2010, the trial court entered final judgment. PM USA filed its notice of appeal and posted a $1.6 million appeal bond. | |||
March 2010 |
R. Cohen | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant. | In July 2010, the trial court entered final judgment and, in August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million appeal bond. | |||
March 2010 |
Douglas | A Hillsborough County jury returned a verdict in favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded $5 million in compensatory damages. Punitive damages were dismissed prior to trial. The jury allocated 18% of the fault to PM USA, resulting in an award of $900,000. | In June 2010, PM USA filed its notice of appeal and posted a $900,000 appeal bond. In September 2010, the plaintiff filed with the trial court a challenge to the constitutionality of the Florida bond cap statute but withdrew the challenge in August 2011. Argument on the merits of the appeal was heard in October 2011. | |||
November 2009 |
Naugle | A Broward County jury returned a verdict in favor of the plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA. | In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages. In April 2010, PM USA filed its notice of appeal and posted a $5 million appeal bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical error. The case remains on appeal. | |||
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Date | Plaintiff | Verdict | Post-Trial Developments | |||
August 2009 |
F. Campbell | An Escambia County jury returned a verdict in favor of the plaintiff and against R.J. Reynolds, PM USA and Liggett Group. The jury awarded $7.8 million in compensatory damages. In September 2009, the trial court entered final judgment and awarded the plaintiff $156,000 in damages against PM USA due to the jury allocating only 2% of the fault to PM USA. | In January 2010, defendants filed their notice of appeal, and PM USA posted a $156,000 appeal bond. In March 2011, the Florida First District Court of Appeal affirmed per curiam (with citation) the trial courts decision without issuing an opinion. PM USAs motion to certify the Court of Appeals decision to the Florida Supreme Court as a matter of public importance was denied in May 2011. In June 2011, PM USA filed a petition for discretionary review with the Florida Supreme Court. In July 2011, the Florida Supreme Court declined to hear PM USAs petition. On December 16, 2011, PM USA and Liggett Group filed a joint petition for a writ of certiorari with the United States Supreme Court. R.J. Reynolds filed a separate petition for a writ of certiorari on December 16, 2011. As of December 31, 2011, PM USA has recorded a provision of approximately $242,000 for compensatory damages, costs and interest. | |||
August 2009 |
Barbanell | A Broward County jury returned a verdict in favor of the plaintiff, awarding $5.3 million in compensatory damages. The judge had previously dismissed the punitive damages claim. In September 2009, the trial court entered final judgment and awarded plaintiff $1.95 million in actual damages. The judgment reduced the jurys $5.3 million award of compensatory damages due to the jury allocating 36.5% of the fault to PM USA. | A notice of appeal was filed by PM USA in September 2009, and PM USA posted a $1.95 million appeal bond. Argument on the merits of the appeal was heard in September 2011. | |||
February 2009 |
Hess | A Broward County jury found in favor of plaintiffs and against PM USA. The jury awarded $3 million in compensatory damages and $5 million in punitive damages. In June 2009, the trial court entered final judgment and awarded plaintiffs $1,260,000 in actual damages and $5 million in punitive damages. The judgment reduced the jurys $3 million award of compensatory damages due to the jury allocating 42% of the fault to PM USA. | PM USA noticed an appeal to the Fourth District Court of Appeal in July 2009. Argument was heard in March 2011. | |||
n Appeals of Engle Progeny Verdicts: Plaintiffs in various Engle progeny cases have appealed adverse rulings or verdicts, and in some cases, PM USA has cross-appealed. PM USAs appeals of adverse verdicts are discussed in the chart above.
Since the remand of B. Brown (discussed above under the heading Federal Engle Progeny Cases), the Eleventh Circuits ruling on Florida state law is currently superseded by two state appellate rulings in Martin, an Engle progeny case against R.J. Reynolds in Escambia County, and J. Brown, an Engle progeny case against R.J. Reynolds in Broward County. In Martin, the Florida First District Court of Appeal rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs burden of proof. R.J. Reynolds had sought Florida Supreme Court review in that case but, in July 2011, the Florida Supreme Court declined to hear the appeal. On December 16, 2011, petitions for certiorari were filed with the United States Supreme Court by R.J. Reynolds in Campbell, Martin, Gray and Hall and by PM USA and Liggett Group in Campbell.
In J. Brown, the Florida Fourth District Court of Appeal also rejected the B. Brown ruling as a matter of state law and upheld the use of the Engle findings to relax plaintiffs burden of proof. However, the Fourth District expressly disagreed with the First Districts Martin decision by ruling that Engle progeny plaintiffs must prove legal causation on their claims. In addition, the J. Brown court expressed concerns that using the Engle findings to reduce plaintiffs burden may violate defendants due process rights. In October 2011, the Fourth District denied R.J. Reynolds motion to certify J. Brown to the Florida Supreme Court for review. R.J. Reynolds is seeking review of the case by the Florida Supreme Court.
As noted above in Federal Engle Progeny Cases, there has been no federal appellate review of the federal due process issues raised by the use of findings from the original Engle trial in Engle progeny cases.
Because of the substantial period of time required for the federal and state appellate processes, it is possible that PM USA may have to pay certain outstanding judgments in the Engle progeny cases before the final adjudication of these issues by the Florida Supreme Court or the United States Supreme Court.
n Other Smoking and Health Class Actions: Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs
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have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 59 smoking and health class actions involving PM USA in Arkansas (1), California (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).
PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in six actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan and British Columbia. In Saskatchewan and British Columbia, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases including chronic obstructive pulmonary disease, emphysema, heart disease or cancer after smoking defendants cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants cigarettes. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
n Scott Class Action: In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs sought creation of a fund to pay for medical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants, including PM USA, in connection with plaintiffs medical monitoring claims, but also found that plaintiffs could benefit from smoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knew about smoking and diseases and marketed their products to minors. In May 2004, in the second phase of the trial, the jury awarded plaintiffs approximately $590 million against all defendants jointly and severally, to fund a 10-year smoking cessation program. Defendants appealed.
In April 2010, the Louisiana Fourth Circuit Court of Appeal issued a decision that affirmed in part prior decisions ordering the defendants to fund a statewide 10-year smoking cessation program. After conducting its own independent review of the record, the Court of Appeal made its own factual findings with respect to liability and the amount owed, lowering the amount of the judgment to approximately $241 million, plus interest commencing July 21, 2008, the date of entry of the amended judgment. In addition, the Court of
Appeal declined plaintiffs cross appeal requests for a medical monitoring program and reinstatement of other components of the smoking cessation program. The Court of Appeal specifically reserved to the defendants the right to assert claims to any unspent or unused surplus funds at the termination of the smoking cessation program. In June 2010, defendants and plaintiffs filed separate writ of certiorari applications with the Louisiana Supreme Court. The Louisiana Supreme Court denied both sides applications. In September 2010, upon defendants application, the United States Supreme Court granted a stay of the judgment pending the defendants filing and the Courts disposition of the defendants petition for a writ of certiorari. In June 2011, the United States Supreme Court denied the defendants petition. As of March 31, 2011, PM USA recorded a provision of $26 million in connection with the case and additional provisions of approximately $3.7 million related to accrued interest. In the second quarter of 2011, after the June 2011 United States Supreme Court denial of defendants petition for a writ of certiorari, PM USA recorded an additional provision of approximately $36 million related to the judgment and approximately $5 million related to interest.
In August 2011, PM USA paid its share of the judgment in an amount of approximately $70 million. The defendants payments have been deposited into a court-supervised fund that is intended to pay for smoking cessation programs. On October 31, 2011, plaintiffs counsel filed a motion for an award of attorneys fees and costs. Plaintiffs counsel seek additional fees from defendants ranging from $91 million to $642 million. Additionally, plaintiffs counsel request an award of approximately $13 million in costs. As of December 31, 2011, PM USA has recorded a provision of approximately $1.3 million for costs, but is opposing plaintiffs counsels request for additional costs and for fees. Argument on whether defendants can be held liable for attorneys fees is scheduled for February 3, 2012.
n Other Medical Monitoring Class Actions: In addition to the Scott class action discussed above, two purported medical monitoring class actions are pending against PM USA. These two cases were brought in New York (Caronia, filed in January 2006 in the United States District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in December 2006 in the United States District Court for the District of Massachusetts) on behalf of each states respective residents who: are age 50 or older; have smoked the Marlboro brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by a physician for suspected lung cancer. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a court-supervised program providing members of the purported class Low Dose CT Scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases do not seek punitive damages. A case brought in California (Xavier) was dismissed in July 2011, and a case brought in Florida (Gargano) was voluntarily dismissed with prejudice in August 2011.
In Caronia, in February 2010, the district court granted in part PM USAs summary judgment motion, dismissing plaintiffs strict liability and negligence claims and certain other claims, granted plaintiffs leave to amend their complaint to allege a medical monitoring cause of action and requested further briefing on PM USAs summary judgment motion as to plaintiffs implied warranty claim and, if plaintiffs amend their complaint, their medical monitoring claim. In March 2010, plaintiffs filed their amended complaint and PM USA moved
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to dismiss the implied warranty and medical monitoring claims. In January 2011, the district court granted PM USAs motion, dismissed plaintiffs claims and declared plaintiffs motion for class certification moot in light of the dismissal of the case. The plaintiffs have appealed that decision to the United States Court of Appeals for the Second Circuit. Argument has been set for March 1, 2012.
In Donovan, the Supreme Judicial Court of Massachusetts, in answering questions certified to it by the district court, held in October 2009 that under certain circumstances state law recognizes a claim by individual smokers for medical monitoring despite the absence of an actual injury. The court also ruled that whether or not the case is barred by the applicable statute of limitations is a factual issue to be determined by the trial court. The case was remanded to federal court for further proceedings. In June 2010, the district court granted in part the plaintiffs motion for class certification, certifying the class as to plaintiffs claims for breach of implied warranty and violation of the Massachusetts Consumer Protection Act, but denying certification as to plaintiffs negligence claim. In July 2010, PM USA petitioned the United States Court of Appeals for the First Circuit for appellate review of the class certification decision. The petition was denied in September 2010. As a remedy, plaintiffs have proposed a 28-year medical monitoring program with an approximate cost of $190 million. In April 2011, plaintiffs moved to amend their class certification to extend the cut-off date for individuals to satisfy the class membership criteria from December 14, 2006 to August 1, 2011. The district court granted this motion in May 2011. Trial has been postponed. In June 2011, plaintiffs filed various motions for summary judgment and to strike affirmative defenses. On October 31, 2011, PM USA filed a motion for class decertification. Argument is scheduled for January 27, 2012.
Evolving medical standards and practices could have an impact on the defense of medical monitoring claims. For example, the first publication of the findings of the National Cancer Institutes National Lung Screening Trial (NLST) in June 2011 reported a 20% reduction in lung cancer deaths among certain long term smokers receiving Low Dose CT Scanning for lung cancer. Since then, various public health organizations have begun to develop new lung cancer screening guidelines. Also, a number of hospitals have advertised the availability of screening programs.
Health Care Cost Recovery Litigation
n Overview: In the health care cost recovery litigation, governmental entities and non-governmental plaintiffs seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
The claims asserted include the claim that cigarette manufacturers were unjustly enriched by plaintiffs payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, unclean hands (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to set off any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by standing in the shoes of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.
Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs appeals from the cases decided by five circuit courts of appeals.
In April 2011, in the health care cost recovery case brought against PM USA and other defendants by the City of St. Louis, Missouri and approximately 40 Missouri hospitals, the jury returned a verdict in favor of the defendants on all counts. In June 2011, the litigation was concluded in a consent judgment pursuant to which the plaintiffs waived all rights to appeal in exchange for the defendants waiver of any claim for costs.
Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer (MSP) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases were brought in New York (2), Florida (2) and Massachusetts (1). All were dismissed by federal courts.
In addition to the cases brought in the United States, health care cost recovery actions have also been brought
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against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (1), the Marshall Islands (dismissed), and Canada (4), and other entities have stated that they are considering filing such actions. In the case in Israel, in July 2011, the Israel Supreme Court reversed the trial courts decision denying defendants motion to dismiss and dismissed the case. In August 2011, plaintiff filed a motion for rehearing with the Israel Supreme Court.
In September 2005, in the first of the four health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USAs and other defendants challenge to the British Columbia courts exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. In December 2009, the Court of Appeals of British Columbia ruled that certain defendants can proceed against the Federal Government of Canada as third parties on the theory that the Federal Government of Canada negligently misrepresented to defendants the efficacy of a low tar tobacco variety that the Federal Government of Canada developed and licensed to defendants. In May 2010, the Supreme Court of Canada granted leave to the Federal Government of Canada to appeal this decision and leave to defendants to cross-appeal the Court of Appeals decision to dismiss claims against the Federal Government of Canada based on other theories of liability. In July 2011, the Supreme Court of Canada dismissed the third-party claims against the Federal Government of Canada.
During 2008, the Province of New Brunswick, Canada, proclaimed into law previously adopted legislation allowing reimbursement claims to be brought against cigarette manufacturers, and it filed suit shortly thereafter. In September 2009, the Province of Ontario, Canada, filed suit against a number of cigarette manufacturers based on previously adopted legislation nearly identical in substance to the New Brunswick health care cost recovery legislation. In February 2011, the Province of Newfoundland and Labrador filed a case substantially similar to the ones brought by New Brunswick and Ontario.
PM USA is named as a defendant in the British Columbia case, while Altria Group, Inc. and PM USA are named as defendants in the New Brunswick, Ontario and Newfoundland cases. Several other provinces and territories in Canada have enacted similar legislation or are in the process of enacting similar legislation. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
n Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the State Settlement Agreements). The State Settlement Agreements require that the original participating manufacturers make substantial annual payments of approximately $9.4 billion each year, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the original participating manufacturers are required to pay settling plaintiffs attorneys fees, subject to an annual cap of $500 million. For the years ended December 31, 2011, 2010 and 2009, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements and the Fair and Equitable Tobacco Reform Act of 2004 (FETRA) was approximately $4.8 billion, $4.8 billion and $5.0 billion, respectively.
The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.
n Possible Adjustments in MSA Payments for 2003 to 2010: Pursuant to the provisions of the MSA, domestic tobacco product manufacturers, including PM USA, who are original signatories to the MSA (the Original Participating Manufacturers or OPMs) are participating in proceedings that may result in downward adjustments to the amounts paid by the OPMs and the other MSA-participating manufacturers to the states and territories that are parties to the MSA for each of the years 2003 to 2010. The proceedings relate to an MSA payment adjustment (the NPM Adjustment) based on the collective loss of market share for the relevant year by all participating manufacturers who are subject to the payment obligations and marketing restrictions of the MSA to non-participating manufacturers (NPMs) who are not subject to such obligations and restrictions.
As part of these proceedings, an independent economic consulting firm jointly selected by the MSA parties or otherwise selected pursuant to the MSAs provisions is required to determine whether the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a significant factor, each state may avoid a downward adjustment to its share of the participating manufacturers annual payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Any potential downward adjustment would then be reallocated to any states that do not establish such diligent enforcement. PM USA believes that the MSAs arbitration clause requires a state to submit its claim to have diligently enforced a qualifying escrow statute to binding arbitration before a panel of three former federal judges in the manner provided for in the MSA. A number of states have taken the position that this claim should be decided in state court on a state-by-state basis.
An independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the
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MSA were a significant factor contributing to the participating manufacturers collective loss of market share for each of the years 2003 - 2005. A different independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for the year 2006. Following the firms determination for 2006, the OPMs and the states agreed that the states would not contest that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers collective loss of market share for the years 2007, 2008 and 2009. Accordingly, the OPMs and the states have agreed that no significant factor determination by an independent economic consulting firm will be necessary with respect to the participating manufacturers collective loss of market share for the years 2007, 2008 and 2009 (the significant factor agreement). This agreement became effective for 2007 and 2008 on February 1, 2010 and February 1, 2011, respectively, and will become effective for 2009 on February 1, 2012. The MSAs Independent Auditor has determined that the participating manufacturers collectively lost market share for 2010. Subsequent to that determination, the OPMs and the states have agreed to extend the significant factor agreement to apply to such collective loss of market share for 2010, as well as to any collective loss of market share that the participating manufacturers experience for 2011-2012. This agreement will become effective for 2010 on February 1, 2013. If the Independent Auditor determines that the participating manufacturers collectively lost market share for 2011 or 2012, this agreement will become effective for 2011 on February 1, 2014 and for 2012 on February 1, 2015.
Following the significant factor determination with respect to 2003, thirty-eight states filed declaratory judgment actions in state courts seeking a declaration that the state diligently enforced its escrow statute during 2003. The OPMs and other MSA-participating manufacturers responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in eleven MSA states and territories that did not file declaratory judgment actions. Courts in all but one of the forty-six MSA states and the District of Columbia and Puerto Rico have ruled that the question of whether a state diligently enforced its escrow statute during 2003 is subject to arbitration. Several of these rulings may be subject to further review. One state court (in State of Montana) has ruled that the diligent enforcement claims of that state may be litigated in state court, rather than in arbitration. In January 2010, the OPMs filed a petition for a writ of certiorari in the United States Supreme Court seeking further review of the Montana decision holding that a states diligent enforcement claims may be litigated in state court, rather than in arbitration. The petition was denied in June 2010. Following the denial of this petition, Montana renewed an action in its state court seeking a declaratory judgment that it diligently enforced its escrow statute during 2003 and other relief. The case is now proceeding in the trial court.
PM USA, the other OPMs and approximately twenty-five other MSA-participating manufacturers have entered into an agreement regarding arbitration with forty-five MSA states concerning the 2003 NPM Adjustment, including the states claims of diligent enforcement for 2003. The agreement further provides for a partial liability reduction for the 2003 NPM Adjustment for states that entered into the agreement by January 30, 2009 and are determined in the arbitration not to have diligently enforced a qualifying escrow statute during 2003. Based on the number of states that entered into the agreement by January 30, 2009 (forty-five), the partial liability reduction for those states is 20%. The partial liability reduction would reduce the amount of PM USAs 2003 NPM Adjustment by up to a corresponding percentage. The selection of the arbitration panel for the 2003 NPM Adjustment was completed in July 2010, and the arbitration is currently ongoing. Proceedings to determine state diligent enforcement claims for the years 2004 through 2010 have not yet been scheduled.
Once a significant factor determination in favor of the participating manufacturers for a particular year has been made by an economic consulting firm, or the states agreement not to contest significant factor for a particular year has become effective, PM USA has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into a disputed payments account or withhold it altogether. PM USA has made its full MSA payment due in each year from 2006 - 2010 to the states (subject to a right to recoup the NPM Adjustment amount in the form of a credit against future MSA payments), even though it had the right to deduct the disputed amounts of the 2003 2007 NPM Adjustments, as described above, from such MSA payments. PM USA paid its share of the amount of the disputed 2008 NPM Adjustment shown below into the MSAs disputed payments account in connection with its MSA payment due in 2011. The approximate maximum principal amounts of PM USAs share of the disputed NPM Adjustment for the years 2003 through 2010, as currently calculated by the MSAs Independent Auditor, are as follows (the amounts shown below do not include the interest or earnings thereon to which PM USA believes it would be entitled in the manner provided in the MSA):
Year for which NPM Adjustment calculated |
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||
Year in which deduction for NPM Adjustment may be taken |
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||||||||
PM USAs Approximate Share of Disputed NPM Adjustment (in millions) |
$337 | $388 | $181 | $154 | $207 | $267 | $211 | $209 | ||||||||||||||||||||||||
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The foregoing amounts may be recalculated by the Independent Auditor if it receives information that is different from or in addition to the information on which it based these calculations, including, among other things, if it receives revised sales volumes from any participating manufacturer. Disputes among the manufacturers could also reduce the foregoing amounts. The availability and the precise amount of any NPM Adjustment for 2003-2010 will not be finally determined until 2012 or thereafter. There is no certainty that the OPMs and other MSA-participating manufacturers will ultimately receive any adjustment as a result of these proceedings, and the amount of any adjustment received for a year could be less than the amount for that year listed above. If the OPMs do receive such an adjustment through these proceedings, the adjustment would be allocated among the OPMs pursuant to the MSAs provisions. It is expected that PM USA would receive its share of any adjustments for 2003 - 2007 in the form of a credit against future MSA payments and its share of any adjustment for 2008 in the form of a withdrawal from the disputed payments account.
PM USA intends to pursue vigorously the disputed NPM Adjustments for 2003-2010 through the proceedings described above. PM USA would be willing, however, to enter into a settlement of those disputed NPM Adjustments if it determined that such a settlement were in its best interests.
n Other Disputes Related to MSA Payments: In addition to the disputed NPM Adjustments described above, MSA states and participating manufacturers, including PM USA, are conducting another arbitration to resolve certain other disputes related to the calculation of the participating manufacturers payments under the MSA. PM USA disputes the method by which ounces of roll your own tobacco have been converted to cigarettes for purposes of calculating the downward volume adjustments to its MSA payments. PM USA believes that, for the years 2004 - 2010, the use of an incorrect conversion method resulted in excess MSA payments by PM USA of approximately $85 million in the aggregate.
If PM USA prevails on this issue, it would be entitled to a credit against future MSA payments in that amount, plus interest. In addition, PM USA seeks application of what it believes to be the correct method for years subsequent to 2010.
This arbitration will also resolve a dispute concerning whether the total domestic cigarette market and certain other calculations related to the participating manufacturers MSA payments should be determined based on the net number of cigarettes on which federal excise tax is paid, as is currently the case, or whether the adjusted gross number of cigarettes on which federal excise tax is paid is the correct methodology. PM USA anticipates that this arbitration will not be concluded until later in 2012 or thereafter.
No assurance can be given that PM USA will prevail on either of these disputes.
n Other MSA-Related Litigation: PM USA was named as a defendant in an action (Vibo) brought in October 2008 in federal court in Kentucky by an MSA participating manufacturer that is not an OPM. Other defendants include various other participating manufacturers and the Attorneys General of all 52 states and territories that are parties to the MSA. The plaintiff alleged that certain of the MSAs payment provisions discriminate against it in favor of certain other participating manufacturers in violation of the federal antitrust laws and the United States Constitution. The plaintiff also sought injunctive relief, alteration of certain MSA payment provisions as applied to it, treble damages under the federal antitrust laws, and/or rescission of its joinder in the MSA. The plaintiff also filed a motion for a preliminary injunction enjoining the states from enforcing the allegedly discriminatory payment provisions against it during the pendency of the action. In January 2009, the district court dismissed the complaint and denied plaintiffs request for preliminary injunctive relief. In January 2010, the court entered final judgment dismissing the case. Plaintiff appealed this decision to the United States Court of Appeals for the Sixth Circuit. Argument was heard in October 2011.
Without naming PM USA or any other private party as a defendant, NPMs and/or their distributors or customers have filed several legal challenges to the MSA and related legislation. New York state officials and the Attorneys General for 24 other states are defendants in a lawsuit (Pryor) filed in the United States District Court for the Southern District of New York in which plaintiffs allege that the MSA and/or related legislation violates federal antitrust laws and the Commerce Clause of the United States Constitution. The United States Court of Appeals for the Second Circuit has held that the allegations in that lawsuit, if proven, establish a basis for relief on antitrust and Commerce Clause grounds and that the trial courts in New York have personal jurisdiction sufficient to enjoin other states officials from enforcing their MSA-related legislation. On remand, the trial court held that plaintiffs are unlikely to succeed on the merits and refused to enjoin the enforcement of New Yorks allocable share amendment to the MSAs Model Escrow Statute. That decision was affirmed by the United States Court of Appeals for the Second Circuit. In March 2011, the trial court granted summary judgment on all claims for the New York state officials. Plaintiffs have filed a motion to modify the judgment and a notice of appeal.
In addition to the Pryor decision above, the United States Courts of Appeals for the Second, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have affirmed dismissals or grants of summary judgment in favor of state officials in seven other cases asserting antitrust and constitutional challenges to the allocable share amendment legislation in those states.
In January 2011, an international arbitration tribunal rejected claims brought against the United States challenging MSA-related legislation in various states under the North American Free Trade Agreement.
n Federal Governments Lawsuit: In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria Group, Inc. asserting claims under three federal statutes, namely the Medical Care Recovery Act (MCRA), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants fraudulent and tortious conduct and paid for by
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the government under various federal health care
programs, including Medicare, military and veterans health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits which arose from defendants allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal governments future costs of providing health care resulting from defendants alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the governments MCRA and MSP claims, but permitted discovery to proceed on the governments claims for relief under the civil provisions of RICO.
The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate remedy. In May 2004, the trial court issued an order denying defendants motion for partial summary judgment limiting the disgorgement remedy. In February 2005, a panel of the United States Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of RICO and entered summary judgment in favor of defendants with respect to the disgorgement claim. In July 2005, the government petitioned the United States Supreme Court for further review of the Court of Appeals ruling that disgorgement is not an available remedy, and in October 2005, the Supreme Court denied the petition.
In June 2005, the government filed with the trial court its proposed final judgment seeking remedies of approximately $14 billion, including $10 billion over a five-year period to fund a national smoking cessation program and $4 billion over a ten-year period to fund a public education and counter-marketing campaign. Further, the governments proposed remedy would have required defendants to pay additional monies to these programs if targeted reductions in the smoking rate of those under 21 are not achieved according to a prescribed timetable. The governments proposed remedies also included a series of measures and restrictions applicable to cigarette business operations including, but not limited to, restrictions on advertising and marketing, potential measures with respect to certain price promotional activities and research and development, disclosure requirements for certain confidential data and implementation of a monitoring system with potential broad powers over cigarette operations.
In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in 7 of the 8 sub-schemes to defraud that the government had alleged. Specifically, the court found that:
n defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;
n defendants hid from the public that cigarette smoking and nicotine are addictive;
n defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;
n defendants falsely marketed and promoted low tar/light cigarettes as less harmful than full-flavor cigarettes;
n defendants falsely denied that they intentionally marketed to youth;
n defendants publicly and falsely denied that ETS is hazardous to non-smokers; and
n defendants suppressed scientific research.
The court did not impose monetary penalties on the defendants, but ordered the following relief: (i) an injunction against committing any act of racketeering relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including lights, ultra lights and low tar, which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of corrective statements in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking low tar or light cigarettes, defendants manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission (FTC) for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the governments costs in bringing the action.
The defendants appealed and, in May 2009, a three judge panel of the Court of Appeals for the District of Columbia Circuit issued a per curiam decision largely affirming the trial courts judgment against defendants and in favor of the government. Although the panel largely affirmed the remedial order that was issued by the trial court, it vacated the following aspects of the order:
n its application to defendants subsidiaries;
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n the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application;
n its point-of-sale display provisions; and
n its application to Brown & Williamson Holdings.
The Court of Appeals panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly.
Furthermore, the Court of Appeals panel rejected all of the governments and intervenors cross appeal arguments and refused to broaden the remedial order entered by the trial court. The Court of Appeals panel also left undisturbed its prior holding that the government cannot obtain disgorgement as a permissible remedy under RICO.
In July 2009, defendants filed petitions for a rehearing before the panel and for a rehearing by the entire Court of Appeals. Defendants also filed a motion to vacate portions of the trial courts judgment on the grounds of mootness because of the passage of the Family Smoking Prevention and Tobacco Control Act (FSPTCA), granting the United States Food and Drug Administration (the FDA) broad authority over the regulation of tobacco products. In September 2009, the Court of Appeals entered three per curiam rulings. Two of them denied defendants petitions for panel rehearing or for rehearing en banc. In the third per curiam decision, the Court of Appeals denied defendants suggestion of mootness and motion for partial vacatur. In February 2010, PM USA and Altria Group, Inc. filed their certiorari petitions with the United States Supreme Court. In addition, the federal government and the intervenors filed their own certiorari petitions, asking the court to reverse an earlier Court of Appeals decision and hold that civil RICO allows the trial court to order disgorgement as well as other equitable relief, such as smoking cessation remedies, designed to redress continuing consequences of prior RICO violations. In June 2010, the United States Supreme Court denied all of the parties petitions. In July 2010, the Court of Appeals issued its mandate lifting the stay of the trial courts judgment and remanding the case to the trial court. As a result of the mandate, except for those matters remanded to the trial court for further proceedings, defendants are now subject to the injunction discussed above and the other elements of the trial courts judgment.
In February 2011, the government submitted its proposed corrective statements and the trial court referred issues relating to a document repository to a special master. The defendants filed a response to the governments proposed corrective statements and filed a motion to vacate the trial courts injunction in light of the FSPTCA, which motion was denied in June 2011. The defendants have appealed the trial courts ruling to the United States Court of Appeals for the District of Columbia Circuit. Argument is scheduled for April 20, 2012.
Apart from the matters on appeal, two issues remain pending before the district court: (i) the substance of the court-ordered corrective statements and (ii) the requirements related to point-of-sale signage. On November 17, 2011, the district court ordered the parties to submit their views on whether the district court should delay its order on these issues while other courts decide more recent cases challenging the FDAs new rules imposing certain tobacco marketing restrictions and graphic warnings. The parties complied with the district courts requests, and defendants asked the court to defer resolution of these issues until these other cases are fully resolved. On January 26, 2012, the district court ruled that it would not delay its decision until after the resolution of the cases challenging the FDAs new rules. The district court has not addressed the content of the corrective communications or the requirements related to point-of-sale signage.
On December 14, 2011, the parties to the lawsuit entered into an agreement as to the issues concerning the document repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million into the district court.
Lights/Ultra Lights Cases
n Overview: Plaintiffs in certain pending matters seek certification of their cases as class actions and allege, among other things, that the uses of the terms Lights and/or Ultra Lights constitute deceptive and unfair trade practices, common law fraud, or RICO violations, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury, and damages, the statute of limitations, express preemption by the Federal Cigarette Labeling and Advertising Act (FCLAA) and implied preemption by the policies and directives of the FTC, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. As of December 31, 2011, a total of eighteen such cases were pending in the United States. Four of these cases were pending in a multidistrict litigation proceeding in a single U.S. federal court as discussed below. The other cases were pending in various U.S. state courts. In addition, a purported Lights class action is pending against PM USA in Israel. Other entities have stated that they are considering filing such actions against Altria Group, Inc. and PM USA.
In the one Lights case pending in Israel, hearings on plaintiffs motion for class certification were held in November and December 2008, and an additional hearing on class certification was held in November 2011. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
n The Good Case: In May 2006, a federal trial court in Maine granted PM USAs motion for summary judgment in Good, a purported Lights class action, on the grounds that plaintiffs claims are preempted by the FCLAA and dismissed
the case. In August 2007, the United States Court of Appeals
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for the First Circuit vacated the district courts grant of PM USAs motion for summary judgment on federal preemption grounds and remanded the case to district court. The district court stayed the case pending the United States Supreme Courts ruling on defendants petition for writ of certiorari with the United States Supreme Court, which was granted in January 2008. The case was stayed pending the United States Supreme Courts decision. In December 2008, the United States Supreme Court ruled that plaintiffs claims are not barred by federal preemption. Although the Court rejected the argument that the FTCs actions were so extensive with respect to the descriptors that the state law claims were barred as a matter of federal law, the Courts decision was limited: it did not address the ultimate merits of plaintiffs claim, the viability of the action as a class action, or other state law issues. The case was returned to the federal court in Maine and consolidated with other federal cases in the multidistrict litigation proceeding discussed below. In June 2011, the plaintiffs voluntarily dismissed the case without prejudice after the district court denied plaintiffs motion for class certification.
n Federal Multidistrict Proceeding: Since the December 2008 United States Supreme Court decision in Good, and through December 31, 2011, twenty-four purported Lights class actions were served upon PM USA and, in certain cases, Altria Group, Inc. These cases were filed in 14 states, the U.S. Virgin Islands and the District of Columbia. All of these cases either were filed in federal court or were removed to federal court by PM USA.
A number of purported Lights class actions were transferred and consolidated by the Judicial Panel on Multidistrict Litigation (JPMDL) before the United States District Court for the District of Maine for pretrial proceedings (MDL proceeding). These cases, and the states in which each originated, included: Biundo (Illinois), Cabbat (Hawaii), Calistro (U.S. Virgin Islands), Corse (Tennessee), Domaingue (New York), Good (Maine), Haubrich (Pennsylvania), McClure (Tennessee), Mirick (Mississippi), Mulford (New Mexico), Parsons (District of Columbia), Phillips (Ohio), Slater (District of Columbia), Tang (New York), Tyrer (California), Williams (Arkansas) and Wyatt (Wisconsin).
In November 2010, the district court in the MDL proceeding denied plaintiffs motion for class certification in four cases, covering the jurisdictions of California, the District of Columbia, Illinois and Maine. These jurisdictions were selected by the parties as sample cases, with two selected by plaintiffs and two selected by defendants. Plaintiffs sought appellate review of this decision but, in February 2011, the United States Court of Appeals for the First Circuit denied plaintiffs petition for leave to appeal. In June 2011, plaintiffs in twelve cases voluntarily dismissed without prejudice their cases, and in August 2011, plaintiff in McClure voluntarily dismissed the case without prejudice. On December 12, 2011, the district court approved the request of the plaintiffs in the remaining four cases (Phillips, Tang, Wyatt and Cabbat) to recommend to the JPMDL that their cases be transferred back to the courts in which the suits originated. The question of the transfer, which defendants oppose, is now before the JPMDL.
n Lights Cases Dismissed, Not Certified or Ordered De-Certified: To date, in addition to the district court in the MDL proceeding, 15 courts in 16 Lights cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA.
Trial courts in Arizona, Illinois, Kansas, New Jersey, New Mexico, Oregon, Tennessee and Washington have refused to grant class certification or have dismissed plaintiffs class action allegations. Plaintiffs voluntarily dismissed a case in Michigan after a trial court dismissed the claims plaintiffs asserted under the Michigan Unfair Trade and Consumer Protection Act.
Several appellate courts have issued rulings that either affirmed rulings in favor of Altria Group, Inc. and/or PM USA or reversed rulings entered in favor of plaintiffs. In Florida, an intermediate appellate court overturned an order by a trial court that granted class certification in Hines. The Florida Supreme Court denied review in January 2008. The Supreme Court of Illinois has overturned a judgment that awarded damages to a certified class in the Price case. See The Price Case below for further discussion. In Louisiana, the United States Court of Appeals for the Fifth Circuit dismissed a purported Lights class action brought in Louisiana federal court (Sullivan) on the grounds that plaintiffs claims were preempted by the FCLAA. In New York, the United States Court of Appeals for the Second Circuit overturned a decision by a New York trial court in Schwab that denied defendants summary judgment motions and granted plaintiffs motion for certification of a nationwide class of all United States residents that purchased cigarettes in the United States that were labeled Light or Lights. In July 2010, plaintiffs in Schwab voluntarily dismissed the case with prejudice. In Ohio, the Ohio Supreme Court overturned class certifications in the Marrone and Phillips cases. Plaintiffs voluntarily dismissed without prejudice both cases in August 2009. The Supreme Court of Washington denied a motion for interlocutory review filed by the plaintiffs in the Davies case that sought review of an order by the trial court that refused to certify a class. Plaintiffs subsequently voluntarily dismissed the Davies case with prejudice.
In Oregon (Pearson), a state court denied plaintiffs motion for interlocutory review of the trial courts refusal to certify a class. In February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the district court granted PM USAs motion based on express preemption under the FCLAA, and plaintiffs appealed this dismissal and the class certification denial to the Oregon Court of Appeals. Argument was held in April 2010.
In Cleary, which was pending in an Illinois federal court, the district court dismissed plaintiffs Lights claims against one defendant and denied plaintiffs request to remand the case to state court. In September 2009, the court issued its ruling on PM USAs and the remaining defendants motion for summary judgment as to all Lights claims. The court
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granted the motion as to all defendants except PM USA. As to PM USA, the court granted the motion as to all Lights and other low tar brands other than Marlboro Lights. As to Marlboro Lights, the court ordered briefing on why the 2002 state court order dismissing the Marlboro Lights claims should not be vacated based upon Good. In January 2010, the court vacated the previous dismissal. In February 2010, the court granted summary judgment in favor of defendants as to all claims except for the Marlboro Lights claims, based on the statute of limitations and deficiencies relating to the named plaintiffs. In June 2010, the court granted summary judgment in favor of all defendants on all remaining claims, dismissing the case. In July 2010, plaintiffs filed a motion for reconsideration with the district court, which was denied. In August 2010, plaintiffs filed an appeal with the United States Court of Appeals for the Seventh Circuit. In August 2011, the Seventh Circuit affirmed the trial courts dismissal of the case. Plaintiffs petition for rehearing was denied by the Seventh Circuit on November 15, 2011.
n Other Developments: In December 2009, the state trial court in the Carroll (formerly known as Holmes) case (pending in Delaware), denied PM USAs motion for summary judgment based on an exemption provision in the Delaware Consumer Fraud Act. In January 2011, the trial court allowed the plaintiffs to file an amended complaint substituting class representatives and naming Altria Group, Inc. and PMI as additional defendants. In July 2011, the parties stipulated to the dismissal without prejudice of Altria Group, Inc. and PMI. The stipulation is signed by the parties but not yet approved by the trial court. See Guarantees for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.
In June 2007, the United States Supreme Court reversed the lower court rulings in the Watson case that denied plaintiffs motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants contention that the case must be tried in federal court under the federal officer statute. The case was removed to federal court in Arkansas and the case was transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the Watson case to Arkansas state court. On December 19, 2011, the plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice.
n The Price Case: Trial in the Price case commenced in state court in Illinois in January 2003, and in March 2003, the judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $3 billion in punitive damages against PM USA. In December 2005, the Illinois Supreme Court reversed the trial courts judgment in favor of the plaintiffs. In November 2006, the United States Supreme Court denied plaintiffs petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County enforced the Illinois Supreme Courts mandate and dismissed the case with prejudice.
In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment that was entered in favor of PM USA. Specifically, plaintiffs sought to vacate the judgment entered by the trial court on remand from the 2005 Illinois Supreme Court decision overturning the verdict on the ground that the United States Supreme Courts December 2008 decision in Good demonstrated that the Illinois Supreme Courts decision was inaccurate. PM USA filed a motion to dismiss plaintiffs petition and, in February 2009, the trial court granted PM USAs motion on the basis that the petition was not timely filed. In March 2009, the Price plaintiffs filed a notice of appeal with the Fifth Judicial District of the Appellate Court of Illinois. In February 2011, the intermediate appellate court ruled that the petition was timely filed and reversed the trial courts dismissal of the plaintiffs petition and, in September 2011, the Illinois Supreme Court declined PM USAs petition for review. As a result, the case has returned to the trial court for proceedings on whether the court should grant the plaintiffs petition to reopen the prior judgment.
In June 2009, the plaintiff in an individual smoker lawsuit (Kelly) brought on behalf of an alleged smoker of Lights cigarettes in Madison County, Illinois state court filed a motion seeking a declaration that his claims under the Illinois Consumer Fraud Act are not (1) barred by the exemption in that statute based on his assertion that the Illinois Supreme Courts decision in Price is no longer good law in light of the decisions by the United States Supreme Court in Good and Watson, and (2) preempted in light of the United States Supreme Courts decision in Good. In September 2009, the court granted plaintiffs motion as to federal preemption, but denied it with respect to the state statutory exemption.
n State Trial Court Class Certifications: State trial courts have certified classes against PM USA in Massachusetts (Aspinall), Minnesota (Curtis), Missouri (Larsen) and New Hampshire (Lawrence). Significant developments in these cases include:
n Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USAs motion for summary judgment and granted plaintiffs motion for summary judgment on the defenses of federal preemption and a state law exemption to Massachusetts consumer protection statute. On motion of the parties, the trial court subsequently reported its decision to deny summary judgment to the appeals court for review and stayed further proceedings pending completion of the appellate review. In December 2008, subsequent to the United States Supreme Courts decision in Good, the Massachusetts Supreme Judicial Court issued an order requesting that the parties advise the court within 30 days whether the Good decision is dispositive of federal preemption issues pending on appeal. In January 2009, PM USA notified the Massachusetts Supreme Judicial Court that Good is dispositive of the federal preemption issues on appeal, but requested further briefing on the state law statutory exemption issue. In March 2009, the
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Massachusetts Supreme Judicial Court affirmed the order denying summary judgment to PM USA and granting the plaintiffs cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). Argument on plaintiffs motion was held in July 2011.
n Curtis: In April 2005, the Minnesota Supreme Court denied PM USAs petition for interlocutory review of the trial courts class certification order. In October 2009, the trial court denied plaintiffs motion for partial summary judgment, filed in February 2009, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). In October 2009, the trial court granted PM USAs motion for partial summary judgment as to all consumer protection counts and, in December 2009, dismissed the case in its entirety. In December 2010, the Minnesota Court of Appeals reversed the trial courts dismissal of the case and affirmed the trial courts prior certification of the class under Minnesotas consumer protection statutes. The Court of Appeals also affirmed the trial courts denial of the plaintiffs motion for partial summary judgment claiming collateral estoppel from the findings in the case brought by the Department of Justice. PM USAs petition for review with the Minnesota Supreme Court was granted in March 2011. Argument on the petition was heard in September 2011.
n Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs motion for reconsideration of the period during which potential class members can qualify to become part of the class. The class period remains 1995 2003. In June 2010, PM USAs motion for partial summary judgment regarding plaintiffs request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit described above). The plaintiffs motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs claims. On August 31, 2011, the trial court granted PM USAs motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that Marlboro Lights are more dangerous than Marlboro Reds. The trial court denied PM USAs remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011 the court declared a mistrial after the jury failed to reach a verdict. The court has scheduled a new trial to begin on January 21, 2013.
n Lawrence: In November 2010, the trial court certified a class consisting of all persons who purchased Marlboro Lights cigarettes in the state of New Hampshire at any time from the date the brand was introduced into commerce until the date trial in the case begins. PM USAs motion for reconsideration of this decision was denied in January 2011. In September 2011, the New Hampshire Supreme Court accepted review of the class certification decision.
Certain Other Tobacco-Related Litigation
n Tobacco Price Case: As of December 31, 2011, one case remains pending in Kansas (Smith) in which plaintiffs allege that defendants, including PM USA and Altria Group, Inc., conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs motion for class certification has been granted. Trial has been set for July 16, 2012.
n Case Under the California Business and Professions Code: In June 1997, a lawsuit (Brown) was filed in California state court alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs claims that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2004, the trial court granted defendants motion for summary judgment as to plaintiffs claims attacking defendants cigarette advertising and promotion and denied defendants motion for summary judgment on plaintiffs claims based on allegedly false affirmative statements. In March 2005, the court granted defendants motion to decertify the class based on a California law, which inter alia limits the ability to bring a lawsuit to only those plaintiffs who have suffered injury in fact and lost money or property as a result of defendants alleged statutory violations (Proposition 64).
In September 2006, an intermediate appellate court affirmed the trial courts order decertifying the class. In May 2009, the California Supreme Court reversed the trial court decision that was affirmed by the appellate court and remanded the case to the trial court. In March 2010, the trial court granted reconsideration of its September 2004 order granting partial summary judgment to defendants with respect to plaintiffs Lights claims on the basis of judicial decisions issued since its order was issued, including the United States Supreme Courts ruling in Good, thereby reinstating plaintiffs Lights claims. Since the trial courts prior ruling decertifying the class was reversed on appeal by the California Supreme Court, the parties and the court are treating all claims currently being asserted by the plaintiffs as certified, subject, however, to defendants challenge to the class representatives standing to assert their claims. The class is defined as people who, at the time they were residents of California, smoked in California one or more cigarettes between June 10, 1993 and April 23, 2001, and who were exposed to defendants marketing and advertising activities in California.
In July 2010, plaintiffs filed a motion seeking collateral estoppel effect from the findings in the case brought by the Department of Justice (see Federal Governments Lawsuit
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described above). In September 2010, plaintiffs filed a motion for preliminary resolution of legal issues regarding restitutionary relief. The trial court denied both of plaintiffs motions in November 2010. In November 2010, defendants filed a motion seeking a determination that Brown class members who were also part of the class in Daniels (a previously disclosed consumer fraud case in which the California Supreme Court affirmed summary judgment in PM USAs favor based on preemption and First Amendment grounds) are precluded by the Daniels judgment from recovering in Brown. This motion was denied in December 2010. Defendants sought review of this decision before the Fourth District Court of Appeal but were denied review in March 2011. On January 9, 2012, defendants filed motions for a determination that the class representatives lack standing and are not typical or adequate to represent the class and to decertify the class. Argument is scheduled for March 21, 2012. Trial is currently scheduled for October 5, 2012.
n Ignition Propensity Cases: PM USA is currently a defendant in two wrongful death actions in which plaintiffs contend that fires caused by cigarettes led to other individuals deaths. In one case pending in federal court in Massachusetts (Sarro), the district court in August 2009 granted in part PM USAs motion to dismiss, but ruled that two claims unrelated to product design could go forward. In November 2010, PM USA filed a motion for summary judgment. Argument was heard in March 2011. In a Kentucky case (Walker), the federal district court denied plaintiffs motion to remand the case to state court and dismissed plaintiffs claims in February 2009. Plaintiffs subsequently filed a notice of appeal. On October 31, 2011, the United States Court of Appeals for the Sixth Circuit (the Sixth Circuit) reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky state court. The Sixth Circuit did not address the merits of the district courts dismissal order. Defendants petition for rehearing with the Sixth Circuit was denied on December 8, 2011.
UST Litigation
Claims related to smokeless tobacco products generally fall within the following categories:
First, UST and/or its tobacco subsidiaries has been named in certain health care cost reimbursement/third-party recoupment/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities.
Second, UST and/or its tobacco subsidiaries has been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers, and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are five individuals alleging use of USSTCs smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.
Third, UST and/or its tobacco subsidiaries has been named in a number of other individual tobacco and health suits. Plaintiffs allegations of liability in these cases are based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction, and breach of consumer protection statutes. Plaintiffs seek various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. USSTC is currently named in one such action in Florida (Vassallo).
Certain Other Actions
n IRS Challenges to PMCC Leases:
n Background: The IRS has concluded its examination of Altria Group, Inc.s consolidated federal income tax returns for the years 1996 through 2003, and for each year has disallowed tax benefits pertaining to certain leveraged lease transactions entered into by PMCC (referred to by the IRS as lease-in/lease-out (LILO) and sale-in/lease-out (SILO) transactions). For financial reporting purposes, PMCC accounted for LILO and SILO transactions as leveraged lease transactions under the guidance in Accounting Standards Codification (ASC) 840, Leases (ASC 840). For income tax purposes, PMCC treated these transactions as leases under case law and applicable IRS administrative guidance for the 1996 through 2009 tax years.
n Refund Claims and Litigation: Altria Group, Inc. believes that its tax treatment of PMCCs LILO and SILO transactions on federal and state income tax returns for the 1996 through 2009 tax years was proper and complied with applicable tax laws in effect during the relevant periods. Altria Group, Inc. has contested the disallowances for the 1996 through 2003 tax years, filed claims for refunds of federal income tax and associated interest paid and pursued or is pursuing refund litigation in federal court with respect to certain of the refund claims, as discussed below.
In October 2006, Altria Group, Inc. filed a complaint in the United States District Court for the Southern District of New York to claim a refund on a portion of these federal income tax payments and associated interest for the years 1996 and 1997, attributable to LILO and SILO transactions entered into during those years. In July 2009, the jury returned a unanimous verdict in favor of the IRS and, in April 2010, after denying Altria Group, Inc.s post-trial motions, the district court entered final judgment in favor of the IRS. Altria Group, Inc. filed an appeal with the United States Court of
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Appeals for the Second Circuit in June 2010. In September 2011, the Second Circuit affirmed the district court decision in favor of the IRS. Altria Group, Inc. has elected not to pursue further judicial review of its refund claim for the 1996 and 1997 transactions.
In March 2008, Altria Group, Inc. filed a second complaint in the United States District Court for the Southern District of New York seeking a refund of the federal income tax payments and associated interest for the years 1998 and 1999 attributable to the disallowance of tax benefits claimed in those years with respect to the LILO and SILO transactions subject to the jury verdict and with respect to the additional LILO and SILO transactions entered into in 1998 and 1999. In May 2009, the district court granted a stay pending the decision by the United States Court of Appeals for the Second Circuit in the appeal involving the 1996 and 1997 transactions. Following Altria Group, Inc.s decision not to pursue further judicial review of its refund claim regarding the 1996 and 1997 transactions, the case for the 1998 and 1999 years has been reactivated.
In March 2011, Altria Group, Inc. filed claims for a refund with the IRS for the years 2000 through 2003 of the tax and associated interest paid with respect to the LILO and SILO transactions that PMCC entered into during the 1996-2003 years. The IRS disallowed the claims in July 2011, and Altria Group, Inc. intends to commence litigation in federal court.
In a closing agreement entered into in May 2010, Altria Group, Inc. and the IRS agreed that, with the exception of the LILO and SILO transactions, the tax treatment reported by Altria Group, Inc. on its consolidated federal income tax returns for the 2000-2003 years, as amended by the agreed-upon adjustments in the closing agreement, is appropriate and final. The IRS may not assess against Altria Group, Inc. any further taxes or additions to tax (including penalties) with respect to these years.
As a prerequisite to commencing in federal court the refund litigation described above following the IRS disallowance of tax benefits of the LILO and SILO transactions for the 1996-1999 audit cycle, in 2006 Altria Group, Inc. paid approximately $150 million related to disallowed tax benefits and associated interest. Similarly, following the IRS disallowance of tax benefits of the LILO and SILO transactions for the 2000-2003 audit cycle, also described above, in 2010, Altria Group, Inc. paid approximately $945 million in disallowed tax benefits and associated interest in order to pursue its legal challenge to the disallowances in federal court.
n Payments to the IRS: As indicated in Refund Claims and Litigation above, Altria Group, Inc. has paid a total of approximately $1.1 billion in federal income tax payments and interest with respect to the LILO and SILO transactions for the 1996 through 2003 tax years. The tax component of this amount represents an acceleration of taxes that Altria Group, Inc. would have otherwise paid over the later stages of the LILO and SILO transactions. Altria Group, Inc. treated the amounts paid to the IRS for these years as deposits for financial reporting purposes pending the ultimate outcomes of the litigation. Altria Group, Inc. included such amounts in Other assets on its consolidated balance sheets and did not include such amounts in the supplemental disclosure of cash paid for income taxes on the consolidated statement of cash flows. As a result of its decision not to pursue further judicial review of its refund claims for the 1996 and 1997 transactions, Altria Group, Inc.s consolidated balance sheet at December 31, 2011 reflects reductions in both Other assets and tax liabilities of approximately $362 million, which is the amount of taxes and interest that Altria Group, Inc. has previously paid related to the 1996 and 1997 transactions for the 1996 through 2003 tax years. This payment has 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, 2011. The impact of these payments on Altria Group, Inc.s earnings has previously been recorded on its financial statements, as discussed below. If Altria Group, Inc. were to prevail in the current and/or anticipated refund litigation, it would receive a refund of the remaining amounts paid to the IRS plus interest. If the IRSs position with respect to the LILO and SILO transactions is ultimately sustained, Altria Group, Inc. would further reduce its tax liabilities and the asset discussed above.
n Anticipated Future Disallowances and Additional Payments to the IRS: Altria Group, Inc. further expects the IRS and impacted states to disallow income tax benefits claimed in years 2004 through 2009 related to the LILO and SILO transactions that PMCC entered into from 1996 through 2003. The disallowance of federal and state income tax benefits for the 2004 through 2009 tax years and associated interest through the 2011 tax year would result in additional payments of approximately $600 million, excluding potential penalties. The tax component of this amount represents an acceleration of taxes that Altria Group, Inc. would have otherwise paid over the later stages of the LILO and SILO transactions. This amount is net of federal and state income taxes paid on gains associated with sales of leased assets from January 1, 2008 through December 31, 2011 and excludes additional taxes paid in 2011 for the 2010 and 2011 tax years as a result of the decision discussed below not to claim tax benefits for the 2010 and future tax years. Although the initial amount payable may be greater than $600 million, such taxes paid on gains associated with sales of leased assets will be subsequently recovered no later than the closing of the audits for the cycles in which the sales have occurred. The payments of disallowed tax benefits, if any, would depend upon the timing and outcome of future IRS audits and any related administrative challenges or litigation. The IRS is currently auditing the 2004-2006 tax years.
2010 and Future Tax Years: Altria Group, Inc. did not claim tax benefits pertaining to PMCCs LILO and SILO transactions on its federal and state income tax returns for 2010 and, at this time, does not intend to claim such tax benefits in future years. Altria Group, Inc., however, intends to preserve its right to file amended returns for these years claiming the tax benefits pertaining to PMCCs LILO and SILO transactions if Altria Group, Inc. is successful in the current and/or anticipated litigation discussed above.
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n Second Quarter 2011 Earnings Charge: Altria Group, Inc. has continually re-evaluated the likelihood of sustaining its tax position on PMCCs LILO and SILO transactions, as required by ASC 740, Income Taxes (ASC 740). In the second quarter of 2011, in accordance with ASC 840 and ASC 740, Altria Group, Inc. recorded a one-time charge of $627 million against its 2011 reported earnings related to the tax treatment of the LILO and SILO transactions that PMCC entered into between 1996 and 2003. Altria Group, Inc.s decision to record the charge was based on the Federal Circuits April 2011 adverse decision in Wells Fargo & Co. v. United States, involving SILO transactions entered into by another taxpayer. Altria Group, Inc. concluded that the decision introduced incremental risk to its tax analysis and, as a result, that it was no longer more likely than not that it would prevail in its defense of its tax position on PMCCs LILO and SILO transactions.
The charge of $627 million reflects the re-characterization of PMCCs LILO and SILO transactions as loans (as opposed to leases) for income tax purposes, which changes the timing of income recognition for tax purposes over the term of the deemed loan. This change, in turn, impacts the income of the leases recorded pursuant to leveraged lease accounting (ASC 840) resulting in a lowering of the cumulative income from the transactions that had been recorded from inception of the transactions to the date of the charge. This earnings charge is incremental to $146 million recorded as a reduction to stockholders equity upon the adoption of new accounting standards for leases (FAS 13-2) and for uncertainty in income taxes (FIN 48) on January 1, 2007, and approximately $95 million recorded to the statements of earnings from January 1, 2007 through March 31, 2011. In quantifying the reduction in cumulative leveraged lease income to include in the second quarter 2011 earnings charge, Altria Group, Inc. was required to make assumptions regarding a potential settlement of these matters with the IRS. To the extent the assumptions change, there may be additional impact on Altria Group, Inc.s earnings but Altria Group, Inc. does not expect such impact, if any, to be significant.
Approximately 50% of the $627 million charge represents the effects of re-characterization of the transactions as loans and the resulting reduction in cumulative leveraged lease income described above. This reduction in income will be recaptured over the remaining terms of the respective transactions. The remaining portion of the charge primarily represents a permanent charge for interest on tax underpayments. The charge does not include potential penalties as Altria Group, Inc. believes that it met the applicable standards to avoid any associated penalties at the time it claimed the deductions on its tax returns.
As of December 31, 2011, the LILO and SILO transactions represented approximately 30% of the Net Finance Assets of PMCCs lease portfolio. PMCC has not entered into any LILO or SILO transactions since 2003.
n Kraft Thrift Plan Cases: Four participants in the Kraft Foods Global, Inc. Thrift Plan (Kraft Thrift Plan), a defined contribution plan, filed a class action complaint (George II) on behalf of all participants and beneficiaries of the Kraft Thrift Plan in July 2008 in the United States District Court for the Northern District of Illinois alleging breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). Named defendants in this action include Altria Corporate Services, Inc. (now Altria Client Services Inc.) and certain company committees that allegedly had a relationship to the Kraft Thrift Plan. Plaintiffs request, among other remedies, that defendants restore to the Kraft Thrift Plan all losses improperly incurred.
In December 2009, the court granted in part and denied in part defendants motion to dismiss plaintiffs complaint. In addition to dismissing certain claims made by plaintiffs for equitable relief under ERISA as to all defendants, the court dismissed claims alleging excessive administrative fees and mismanagement of company stock funds as to one of the Altria Group, Inc. defendants. In February 2010, the court granted a joint stipulation dismissing the fee and stock fund claims without prejudice as to the remaining defendants, including Altria Corporate Services, Inc. Accordingly, the only claim remaining at this time in George II relates to the alleged negligence of plan fiduciaries for including the Growth Equity Fund and Balanced Fund as Kraft Thrift Plan investment options. Plaintiffs filed a motion for class certification in March 2010, which the court granted in August 2010. Defendants filed a motion for summary judgment in January 2011, and plaintiffs filed a motion for partial summary judgment. In March 2011, defendants filed a motion to vacate the class certification in light of recent federal judicial precedent. In July 2011, the court granted defendants summary judgment motion in part, finding that claims for periods prior to July 2, 2002 were time barred, and that the defendants properly monitored the funds. The court also denied plaintiffs motion for partial summary judgment. Remaining in the case are claims after July 2, 2002 relating to whether it was prudent to retain actively managed investments (Growth Equity Fund and Balanced Fund) in the Kraft Thrift Plan after 1999. In July 2011, the court also granted defendants motion to vacate the class certification, and allowed plaintiffs leave to file a new motion for class certification in light of recent precedent and the courts summary judgment findings. Plaintiffs motion to certify the class is pending before the court.
In August 2011, Altria Client Services, Inc. and a company committee that allegedly had a relationship to the Kraft Thrift Plan were added as defendants in another class action previously brought by the same plaintiffs in 2006 (George I), in which plaintiffs allege defendants breached their fiduciary duties under ERISA by offering company stock funds in a unitized format and by allegedly overpaying for recordkeeping services.
The Altria Group, Inc. defendants deny any violation of ERISA or other unlawful conduct and are defending these cases vigorously. The parties are currently in mediation. Absent a resolution, trial in both cases is expected to be scheduled to occur in the first half of 2012. Under the terms of a Distribution Agreement between Altria Group, Inc. and Kraft, the Altria Group, Inc. defendants may be entitled to indemnity against any liabilities incurred in connection with these cases.
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California Wage and Hour Case
In September 2011, two former sales representatives employed in California by Altria Group Distribution Company (AGDC) filed a putative class action in the United States District Court for the Northern District of California, under Californias wage and hour laws. The named plaintiffs seek to represent a class of all former sales representatives who worked for AGDC in California at any time since September 2007. The plaintiffs seek overtime pay, recovery of certain wages, reimbursement of business expenses and other non-monetary relief and penalties. On November 9, 2011, the plaintiffs amended their complaint to add an additional claim for penalties under Californias Private Attorney General Act. On January 6, 2012, AGDC moved to dismiss certain of plaintiffs claims and to transfer the case from the Northern District of California to the Central District of California.
Environmental Regulation
Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. 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. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation 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 results of operations, capital expenditures, financial position or cash flows.
Guarantees
In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, 2011, subsidiaries of Altria Group, Inc. were also contingently liable for $29 million of guarantees related to their own performance, consisting primarily of surety bonds. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.s liquidity.
Under the terms of a distribution agreement between Altria Group, Inc. and PMI, entered into as a result of Altria Group, Inc.s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, 2011 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 20. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria Group, Inc.s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program.
Redeemable Noncontrolling Interest
In September 2007, Ste. Michelle completed the acquisition of Stags Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC (Michelle-Antinori), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California (Antinori). In connection with the acquisition of Stags Leap Wine Cellars, Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinoris initial investment of $27 million. The put arrangement became exercisable on September 11, 2010 and has no expiration date. As of December 31, 2011, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized in the consolidated balance sheet for the put arrangement.
The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section in the consolidated balance sheets at December 31, 2011 and 2010.
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Note 20.
Condensed Consolidating Financial Information:
PM USA, which is a wholly-owned subsidiary of Altria Group, Inc., has issued guarantees relating to Altria Group, Inc.s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the Guarantees). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.s obligations under the guaranteed debt instruments (the Obligations), subject to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.
The obligations of PM USA under the Guarantees are limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees, result in PM USAs obligations under the Guarantees not constituting a fraudulent transfer or conveyance. For this purpose, Bankruptcy Law means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
PM USA will be unconditionally released and discharged from its obligations under each of the Guarantees upon the earliest to occur of:
n the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;
n the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;
n the payment in full of the Obligations pertaining to such Guarantees; and
n the rating of Altria Group, Inc.s long-term senior unsecured debt by Standard & Poors of A or higher.
At December 31, 2011, the respective principal wholly-owned subsidiaries of Altria Group, Inc. and PM USA were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
The following sets forth the condensed consolidating balance sheets as of December 31, 2011 and 2010, condensed consolidating statements of earnings for the years ended December 31, 2011, 2010 and 2009, and condensed consolidating statements of cash flows for the years ended December 31, 2011, 2010 and 2009 for Altria Group, Inc., PM USA and Altria Group, Inc.s other subsidiaries that are not guarantors of Altria Group, Inc.s debt instruments (the Non-Guarantor Subsidiaries). The financial information is based on Altria Group, Inc.s understanding of the SEC interpretation and application of Rule 3-10 of SEC Regulation S-X.
The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.
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Condensed Consolidating Balance Sheets
(in millions of dollars)
December 31, 2011 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Assets |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Cash and cash equivalents |
$ | 3,245 | $ | | $ | 25 | $ | | $ | 3,270 | ||||||||||
Receivables |
174 | 16 | 78 | 268 | ||||||||||||||||
Inventories: |
||||||||||||||||||||
Leaf tobacco |
565 | 369 | 934 | |||||||||||||||||
Other raw materials |
128 | 42 | 170 | |||||||||||||||||
Work in process |
4 | 312 | 316 | |||||||||||||||||
Finished product |
126 | 233 | 359 | |||||||||||||||||
823 | 956 | 1,779 | ||||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
403 | 3,007 | 1,765 | (5,175 | ) | |||||||||||||||
Deferred income taxes |
9 | 1,157 | 41 | 1,207 | ||||||||||||||||
Other current assets |
6 | 430 | 247 | (76 | ) | 607 | ||||||||||||||
Total current assets |
3,837 | 5,433 | 3,112 | (5,251 | ) | 7,131 | ||||||||||||||
Property, plant and equipment, at cost |
2 | 3,280 | 1,446 | 4,728 | ||||||||||||||||
Less accumulated depreciation |
2 | 2,005 | 505 | 2,512 | ||||||||||||||||
1,275 | 941 | 2,216 | ||||||||||||||||||
Goodwill |
5,174 | 5,174 | ||||||||||||||||||
Other intangible assets, net |
2 | 12,096 | 12,098 | |||||||||||||||||
Investment in SABMiller |
5,509 | 5,509 | ||||||||||||||||||
Investment in consolidated subsidiaries |
7,009 | 342 | (7,351 | ) | ||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
6,500 | (6,500 | ) | |||||||||||||||||
Other assets |
941 | 586 | 111 | (381 | ) | 1,257 | ||||||||||||||
Total consumer products assets |
23,796 | 7,638 | 21,434 | (19,483 | ) | 33,385 | ||||||||||||||
Financial services |
||||||||||||||||||||
Finance assets, net |
3,559 | 3,559 | ||||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
292 | (292 | ) | |||||||||||||||||
Other assets |
18 | 18 | ||||||||||||||||||
Total financial services assets |
3,869 | (292 | ) | 3,577 | ||||||||||||||||
Total Assets |
$ | 23,796 | $ | 7,638 | $ | 25,303 | $ | (19,775 | ) | $ | 36,962 | |||||||||
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Condensed Consolidating Balance Sheets (continued)
(in millions of dollars)
December 31, 2011 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Liabilities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | 600 | $ | | $ | 600 | ||||||||||
Accounts payable |
69 | 159 | 275 | 503 | ||||||||||||||||
Accrued liabilities: |
||||||||||||||||||||
Marketing |
390 | 40 | 430 | |||||||||||||||||
Taxes, except income taxes |
209 | 11 | 220 | |||||||||||||||||
Employment costs |
29 | 12 | 184 | 225 | ||||||||||||||||
Settlement charges |
3,508 | 5 | 3,513 | |||||||||||||||||
Other |
384 | 620 | 383 | (76 | ) | 1,311 | ||||||||||||||
Dividends payable |
841 | 841 | ||||||||||||||||||
Due to Altria Group, Inc. and subsidiaries |
3,792 | 474 | 1,201 | (5,467 | ) | |||||||||||||||
Total current liabilities |
5,115 | 5,372 | 2,699 | (5,543 | ) | 7,643 | ||||||||||||||
Long-term debt |
12,790 | 299 | 13,089 | |||||||||||||||||
Deferred income taxes |
1,787 | 3,345 | (381 | ) | 4,751 | |||||||||||||||
Accrued pension costs |
236 | 1,426 | 1,662 | |||||||||||||||||
Accrued postretirement health care costs |
1,562 | 797 | 2,359 | |||||||||||||||||
Due to Altria Group, Inc. and subsidiaries |
6,500 | (6,500 | ) | |||||||||||||||||
Other liabilities |
188 | 216 | 198 | 602 | ||||||||||||||||
Total consumer products liabilities |
20,116 | 7,150 | 15,264 | (12,424 | ) | 30,106 | ||||||||||||||
Financial services |
||||||||||||||||||||
Deferred income taxes |
2,811 | 2,811 | ||||||||||||||||||
Other liabilities |
330 | 330 | ||||||||||||||||||
Total financial services liabilities |
3,141 | 3,141 | ||||||||||||||||||
Total liabilities |
20,116 | 7,150 | 18,405 | (12,424 | ) | 33,247 | ||||||||||||||
Contingencies | ||||||||||||||||||||
Redeemable noncontrolling interest | 32 | 32 | ||||||||||||||||||
Stockholders Equity |
||||||||||||||||||||
Common stock |
935 | 9 | (9 | ) | 935 | |||||||||||||||
Additional paid-in capital |
5,674 | 408 | 8,238 | (8,646 | ) | 5,674 | ||||||||||||||
Earnings reinvested in the business |
23,583 | 393 | 265 | (658 | ) | 23,583 | ||||||||||||||
Accumulated other comprehensive losses |
(1,887 | ) | (313 | ) | (1,649 | ) | 1,962 | (1,887 | ) | |||||||||||
Cost of repurchased stock |
(24,625 | ) | (24,625 | ) | ||||||||||||||||
Total stockholders equity attributable to Altria Group, Inc. |
3,680 | 488 | 6,863 | (7,351 | ) | 3,680 | ||||||||||||||
Noncontrolling interests |
3 | 3 | ||||||||||||||||||
Total stockholders equity |
3,680 | 488 | 6,866 | (7,351 | ) | 3,683 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 23,796 | $ | 7,638 | $ | 25,303 | $ | (19,775 | ) | $ | 36,962 | |||||||||
63 |
Condensed Consolidating Balance Sheets
(in millions of dollars)
December 31, 2010 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Assets |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Cash and cash equivalents |
$ | 2,298 | $ | | $ | 16 | $ | | $ | 2,314 | ||||||||||
Receivables |
1 | 9 | 75 | 85 | ||||||||||||||||
Inventories: |
||||||||||||||||||||
Leaf tobacco |
594 | 366 | 960 | |||||||||||||||||
Other raw materials |
121 | 39 | 160 | |||||||||||||||||
Work in process |
299 | 299 | ||||||||||||||||||
Finished product |
145 | 239 | 384 | |||||||||||||||||
860 | 943 | 1,803 | ||||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
429 | 2,902 | 1,556 | (4,887 | ) | |||||||||||||||
Deferred income taxes |
18 | 1,190 | (43 | ) | 1,165 | |||||||||||||||
Other current assets |
64 | 420 | 130 | 614 | ||||||||||||||||
Total current assets |
2,810 | 5,381 | 2,720 | (4,930 | ) | 5,981 | ||||||||||||||
Property, plant and equipment, at cost |
2 | 3,749 | 1,399 | 5,150 | ||||||||||||||||
Less accumulated depreciation |
2 | 2,343 | 425 | 2,770 | ||||||||||||||||
1,406 | 974 | 2,380 | ||||||||||||||||||
Goodwill |
5,174 | 5,174 | ||||||||||||||||||
Other intangible assets, net |
2 | 12,116 | 12,118 | |||||||||||||||||
Investment in SABMiller |
5,367 | 5,367 | ||||||||||||||||||
Investment in consolidated subsidiaries |
7,561 | 325 | (7,886 | ) | ||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
6,500 | (6,500 | ) | |||||||||||||||||
Other assets |
1,511 | 680 | 98 | (438 | ) | 1,851 | ||||||||||||||
Total consumer products assets |
23,749 | 7,794 | 21,082 | (19,754 | ) | 32,871 | ||||||||||||||
Financial services |
||||||||||||||||||||
Finance assets, net |
4,502 | 4,502 | ||||||||||||||||||
Due from Altria Group, Inc. and subsidiaries |
690 | (690 | ) | |||||||||||||||||
Other assets |
29 | 29 | ||||||||||||||||||
Total financial services assets |
5,221 | (690 | ) | 4,531 | ||||||||||||||||
Total Assets |
$ | 23,749 | $ | 7,794 | $ | 26,303 | $ | (20,444 | ) | $ | 37,402 | |||||||||
64 |
Condensed Consolidating Balance Sheets (continued)
(in millions of dollars)
December 31, 2010 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Liabilities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Accounts payable |
$ | | $ | 215 | $ | 314 | $ | | $ | 529 | ||||||||||
Accrued liabilities: |
||||||||||||||||||||
Marketing |
347 | 100 | 447 | |||||||||||||||||
Taxes, except income taxes |
212 | 19 | 231 | |||||||||||||||||
Employment costs |
30 | 18 | 184 | 232 | ||||||||||||||||
Settlement charges |
3,531 | 4 | 3,535 | |||||||||||||||||
Other |
312 | 467 | 333 | (43 | ) | 1,069 | ||||||||||||||
Dividends payable |
797 | 797 | ||||||||||||||||||
Due to Altria Group, Inc. and subsidiaries |
3,674 | 454 | 1,449 | (5,577 | ) | |||||||||||||||
Total current liabilities |
4,813 | 5,244 | 2,403 | (5,620 | ) | 6,840 | ||||||||||||||
Long-term debt |
11,295 | 899 | 12,194 | |||||||||||||||||
Deferred income taxes |
1,800 | 3,256 | (438 | ) | 4,618 | |||||||||||||||
Accrued pension costs |
204 | 987 | 1,191 | |||||||||||||||||
Accrued postretirement health care costs |
1,500 | 902 | 2,402 | |||||||||||||||||
Due to Altria Group, Inc. and subsidiaries |
6,500 | (6,500 | ) | |||||||||||||||||
Other liabilities |
445 | 335 | 169 | 949 | ||||||||||||||||
Total consumer products liabilities |
18,557 | 7,079 | 15,116 | (12,558 | ) | 28,194 | ||||||||||||||
Financial services |
||||||||||||||||||||
Deferred income taxes |
3,880 | 3,880 | ||||||||||||||||||
Other liabilities |
101 | 101 | ||||||||||||||||||
Total financial services liabilities |
3,981 | 3,981 | ||||||||||||||||||
Total liabilities |
18,557 | 7,079 | 19,097 | (12,558 | ) | 32,175 | ||||||||||||||
Contingencies |
||||||||||||||||||||
Redeemable noncontrolling interest |
32 | 32 | ||||||||||||||||||
Stockholders Equity |
||||||||||||||||||||
Common stock |
935 | 9 | (9 | ) | 935 | |||||||||||||||
Additional paid-in capital |
5,751 | 408 | 8,217 | (8,625 | ) | 5,751 | ||||||||||||||
Earnings reinvested in the business |
23,459 | 583 | 385 | (968 | ) | 23,459 | ||||||||||||||
Accumulated other comprehensive losses |
(1,484 | ) | (276 | ) | (1,440 | ) | 1,716 | (1,484 | ) | |||||||||||
Cost of repurchased stock |
(23,469 | ) | (23,469 | ) | ||||||||||||||||
Total stockholders equity attributable to Altria Group, Inc. |
5,192 | 715 | 7,171 | (7,886 | ) | 5,192 | ||||||||||||||
Noncontrolling interests |
3 | 3 | ||||||||||||||||||
Total stockholders equity |
5,192 | 715 | 7,174 | (7,886 | ) | 5,195 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 23,749 | $ | 7,794 | $ | 26,303 | $ | (20,444 | ) | $ | 37,402 | |||||||||
65 |
Condensed Consolidating Statements of Earnings
(in millions of dollars)
for the year ended December 31, 2011 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Net revenues |
$ | | $ | 21,330 | $ | 2,496 | $ | (26 | ) | $ | 23,800 | |||||||||
Cost of sales |
6,883 | 823 | (26 | ) | 7,680 | |||||||||||||||
Excise taxes on products |
6,846 | 335 | 7,181 | |||||||||||||||||
Gross profit |
7,601 | 1,338 | 8,939 | |||||||||||||||||
Marketing, administration and research costs |
186 | 2,164 | 293 | 2,643 | ||||||||||||||||
Changes to Kraft and PMI tax-related receivables |
(14 | ) | (14 | ) | ||||||||||||||||
Asset impairment and exit costs |
8 | 200 | 14 | 222 | ||||||||||||||||
Amortization of intangibles |
20 | 20 | ||||||||||||||||||
Operating (expense) income |
(180 | ) | 5,237 | 1,011 | 6,068 | |||||||||||||||
Interest and other debt expense, net |
698 | 61 | 457 | 1,216 | ||||||||||||||||
Earnings from equity investment in SABMiller |
(730 | ) | (730 | ) | ||||||||||||||||
(Loss) earnings before income taxes and equity earnings of subsidiaries |
(148 | ) | 5,176 | 554 | 5,582 | |||||||||||||||
(Benefit) provision for income taxes |
(199 | ) | 1,930 | 458 | 2,189 | |||||||||||||||
Equity earnings of subsidiaries |
3,339 | 64 | (3,403 | ) | ||||||||||||||||
Net earnings |
3,390 | 3,310 | 96 | (3,403 | ) | 3,393 | ||||||||||||||
Net earnings attributable to noncontrolling interests |
(3 | ) | (3 | ) | ||||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 3,390 | $ | 3,310 | $ | 93 | $ | (3,403 | ) | $ | 3,390 | |||||||||
Condensed Consolidating Statements of Earnings
(in millions of dollars)
for the year ended December 31, 2010 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Net revenues |
$ | | $ | 21,580 | $ | 2,809 | $ | (26 | ) | $ | 24,363 | |||||||||
Cost of sales |
6,990 | 740 | (26 | ) | 7,704 | |||||||||||||||
Excise taxes on products |
7,136 | 335 | 7,471 | |||||||||||||||||
Gross profit |
7,454 | 1,734 | 9,188 | |||||||||||||||||
Marketing, administration and research costs |
147 | 2,280 | 308 | 2,735 | ||||||||||||||||
Changes to Kraft and PMI tax-related receivables |
169 | 169 | ||||||||||||||||||
Asset impairment and exit costs |
24 | 12 | 36 | |||||||||||||||||
Amortization of intangibles |
20 | 20 | ||||||||||||||||||
Operating (expense) income |
(316 | ) | 5,150 | 1,394 | 6,228 | |||||||||||||||
Interest and other debt expense, net |
549 | 2 | 582 | 1,133 | ||||||||||||||||
Earnings from equity investment in SABMiller |
(628 | ) | (628 | ) | ||||||||||||||||
(Loss) earnings before income taxes and equity earnings of subsidiaries |
(237 | ) | 5,148 | 812 | 5,723 | |||||||||||||||
(Benefit) provision for income taxes |
(329 | ) | 1,864 | 281 | 1,816 | |||||||||||||||
Equity earnings of subsidiaries |
3,813 | 46 | (3,859 | ) | ||||||||||||||||
Net earnings |
3,905 | 3,330 | 531 | (3,859 | ) | 3,907 | ||||||||||||||
Net earnings attributable to noncontrolling interests |
(2 | ) | (2 | ) | ||||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 3,905 | $ | 3,330 | $ | 529 | $ | (3,859 | ) | $ | 3,905 | |||||||||
66 |
Condensed Consolidating Statements of Earnings
(in millions of dollars)
for the year ended December 31, 2009 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Net revenues |
$ | | $ | 20,922 | $ | 2,634 | $ | | $ | 23,556 | ||||||||||
Cost of sales |
7,332 | 658 | 7,990 | |||||||||||||||||
Excise taxes on products |
6,465 | 267 | 6,732 | |||||||||||||||||
Gross profit |
7,125 | 1,709 | 8,834 | |||||||||||||||||
Marketing, administration and research costs |
234 | 2,180 | 429 | 2,843 | ||||||||||||||||
Changes to Kraft and PMI tax-related receivables |
88 | 88 | ||||||||||||||||||
Asset impairment and exit costs |
142 | 279 | 421 | |||||||||||||||||
Amortization of intangibles |
11 | 9 | 20 | |||||||||||||||||
Operating (expense) income |
(322 | ) | 4,792 | 992 | 5,462 | |||||||||||||||
Interest and other debt expense (income), net |
579 | (3 | ) | 609 | 1,185 | |||||||||||||||
Earnings from equity investment in SABMiller |
(600 | ) | (600 | ) | ||||||||||||||||
(Loss) earnings before income taxes and equity earnings of subsidiaries |
(301 | ) | 4,795 | 383 | 4,877 | |||||||||||||||
(Benefit) provision for income taxes |
(313 | ) | 1,882 | 100 | 1,669 | |||||||||||||||
Equity earnings of subsidiaries |
3,194 | (3,194 | ) | |||||||||||||||||
Net earnings |
3,206 | 2,913 | 283 | (3,194 | ) | 3,208 | ||||||||||||||
Net earnings attributable to noncontrolling interests |
(2 | ) | (2 | ) | ||||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 3,206 | $ | 2,913 | $ | 281 | $ | (3,194 | ) | $ | 3,206 | |||||||||
67 |
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
for the year ended December 31, 2011 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Cash Provided by (Used in) Operating Activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (151 | ) | $ | 3,562 | $ | 202 | $ | | $ | 3,613 | |||||||||
Cash Provided by (Used in) Investing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Capital expenditures |
(26 | ) | (79 | ) | (105 | ) | ||||||||||||||
Other |
1 | 1 | 2 | |||||||||||||||||
Financial services |
||||||||||||||||||||
Proceeds from finance assets |
490 | 490 | ||||||||||||||||||
Net cash (used in) provided by investing activities |
(25 | ) | 412 | 387 | ||||||||||||||||
Cash Provided by (Used in) Financing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Long-term debt issued |
1,494 | 1,494 | ||||||||||||||||||
Repurchases of common stock |
(1,327 | ) | (1,327 | ) | ||||||||||||||||
Dividends paid on common stock |
(3,222 | ) | (3,222 | ) | ||||||||||||||||
Issuances of common stock |
29 | 29 | ||||||||||||||||||
Changes in amounts due to/from Altria Group, Inc. and subsidiaries |
441 | (28 | ) | (413 | ) | |||||||||||||||
Financing fees and debt issuance costs |
(24 | ) | (24 | ) | ||||||||||||||||
Cash dividends received from/(paid by) subsidiaries |
3,666 | (3,453 | ) | (213 | ) | |||||||||||||||
Other |
41 | (56 | ) | 21 | 6 | |||||||||||||||
Net cash provided by (used in) financing activities |
1,098 | (3,537 | ) | (605 | ) | (3,044 | ) | |||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||
Increase |
947 | | 9 | | 956 | |||||||||||||||
Balance at beginning of year |
2,298 | 16 | 2,314 | |||||||||||||||||
Balance at end of year |
$ | 3,245 | $ | | $ | 25 | $ | | $ | 3,270 | ||||||||||
Condensed Consolidating Statements of Cash Flows (in millions of dollars) |
||||||||||||||||||||
for the year ended December 31, 2010 | Altria |
PM USA |
Non- |
Total |
Consolidated |
|||||||||||||||
Cash Provided by (Used in) Operating Activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (712 | ) | $ | 2,993 | $ | 486 | $ | | $ | 2,767 | |||||||||
Cash Provided by (Used in) Investing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Capital expenditures |
(54 | ) | (114 | ) | (168 | ) | ||||||||||||||
Other |
3 | 112 | 115 | |||||||||||||||||
Financial services |
||||||||||||||||||||
Proceeds from finance assets |
312 | 312 | ||||||||||||||||||
Net cash (used in) provided by investing activities |
(51 | ) | 310 | 259 | ||||||||||||||||
Cash Provided by (Used in) Financing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Long-term debt issued |
1,007 | 1,007 | ||||||||||||||||||
Long-term debt repaid |
(775 | ) | (775 | ) | ||||||||||||||||
Dividends paid on common stock |
(2,958 | ) | (2,958 | ) | ||||||||||||||||
Issuances of common stock |
104 | 104 | ||||||||||||||||||
Changes in amounts due to/from Altria Group, Inc. and subsidiaries |
279 | 325 | (604 | ) | ||||||||||||||||
Financing fees and debt issuance costs |
(6 | ) | (6 | ) | ||||||||||||||||
Cash dividends received from/(paid by) subsidiaries |
3,438 | (3,259 | ) | (179 | ) | |||||||||||||||
Other |
59 | (8 | ) | (6 | ) | 45 | ||||||||||||||
Net cash provided by (used in) financing activities |
1,148 | (2,942 | ) | (789 | ) | (2,583 | ) | |||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||
Increase |
436 | | 7 | | 443 | |||||||||||||||
Balance at beginning of year |
1,862 | 9 | 1,871 | |||||||||||||||||
Balance at end of year |
$ | 2,298 | $ | | $ | 16 | $ | | $ | 2,314 | ||||||||||
68 |
Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
for the year ended December 31, 2009 | Altria Group, Inc. |
PM USA | Non- Guarantor Subsidiaries |
Total Consolidating Adjustments |
Consolidated | |||||||||||||||
Cash Provided by (Used in) Operating Activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (10 | ) | $ | 3,496 | $ | (43 | ) | $ | | $ | 3,443 | ||||||||
Cash Provided by (Used in) Investing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Capital expenditures |
(149 | ) | (124 | ) | (273 | ) | ||||||||||||||
Acquisition of UST, net of acquired cash |
(10,244 | ) | (10,244 | ) | ||||||||||||||||
Changes in amounts due to/from Altria Group, Inc. and subsidiaries |
(6,000 | ) | 6,000 | |||||||||||||||||
Other |
(4 | ) | (27 | ) | (31 | ) | ||||||||||||||
Financial services |
||||||||||||||||||||
Investment in finance assets |
(9 | ) | (9 | ) | ||||||||||||||||
Proceeds from finance assets |
793 | 793 | ||||||||||||||||||
Net cash used in investing activities |
(6,000 | ) | (153 | ) | (3,611 | ) | (9,764 | ) | ||||||||||||
Cash Provided by (Used in) Financing Activities |
||||||||||||||||||||
Consumer products |
||||||||||||||||||||
Net repayment of short-term borrowings |
(205 | ) | (205 | ) | ||||||||||||||||
Long-term debt issued |
4,221 | 4,221 | ||||||||||||||||||
Long-term debt repaid |
(135 | ) | (240 | ) | (375 | ) | ||||||||||||||
Financial Services |
||||||||||||||||||||
Long-term debt repaid |
(500 | ) | (500 | ) | ||||||||||||||||
Dividends paid on common stock |
(2,693 | ) | (2,693 | ) | ||||||||||||||||
Issuances of common stock |
89 | 89 | ||||||||||||||||||
Financing fees and debt issuance costs |
(177 | ) | (177 | ) | ||||||||||||||||
Changes in amounts due to/from Altria Group, Inc. and subsidiaries |
(5,227 | ) | 423 | 4,804 | ||||||||||||||||
Cash dividends received from/(paid by) subsidiaries |
3,711 | (3,575 | ) | (136 | ) | |||||||||||||||
Other |
38 | (57 | ) | (65 | ) | (84 | ) | |||||||||||||
Net cash (used in) provided by financing activities |
(38 | ) | (3,344 | ) | 3,658 | 276 | ||||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||
(Decrease) increase |
(6,048 | ) | (1 | ) | 4 | | (6,045 | ) | ||||||||||||
Balance at beginning of year |
7,910 | 1 | 5 | 7,916 | ||||||||||||||||
Balance at end of year |
$ | 1,862 | $ | | $ | 9 | $ | | $ | 1,871 | ||||||||||
69 |
Note 21.
Quarterly Financial Data (Unaudited):
2011 Quarters | ||||||||||||||||||||||
(in millions, except per share data) | 1st | 2nd | 3rd | 4th | ||||||||||||||||||
Net revenues |
$ | 5,643 | $ | 5,920 | $ | 6,108 | $ | 6,129 | ||||||||||||||
Gross profit |
$ | 2,148 | $ | 1,972 | $ | 2,445 | $ | 2,374 | ||||||||||||||
Net earnings |
$ | 938 | $ | 444 | $ | 1,174 | $ | 837 | ||||||||||||||
Net earnings attributable to noncontrolling interests |
(1 | ) | (1 | ) | (1 | ) | ||||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 937 | $ | 444 | $ | 1,173 | $ | 836 | ||||||||||||||
Per share data: |
||||||||||||||||||||||
Basic EPS attributable to Altria Group, Inc. |
$ | 0.45 | $ | 0.21 | $ | 0.57 | $ | 0.41 | ||||||||||||||
Diluted EPS attributable to Altria Group, Inc. |
$ | 0.45 | $ | 0.21 | $ | 0.57 | $ | 0.41 | ||||||||||||||
Dividends declared |
$ | 0.38 | $ | 0.38 | $ | 0.41 | $ | 0.41 | ||||||||||||||
Market price high |
$ | 26.27 | $ | 28.13 | $ | 27.41 | $ | 30.40 | ||||||||||||||
low |
$ | 23.34 | $ | 25.81 | $ | 23.20 | $ | 25.94 | ||||||||||||||
2010 Quarters | ||||||||||||||||||||||
(in millions, except per share data) | 1st | 2nd | 3rd | 4th | ||||||||||||||||||
Net revenues |
$ | 5,760 | $ | 6,274 | $ | 6,402 | $ | 5,927 | ||||||||||||||
Gross profit |
$ | 2,084 | $ | 2,374 | $ | 2,476 | $ | 2,254 | ||||||||||||||
Net earnings |
$ | 813 | $ | 1,043 | $ | 1,131 | $ | 920 | ||||||||||||||
Net earnings attributable to noncontrolling interests |
(1 | ) | (1 | ) | ||||||||||||||||||
Net earnings attributable to Altria Group, Inc. |
$ | 813 | $ | 1,042 | $ | 1,131 | $ | 919 | ||||||||||||||
Per share data: |
||||||||||||||||||||||
Basic EPS attributable to Altria Group, Inc. |
$ | 0.39 | $ | 0.50 | $ | 0.54 | $ | 0.44 | ||||||||||||||
Diluted EPS attributable to Altria Group, Inc. |
$ | 0.39 | $ | 0.50 | $ | 0.54 | $ | 0.44 | ||||||||||||||
Dividends declared |
$ | 0.35 | $ | 0.35 | $ | 0.38 | $ | 0.38 | ||||||||||||||
Market price high |
$ | 20.86 | $ | 21.91 | $ | 24.39 | $ | 26.22 | ||||||||||||||
low |
$ | 19.14 | $ | 19.20 | $ | 19.89 | $ | 23.66 | ||||||||||||||
During 2011 and 2010, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.:
2011 Quarters | ||||||||||||||||||||||
(in millions) | 1st | 2nd | 3rd | 4th | ||||||||||||||||||
Asset impairment and exit costs |
$ | 2 | $ | 1 | $ | | $ | 219 | ||||||||||||||
Implementation and integration costs |
2 | 1 | 1 | |||||||||||||||||||
Tobacco and health judgments, including accrued interest |
41 | 121 | ||||||||||||||||||||
UST acquisition-related costs |
4 | 1 | 1 | |||||||||||||||||||
PMCC (decrease) increase to allowance for losses |
(35 | ) | 60 | |||||||||||||||||||
Reduction to cumulative lease earnings related to the PMCC Leveraged Lease Charge |
490 | |||||||||||||||||||||
SABMiller special items |
(32 | ) | 57 | 11 | 46 | |||||||||||||||||
$ | (26 | ) | $ | 591 | $ | (22 | ) | $ | 448 | |||||||||||||
2010 Quarters | ||||||||||||||||||||||
(in millions) | 1st | 2nd | 3rd | 4th | ||||||||||||||||||
Asset impairment and exit costs |
$ | 7 | $ | 21 | $ | 3 | $ | 5 | ||||||||||||||
Implementation and integration costs |
33 | 29 | 24 | 9 | ||||||||||||||||||
Tobacco and health judgments, including accrued interest |
3 | 16 | 2 | |||||||||||||||||||
UST acquisition-related costs |
5 | 5 | 5 | 7 | ||||||||||||||||||
SABMiller special items |
17 | 47 | 21 | 22 | ||||||||||||||||||
$ | 65 | $ | 118 | $ | 55 | $ | 43 | |||||||||||||||
As discussed in Note 15. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated statements of earnings during 2011 and 2010 as a result of various tax events.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
Description of the Company
At December 31, 2011, 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 direct and indirect wholly-owned subsidiaries including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine; 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 27.0% economic and voting interest in SABMiller plc (SABMiller) at December 31, 2011, which is accounted for under the equity method of accounting. Altria Group, Inc.s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller, if and when SABMiller pays such dividends. At December 31, 2011, Altria Group, Inc.s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
As discussed in Note 3. UST Acquisition to the consolidated financial statements (Note 3), on January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST. As a result of the acquisition, UST became an indirect wholly-owned subsidiary of Altria Group, Inc.
At December 31, 2011, the products and services of Altria Group, Inc.s subsidiaries constituted Altria Group, Inc.s reportable segments of cigarettes, smokeless products, cigars, wine and financial services.
Beginning January 1, 2012, the chief operating decision maker is evaluating the combination of the former cigars and cigarettes segments as a single smokeable products segment, which is related to a cost reduction program announced in October 2011 (the 2011 Cost Reduction Program). Effective with the first quarter of 2012, Altria Group, Inc.s reportable segments will be smokeable products, smokeless products, wine and financial services. In addition, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA. For further discussion on the 2011 Cost Reduction Program, see Note 5. Asset Impairment, Exit, Implementation and Integration Costs to the consolidated financial statements (Note 5).
Executive Summary
The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.
Consolidated Results of Operations: The changes in Altria Group, Inc.s net earnings and diluted earnings per share (EPS) attributable to Altria Group, Inc. for the year ended December 31, 2011, from the year ended December 31, 2010, were due primarily to the following:
(in million except per share data) | Net Earnings |
Diluted EPS |
||||||
For the year ended December 31, 2010 |
$ | 3,905 | $ | 1.87 | ||||
2010 Asset impairment, exit, implementation and integration costs |
84 | 0.04 | ||||||
2010 UST acquisition-related costs |
14 | 0.01 | ||||||
2010 Tobacco and health judgments |
13 | |||||||
2010 SABMiller special items |
69 | 0.03 | ||||||
2010 Tax items |
(110 | ) | (0.05 | ) | ||||
Subtotal 2010 items |
70 | 0.03 | ||||||
2011 Asset impairment, exit, implementation and integration costs |
(142 | ) | (0.07 | ) | ||||
2011 UST acquisition-related costs |
(5 | ) | | |||||
2011 Tobacco and health judgments |
(102 | ) | (0.05 | ) | ||||
2011 SABMiller special items |
(54 | ) | (0.03 | ) | ||||
2011 PMCC Leveraged Lease Charge |
(627 | ) | (0.30 | ) | ||||
2011 Tax items* |
77 | 0.04 | ||||||
Subtotal 2011 items |
(853 | ) | (0.41 | ) | ||||
Fewer shares outstanding |
0.01 | |||||||
Operations |
268 | 0.14 | ||||||
For the year ended December 31, 2011 |
$ | 3,390 | $ | 1.64 | ||||
* Excludes the tax impact included in the 2011 PMCC Leveraged Lease Charge.
See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.
Shares Outstanding: Fewer shares outstanding during 2011 compared with 2010 were due primarily to shares repurchased by Altria Group, Inc. under its $1.0 billion one-year share repurchase program, which was completed during the third quarter of 2011, and shares repurchased under its new $1.0 billion share repurchase program, which was announced in October 2011.
Operations: The increase of $268 million shown in the table above was due primarily to the following:
n Higher income from the cigarettes, smokeless products and wine segments; and
n Higher ongoing equity earnings from SABMiller;
partially offset by:
n Higher general corporate expenses;
n Higher interest and other debt expense, net; and
n Lower income from the financial services segment.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
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2012 Forecasted Results: In January 2012, Altria Group, Inc. forecasted that its 2012 full-year reported diluted EPS is expected to be in the range of $2.14 to $2.20. This forecast includes estimated charges of $0.03 per share as detailed in the table below, as compared with 2011 full-year reported diluted EPS of $1.64, which included $0.41 per share of net charges, as detailed in the table below. Expected 2012 full-year adjusted diluted EPS, which excludes the charges in the table below, represents a growth rate of 6% to 9% over 2011 full-year adjusted diluted EPS.
The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.
Net Charges Included in Reported Diluted EPS
2012 | 2011 | |||||||
Asset impairment, exit, implementation and integration costs |
$ | 0.02 | $ | 0.07 | ||||
SABMiller special items |
0.01 | 0.03 | ||||||
PMCC Leveraged Lease Charge |
0.30 | |||||||
Tax items* |
(0.04 | ) | ||||||
Tobacco and health judgments |
0.05 | |||||||
$ | 0.03 | $ | 0.41 | |||||
* Excludes the tax impact included in the 2011 PMCC Leveraged Lease Charge.
Adjusted diluted EPS is a financial measure that is not consistent with accounting principles generally accepted in the United States of America (U.S. GAAP). Altria Group, Inc.s management reviews diluted EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items typically include restructuring charges, SABMiller special items, certain PMCC leveraged lease charges and certain tax items. In December 2011, Altria Group, Inc. announced that it would also exclude charges for tobacco and health judgments from its adjusted diluted EPS calculation. Altria Group, Inc.s management does not view any of these special items to be part of its sustainable results as they may be highly variable and difficult to predict and can distort underlying business trends and results. Altria Group, Inc.s management believes that the redefined adjusted diluted EPS measure provides useful insight into underlying business trends and results, and provides a more meaningful comparison of year-over-year results. Adjusted measures are used by management and regularly provided to Altria Group, Inc.s chief operating decision maker for planning, forecasting and evaluating the performances of Altria Group, Inc.s businesses, including allocating resources and evaluating results relative to employee compensation targets. This information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.
Discussion and Analysis
Critical Accounting Policies and Estimates
Note 2. Summary of Significant Accounting Policies to the consolidated financial statements (Note 2) includes a summary of the significant accounting policies and methods used in the preparation of Altria Group, Inc.s consolidated financial statements. In most instances, Altria Group, Inc. must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP.
The preparation of financial statements includes the use of 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. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria Group, Inc.s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.s estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements.
The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods used in the preparation of Altria Group, Inc.s consolidated financial statements:
n Consolidation: 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 are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.
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 Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria Group, Inc. depreciates property, plant and equipment, and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.
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. These analyses are affected by general economic conditions and projected growth rates. 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. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
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Goodwill and indefinite-lived intangible assets recorded by Altria Group, Inc. at December 31, 2011 relate primarily to the acquisitions of UST in 2009 (see Note 3) and Middleton in 2007. As required, Altria Group, Inc. conducts an 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.
Goodwill and indefinite-lived intangible assets, by reporting unit at December 31, 2011 were as follows:
(in millions) | Goodwill | Indefinite-Lived Intangible Assets |
||||||
Cigarettes |
$ | | $ | 2 | ||||
Smokeless products |
5,023 | 8,801 | ||||||
Cigars |
77 | 2,640 | ||||||
Wine |
74 | 258 | ||||||
Total |
$ | 5,174 | $ | 11,701 | ||||
During 2011, 2010 and 2009, Altria Group, Inc. completed its annual review of goodwill and indefinite-lived intangible assets, and no impairment charges resulted from these reviews.
At December 31, 2011, the estimated fair values of the smokeless products and wine reporting units, as well as the estimated fair value of the indefinite-lived intangible assets within those reporting units, except for certain smokeless products trademarks (primarily Red Seal and Husky), substantially exceeded their carrying values.
At December 31, 2011, the estimated fair value of the cigars reporting unit exceeded its carrying value by approximately 7%. In addition, the carrying value and excess fair value over carrying value for the indefinite-lived intangible assets of the cigars and certain smokeless products trademarks were as follows:
(in millions) | Carrying Value | Excess Fair Value Over Carrying Value |
||||||
Cigars trademarks, primarily Black & Mild |
$ | 2,640 | 8 | % | ||||
Certain smokeless products trademarks, primarily Red Seal and Husky |
921 | 2 | % | |||||
The cigars segments results for 2011 were impacted by promotional investments to defend Black & Milds marketplace position. During 2011, Middleton observed significant competitive activity, including higher levels of imported, low-priced machine-made large cigars. In the smokeless products segment, 2011 results for certain smokeless products, primarily Red Seal and Husky, were impacted by lower levels of promotional support on these brands and increased competitive activity in the discount category. These specific marketplace dynamics resulted in lower expected discounted cash flows when conducting the 2011 annual review of goodwill and indefinite-lived intangible assets. As a result, management concluded after the 2011 review that while the fair values for the cigars reporting unit, the cigars trademarks, and certain smokeless products trademarks exceeded their respective carrying values (as indicated above), they no longer substantially exceeded their carrying values.
While Altria Group, Inc.s management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset are reasonable, actual performance in the short-term or long-term could be significantly different from forecasted performance, which could result in impairment charges in future periods.
In 2011, Altria Group, Inc. utilized an income approach to estimate the fair value of its reporting units and its indefinite-lived intangible assets. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation, and the risks associated with realizing expected future cash flows. The average discount rate utilized in performing the valuations was 10%.
In performing a discounted cash flow analysis, Altria Group, Inc. makes various judgments, estimates and assumptions, the most significant of which are future volume, income, growth rates, and discount rates. The analysis incorporates the assumptions in Altria Group, Inc.s long-term financial forecast. Assumptions are also made for perpetual growth rates for periods beyond the long-term financial forecast. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside of Altria Group, Inc.s control.
Although Altria Group, Inc.s discounted cash flow analysis is based on assumptions that are (i) considered reasonable; (ii) consistent with Altria Group, Inc.s long-term financial planning process; and (iii) based on the best available information at the time that the discounted cash flow analysis is developed, there is significant judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore, Altria Group, Inc.s impairment conclusions: general economic conditions, federal, state and local regulatory developments, changes in category growth rates as a result of changing consumer preferences, success of planned new product introductions, competitive activity, and tobacco-related taxes. For additional information on goodwill and other intangible assets, see Note 4. Goodwill and Other Intangible Assets, net to the consolidated financial statements.
n Marketing Costs: Altria Group, Inc.s 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
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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 Contingencies: As discussed in Note 19. Contingencies to the consolidated financial statements (Note 19), and Item 3. Legal Proceedings to Altria Group, Inc.s 2011 Form 10-K (Item 3), legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. In 1998, PM USA and certain other U.S. tobacco product manufacturers entered into the Master Settlement Agreement (the MSA) with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other U.S. tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the State Settlement Agreements). PM USAs portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USAs obligations under this trust expired on December 15, 2010 (these obligations had been offset by the obligations imposed on PM USA by the Fair and Equitable Tobacco Reform Act of 2004 (FETRA), which expires in 2014). USSTC and Middleton are also subject to obligations imposed by FETRA. In addition, in June 2009, PM USA and a subsidiary of USSTC became subject to quarterly user fees imposed by the United States Food and Drug Administration (FDA) as a result of the Family Smoking Prevention and Tobacco Control Act (FSPTCA). The State Settlement Agreements, FETRA, and the FDA user fees call for payments that are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.s subsidiaries recorded approximately $5.0 billion of charges to cost of sales for each of the years ended December 31, 2011, 2010 and 2009. See Note 19 and Item 3 for a discussion of proceedings that may result in a downward adjustment of amounts paid under the State Settlement Agreements for the years 2003 to 2010.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed in Note 19 and Item 3, at the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and are included in marketing, administration and research costs on the consolidated statements of earnings.
n Employee Benefit Plans: As discussed in Note 17. Benefit Plans to the consolidated financial statements (Note 17), Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of tax, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost.
At December 31, 2011, Altria Group, Inc.s discount rate assumptions for its pension and postretirement plans decreased to 5.0% and 4.9%, respectively, from 5.5% at December 31, 2010. Altria Group, Inc. presently anticipates a decrease of approximately $19 million in its 2012 pre-tax pension and postretirement expense, not including amounts in each year related to termination, settlement and curtailment. This anticipated decrease is due primarily to an increase in the amortization of deferred gains resulting from plan amendments in the postretirement plan, and a $500 million voluntary pension plan contribution made in January 2012, partially offset by an increase in the amortization of deferred losses in the pension plan, as well as the discount rate changes. A fifty basis point decrease (increase) in Altria Group, Inc.s discount rates would increase (decrease) Altria Group, Inc.s pension and postretirement expense by approximately $38 million. Similarly, a fifty basis point decrease (increase) in the expected return on plan assets would increase (decrease) Altria Group, Inc.s pension expense by approximately $28 million. See Note 17 for a sensitivity discussion of the assumed health care cost trend rates.
n Income Taxes: Altria Group, Inc.s 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
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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.
As discussed in Note 15. Income Taxes to the consolidated financial statements (Note 15), Altria Group, Inc. recognized income tax benefits and charges in the consolidated statements of earnings during 2011, 2010 and 2009 as a result of various tax events.
n Leasing: Substantially all of PMCCs net revenues in 2011 related to leveraged leases. Income relating to leveraged leases is recorded initially as unearned income, which is included in the line item finance assets, net, on Altria Group, Inc.s consolidated balance sheets, and is subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. The remainder of PMCCs net revenues consists of amounts related to direct finance leases, with income initially recorded as unearned and subsequently recognized as revenue over the terms of the respective leases at constant pre-tax rates of return on the net investment balances. As discussed in Note 8. Finance Assets, net to the consolidated financial statements (Note 8), PMCC lessees are affected by bankruptcy filings, credit rating changes and financial market conditions.
PMCCs investment in leases is included in the line item finance assets, net, on the consolidated balance sheets as of December 31, 2011 and 2010. At December 31, 2011, PMCCs net finance receivables of approximately $3.5 billion in leveraged leases, which are included in finance assets, net, on Altria Group, Inc.s consolidated balance sheet, consisted of rents receivable ($10.7 billion) and the residual value of assets under lease ($1.3 billion), reduced by third-party nonrecourse debt ($6.8 billion) and unearned income ($1.7 billion). 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 has been offset against the related rents receivable and has been presented on a net basis within finance assets, net, on Altria Group, Inc.s consolidated balance sheets. Finance assets, net, at December 31, 2011, also included net finance receivables for direct finance leases ($0.2 billion) and an allowance for losses ($0.2 billion).
Estimated residual values represent PMCCs estimate 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 PMCCs 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 PMCCs net revenues and results of operations in 2010. There were no adjustments in 2011 and 2009.
PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC stops 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 was $140 million of investment in finance leases on non-accrual status at December 31, 2011 related to American Airlines, Inc. (American) bankruptcy filing on November 29, 2011. See Note 8.
To the extent that rents receivable due to PMCC may be uncollectible, PMCC records an allowance for losses against its finance assets. 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 PMCCs allowance for losses.
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Consolidated Operating Results
See pages 96 99 for a discussion of Cautionary Factors That May Affect Future Results.
For the Years Ended December 31, | ||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Net Revenues: |
||||||||||||
Cigarettes |
$ | 21,403 | $ | 21,631 | $ | 20,919 | ||||||
Smokeless products |
1,627 | 1,552 | 1,366 | |||||||||
Cigars |
567 | 560 | 520 | |||||||||
Wine |
516 | 459 | 403 | |||||||||
Financial services |
(313 | ) | 161 | 348 | ||||||||
Net revenues |
$ | 23,800 | $ | 24,363 | $ | 23,556 | ||||||
Excise Taxes on Products: |
||||||||||||
Cigarettes |
$ | 6,846 | $ | 7,136 | $ | 6,465 | ||||||
Smokeless products |
108 | 105 | 88 | |||||||||
Cigars |
207 | 212 | 162 | |||||||||
Wine |
20 | 18 | 17 | |||||||||
Excise taxes on products |
$ | 7,181 | $ | 7,471 | $ | 6,732 | ||||||
Operating Income: |
||||||||||||
Operating companies income (loss): |
||||||||||||
Cigarettes |
$ | 5,574 | $ | 5,451 | $ | 5,055 | ||||||
Smokeless products |
859 | 803 | 381 | |||||||||
Cigars |
163 | 167 | 176 | |||||||||
Wine |
91 | 61 | 43 | |||||||||
Financial services |
(349 | ) | 157 | 270 | ||||||||
Amortization of intangibles |
(20 | ) | (20 | ) | (20 | ) | ||||||
General corporate expenses |
(256 | ) | (216 | ) | (204 | ) | ||||||
Changes to Kraft and PMI tax-related receivables |
14 | (169 | ) | (88 | ) | |||||||
UST acquisition-related transaction costs |
(60 | ) | ||||||||||
Corporate asset impairment and exit costs |
(8 | ) | (6 | ) | (91 | ) | ||||||
Operating income |
$ | 6,068 | $ | 6,228 | $ | 5,462 | ||||||
As discussed further in Note 16. Segment Reporting to the consolidated financial statements, Altria Group, Inc.s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments is defined as operating income before amortization of intangibles and general corporate expenses. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.
The following events that occurred during 2011, 2010 and 2009 affected the comparability of statement of earnings amounts.
n Asset Impairment, Exit, Implementation and Integration Costs: Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
For the Year Ended December 31, 2011 | ||||||||||||||||
(in millions) | Asset and Exit |
Implementation Costs |
Integration Costs |
Total | ||||||||||||
Cigarettes |
$ | 178 | $ | 1 | $ | | $ | 179 | ||||||||
Smokeless products |
32 | 3 | 35 | |||||||||||||
Cigars |
4 | 4 | ||||||||||||||
General corporate |
8 | 8 | ||||||||||||||
Total |
$ | 222 | $ | 1 | $ | 3 | $ | 226 | ||||||||
For the Year Ended December 31, 2010 | ||||||||||||||||
(in millions) | Asset and Exit |
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 and Exit |
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 | ||||||||
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In the third quarter of 2011, Altria Group, Inc. completed its 2007 to 2011 cost reduction program, exceeding its $1.5 billion goal versus its 2006 cost base.
In October 2011, Altria Group, Inc. announced the 2011 Cost Reduction Program for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.s objective to reduce cigarette-related infrastructure ahead of PM USAs cigarette volume declines. This program is expected to deliver $400 million in annualized savings against previously planned spending by the end of 2013. As a result of this program, Altria Group, Inc. expects to incur total pre-tax charges of approximately $300 million (concluding in 2012). For the year ended December 31, 2011, Altria Group, Inc. recorded total pre-tax charges of $224 million related to this restructuring program.
Altria Group, Inc. had a severance liability balance of $156 million at December 31, 2011 related to its restructuring programs, which is expected to be substantially paid out by the end of 2012.
For further details on asset impairment, exit, implementation and integration costs, see Note 5.
n UST Acquisition-Related Costs: In connection with the acquisition of UST, Altria Group, Inc. incurred pre-tax charges consisting of the following:
n Transaction costs of $60 million, incurred in the first quarter of 2009, which consisted primarily of investment banking and legal fees. These amounts are included in marketing, administration and research costs on Altria Group, Inc.s consolidated statements of earnings.
n Cost of sales as shown in the table below, relating to the fair value purchase accounting adjustment of USTs inventory at the acquisition date that was sold during the periods:
For the Years Ended December 31, |
||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Smokeless products |
$ | 2 | $ | 2 | $ | 15 | ||||||
Wine |
4 | 20 | 21 | |||||||||
Total |
$ | 6 | $ | 22 | $ | 36 | ||||||
n Financing fees of $91 million during 2009 for borrowing facilities related to the acquisition of UST. This amount is included in interest and other debt expense, net on Altria Group, Inc.s consolidated statements of earnings.
n SABMiller Special Items: Altria Group, Inc.s earnings from its equity investment in SABMiller for 2011 included pre-tax costs for SABMillers business capability programme, pre-tax acquisition-related costs for SABMillers acquisition of Fosters Group Limited and asset impairment charges, partially offset by pre-tax gains resulting from SABMillers hotel and gaming transaction and the disposal of a business in Kenya. Altria Group, Inc.s earnings from its equity investment in SABMiller for the year ended December 31, 2010 included costs for SABMillers business capability programme and costs for SABMillers transaction to promote sustainable economic and social development in South Africa. Altria Group, Inc.s earnings from its equity investment in SABMiller for the year ended December 31, 2009 included gains on the issuance of 60 million shares of common stock by SABMiller in connection with its acquisition of the remaining noncontrolling interest in its Polish subsidiary, partially offset by intangible asset impairment charges and costs for SABMillers business capability programme.
n PMCC Leveraged Lease Charge: During the second quarter of 2011, Altria Group, Inc. recorded a one-time charge of $627 million related to the tax treatment of certain leveraged lease transactions entered into by PMCC (the PMCC Leveraged Lease Charge). Approximately 50% of the charge ($315 million), which does not include potential penalties, represents a reduction in cumulative lease earnings recorded to date that will be recaptured over the remainder of the affected lease terms. The remaining portion of the charge ($312 million) primarily represents a permanent charge for interest on tax underpayments. The one-time charge was recorded in Altria Group, Inc.s consolidated statement of earnings for 2011 as follows:
(in millions) | Net Revenues | Provision for Income Taxes |
Total | |||||||||
Reduction to cumulative lease earnings |
$ | 490 | $ | (175 | ) | $ | 315 | |||||
Interest on tax underpayments |
312 | 312 | ||||||||||
Total |
$ | 490 | $ | 137 | $ | 627 | ||||||
For further discussion of matters relating to this charge see Note 19 and Item 3.
n PMCC Allowance for Losses: During 2011, PMCC increased its allowance for losses by $25 million due primarily to Americans bankruptcy filing. During 2009, PMCC increased its allowance for losses by $15 million based on managements assessment of its portfolio, including its exposure to General Motors Corporation (see Note 8).
n Tobacco and Health Judgments: During 2011, Altria Group, Inc. recorded pre-tax charges of $98 million related to tobacco and health judgments in the Bullock, Scott and Williams cases as well as $64 million in interest costs related to those cases. During 2010, Altria Group, Inc. recorded pre-tax charges of $16 million as well as $5 million in interest costs related to certain tobacco and health judgments (including a settlement of $5 million). For further discussion see Note 19 and Item 3.
For the years ended December 31, 2011, 2010 and 2009, tobacco and health judgments were recorded in Altria Group, Inc.s consolidated statements of earnings as follows:
For the Years Ended December 31, |
||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Cigarettes* |
$ | 98 | $ | 11 | $ | | ||||||
Smokeless products* |
5 | |||||||||||
Interest and other debt expense, net |
64 | 5 | 3 | |||||||||
Total |
$ | 162 | $ | 21 | $ | 3 | ||||||
* The charges for tobacco and health judgments for the cigarettes and smokeless products segments were included in marketing, administration and research costs on Altria Group, Inc.s consolidated statements of earnings.
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n Tax Items: Tax items for 2011, excluding the tax impact included in the PMCC Leveraged Lease Charge, included the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. Tax items for 2010 included the reversal of tax reserves and associated interest related to federal and several state audits, and the expiration of statutes of limitations. The tax provision in 2009 includes tax benefits from the reversal of tax reserves and associated interest, related to a federal audit, and a tax benefit from the utilization of net operating losses. For further discussion, see Note 15.
2011 Compared With 2010
The following discussion compares consolidated operating results for the year ended December 31, 2011, with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, decreased $563 million (2.3%), due primarily to lower net revenues from the financial services segment as a result of the PMCC Leveraged Lease Charge, and the cigarettes segment, partially offset by higher net revenues from the smokeless products, wine and cigars segments.
Excise taxes on products decreased $290 million (3.9%), due primarily to lower cigarettes volume.
Cost of sales decreased $24 million (0.3%), due primarily to lower cigarettes volume and 2010 implementation costs, partially offset by higher per unit settlement charges, higher user fees imposed by the FDA and higher manufacturing costs.
Marketing, administration and research costs decreased $92 million (3.4%), primarily reflecting cost reduction initiatives and lower integration costs, partially offset by higher charges in 2011 related to tobacco and health judgments (See Note 19 and Item 3), higher general corporate expenses and an increase to the allowance for losses in the financial services segment.
Operating income decreased $160 million (2.6%), due primarily to lower operating results from the financial services segment (reflecting the impact to net revenues associated with the PMCC Leveraged Lease Charge) and higher general corporate expenses, partially offset by higher operating results from the cigarettes, smokeless products and wine segments (which included higher asset impairment and exit costs and higher charges related to tobacco and health judgments in the cigarettes segment, and higher asset impairment and exit costs in the smokeless products segment), and a reduction to the Kraft Foods Inc. (Kraft) and Philip Morris International Inc. (PMI) tax-related receivables in 2010. As discussed in Note 15, changes to Kraft and PMI tax-related receivables were fully offset by a corresponding provision/benefit for income taxes associated with Kraft and PMI.
Interest and other debt expense, net, increased $83 million (7.3%), as a result of higher interest costs in 2011 related to tobacco and health judgments, and the issuance of senior unsecured long-term notes in May 2011, partially offset by debt refinancing activities in 2010.
Earnings from Altria Group, Inc.s equity investment in SABMiller increased $102 million (16.2%), due primarily to higher ongoing equity earnings and higher net charges in 2010 for SABMiller special items, partially offset by lower gains in 2011 resulting from issuances of common stock by SABMiller.
Altria Group, Inc.s effective income tax rate increased 7.5 percentage points to 39.2%, due primarily to a $312 million charge that primarily represents a permanent charge for interest on tax underpayments associated with the PMCC Leveraged Lease Charge and higher reversals of tax reserves and associated interest in 2010 principally related to certain Kraft and PMI tax matters discussed above.
Net earnings attributable to Altria Group, Inc. of $3,390 million decreased $515 million (13.2%), due primarily to lower operating income, higher interest and other debt expense, net, and a higher income tax rate, partially offset by higher earnings from Altria Group, Inc.s equity investment in SABMiller. Diluted and basic EPS attributable to Altria Group, Inc. of $1.64, each decreased by 12.3%.
2010 Compared With 2009
The following discussion compares consolidated operating results for the year ended December 31, 2010, with the year ended December 31, 2009.
Net revenues, which include excise taxes billed to customers, increased $807 million (3.4%), reflecting higher pricing related primarily to the April 1, 2009 federal excise tax (FET) increase on tobacco products and higher smokeless products volume, partially offset by lower cigarettes volume and lower revenues from financial services.
Excise taxes on products increased $739 million (11.0%), due primarily to the impact of the FET increase, partially offset by lower cigarettes volume.
Cost of sales decreased $286 million (3.6%), due primarily to lower cigarettes volume, lower manufacturing costs and lower implementation costs, partially offset by higher user fees imposed by the FDA and higher per unit settlement charges.
Marketing, administration and research costs decreased $108 million (3.8%), due primarily to UST acquisition-related transaction costs during the first quarter of 2009, lower marketing, administration and research costs for the smokeless products segment reflecting cost reduction initiatives, and lower integration costs, partially offset by higher product liability defense costs in the cigarettes segment.
Operating income increased $766 million (14.0%), due primarily to higher operating results from the smokeless products and cigarettes segments (which included lower asset impairment, exit, integration and implementation costs in 2010), lower corporate asset impairment and exit costs, and UST acquisition-related transaction costs in 2009. These increases were partially offset by lower operating results from the financial services segment as well as a higher reduction of Kraft and PMI tax-related receivables in 2010. As discussed in Note 15, the reduction of the Kraft and PMI tax-related receivables was fully offset by a tax benefit associated with Kraft and PMI.
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Interest and other debt expense, net, decreased $52 million (4.4%), due primarily to financing fees of $91 million in 2009 related to the acquisition of UST, partially offset by higher interest expense resulting from the issuance of senior unsecured long-term notes in February 2009 related to financing for the UST acquisition.
Earnings from Altria Group, Inc.s equity investment in SABMiller increased $28 million (4.7%), due primarily to intangible asset impairment charges in 2009 and higher ongoing equity earnings in 2010, partially offset by lower gains associated with the issuances of common stock by SABMiller and costs in 2010 for SABMillers transaction to promote sustainable economic and social development in South Africa.
Altria Group, Inc.s effective income tax rate decreased 2.5 percentage points to 31.7%, due primarily to the higher reversal of tax reserves and associated interest in 2010 resulting from the execution of a closing agreement during 2010 with the Internal Revenue Service (IRS) and the resolution of several state audits, and the expiration of statutes of limitations, as well as an increase in the domestic manufacturing deduction, effective January 1, 2010. For further discussion, see Note 15.
Net earnings attributable to Altria Group, Inc. of $3,905 million increased $699 million (21.8%), due primarily to higher operating income, a lower income tax rate and lower interest and other debt expense, net. Diluted and basic EPS attributable to Altria Group, Inc. of $1.87, increased by 21.4% and 20.6%, respectively.
Operating Results by Business Segment
Tobacco Space
Business Environment
Summary
The United States tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of our tobacco subsidiaries and our consolidated results of operations, cash flows and financial position. These challenges, some of which are discussed in more detail below, in Item 3, in Note 19 and in Cautionary Factors That May Affect Future Results, include:
n pending and threatened litigation and bonding requirements as discussed in Item 3 and Note 19;
n restrictions imposed by the Family Smoking Prevention and Tobacco Control Act (the FSPTCA) enacted in June 2009, and restrictions that have been, and in the future may be, imposed by the FDA under this statute;
n actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;
n bans and restrictions on tobacco use imposed by governmental and private entities;
n other federal, state and local government actions, including:
n restrictions on the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;
n additional restrictions on the advertising and promotion of tobacco products;
n other actual and proposed tobacco product legislation and regulation; and
n governmental investigations;
n the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates and others (including employers) to further restrict tobacco use;
n price gaps and changes in price gaps between premium and lowest price brands;
n competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;
n illicit trade practices, including the sale of counterfeit tobacco products by third parties; the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes; diversion into one market of products intended for sale in another; the potential assertion of claims and other issues relating to contraband shipments of tobacco products; and the imposition of additional legislative or regulatory requirements related to illicit trade practices; and
n potential adverse changes in tobacco leaf price, availability and quality.
In addition to and in connection with the foregoing business and legal challenges, our tobacco subsidiaries are subject to evolving adult tobacco consumer preferences. Altria Group, Inc.s tobacco operating companies believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 30% of adult smokers are interested in spit-free smokeless alternatives to cigarettes. Future success is dependent in part on the ability of Altria Group, Inc. and its subsidiaries to meet these evolving adult consumer preferences by developing over time new products and markets within and potentially outside the United States through technological innovation (including, where appropriate, arrangements with third parties) and pursuit of their adjacency strategies. See Cautionary Factors That May Affect Future Results for certain risks associated with the foregoing discussion.
We have provided additional detail on the following topics below:
n FSPTCA and FDA Regulation;
n Excise Taxes;
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n International Treaty on Tobacco Control;
n State Settlement Agreements;
n Other Federal, State and Local Regulation and Activity;
n Illicit Trade;
n Tobacco Price, Availability and Quality; and
n Timing of Sales.
FSPTCA and FDA Regulation
The Regulatory Framework
The FSPTCA expressly establishes certain restrictions and prohibitions on our cigarette and smokeless tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; the authority to require disclosures of related information; and the authority to enforce the FSPTCA and related regulations. The law also grants the FDA authority to extend its application, by regulation, to other tobacco products, including cigars. The FDA has indicated that regulation of cigars and other tobacco products is on its agenda of items to consider for possible rule-making.
Among other measures, the FSPTCA:
n imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;
n prohibits cigarettes with characterizing flavors other than menthol and tobacco;
n bans descriptors such as light, mild or low or similar descriptors unless expressly authorized by the FDA;
n requires extensive ingredient disclosure to the FDA and may require more limited public ingredient disclosure;
n prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
n imposes reporting obligations relating to contraband activity and grants the FDA authority to impose other recordkeeping and reporting obligations to address counterfeit and contraband products;
n changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warnings for cigarettes, which it published in June 2011, and gives the FDA the authority to require new warnings;
n authorizes the FDA to adopt product regulations and related actions, including:
n to impose tobacco product standards that are appropriate for the protection of the public health through a regulatory process including, among other possibilities, restrictions on ingredients, constituents or other properties, performance or design criteria as well as to impose testing, measurement, reporting and disclosure requirements;
n to subject tobacco products that are modified or first introduced into the market after March 22, 2011 to application and premarket review and authorization requirements (the New Product Application Process) if the FDA does not find them to be substantially equivalent to products commercially marketed as of February 15, 2007, and to deny any such new product application thus preventing the distribution and sale of any product affected by such denial;
n to determine that certain existing tobacco products modified or introduced into the market for the first time between February 15, 2007 and March 22, 2011 are not substantially equivalent to products commercially marketed as of February 15, 2007, in which case the FDA could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products (see FDA Regulatory Actions below);
n to restrict or otherwise regulate menthol cigarettes, as well as other tobacco products with characterizing flavors;
n to regulate nicotine yields and to reduce or eliminate harmful constituents or harmful ingredients or other components of tobacco products;
n to impose manufacturing standards for tobacco products; and
n equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities.
Implementation Timing
The implementation of the FSPTCA began in 2009 and will continue over time. Some provisions took effect immediately, some provisions have taken effect since the enactment of the FSPTCA and other provisions will not take effect for some time. Those provisions that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. Altria Group, Inc.s tobacco subsidiaries are participating actively in processes established by the FDA to develop and implement its regulatory framework, including submission of comments to FDA proposals and draft guidelines and participation in public hearings and engagement sessions.
Impact on Our Business; Compliance Costs
Regulations imposed by the FDA under the FSPTCA could have a material adverse impact on the business and sales volume of Altria Group, Inc.s tobacco businesses in a number of different ways. For example, actions by the FDA could:
n impact the consumer acceptability of tobacco products;
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n delay or prevent the sale or distribution of existing, new or modified tobacco products;
n limit adult consumer choices;
n restrict communications to adult consumers;
n create a competitive advantage or disadvantage for certain tobacco companies;
n impose additional manufacturing, labeling or packaging requirements;
n impose restrictions at retail;
n result in increased illicit trade activities; or
n otherwise significantly increase the cost of doing business.
The failure to comply with FDA regulatory requirements, even by inadvertence, and FDA enforcement actions could have a material adverse effect on the business, financial condition and results of operations of Altria Group, Inc. and its tobacco subsidiaries.
The law imposes fees on tobacco product manufacturers and importers to pay for the cost of regulation and other matters. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA regulation according to a process set out in the statute, and then among manufacturers and importers within each respective class based on their relative market shares. For a discussion of the impact of the State Settlement Agreements, FETRA and FDA user fee payments on Altria Group, Inc., see Debt and Liquidity Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation. In addition, compliance with the laws regulatory requirements has resulted and will result in additional costs for our tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter to date but could become substantial, either individually or in the aggregate, and will depend on the nature of the requirements imposed by the FDA.
Investigation and Enforcement
The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, money penalties, product withdrawals and recalls, and product seizures. The use of any of these investigatory or enforcement tools by the FDA could result in significant costs to the tobacco businesses of Altria Group, Inc. or otherwise have a material adverse effect on the business, financial condition and results of operations of Altria Group, Inc. and its tobacco subsidiaries.
For example, in June 2010, the FDA issued a document request regarding changes to Marlboro Gold Pack cigarette packaging in connection with the FSPTCAs ban of certain descriptors. PM USA submitted documents in response to the FDAs request.
TPSAC
n The Role of the TPSAC: As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the TPSAC), which consists of both voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on scientific and health issues relating to tobacco products. The TPSAC:
n advises the FDA about modified risk products (products marketed with reduced risk claims), good manufacturing practices, the effects of the alteration of nicotine yields from tobacco products and nicotine dependence thresholds; and
n makes reports and recommendations to the FDA on menthol cigarettes, including the impact of the use of menthol in cigarettes on the public health, and the nature and impact of dissolvable tobacco products on the public health.
The FDA may seek advice from the TPSAC about other safety, dependence or health issues relating to tobacco products, including tobacco product standards and applications to market new tobacco products.
n TPSAC Membership: PM USA and USSTC have raised with the FDA their concerns that certain of the voting members of the TPSAC have financial and other conflicts (including services as paid experts for plaintiffs in tobacco litigation) that could hamper the full and fair consideration of issues by the TPSAC and requested that their appointments be withdrawn. The FDA declined PM USAs and USSTCs requests, stating that the FDA had satisfied itself, after inquiry, that the TPSAC members did not have disqualifying conflicts of interest. The FDA stated further that it would continue to screen, in accordance with relevant statutory and regulatory provisions and FDA guidance, all TPSAC members for potential conflicts of interest for matters that the TPSAC would be considering. The FDA also engaged two individuals to serve as consultants to a TPSAC subcommittee who also served as paid experts for plaintiffs in tobacco litigation. PM USA and USSTC raised similar concerns related to the engagement of these individuals and the FDA similarly declined to terminate these engagements. In February 2011, Lorillard Tobacco Company and R.J. Reynolds Tobacco Company filed suit in the U.S. District Court for the District of Columbia against the United States Department of Health and Human Services and individual defendants (sued in their official capacities) asserting that the composition of the TPSAC and the composition of the Constituents Subcommittee of the TPSAC violates several federal laws, including the Federal Advisory Committee Act.
TPSAC Action on Menthol
As mandated by the FSPTCA, in March 2011, the TPSAC submitted to the FDA a report on the impact of the use of menthol in cigarettes on the public health and related recommendations. The TPSAC report stated that [m]enthol cigarettes have an adverse impact on public health in the United States. The TPSAC report recommended that the [r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States. The report noted
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the potential that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences and suggested that the FDA consult with appropriate experts on this matter. The TPSAC report also recommended that additional research could address gaps in understanding menthol cigarettes.
In March 2011, PM USA submitted a report to the FDA outlining its position that neither science nor other evidence demonstrates that regulatory actions or restrictions related to the use of menthol cigarettes are warranted. The report noted PM USAs belief that significant restrictions on the use of menthol cigarettes would have unintended consequences detrimental to public health and society.
In July 2011, the TPSAC revised and approved its March 2011 report. The revisions were editorial in nature and did not change the substantive conclusions and recommendations of the TPSAC.
The FSPTCA does not set a deadline or required timeline for the FDA to act on the TPSAC report. The FDA has stated that the TPSAC report is only a recommendation and that the FDAs receipt of the TPSACs menthol report will not have an immediate effect on the availability of menthol cigarettes. On January 30, 2012, the FDA announced that it had evaluated scientific information on menthol and had drafted a report related to the impact of menthol in cigarettes on public health. The FDA indicated that it had sent its report to external scientists for peer review. It also indicated that it will make its final draft report and related information available for public comment, although it has not yet done so. Any future action taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) will require formal rulemaking that includes public notice and the opportunity for public comment.
Final Tobacco Marketing Rule
As required by the FSPTCA, the FDA re-promulgated in March 2010 certain advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling) (the Final Tobacco Marketing Rule). The Final Tobacco Marketing Rule:
n bans the use of color and graphics in tobacco product labeling and advertising;
n prohibits the sale of cigarettes and smokeless tobacco to underage persons;
n requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions;
n prohibits sampling of cigarettes and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities;
n prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products;
n prohibits the sale or distribution of items such as hats and tee shirts with tobacco brands or logos; and
n prohibits brand name sponsorship of any athletic, musical, artistic, or other social or cultural event, or any entry or team in any event.
Subject to the limitations imposed by the injunction in the Commonwealth Brands case described below, the Final Tobacco Marketing Rule took effect in June 2010. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an advance notice of proposed rulemaking regarding the so-called 1000 foot rule, which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds. PM USA and USSTC submitted comments on this advance notice.
Since enactment, several lawsuits have been filed challenging various provisions of the FSPTCA and the Final Tobacco Marketing Rule, including their constitutionality and the scope of the FDAs authority thereunder. Altria Group, Inc. and its tobacco subsidiaries are not parties to any of these lawsuits. In January 2010, in one such challenge (Commonwealth Brands), the United States District Court of the Western District of Kentucky struck down as unconstitutional, and enjoined enforcement of, the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising and claims implying that a tobacco product is safer because of FDA regulation. The parties have appealed and argument on the appeal was heard in July 2011. The FDA has indicated that it does not intend to enforce the ban on the use of color and graphics in labeling and advertising for the duration of the injunction. It is not possible to predict the outcome of any such litigation or its effect on the extent of the FDAs authority to regulate tobacco products.
Contraband
The FSPTCA imposes on manufacturers reporting obligations relating to knowledge of suspected contraband activity and also grants the FDA the authority to impose certain other recordkeeping and reporting obligations to address counterfeit and contraband tobacco products. The FSPTCA also empowers the FDA to assess whether additional tools should be employed to track and trace tobacco products through the distribution chain.
FDA Regulatory Actions
n Graphic Warnings: In June 2011, as required by the FSPTCA, the FDA issued its final rule to modify the required warnings that appear on cigarette packages and in cigarette advertisements. The FSPTCA requires the warnings to consist of nine new textual warning statements accompanied by color graphics depicting the negative health consequences of smoking. The graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50 percent of the front and rear panels of cigarette packages and (ii) occupy 20 percent of a cigarette advertisement and be located at the top of the advertisement. The rule requires that cigarette packaging manufactured after September 22, 2012 contain the new graphic warnings and all cigarette advertising contain the new warnings by that date.
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In August 2011, R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, and several other plaintiffs filed suit in the United States District Court for the District of Columbia against the FDA challenging its graphic warnings rule. On November 7, 2011, the district court granted the plaintiffs motion for a preliminary injunction, thereby staying enforcement of the graphics warning rule until 15 months after a final ruling from the district court. The FDA has appealed this decision to the United States Court of Appeals for the District of Columbia Circuit. Argument on the FDA appeal for the preliminary injunction is scheduled for April 10, 2012. On February 1, 2012, the district court heard argument on plaintiffs motion for summary judgment.
PM USA is not a party to this lawsuit, but the FDA has confirmed that it will not enforce the graphic warnings rule against PM USA on the same terms and with the same effect as the district court injunction discussed above.
n New Product Marketing Authorization Processes: In January 2011, the FDA issued guidance concerning reports that manufacturers must submit for certain FDA-regulated tobacco products that the manufacturer modified or introduced for the first time into the market after February 15, 2007. These reports must be reviewed by the agency to determine if such tobacco products are substantially equivalent to products commercially available as of February 15, 2007. In general, in order to continue marketing these products sold before March 22, 2011, manufacturers of FDA-regulated tobacco products were required to send to the FDA a report demonstrating substantial equivalence by March 22, 2011. PM USA and USSTC submitted timely reports. PM USA and USSTC can continue marketing these products unless the FDA makes a determination that a specific product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products. PM USA and USSTC believe all of their current products meet the statutes requirements, but cannot predict when or how the FDA will respond to their reports.
Manufacturers intending to introduce new products and certain modified products into the market after March 22, 2011 must submit a report to the FDA and obtain a substantial equivalence order from the agency before introducing the products into the market. If the FDA declines to issue a so-called substantial equivalence order for a product or if the manufacturer itself determines that the product does not meet the substantial equivalence requirements, the product would need to undergo the New Product Application Process. At this time, it is not possible to predict how long agency reviews of either substantial equivalence reports or new product applications will take.
The FDA also published a final regulation in July 2011, establishing a process for requesting an exemption from the substantial equivalence requirements for certain minor modifications to tobacco additives. The final rule became effective in August 2011.
Excise Taxes
Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.
Federal, state and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. For example, in 2009, the FET on cigarettes increased from 39 cents per pack to approximately $1.01 per pack and on July 1, 2010, the New York state excise tax increased $1.60 to $4.35 per pack. Between the end of 1998 and February 13, 2012, the weighted-average state and certain local cigarette excise taxes increased from $0.36 to $1.37 per pack. During 2011, Connecticut, Hawaii and Vermont increased their cigarette excise taxes and New Hampshire decreased its cigarette excise tax. As of February 13, 2012, no state has increased its cigarette excise tax in 2012.
Tax increases are expected to continue to have an adverse impact on sales of tobacco products by our tobacco subsidiaries, due to lower consumption levels and to a potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an impact on the reported share performance of tobacco products of Altria Group, Inc.s tobacco subsidiaries.
A majority of states currently tax smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria Group, Inc.s subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of February 13, 2012, twenty-one states, Washington, D.C. and Philadelphia, Pennsylvania have adopted a weight-based tax methodology for smokeless tobacco.
International Treaty on Tobacco Control
The World Health Organizations Framework Convention on Tobacco Control (the FCTC) entered into force in February 2005. As of February 13, 2012, 174 countries, as well as the European Community, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco
use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things:
n establish specific actions to prevent youth tobacco product use;
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n restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship;
n initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting;
n implement regulations imposing product testing, disclosure and performance standards;
n impose health warning requirements on packaging;
n adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products;
n restrict smoking in public places;
n implement fiscal policies (tax and price increases);
n adopt and implement measures that ensure that descriptive terms do not create the false impression that one brand of tobacco product is safer than another;
n phase out duty-free tobacco product sales;
n encourage litigation against tobacco product manufacturers; and
n adopt and implement guidelines for testing and measuring the contents and emissions of tobacco products.
In addition, there are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture and marketing of tobacco products. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either directly as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.
State Settlement Agreements
As discussed in Item 3 and Note 19, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims (collectively, the State Settlement Agreements). These settlements require participating manufacturers to make substantial annual payments. For a discussion of the impact of the State Settlement Agreements, FETRA and FDA user fee payments on Altria Group, Inc., see Debt and Liquidity Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation. The settlements also place numerous requirements and restrictions on participating manufacturers business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement, and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industrys ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the STMSA) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.
Other Federal, State and Local Regulation and Activity
Federal, State and Local Laws
State and Local Laws Addressing Certain Characterizing Flavors: In a growing number of states and localities, legislation has been enacted or proposed that prohibits or would prohibit the sale of certain tobacco products with certain characterizing flavors. The legislation varies in terms of the type of tobacco products subject to prohibition, the conditions under which the sale of such products is or would be prohibited, and exceptions to the prohibitions. For example, a number of proposals would prohibit characterizing flavors in smokeless tobacco products, with no exception for mint- or wintergreen-flavored products.
To date, the following states have enacted legislation that prohibits certain tobacco products with certain characterizing flavors:
Maine has enacted legislation that prohibits the sale of certain flavored cigar and cigarette products. As implemented, including the application of certain statutory exemptions, this prohibition does not ban any PM USA, USSTC, or Middleton product. In 2010, Maine amended the characterizing flavor prohibition. The amendment allows the continued sale of cigars that obtained favorable exemption rulings under the previous statute but does not provide for the possibility of further exemptions, such as for future products with characterizing flavors.
New Jersey has enacted legislation banning the sale and marketing of cigarettes with a characterizing flavor other than menthol, mint or clove. This legislation does not ban any PM USA, USSTC or Middleton product.
In addition, such legislation has been enacted or is being considered in a number of localities. For example:
New York City has adopted an ordinance that prohibits the sale of certain flavored tobacco products other than cigarettes. This legislation affects certain USSTC and Middleton products. The ordinance and related final regulations took effect in August 2010. Certain subsidiaries of USSTC have filed a lawsuit in the United States District Court for the Southern District of New York challenging the New York City legislation on the grounds that it is preempted by the FSPTCA. In March 2010, the district court denied plaintiffs motion for preliminary injunction against enforcement of the ordinance and, on November 15, 2011, the district court
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denied plaintiffs motion for summary judgment, and granted the Citys cross-motion for summary judgment, on the preemption claim. Plaintiffs have appealed the denial to the United States Court of Appeals for the Second Circuit and, in the meantime, are complying with the ordinance pending resolution of the litigation.
Providence, Rhode Island adopted two ordinances on January 9, 2012. One would prohibit the sale in most retail outlets of certain flavored tobacco products other than cigarettes. This legislation differs in a number of ways from the New York City ordinance, including by attempting to prohibit reference to concepts such as spicy, arctic, ice, cool, warm, hot, mellow, fresh and breeze. The second Providence ordinance prohibits licensed retailers in the city from accepting or redeeming coupons for cigarettes and other tobacco products or from selling such products to consumers through multi-pack discounts or other discounts provided in exchange for the purchase of another tobacco product. Both ordinances are scheduled to take effect on March 1, 2012. On February 13, 2012, Altria Group, Inc.s tobacco operating companies filed a legal challenge to these ordinances, including on preemption and First Amendment grounds.
Whether other states or localities will enact legislation in this area, and the precise nature of such legislation if enacted, cannot be predicted. See FDA Regulation above for a summary of the FSPTCAs regulation of certain tobacco products with characterizing flavors.
State and Local Laws Imposing Certain Speech Requirements and Restrictions: In several jurisdictions, legislation or regulations have been enacted or proposed that would require the disclosure of health information separate from or in addition to federally-mandated health warnings or that would restrict commercial speech in certain respects. For example, New York City has adopted a regulation requiring retailers selling tobacco products to display a sign, issued by the New York City Board of Health, depicting graphic images of the potential health consequences of smoking and urging smokers to quit. In June 2010, PM USA and other plaintiffs filed a lawsuit in the United States District Court for the Southern District of New York challenging New York Citys graphic health warnings regulation and filed a motion seeking to preliminarily enjoin the regulation. In December 2010, the district court declared the regulation null and void, finding that such requirements were preempted by federal law. The City has appealed the decision to the United States Court of Appeals for the Second Circuit. Argument was heard on December 1, 2011.
Federal Tobacco Quota Buy-Out: In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (FETRA) was signed into law. PM USA, Middleton and USSTC are subject to the requirements of FETRA. FETRA eliminated the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out is approximately $9.5 billion and is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product.
In February 2011, PM USA filed a lawsuit in federal court challenging the United States Department of Agricultures (the USDA) method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above and are used by the FDA to calculate the industrys FDA user fees. PM USA asserts in this litigation that the USDA violated FETRA and its own regulations by failing to apply the most current FET rates enacted by Congress, which became effective in April 2009, in calculating the class share allocations. PM USA has filed administrative appeals of its FETRA assessments for fiscal year 2011 (all of which have been or are expected to be denied by the USDA) and has submitted a petition for rulemaking with USDA (which petition was denied by the USDA on November 16, 2011), in each case asserting that USDA erroneously failed to base the FETRA class share allocations on the current FET rates. PM USA is appealing the USDAs calculation methodology as well as the denial of the petition for rulemaking and the denial of its quarterly assessment challenges.
For a discussion of the impact of the State Settlement Agreements, FETRA and FDA user fee payments on Altria Group, Inc., see Debt and Liquidity Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation. We do not anticipate that the quota buy-out will have a material adverse impact on our consolidated results in 2012 and beyond.
Health Effects of Tobacco Consumption and Exposure to Environmental Tobacco Smoke (ETS): It is the policy of Altria Group, Inc. and its tobacco subsidiaries to defer to the judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of tobacco consumption, addiction and exposure to ETS. Altria Group, Inc. and its tobacco subsidiaries believe that the public should be guided by the messages of the United States Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.
Reports with respect to the health effects of smoking have been publicized for many years, including in a June 2006 United States Surgeon General report on ETS entitled The Health Consequences of Involuntary Exposure to Tobacco Smoke. Many jurisdictions within the United States have restricted smoking in public places. The pace and scope of public smoking bans have increased significantly. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking in outdoor places, in private apartments and in cars with minors in them. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on regulation.
Other Legislation or Governmental Initiatives
In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local
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level to subject tobacco products to various reporting requirements and performance standards (such as reduced cigarette ignition propensity standards); establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain packing sizes; require tax stamping of moist smokeless tobacco products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products.
It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented in the United States that might materially adversely affect the business and volume of our tobacco subsidiaries and our consolidated results of operations and cash flows.
Governmental Investigations
From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. Altria Group, Inc. and its subsidiaries cannot predict whether new investigations may be commenced.
Illicit Trade
Altria Group, Inc. and its tobacco subsidiaries support appropriate regulations and enforcement measures to prevent illicit trade in tobacco products. For example, Altria Group, Inc.s tobacco subsidiaries are engaged in a number of initiatives to help prevent trade in contraband tobacco products, including: enforcement of wholesale and retail trade programs and policies on trade in contraband tobacco products; engagement with and support of law enforcement and regulatory agencies; litigation to protect their trademarks; and support for a variety of federal and state legislative initiatives. Legislative initiatives to address trade in contraband tobacco products are designed to protect the legitimate channels of distribution, impose more stringent penalties for the violation of illegal trade laws and provide additional tools for law enforcement. Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products are being considered by a number of jurisdictions. For example, in March 2010, the President signed into law the Prevent All Cigarette Trafficking (PACT) Act, which addresses illegal Internet sales by, among other things, imposing a series of restrictions and requirements on the delivery sale of cigarettes and smokeless tobacco products and makes such products non-mailable to consumers through the United States Postal Service, subject to limited exceptions. Certain Internet cigarette sellers have filed lawsuits challenging the constitutionality of various aspects of this statute and seek injunctive relief in the United States District Courts for the District of Columbia, the Western District of New York and the Eastern District of Pennsylvania. In the Western District of New York, plaintiffs have received injunctive relief limited to only certain elements of the PACT Act, including a requirement that delivery-sellers obey the laws of the jurisdiction to which they ship cigarettes. In the District of Columbia, the district court has issued a preliminary injunction substantially similar to the injunctive relief issued in the Western District of New York. The U.S. Department of Justice is challenging these injunctions on appeal.
Tobacco Price, Availability and Quality
Shifts in crops driven by economic conditions and adverse weather patterns, government mandated prices and production control programs may increase or decrease the cost or reduce the quality of tobacco and other agricultural products used to manufacture our products. As with other agriculture commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could cause tobacco leaf prices to increase and could result in farmers growing less tobacco. Any significant change in tobacco leaf prices, quality or availability could affect our tobacco subsidiaries profitability and business.
Timing of Sales
In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.
Operating Results
For the Years Ended December 31, | ||||||||||||||||||||||||||
Net Revenues | Operating Companies Income |
|||||||||||||||||||||||||
(in millions) | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||
Cigarettes |
$ | 21,403 | $ | 21,631 | $ | 20,919 | $ | 5,574 | $ | 5,451 | $ | 5,055 | ||||||||||||||
Smokeless products |
1,627 | 1,552 | 1,366 | 859 | 803 | 381 | ||||||||||||||||||||
Cigars |
567 | 560 | 520 | 163 | 167 | 176 | ||||||||||||||||||||
Total tobacco space |
$ | 23,597 | $ | 23,743 | $ | 22,805 | $ | 6,596 | $ | 6,421 | $ | 5,612 | ||||||||||||||
n Cigarettes Segment: PM USA delivered full-year operating companies income and margin growth through higher pricing and effective cost management as well as a continued focus on Marlboro. Operating companies income results for 2011 were also impacted by restructuring charges related to the 2011 Cost Reduction Program and charges related to tobacco and health judgments.
PM USA reports volume and retail share performance as follows: Marlboro; Other Premium brands, such as Virginia
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Slims, Parliament and Benson & Hedges; and Discount brands, which include Basic and L&M.
The following table summarizes cigarettes segment volume performance, which includes units sold as well as promotional units, but excludes Puerto Rico, U.S. Territories, Overseas Military and Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the cigarettes segment:
Shipment Volume For the Years Ended December 31, |
||||||||||||
(in billion units) | 2011 | 2010 | 2009 | |||||||||
Marlboro |
117.2 | 121.9 | 126.5 | |||||||||
Other Premium |
9.4 | 10.3 | 11.8 | |||||||||
Discount |
8.5 | 8.6 | 10.4 | |||||||||
Total Cigarettes |
135.1 | 140.8 | 148.7 | |||||||||
The following table summarizes cigarettes segment retail share performance:
Retail Share For the Years Ended December 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Marlboro |
42.0 | % | 42.6 | % | 41.8 | % | ||||||
Other Premium |
3.7 | 3.9 | 4.4 | |||||||||
Discount |
3.3 | 3.3 | 3.7 | |||||||||
Total Cigarettes |
49.0 | % | 49.8 | % | 49.9 | % | ||||||
Cigarettes segment retail share results are based on data from SymphonyIRI Group/Capstone, which is a retail tracking service that uses a sample of stores to project market share performance in retail stores selling cigarettes. The panel was not designed to capture sales through other channels, including the Internet, direct mail and some illicitly tax-advantaged outlets.
PM USA executed the following pricing and promotional allowance actions during 2011, 2010 and 2009:
n Effective December 12, 2011, PM USA increased the list price on all of its cigarette brands by $0.05 per pack. In addition, PM USA reduced its wholesale promotional allowance on L&M by $0.21 per pack from $0.55 to $0.34 per pack.
n Effective July 8, 2011, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.
n Effective December 6, 2010, PM USA increased the list price on all of its cigarette brands by $0.08 per pack.
n Effective May 10, 2010, PM USA increased the list price on all of its cigarette brands by $0.08 per pack. In addition, PM USA cancelled its wholesale promotional allowance of $0.21 per pack on Basic.
n Effective October 28, 2009, PM USA increased the list price on Marlboro, Basic and L&M by $0.06 per pack. In addition, PM USA increased the list price on all of its other brands by $0.08 per pack.
n Effective March 9, 2009, PM USA increased the list price on Marlboro, Parliament, Virginia Slims, Basic and L&M by $0.71 per pack. In addition, PM USA increased the list price on all of its other premium brands by $0.81 per pack.
n Effective February 9, 2009, PM USA increased the list price on Marlboro, Parliament, Virginia Slims, Basic and L&M by $0.09 per pack. In addition, PM USA increased the list price on all of its other premium brands by $0.18 per pack.
The following discussion compares cigarettes segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, decreased $228 million (1.1%) due to lower volume ($1,049 million) and higher promotional allowances ($164 million), partially offset by higher list prices ($985 million).
Operating companies income increased $123 million (2.3%), due primarily to higher list prices ($985 million), marketing, administration, and research savings reflecting cost reduction initiatives ($196 million) and 2010 implementation costs related to the closure of the Cabarrus, North Carolina manufacturing facility ($75 million), partially offset by lower volume ($527 million), higher promotional allowances ($164 million), higher asset impairment and exit costs due primarily to the 2011 Cost Reduction Program ($154 million), higher per unit settlement charges ($116 million), higher charges related to tobacco and health judgments ($87 million) (See Note 19 and Item 3) and higher FDA user fees ($73 million).
Marketing, administration and research costs include PM USAs cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including those discussed in Note 19 and Item 3. Principal among these factors are the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For the years ended December 31, 2011, 2010 and 2009, product liability defense costs were $272 million, $259 million and $220 million, respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. PM USA does not expect future product liability defense costs to be significantly different from product liability defense costs incurred in 2011.
For 2011, PM USAs reported domestic cigarette shipment volume declined 4.0% versus 2010 due primarily to retail share losses and one less shipping day, partially offset by changes in trade inventories. After adjusting for changes in trade inventories and one less shipping day, PM USAs 2011 domestic cigarette shipment volume was estimated to be down approximately 4% versus 2010. PM USA believes that total cigarette category volume for 2011 decreased approximately 3.5% versus 2010, when adjusted primarily for changes in trade inventories and one less shipping day.
PM USAs total premium brands (Marlboro and Other Premium brands) shipment volume decreased 4.3%. Marlboro shipment volume decreased 4.7 billion units (3.8%) to 117.2 billion units. In the Discount brands, PM USAs shipment volume decreased 0.9%. Shipments of premium cigarettes accounted for 93.7% of PM USAs total 2011 volume, down from 93.9% in 2010.
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For 2011, total retail share for the cigarettes segment declined 0.8 share points to 49.0% due primarily to retail share losses on Marlboro. Marlboros 2011 retail share decreased 0.6 share points. In 2010, Marlboro delivered record full-year retail share results that were achieved at lower margin levels. Marlboro plans to continue to focus on brand-building initiatives and equity-enhancing new products and programs in 2012. For example, PM USA recently launched Marlboro Black with packaging in non-menthol and menthol varieties.
The following discussion compares cigarettes segment results for the year ended December 31, 2010 with the year ended December 31, 2009.
Net revenues, which include excise taxes billed to customers, increased $712 million (3.4%), reflecting higher pricing related primarily to the FET increase ($1,923 million) and lower promotional allowances, partially offset by lower volume ($1,337 million).
Operating companies income increased $396 million (7.8%), due primarily to higher list prices ($858 million), lower asset impairment, exit and implementation costs primarily related to the closure of the Cabarrus, North Carolina manufacturing facility ($155 million), lower manufacturing costs ($152 million) and lower promotional allowances, partially offset by lower volume ($632 million), higher FDA user fees ($96 million), higher marketing, administration and research costs, and higher per unit settlement charges.
For 2010, PM USAs domestic cigarette shipment volume declined 5.3% versus 2009. After adjusting primarily for changes in trade inventories, PM USAs domestic cigarette shipment volume for 2010 was estimated to be down approximately 6% versus 2009. Total cigarette category volume was down an estimated 5% in 2010 versus 2009 when adjusted primarily for changes in trade inventories.
PM USAs total premium brands (Marlboro and Other Premium brands) shipment volume decreased 4.4%. Marlboro shipment volume decreased 4.6 billion units (3.7%) to 121.9 billion units. In the Discount brands, PM USAs shipment volume decreased 16.8% reflecting brand support strategies. Shipments of premium cigarettes accounted for 93.9% of PM USAs total 2010 volume, up from 93.0% in 2009.
For 2010, Marlboros retail share increased 0.8 share points versus 2009 to 42.6%, as the brand benefited from the introductions of Marlboro Special Blend in the first quarter of 2010 and Marlboro Skyline Menthol in the fourth quarter of 2010. For 2010, total retail share for the cigarettes segment declined 0.1 share point versus 2009 to 49.8%.
n Smokeless Products Segment: Altria Group, Inc. acquired UST and its smokeless tobacco business, USSTC, on January 6, 2009. As a result, USSTCs financial results from January 6 through December 31, 2009 are included in Altria Group, Inc.s 2009 consolidated and segment results. In addition, the smokeless products segment includes PM USAs smokeless products.
The smokeless products segment delivered 2011 full-year operating companies income and margin growth behind Copenhagen and Skoals combined volume and retail share performance.
The following table summarizes smokeless products segment volume performance (full year results):
Shipment Volume For the Years Ended December 31, |
||||||||||||
(cans and packs in millions) | 2011 | 2010 | 2009 | |||||||||
Copenhagen |
354.2 | 327.5 | 280.6 | |||||||||
Skoal |
286.8 | 274.4 | 265.4 | |||||||||
Copenhagen and Skoal |
641.0 | 601.9 | 546.0 | |||||||||
Other |
93.6 | 122.5 | 99.6 | |||||||||
Total Smokeless products |
734.6 | 724.4 | 645.6 | |||||||||
Volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is not material to the smokeless products segment. Other includes certain USSTC and PM USA smokeless products. Additionally, 2009 volume includes 10.9 million cans of domestic volume shipped by USSTC prior to the UST acquisition.
New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing moist smokeless tobacco (MST) products on a can for can basis. USSTC and PM USA have assumed the following equivalent ratios to calculate volumes of cans and packs shipped:
n One pack of snus, irrespective of the number of pouches in the pack, is equivalent to one can of MST;
n One can of Skoal Slim Can pouches is equivalent to a 0.53 can of MST; and
n All other products are considered to be equivalent on a can for can basis.
If assumptions regarding these equivalent ratios change, it may result in a change to these reported results.
The following table summarizes smokeless products segment retail share performance (full year results, excluding international volume):
Retail Share For the Years Ended December 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Copenhagen |
26.2 | % | 24.7 | % | 22.8 | % | ||||||
Skoal |
22.8 | 23.3 | 24.6 | |||||||||
Copenhagen and Skoal |
49.0 | 48.0 | 47.4 | |||||||||
Other |
6.1 | 7.2 | 7.1 | |||||||||
Total Smokeless products |
55.1 | % | 55.2 | % | 54.5 | % | ||||||
Other includes certain USSTC and PM USA smokeless products. New types of smokeless products, as well as new packaging configuration of existing smokeless products, may or may not be equivalent to existing MST products on a can for can basis. USSTC and PM USA have made the following assumptions for calculating retail share:
n One pack of snus, irrespective of the number of pouches in the pack, is equivalent to one can of MST; and
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n All other products are considered to be equivalent on a can for can basis.
If assumptions regarding these equivalent ratios change, it may result in a change to these reported results.
Smokeless products segment retail share performance is based on data from the SymphonyIRI Group (SymphonyIRI) InfoScan Smokeless Tobacco Database 2011 for Food, Drug, Mass Merchandisers (excluding Wal-Mart) and Convenience trade classes (InfoScan Smokeless Tobacco Database), which tracks smokeless products market share performance based on the number of cans and packs sold. Smokeless products is defined by SymphonyIRI as moist smokeless and spit-less tobacco products. It is SymphonyIRIs standard practice to periodically refresh its InfoScan syndicated services, which could restate retail share results that were previously released.
SymphonyIRI performed a restatement of its InfoScan Smokeless Tobacco Database in 2011. As a result of the InfoScan Smokeless Tobacco Database restatement, USSTC and PM USAs previously released full year 2010 and 2009 retail share results for smokeless products were restated and are reflected in the table above.
USSTC and PM USA executed the following pricing actions during 2011, 2010 and 2009:
n Effective May 22, 2011, USSTC increased the list price on its MST brands by $0.10 per can and Skoal Snus by $0.31 per can.
n Effective May 18, 2011, PM USA increased the list price on Marlboro Snus tins by $0.31 per tin.
n Effective May 28, 2010, USSTC increased the list price on substantially all of its brands by $0.10 per can.
n Effective March 29, 2009, USSTC announced a national wholesale incentive program that lowered the list price of some of USSTCs brands, including Copenhagen and Skoal, by $0.62 per can.
The following discussion compares smokeless products segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, increased $75 million (4.8%), due primarily to higher pricing ($79 million) and higher volume, partially offset by higher promotional allowances ($11 million).
Operating companies income increased $56 million (7.0%), due primarily to higher pricing ($79 million), and lower marketing, administration and research costs ($36 million) reflecting cost reduction initiatives, partially offset by higher manufacturing costs ($32 million) and higher asset impairment and exit costs due primarily to the 2011 Cost Reduction Program.
Copenhagen and Skoals 2011 combined shipment volume increased 6.5%. Copenhagens volume continued to benefit from new product introductions, including the 2011 introduction of Copenhagen Wintergreen Pouches as well as continued strength from the introductions of Copenhagen Long Cut Wintergreen in late 2009, and Long Cut Straight and Extra Long Cut Natural in the first quarter of 2010. Skoals volume growth benefited from the Skoal X-tra and Skoal Snus new products introduced in the first quarter of 2011, partially offset by the de-listing of seven Skoal stock-keeping units (SKUs) that occurred in the second quarter of 2011. Marlboro Snuss volume was negatively impacted by significantly lower levels of promotional support when compared to activity around its national expansion in 2010, and the shift in mix from packages with six pouches to tins with fifteen pouches. USSTC and PM USAs 2011 combined reported domestic smokeless products shipment volume increased 1.4%, as shipment volume growth on Copenhagen and Skoal were partially offset by volume declines in its Other portfolio brands, including Marlboro Snus.
After adjusting for changes in trade inventories, USSTC and PM USAs 2011 combined domestic smokeless products shipment volume was estimated to be up approximately 4%. USSTC and PM USA believe that the smokeless categorys 2011 volume grew at an estimated rate of approximately 5%.
Copenhagen and Skoals 2011 combined retail share grew 1.0 share point for the full year of 2011. Copenhagens 2011 retail share increased 1.5 share points. The brands retail share results continued to benefit from new product introductions over the past several years. Skoals 2011 retail share decreased 0.5 share points, as share losses, which include the impact of the 2011 second-quarter de-listing of seven SKUs, were partially offset by share gains on new products that were introduced in 2011. For 2011, USSTC and PM USAs combined retail share decreased 0.1 share point due to share losses on Skoal and Other portfolio brands, including Marlboro Snus, mostly offset by share gains on Copenhagen.
The following discussion compares smokeless products segment results for the year ended December 31, 2010 with the year ended December 31, 2009.
Net revenues, which include excise taxes billed to customers, increased $186 million (13.6%), due primarily to higher volume ($175 million) and lower sales returns and promotional allowances, partially offset by list price reductions.
Operating companies income increased $422 million (100+%), due primarily to lower asset impairment, exit, integration and UST acquisition-related costs ($227 million), higher volume ($135 million), lower marketing, administration and research costs ($77 million) reflecting cost savings, and lower sales returns and promotional allowances, partially offset by list price reductions and higher manufacturing costs.
For 2010, USSTC and PM USAs combined domestic smokeless products shipment volume increased 12.2% versus 2009, due primarily to category growth, retail share growth and trade inventory changes. After adjusting primarily for trade inventory changes, USSTC and PM USAs combined domestic smokeless products shipment volume for the year ended December 31, 2010 was estimated to be up approximately 8% versus 2009. USSTC and PM USA believe that the smokeless categorys volume grew at an estimated rate of approximately 7% for 2010 versus 2009.
USSTC and PM USAs combined retail share of smokeless products increased 0.7 share points versus 2009 to 55.2%, driven primarily by Copenhagen and the national introduction of Marlboro Snus, partially offset by share
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declines on Skoal. Copenhagen and Skoals combined retail share increased 0.6 share points versus 2009. Copenhagens retail share increased 1.9 share points versus 2009 to 24.7%. Copenhagen benefited from USSTCs introductions of Copenhagen Long Cut Wintergreen in the fourth quarter of 2009, Copenhagen Long Cut Straight and Extra Long Cut Natural at the end of the first quarter of 2010 and Copenhagen Black in the fourth quarter of 2010, which was offered for a limited time only, as well as other brand-building programs. Skoals retail share declined 1.3 share points versus 2009 to 23.3% as the brands performance continued to be impacted by the Copenhagen and Marlboro Snus product introductions and competitive activity.
n Cigars Segment: The cigars segments results for 2011 were impacted by promotional investments to defend Black & Milds marketplace position. During 2011, Middleton observed significant competitive activity, including higher levels of imported, low-priced machine-made large cigars. As a result, operating companies income for the full year 2011 was lower than 2010; however, the cigars segments 2011 second-half financial results were higher compared to the first half of 2011 as Middleton made significant progress on improving its operating companies income through new product introductions and brand-building initiatives on Black & Mild. As a result of these initiatives, Black & Mild achieved higher 2011 retail share results and operating companies income increased by approximately 47% for the second half of 2011 versus the second half of 2010.
The following table summarizes cigars segment volume performance for machine-made large cigars:
Shipment Volume For the Years Ended December 31, |
||||||||||||
(units in millions) | 2011 | 2010 | 2009 | |||||||||
Black & Mild |
1,226 | 1,222 | 1,228 | |||||||||
Other |
20 | 24 | 31 | |||||||||
Total Cigars |
1,246 | 1,246 | 1,259 | |||||||||
The following table summarizes cigars segment retail share performance:
Retail Share For the Years Ended December 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Black & Mild |
29.5 | % | 29.0 | % | 30.0 | % | ||||||
Other |
0.3 | 0.4 | 0.7 | |||||||||
Total Cigars |
29.8 | % | 29.4 | % | 30.7 | % | ||||||
Cigars segment retail share results are based on data from the SymphonyIRI InfoScan Cigar Database 2011 for Food, Drug, Mass Merchandisers (excluding Wal-Mart) and Convenience trade classes (InfoScan Cigar Database), which tracks machine-made large cigars market share performance. Middleton defines machine-made large cigars as cigars made by machine that weigh greater than three pounds per thousand, except cigars sold at retail in packages of 20 cigars. This service was developed to provide a representation of retail business performance in key trade channels. It is SymphonyIRIs standard practice to periodically refresh its InfoScan syndicated services, which could restate retail share results that were previously released.
SymphonyIRI performed a restatement of its InfoScan Cigar Database in 2011. As a result of the InfoScan Cigar Database restatement, Middletons previously released full year 2010 and 2009 retail share results for machine-made large cigars were restated and are reflected in the table above.
Middleton executed the following pricing actions during 2011, 2010 and 2009:
n Effective December 5, 2011, Middleton executed various list price increases across substantially all of its brands resulting in a weighted-average increase of approximately $0.12 per five-pack.
n Effective November 15, 2010, Middleton executed various list price increases across substantially all of its brands resulting in a weighted-average increase of approximately $0.09 per five-pack.
n Effective January 11, 2010, Middleton executed various list price increases across substantially all of its brands resulting in a weighted-average increase of approximately $0.18 per five-pack.
n Effective March 4, 2009, Middleton executed various list price increases across substantially all of its brands resulting in a weighted-average increase of approximately $0.40 per five-pack.
n Effective February 11, 2009, Middleton increased the list price on all of its brands by approximately $0.20 per five-pack.
n Effective January 28, 2009, Middleton increased the list price on substantially all of its brands by $0.08 per five-pack.
The following discussion compares cigars segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, increased $7 million (1.3%), due primarily to higher pricing ($16 million), partially offset by higher promotional investments.
Operating companies income decreased $4 million (2.4%), due primarily to higher manufacturing costs ($10 million), higher promotional investments ($7 million) and asset impairment and exit costs in 2011 due to the 2011 Cost Reduction Program ($4 million), partially offset by higher pricing.
Middletons 2011 reported cigars shipment volume was unchanged versus 2010.
Middleton retained a leading share of the tipped cigarillo segment of the machine-made large cigars category, with a retail share of approximately 84% in 2011. The cigars segment total 2011 retail share increased 0.4 share points to 29.8%. Black & Milds 2011 retail share increased 0.5 share points, as the brand benefited from new product introductions. During the fourth quarter of 2011, Middleton broadened its untipped cigarillo portfolio with new Aroma
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Wrap foil pouch packaging that accompanied the national introduction of Black & Mild Wine. This new fourth-quarter packaging roll-out also included Black & Mild Sweets and Classic varieties.
During the second quarter of 2011, Middleton entered into a contract manufacturing arrangement to source the production of a portion of its cigars overseas. Middleton entered into this arrangement to access additional production capacity in an uncertain competitive environment and an excise tax environment that potentially benefits imported large cigars over those manufactured domestically.
The following discussion compares cigars segment results for the year ended December 31, 2010 with the year ended December 31, 2009.
Net revenues, which include excise taxes billed to customers, increased $40 million (7.7%), reflecting higher pricing related primarily to the FET increase, partially offset by higher promotional allowances.
Operating companies income decreased $9 million (5.1%), due primarily to higher promotional investments ($37 million) and higher manufacturing costs ($12 million), partially offset by higher pricing ($33 million) and lower integration costs.
For 2010, Middletons cigar volume decreased 1.0% versus 2009 to 1,246 million units due primarily to Black & Milds share performance. After adjusting primarily for changes in trade inventories, Middletons shipment volume was estimated to be down approximately 4% versus 2009. Middleton estimates that the machine-made large cigar categorys volume grew approximately 2% for 2010.
For 2010, Middletons retail share decreased 1.3 share points versus 2009 to 29.4%. Black & Milds retail share decreased 1.0 share point versus 2009 to 29.0% due primarily to heightened competitive activity. On a sequential basis, Black & Milds second half of 2010 retail share increased 1.6 share points versus the first half of 2010 to 29.8%, as the brand benefited from the introduction of Black & Mild Royale and other brand-building initiatives.
Wine Segment
Business Environment
Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle and Columbia Crest, and owns wineries in or distributes wines from several other wine regions. As discussed in Item 3 and Note 19, Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stags Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon. In addition, Ste. Michelle distributes Antinori and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. A key element of Ste. Michelles strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers and a focus on improving product mix to higher-priced premium products.
Ste. Michelles business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising.
Federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelles wine business.
Operating Results
Altria Group, Inc. acquired UST and its premium wine business, Ste. Michelle, on January 6, 2009. As a result, Ste. Michelles financial results from January 6 through December 31, 2009 are included in Altria Group, Inc.s consolidated and segment results for the year ended December 31, 2009.
Ste. Michelle delivered higher 2011 financial and volume results as it continued to focus on improving its mix to higher margin, premium products. Net revenues and operating companies income increased 12.4% and 49.2%, respectively, in 2011.
For the Years Ended December 31, |
||||||||||||
(in millions) | 2011 | 2010 | 2009 | |||||||||
Net revenues |
$ | 516 | $ | 459 | $ | 403 | ||||||
Operating companies income |
$ | 91 | $ | 61 | $ | 43 | ||||||
The following table summarizes wine segment case shipment volume performance:
Shipment Volume For the Years Ended December 31, |
||||||||||||
(cases in thousands) | 2011 | 2010 | 2009 | |||||||||
Chateau Ste. Michelle |
2,522 | 2,338 | 2,034 | |||||||||
Columbia Crest |
2,055 | 2,054 | 1,968 | |||||||||
Other |
2,744 | 2,289 | 2,003 | |||||||||
Total Wine |
7,321 | 6,681 | 6,005 | |||||||||
The following discussion compares wine segment results for the year ended December 31, 2011 with the year ended December 31, 2010.
Net revenues, which include excise taxes billed to customers, increased $57 million (12.4%), due primarily to higher premium shipment volume.
Operating companies income increased $30 million (49.2%), due primarily to higher premium shipment volume ($26 million) and lower UST acquisition-related costs, partially offset by higher manufacturing costs.
Ste. Michelles 2011 reported wine shipment volume increased 9.6% versus 2010 due primarily to the national expansion of select wines into off-premise channels and growth in its Chateau Ste. Michelle brand.
The following discussion compares wine segment results for the year ended December 31, 2010 with the year ended
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December 31, 2009.
Net revenues, which include excise taxes billed to customers, increased $56 million (13.9%), due primarily to higher volume.
Operating companies income increased $18 million (41.9%), due primarily to higher volume ($23 million) and lower exit, integration, and UST acquisition-related costs, partially offset by higher marketing, administration and research costs.
Ste. Michelles wine shipment volume for 2010 increased 11.3% versus 2009 due primarily to higher off-premise channel volume that includes supermarkets, liquor stores and wholesale clubs, as well as higher on-premise channel volume that includes restaurants and bars. Full-year volume results were also positively impacted by calendar differences. After adjusting for calendar differences, Ste. Michelles wine shipment volume for 2010 was estimated to be up 9.8% versus 2009.
Financial Services Segment
Business Environment
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, PMCCs operating companies income will fluctuate over time as investments mature or are sold. During 2011, 2010 and 2009, proceeds from asset management activities totaled $490 million, $312 million and $793 million, respectively, and gains included in operating companies income totaled $107 million, $72 million and $257 million, respectively.
As discussed previously, during the second quarter of 2011, Altria Group, Inc. recorded the PMCC Leveraged Lease Charge. See Note 8, Note 19 and Item 3 for further discussion of matters related to this charge.
PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During 2011, PMCCs net increase to its allowance for losses was $25 million due primarily to Americans bankruptcy filing. PMCC believes that, as of December 31, 2011, the allowance for losses of $227 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. With the exception of American, all PMCC lessees were current on their lease payment obligations as of December 31, 2011. For further discussion of finance assets, see Note 8.
On February 10, 2012, American filed a motion to reject the leases for nine of the 28 aircraft under lease, which will result in a $23 million write-off of the related investment in finance lease balance against PMCCs allowance for losses in the first quarter of 2012. The rejection of the leases for these nine aircraft does not change PMCCs assessment of the adequacy of its allowance for losses at December 31, 2011.
Operating Results
For the Years Ended December 31, | ||||||||||||||||||||||||||
Net Revenues | Operating Companies (Loss) Income |
|||||||||||||||||||||||||
(in millions) | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||
Financial services |
$ | (313 | ) | $ | 161 | $ | 348 | $ | (349 | ) | $ | 157 | $ | 270 | ||||||||||||
PMCCs net revenues for 2011 decreased $474 million (100+%) from 2010, due primarily to the PMCC Leveraged Lease Charge, partially offset by higher lease revenues, which included gains on asset sales. PMCCs operating companies income for 2011 decreased $506 million (100+%) from 2010, due primarily to the PMCC Leveraged Lease Charge, a net increase of $25 million to the allowance for losses as discussed in Note 8, partially offset by higher lease revenues, which included gains on asset sales.
PMCCs net revenues for 2010 decreased $187 million (53.7%) from 2009. PMCCs operating companies income for 2010 decreased $113 million (41.9%) from 2009. The decreases were due primarily to lower gains on asset sales in 2010.
Financial Review
Net Cash Provided by Operating Activities
During 2011, net cash provided by operating activities was $3.6 billion compared with $2.8 billion during 2010. This increase was due primarily to a payment to the IRS of approximately $945 million for taxes and associated interest in July 2010 associated with certain leveraged lease transactions entered into by PMCC during 1996 2003 and lower payments in 2011 related to exit and integration costs and State Settlement Agreements, partially offset by a voluntary $200 million contribution made to Altria Group, Inc.s pension plan during the first quarter of 2011, and higher tax payments in 2011 related to the decision not to claim tax benefits for certain PMCC leveraged lease transactions beginning in 2010 as discussed in Note 19 and Item 3.
During 2010, net cash provided by operating activities was $2.8 billion compared with $3.4 billion during 2009. The decrease in cash provided by operating activities was due primarily to the $945 million payment for taxes and associated interest to the IRS discussed above, and higher interest payments in 2010 due to the issuance of senior unsecured long-term notes in February 2009, partially offset by lower payments for State Settlement Agreements in 2010 and higher tax payments in 2009 related to finance asset sales.
Altria Group, Inc. had a working capital deficit at December 31, 2011 and December 31, 2010. Altria Group, Inc.s management believes that it has the ability to fund these working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program as discussed in the Debt and Liquidity section.
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Net Cash Provided by (Used in) Investing Activities
During 2011, net cash provided by investing activities was $387 million compared with $259 million during 2010. This increase was due primarily to higher proceeds from finance asset sales in 2011.
During 2010, net cash provided by investing activities was $259 million, compared with net cash used of $9.8 billion during 2009. This change was due primarily to the acquisition of UST in January 2009 and lower capital expenditures in 2010, partially offset by lower proceeds from finance asset sales during 2010.
Capital expenditures for 2011 decreased 37.5% to $105 million. Capital expenditures for 2012 are expected to be approximately $150 million, and are expected to be funded from operating cash flows.
Net Cash Provided by (Used in) Financing Activities
During 2011, net cash used in financing activities was $3.0 billion compared with $2.6 billion during 2010. This increase was due primarily to Altria Group, Inc.s repurchases of its common stock during 2011 and a higher dividend rate in 2011, partially offset by higher net issuances of debt during 2011.
During 2010, net cash used in financing activities was $2.6 billion compared with net cash provided of $276 million during 2009. This change was due primarily to lower net issuances of debt and a higher dividend rate during 2010.
Debt and Liquidity
Credit Ratings: Altria Group, Inc.s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. Under the terms of certain of Altria Group, Inc.s existing debt instruments, a change in a credit rating could result in an increase or a decrease of the cost of borrowings. For instance, the interest rate payable on certain of Altria Group, Inc.s outstanding notes is subject to adjustment from time to time if the rating assigned to the notes of such series by Moodys Investors Service, Inc. (Moodys) or Standard & Poors Ratings Services (Standard & Poors) is downgraded (or subsequently upgraded) as and to the extent set forth in the notes. The impact of credit ratings on the cost of borrowings under Altria Group, Inc.s credit agreements is discussed below.
At December 31, 2011, the credit ratings and outlook for Altria Group, Inc.s indebtedness by major credit rating agencies were:
Short-term Debt |
Long-term Debt |
Outlook | ||||||||||
Moodys |
P-2 | Baa1 | Stable | |||||||||
Standard & Poors |
A-2 | BBB | Stable | |||||||||
Fitch |
F2 | BBB+ | Stable | |||||||||
Credit Lines: From time to time, Altria Group, Inc. has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. At December 31, 2011, 2010 and 2009, Altria Group, Inc. had no short-term borrowings outstanding.
For the years ended December 31, 2011, 2010 and 2009, Altria Group, Inc.s average daily short-term borrowings, peak short-term borrowings outstanding and weighted-average interest rate on short-term borrowings were as follows:
(dollars in millions) | 2011 | 2010 | 2009 | |||||||||
Average daily short-term borrowings |
$ | 68 | $ | 186 | $ | 761 | ||||||
Peak short-term borrowings outstanding |
$ | 865 | $ | 1,419 | $ | 4,307 | ||||||
Weighted-average interest rate on short-term borrowings |
0.40 | % | 0.39 | % | 2.10 | % | ||||||
Peak borrowings for 2011 and 2010 were due primarily to payments related to State Settlement Agreements as further discussed in Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation, Tobacco Space Business Environment, Note 19 and Item 3. Peak borrowings for 2011 and 2010 were repaid with cash provided by operating activities. Peak borrowings for 2009 represented borrowings under a 364-day term bridge loan facility related to the acquisition of UST as further discussed in Note 3.
At December 31, 2011 the credit line available to Altria Group, Inc. was $3.0 billion and there were no short-term borrowings. As discussed further below, Altria Group, Inc.s credit line provides support for its commercial paper program.
On June 30, 2011, Altria Group, Inc. entered into a senior unsecured 5-year revolving credit agreement (the Credit Agreement). The Credit Agreement provides for borrowings up to an aggregate principal amount of $3.0 billion and expires on June 30, 2016. The Credit Agreement replaced Altria Group, Inc.s $0.6 billion senior unsecured 364-day revolving credit agreement, which was to expire on November 16, 2011 (the 364-Day Agreement) and Altria Group, Inc.s $2.4 billion senior unsecured 3-year revolving credit agreement, which was to expire on November 20, 2012 (together with the 364-Day Agreement, the Terminated Agreements). The Terminated Agreements were terminated effective June 30, 2011. Pricing for interest and fees under the Credit Agreement 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 Credit Agreement are expected to 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 & Poors and Moodys. The applicable minimum and maximum rates based on Altria Group, Inc.s long-term senior unsecured debt ratings at December 31, 2011 for borrowings under the Credit Agreement are 0.75% and 1.75%, respectively. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral.
The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.s commercial paper issuances. As in the Terminated Agreements, the Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated EBITDA of not more than 3.0 to 1.0
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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, 2011, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.9 to 1.0 and 6.4 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms consolidated EBITDA, debt and consolidated interest expense, as defined in the Credit Agreement, include certain adjustments. Exhibit 99.3 to Altria Group, Inc.s 2011 Form 10-K sets forth the definitions of these terms as they appear in the Credit Agreement.
Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 20. Condensed Consolidating Financial Information to the consolidated financial statements (Note 20).
Financial Market Environment: Altria Group, Inc. believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria Group, Inc. continues to monitor the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group. Altria Group, Inc. believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations.
Debt: At December 31, 2011 and 2010, Altria Group, Inc.s total debt, all of which is consumer products debt, was $13.7 billion and $12.2 billion, respectively.
As discussed in Note 10. Long-Term Debt to the consolidated financial statements (Note 10), on May 5, 2011, Altria Group, Inc. issued $1.5 billion (aggregate principal amount) of 4.75% senior unsecured long-term notes due May 5, 2021, with interest payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.s general funds and used for general corporate purposes.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA. For further discussion, see Note 20.
All of Altria Group, Inc.s debt was fixed-rate debt at December 31, 2011 and 2010. The weighted-average coupon interest rate on total debt was approximately 8.3% and 8.8% at December 31, 2011 and 2010, respectively. For further details on long-term debt, see Note 10.
On October 28, 2011, Altria Group, Inc. filed a registration statement on Form S-3 with the Securities and Exchange Commission, under which Altria Group, Inc. may offer debt securities or warrants to purchase debt securities from time to time over a three-year period from the date of filing.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.
Guarantees and Redeemable Noncontrolling Interest: As discussed in Note 19 and Item 3, Altria Group, Inc. had guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at December 31, 2011. In addition, as discussed in Note 20, PM USA has issued guarantees related to Altria Group, Inc.s indebtedness.
Aggregate Contractual Obligations: The following table summarizes Altria Group, Inc.s contractual obligations at December 31, 2011:
Payments Due | ||||||||||||||||||||
(in millions) | Total | 2012 | 2013-2014 | 2015-2016 | 2017 and Thereafter |
|||||||||||||||
Long-term debt(1) |
$ | 13,726 | $ | 600 | $ | 1,984 | $ | 1,000 | $ | 10,142 | ||||||||||
Interest on borrowings(2) |
13,363 | 1,143 | 2,063 | 1,838 | 8,319 | |||||||||||||||
Operating |
295 | 56 | 83 | 46 | 110 | |||||||||||||||
Purchase obligations(4) : |
||||||||||||||||||||
Inventory and production costs |
1,978 | 681 | 745 | 361 | 191 | |||||||||||||||
Other |
767 | 435 | 210 | 109 | 13 | |||||||||||||||
2,745 | 1,116 | 955 | 470 | 204 | ||||||||||||||||
Other long-term liabilities(5) |
3,602 | 647 | 342 | 928 | 1,685 | |||||||||||||||
$ | 33,731 | $ | 3,562 | $ | 5,427 | $ | 4,282 | $ | 20,460 | |||||||||||
(1) Amounts represent the expected cash payments of Altria Group, Inc.s long-term debt, all of which is consumer products debt.
(2) Amounts represent the expected cash payments of Altria Group, Inc.s interest expense on its long-term debt. Interest on Altria Group, Inc.s debt, which is all fixed-rate debt at December 31, 2011, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and premiums, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net on the consolidated statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of a voluntary $500 million contribution made on January 3, 2012 as well as the actuarially determined anticipated minimum funding requirements for each year from 2013 through 2016. Contributions beyond 2016 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.
The State Settlement Agreements and related legal fee payments, payments for tobacco growers and FDA user fees, as discussed below and in Note 19 and Item 3, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 19 and Item 3, are also excluded from the
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table above since these deposits will be returned to PM USA should it prevail on appeal.
Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation: As discussed previously and in Note 19 and Item 3, PM USA has entered into State Settlement Agreements with the states and territories of the United States. PM USA also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USAs obligations under this trust expired on December 15, 2010 (these obligations had been offset by the obligations imposed on PM USA by FETRA, which expires in 2014). USSTC and Middleton are also subject to obligations imposed by FETRA. In addition, in June 2009, PM USA and a subsidiary of USSTC became subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. The State Settlement Agreements, FETRA, and the FDA user fees call for payments that are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.s subsidiaries recorded approximately $5.0 billion of charges to cost of sales for each of the years ended December 31, 2011, 2010 and 2009.
Based on current agreements, 2011 market share, and historical annual industry volume decline rates, the estimated amounts that Altria Group, Inc.s subsidiaries may charge to cost of sales for these payments will approximate $5 billion in 2012 and each year thereafter.
The estimated amounts due under the State Settlement Agreements and FETRA charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for the FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements, FETRA and FDA user fees are subject to adjustment for several factors, including volume, inflation and certain contingent events and, in general, are allocated based on each manufacturers market share. Future payment amounts are estimates, and actual amounts will differ as underlying assumptions differ from actual future results. See Note 19 and Item 3 for a discussion of proceedings that may result in a downward adjustment of amounts paid under State Settlement Agreements for the years 2003 to 2010.
Litigation Escrow Deposits: With respect to certain adverse verdicts currently on appeal, as of December 31, 2011, PM USA has posted various forms of security totaling approximately $63 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. These cash deposits are included in other assets on the consolidated balance sheet.
Although litigation is subject to uncertainty and could result in material adverse consequences for the financial condition, cash flows or results of operations of PM USA, UST or Altria Group, Inc. in a particular fiscal quarter or fiscal year as more fully disclosed in Note 19, Item 3, and in Cautionary Factors That May Affect Future Results, management expects cash flow from operations, together with Altria Group, Inc.s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.
Equity and Dividends
As discussed in Note 12. Stock Plans to the consolidated financial statements, during 2011 Altria Group, Inc. granted 2.2 million shares of restricted and deferred stock to eligible employees.
At December 31, 2011, the number of shares to be issued upon exercise of outstanding stock options and vesting of deferred stock was 0.3 million, and 0.01% of shares outstanding.
Dividends paid in 2011 and 2010 were approximately $3.2 billion and $3.0 billion, respectively, an increase of 8.9%, primarily reflecting a higher dividend rate.
In August 2011, Altria Group, Inc.s Board of Directors approved a 7.9% increase in the quarterly dividend rate to $0.41 per common share versus the previous rate of $0.38 per common share. Altria Group, Inc. expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is $1.64 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 $1.0 billion one-year share repurchase program. Altria Group, Inc. completed this share repurchase program during the third quarter of 2011. Under this program, Altria Group, Inc. repurchased a total of 37.6 million shares of its common stock at an average price of $26.62 per share.
In October 2011, Altria Group, Inc.s Board of Directors authorized a new $1.0 billion share repurchase program, which Altria Group, Inc. intends to complete by the end of 2012. During the fourth quarter of 2011, Altria Group, Inc. repurchased 11.7 million shares of its common stock at an aggregate cost of approximately $327 million, and an average price of $27.84 per share, under this share repurchase program. Share repurchases under the new program will depend upon marketplace conditions and other factors, and the program remains subject to the discretion of Altria Group, Inc.s Board of Directors.
During 2011, Altria Group, Inc. repurchased a total of 49.3 million shares of its common stock under the two programs at an aggregate cost of approximately $1.3 billion, and an average price of $26.91 per share.
Market Risk
Interest Rate Sensitive Financial Instruments: At December 31, 2011 and 2010, the fair value of Altria Group, Inc.s total debt was $17.7 billion and $15.5 billion, respectively. The fair value of Altria Group, Inc.s debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at December 31, 2011 and 2010, would decrease the fair value of Altria Group, Inc.s total debt by approximately $1.1 billion and $1.0 billion, respectively. A 1% decrease in market interest rates at December 31, 2011 and 2010, would increase the fair value of Altria Group, Inc.s total debt by approximately $1.2 billion and $1.1 billion, respectively.
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Interest rates on borrowings under the Credit Agreement are expected to be based on 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 & Poors and Moodys. The applicable minimum and maximum rates based on Altria Group, Inc.s long-term senior unsecured debt ratings at December 31, 2011 for borrowings under the Credit Agreement are 0.75% and 1.75%, respectively. At December 31, 2011, Altria Group, Inc. had no borrowings under the Credit Agreement.
Recent Accounting Guidance Not Yet Adopted
See Note 2 for a discussion of new accounting standards.
Contingencies
See Note 19 and Item 3 for a discussion of contingencies.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
We* may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the SEC, in reports to security holders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as strategy, expects, continues, plans, anticipates, believes, will, estimates, forecasts, intends, projects, goals, objectives, guidance, targets and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.s securities. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in the Business Environment sections preceding our discussion of operating results of our subsidiaries businesses. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
n Tobacco-Related Litigation: Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 45 states now limit the dollar amount of bonds or require no bond at all. Tobacco litigation plaintiffs, however, have challenged the constitutionality of Floridas bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of
operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially
* | This section uses the terms we, our and us when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context. |
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affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. See Item 3, Note 19 and Exhibits 99.1 and 99.2 to Altria Group, Inc.s 2011 Form 10-K for a discussion of pending tobacco-related litigation.
n Tobacco Regulation and Control Action in the Public and Private Sectors: Our tobacco subsidiaries face significant governmental action, including efforts aimed at reducing the incidence of tobacco use, restricting marketing and advertising, imposing regulations on packaging, warnings and disclosure of flavors or other ingredients, prohibiting the sale of tobacco products with certain characterizing flavors or other characteristics, limiting or prohibiting the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packing sizes, and seeking to hold them responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.
PM USA, USSTC and other Altria Group, Inc. subsidiaries are subject to regulation, and may become subject to additional regulation, by the FDA, as discussed in detail in Tobacco Space Business Environment FSPTCA and FDA Regulation. We cannot predict how the FDA will implement and enforce its statutory authority, including by promulgating additional regulations and pursuing possible investigatory or enforcement actions.
Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels. Actions by the FDA or other federal, state or local governments or agencies may impact the consumer acceptability of tobacco products, limit adult consumer choices, delay or prevent the launch of new or modified tobacco products, restrict communications to adult consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, require the recall or removal of tobacco products from the marketplace or otherwise significantly increase the cost of doing business, all or any of which may have a material adverse impact on the results of operations or financial condition of Altria Group, Inc.
n Excise Taxes: Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the state, federal and local levels. Tax increases are expected to continue to have an adverse impact on sales of our tobacco products due to lower consumption levels and to a potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an impact on the reported share performance of tobacco products of Altria Group, Inc.s tobacco subsidiaries. For further discussion, see Tobacco Space Business Environment Excise Taxes.
n Increased Competition in the United States Tobacco Categories: Each of Altria Group, Inc.s tobacco subsidiaries operates in highly competitive tobacco categories. Settlements of certain tobacco litigation in the United States have resulted in substantial cigarette price increases. PM USA faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and increased imports of foreign lowest priced brands. USSTC faces significant competition in the smokeless tobacco category, both from existing competitors and new entrants, and has experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.
n Governmental Investigations: From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. We cannot predict whether new investigations may be commenced or the outcome of such investigations, and it is possible that our subsidiaries businesses could be materially affected by an unfavorable outcome of future investigations.
n New Product Technologies: Altria Group, Inc.s subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and potentially outside the United States) products that meet their taste expectations and evolving preferences. Potential solutions being researched include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. These efforts may include arrangements with third parties. Moreover, these efforts may not succeed. If they do not succeed, but one or more of their competitors does, our subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of such products with claims of reduced risk to consumers or whether
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consumers purchase decisions would be affected by such claims, which could affect the commercial viability of any such products that might be developed.
n Adjacency Strategy: Altria Group, Inc. and its subsidiaries have adjacency growth strategies involving moves and potential moves into complementary products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful. For a related discussion, see New Product Technologies above.
n Tobacco Price, Availability and Quality: Any significant change in tobacco leaf prices, quality or availability could affect our tobacco subsidiaries profitability and business. For a discussion of factors that influence leaf prices, availability and quality, see Tobacco Space Business Environment Tobacco Price, Availability and Quality.
n Tobacco Key Facilities; Supply Security: Altria Group, Inc.s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of significant suppliers. A natural or man-made disaster or other disruption that affects the manufacturing facilities of any of Altria Group, Inc.s tobacco subsidiaries or the facilities of any significant suppliers of any of Altria Group, Inc.s tobacco subsidiaries could adversely impact the operations of the affected subsidiaries. An extended interruption in operations experienced by one or more Altria Group, Inc. subsidiaries or significant suppliers could have a material adverse effect on the results of operations and financial condition of Altria Group, Inc.
n Attracting and Retaining Talent: Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the decreasing social acceptance of tobacco usage. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, our tobacco subsidiaries may be unable to attract and retain the best talent.
n Competition, Evolving Consumer Preferences and Economic Downturns: Each of our tobacco and wine subsidiaries is subject to intense competition, changes in consumer preferences and changes in economic conditions. To be successful, they must continue to:
n promote brand equity successfully;
n anticipate and respond to new and evolving consumer preferences;
n develop new products and markets within and potentially outside of the United States and to broaden brand portfolios in order to compete effectively with lower-priced products;
n improve productivity; and
n protect or enhance margins through cost savings and price increases.
The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products. The volumes of our tobacco and wine subsidiaries could suffer accordingly.
Our finance subsidiary, PMCC, holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If parties to PMCCs leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.
n Acquisitions: Altria Group, Inc. from time to time considers acquisitions. From time to time we may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or other event could impact our credit ratings or the outlook for those ratings. Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms, that we will realize any of the anticipated benefits from an acquisition or that acquisitions will be quickly accretive to earnings.
n Capital Markets: Access to the capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the capital markets and any resulting tightening of credit availability, pricing and/or credit terms may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.
n Exchange Rates: For purposes of financial reporting, the equity earnings attributable to Altria Group, Inc.s investment in SABMiller are translated into U.S. dollars from various local currencies based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar against these currencies, our reported equity earnings in SABMiller will be reduced because the local currencies will translate into fewer U.S. dollars.
n Asset Impairment: We periodically calculate the fair value of our goodwill and intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. If an impairment is determined to exist, we will incur impairment losses, which will reduce our earnings. For further discussion, see Discussion and Analysis Critical Accounting Policies and Estimates.
n IRS Challenges to PMCC Leases: The IRS has challenged and is expected to further challenge the tax treatment
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of certain of PMCCs leveraged leases. As discussed in Item 3 and Note 19, should Altria Group, Inc. not prevail in any one or more of these matters, Altria Group, Inc. will have to accelerate the payment of significant amounts of federal and state income tax and pay associated interest costs and penalties, if imposed. In the second quarter of 2011, Altria Group, Inc. recorded the PMCC Leveraged Lease Charge, which is discussed in Item 3, Note 8, Note 15 and Note 19. The PMCC Leveraged Lease Charge excludes potential penalties because Altria Group, Inc. believes that it met the applicable standards to avoid any associated penalties at the time it claimed the deductions on its tax returns.
n Wine Competition; Grape Supply; Regulation and Excise Taxes: Ste. Michelles business is subject to significant competition, including from many large, well-established domestic and international companies. The adequacy of Ste. Michelles grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington state. Supply shortages related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelles sales. In addition, federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages, may have an adverse effect on Ste. Michelles wine business. For further discussion, see Wine Segment Business Environment.
n Information Systems: Altria Group, Inc. and its subsidiaries use information systems to help manage business processes, collect and interpret business data and communicate internally and externally with employees, suppliers, customers and others. Many of these information systems are managed by third-party service providers. We have backup systems and business continuity plans in place and we take care to protect our systems and data from unauthorized access. Nevertheless, failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could result in loss of revenue, assets or personal or other sensitive data, cause damage to the reputation of our companies and their brands and result in legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Altria Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders equity, and cash flows, present fairly, in all material respects, the financial position of Altria Group, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Altria Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Altria Group, Inc.s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on Altria Group, Inc.s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
January 27, 2012
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Report of Management On Internal Control Over Financial Reporting
Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Altria Group, Inc.s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:
n pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Altria Group, Inc.;
n provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
n provide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance with the authorization of management and directors of Altria Group, Inc.; and
n provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Altria Group, Inc.s internal control over financial reporting as of December 31, 2011. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment included an evaluation of the design of Altria Group, Inc.s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2011, Altria Group, Inc. maintained effective internal control over financial reporting.
PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of Altria Group, Inc. included in this report, has audited the effectiveness of Altria Group, Inc.s internal control over financial reporting as of December 31, 2011, as stated in their report herein.
January 27, 2012
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Exhibit 21
ALTRIA GROUP, INC. SUBSIDIARIES
Certain active subsidiaries of the Company and their subsidiaries as of December 31, 2011, are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.
Name |
State or Country of Organization | |
Altria Client Services Inc. |
New York | |
Altria Enterprises II LLC |
Virginia | |
Altria Enterprises LLC |
Virginia | |
Altria Group Distribution Company |
Virginia | |
Altria Import Export Services LLC |
Virginia | |
Col Solare, LLP |
Washington | |
Cormorant Energy Investment Corp. |
Delaware | |
Dart Resorts Inc. |
Delaware | |
F.W. Rickard Seeds, Inc. |
Kentucky | |
General Foods Credit Corporation |
Delaware | |
General Foods Credit Investors No. 1 Corporation |
Delaware | |
General Foods Credit Investors No. 2 Corporation |
Delaware | |
General Foods Credit Investors No. 3 Corporation |
Delaware | |
Grant Holdings, Inc. |
Pennsylvania | |
Grant Transit Co. |
Delaware | |
HNB Investment Corp. |
Delaware | |
International Wine & Spirits Ltd. |
Delaware | |
John Middleton Co. |
Pennsylvania | |
Management Subsidiary Holdings Inc. |
Virginia | |
Michelle-Antinori, LLC |
California | |
Michigan Investment Corp. |
Delaware | |
National Smokeless Tobacco Company Ltd. |
Canada | |
Philip Morris Capital Corporation |
Delaware | |
Philip Morris Duty Free Inc. |
Virginia | |
Philip Morris USA Inc. |
Virginia | |
PMCC Investors No. 1 Corporation |
Delaware | |
PMCC Investors No. 2 Corporation |
Delaware | |
PMCC Investors No. 3 Corporation |
Delaware | |
PMCC Investors No. 4 Corporation |
Delaware | |
PMCC Leasing Corporation |
Delaware | |
Profigen do Brazil Ltda. |
Brazil | |
Profigen Inc. |
Delaware | |
SB Leasing Inc. |
Delaware | |
Stags Leap Wine Cellars, LLC |
California | |
Ste. Michelle Wine Estates Ltd. |
Washington | |
TMLLC, Inc. |
Virginia | |
Trademarks LLC |
Delaware | |
Trimaran Leasing Investors, L.L.C.-II |
Delaware | |
U.S. Smokeless Tobacco Brands Inc. |
Virginia | |
U.S. Smokeless Tobacco Company LLC |
Virginia | |
UST International Inc. |
Delaware | |
U.S. Smokeless Tobacco Manufacturing Company LLC |
Virginia | |
U.S. Smokeless Tobacco Products LLC |
Virginia | |
UST LLC |
Virginia |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement of Altria Group, Inc. on Form S-14 (File No. 2-96149) and in Altria Group, Inc.s Registration Statements on Form S-3 (File Nos. 333-35143, 333-155009 and 333-177580) and Form S-8 (File Nos. 333-28631, 33-10218, 33-13210, 33-14561, 33-48781, 33-59109, 333-43478, 333-43484, 333-128494, 333-139523, 333-148070, 333-156188, 333-167516 and 333-170185), of our report dated January 27, 2012 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Altria Group, Inc., which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K (Form 10-K). We also consent to the incorporation by reference of our report dated January 27, 2012 relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP |
Richmond, Virginia |
February 16, 2012 |
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 13th day of February, 2012.
/S/ ELIZABETH E. BAILEY Elizabeth E. Bailey |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/S/ GERALD L. BALILES Gerald L. Baliles |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 15th day of February, 2012.
/S/ MARTIN J. BARRINGTON Martin J. Barrington |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/S/ JOHN T. CASTEEN III John T. Casteen III |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/S/ DINYAR S. DEVITRE Dinyar S. Devitre |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/S/ THOMAS F. FARRELL II Thomas F. Farrell II |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 13th day of February, 2012.
/S/ THOMAS W. JONES Thomas W. Jones |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/S/ W. LEO KIELY III W. Leo Kiely III |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 15th day of February, 2012.
/s/ GEORGE MUÑOZ George Muñoz |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the Company), does hereby constitute and appoint Michael E. Szymanczyk, Denise F. Keane, Howard A. Willard III, and W. Hildebrandt Surgner, Jr., or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2011 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 16th day of February, 2012.
/s/ NABIL Y. SAKKAB Nabil Y. Sakkab |
Exhibit 31.1
Certifications
I, Michael E. Szymanczyk, certify that:
1. | I have reviewed this annual report on Form 10-K of Altria Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 16, 2012 | ||
/s/ MICHAEL E. SZYMANCZYK | ||
Michael E. Szymanczyk | ||
Chairman and Chief Executive Officer |
Exhibit 31.2
Certifications
I, Howard A. Willard III, certify that:
1. | I have reviewed this annual report on Form 10-K of Altria Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 16, 2012 | ||
/s/ HOWARD A. WILLARD III | ||
Howard A. Willard III | ||
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Altria Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael E. Szymanczyk, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ MICHAEL E. SZYMANCZYK |
Michael E. Szymanczyk |
Chairman and Chief Executive Officer |
February 16, 2012 |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Altria Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Howard A. Willard III, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ HOWARD A. WILLARD III |
Howard A. Willard III |
Executive Vice President and Chief Financial Officer |
February 16, 2012 |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
CERTAIN LITIGATION MATTERS
As described in Item 3. Legal Proceedings to this Form 10-K (Item 3) and in Note 19. Contingencies to Altria Group, Inc.s consolidated financial statements, there are legal proceedings covering a wide range of matters pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc., its subsidiaries, including Philip Morris USA Inc. (PM USA), and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, (iv) class action suits alleging that the uses of the terms Lights and Ultra Lights constitute deceptive and unfair trade practices, common law fraud or RICO violations, (v) international cases, and (vi) other tobacco-related litigation.
The following lists certain of the pending claims against Altria Group, Inc., PM USA, UST LLC (UST) and/or USTs subsidiaries included in these categories.
SMOKING AND HEALTH LITIGATION
The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM USA and, in some cases, Altria Group, Inc. and/or its other subsidiaries and affiliates, as of February 13, 2012. See International Cases below for a list of smoking and health class actions pending in Canada.
Consolidated Individual Smoking and Health Cases
In re: Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. See Item 3 for a discussion of this litigation.
Flight Attendant Litigation
The settlement agreement entered into in 1997 in the case of Broin, et al. v. Philip Morris Companies Inc., et al., which was brought by flight attendants seeking damages for personal injuries allegedly caused by environmental tobacco smoke, allows members of the Broin class to file individual lawsuits seeking compensatory damages, but prohibits them from seeking punitive damages. See Item 3 for a discussion of this litigation.
Domestic Class Actions
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Item 3 for a discussion of this case (which has concluded) and the Engle progeny litigation.
Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. See Item 3 for a discussion of this case.
Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997.
Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998.
Cypret, et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998.
Caronia, et al. v. Philip Morris USA Inc., United States District Court, Eastern District, New York, filed January 13, 2006. See Item 3 for a discussion of this case.
Donovan, et al. v. Philip Morris, United States District Court, District of Massachusetts, filed March 2, 2007. See Item 3 for a discussion of this case.
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending against PM USA and, in some cases, Altria Group, Inc. and/or its other subsidiaries and affiliates as of February 13, 2012. See International Cases below for a list of international health care cost recovery actions.
Master Settlement Agreement-Related Cases
State of Montana v. Philip Morris Incorporated, et al., Montana First Judicial District Court, Lewis and Clark County, filed May 8, 2006. See Item 3 for a discussion of this case.
Vibo Corp. v. Conway, et al., United States District Court, Western District, Kentucky, filed October 28, 2008. See Item 3 for a discussion of this case.
Possible Adjustments in MSA Payments for 2003 to 2010 and Other Disputes Related to MSA Payments
See Item 3 for a discussion of these matters.
Department of Justice Case
The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Item 3 for a discussion of this case.
LIGHTS/ULTRA LIGHTS CASES
The following lists the Lights/Ultra Lights cases pending against Altria Group, Inc. and/or its various subsidiaries and others as of February 13, 2012. See International Cases below for a reference to one Lights action pending in Israel.
Cleary, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, Illinois, filed June 3, 1998. See Item 3 for a discussion of this case.
Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. See Item 3 for a discussion of this case.
Price, et al. v. Philip Morris Inc., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed February 10, 2000. See Item 3 for a discussion of this case.
Larsen, et al. v. Philip Morris Inc. (formerly known as Craft, et al. v. Philip Morris Companies Inc., et al.), Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. See Item 3 for a discussion of this case.
Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. See Item 3 for a discussion of this case.
Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court, Marshall County, West Virginia, filed September 17, 2001.
Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Minnesota, filed November 28, 2001. See Item 3 for a discussion of this case.
Lawrence, et al. v. Philip Morris Incorporated (formerly known as Tremblay, et al. v. Philip Morris Incorporated), Superior Court, Rockingham County, New Hampshire, filed March 29, 2002. See Item 3 for a discussion of this case.
Pearson v. Philip Morris Incorporated, et al., Circuit Court, Multnomah County, Oregon, filed November 20, 2002. See Item 3 for a discussion of this case.
Virden v. Altria Group, Inc., et al., Circuit Court, Hancock County, West Virginia, filed March 28, 2003.
Stern, et al. v. Philip Morris USA Inc., et al., Superior Court, Middlesex County, New Jersey, filed April 4, 2003.
-2-
Arnold, et al. v. Philip Morris USA Inc., Circuit Court, Madison County, Illinois, filed May 5, 2003.
Watson, et al. v. Altria Group, Inc., et al., Circuit Court, Pulaski County, Arkansas, filed May 29, 2003. See Item 3 for a discussion of this case.
Carroll (formerly known as Holmes), et al. v. Philip Morris USA Inc., et al., Superior Court, New Castle County, Delaware, filed August 18, 2003. See Item 3 for a discussion of this case.
Kelly v. Martin & Bayley, Inc., et al., Circuit Court, Madison County, Illinois, filed February 4, 2005. This case is an individual Lights case, not a class action. See Item 3 for a discussion of this case.
Tang v. Philip Morris USA Inc., United States District Court, Eastern District, New York, filed December 17, 2008. See Item 3 for a discussion of this case.
Wyatt, et al. v. Philip Morris USA Inc., et al., (formerly Nikolic, et al. v. Philip Morris USA Inc., et al.), United States District Court, Eastern District, Wisconsin, filed June 16, 2009. See Item 3 for a discussion of this case.
Cabbat v. Philip Morris USA, Inc., United States District Court, Hawaii, filed March 19, 2010. See Item 3 for a discussion of this case.
Phillips, et al. v. Altria Group, Inc., et al., United States District Court, Northern District, Ohio, filed August 9, 2010. See Item 3 for a discussion of this case.
INTERNATIONAL CASES
Canada
Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001. Health care cost recovery action. See Item 3 for a discussion of this case.
Her Majesty the Queen in Right of the Province of New Brunswick v. Rothmans, Inc., et al., Court of the Queens Bench of New Brunswick Judicial District of Fredericton, Canada, filed March 13, 2008. Health care cost recovery action. See Item 3 for a discussion of this case.
Dorion v. Canadian Tobacco Manufacturers Council, et al., Court of Queens Bench of Alberta, Judicial District of Calgary, Canada, filed on or about June 17, 2009. Smoking and health class action. See Item 3 for a discussion of this case.
Semple v. Canadian Tobacco Manufacturers Council, et al., Supreme Court of Nova Scotia, Canada, filed on or about June 18, 2009. Smoking and health class action. See Item 3 for a discussion of this case.
Kunta v. Canadian Tobacco Manufacturers Council, et al., Court of Queens Bench of Manitoba, Winnipeg Centre, Canada, filed on an unknown date in June 2009. Smoking and health class action. See Item 3 for a discussion of this case.
Adams v. Canadian Tobacco Manufacturers Council, et al., Court of Queens Bench for Saskatchewan, Judicial Centre of Regina, Canada, filed on or about July 10, 2009. Smoking and health class action. See Item 3 for a discussion of this case.
Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Superior Court of Justice of Ontario, Canada, filed on or about September 30, 2009. Health care cost recovery action. See Item 3 for a discussion of this case.
Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court of British Columbia, Vancouver Registry, Canada, filed on or about June 25, 2010. Smoking and health class action. See Item 3 for a discussion of this case.
McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court of British Columbia, Vancouver Registry, Canada, filed on or about June 25, 2010. Smoking and health class action. See Item 3 for a discussion of this case.
Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of Newfoundland and Labrador, Trial Division, Canada, filed February 8, 2011. Health care cost recovery action. See Item 3 for a discussion of this case.
Israel
El-Roy, et al. v. Philip Morris Incorporated, et al., District Court of Tel-Aviv/Jaffa, Israel, filed January 18, 2004. Lights case. See Item 3 for a discussion of this case.
-3-
See Item 3 for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI, which provides for indemnities for certain liabilities concerning tobacco products.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
The following lists certain other tobacco-related litigation pending against Altria Group, Inc. and/or its various subsidiaries as of February 13, 2012. See Item 3 for a discussion of these cases.
Tobacco Price Cases
Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000.
Cases under the California Business and Professions Code
Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997.
Ignition Propensity Cases
Sarro v. Philip Morris USA Inc., United States District Court, Massachusetts, filed December 20, 2007.
Walker, et al. v. Philip Morris USA, Inc., et al., Circuit Court, Nelson County, Kentucky, filed February 1, 2008.
False Claims Act Case
United States ex. rel. Anthony Oliver vs. Philip Morris Incorporated, et. al., United States District Court, District of Columbia, filed September 12, 2008 and unsealed by the district court on September 13, 2011. See Item 3 for a discussion of this case.
Argentine Grower Case
Hupan, et al. v. Alliance One International, et al., Superior Court, New Castle County, Delaware, filed on February 14, 2012.
UST LITIGATION
The following action is pending against UST and/or its subsidiaries as of February 13, 2012. See Item 3 for a discussion of this case.
Vassallo v. United States Tobacco Co., et al., Circuit Court of the Judicial District, Miami-Dade County, Florida, filed November 12, 2002.
-4-
Exhibit 99.2
TRIAL SCHEDULE FOR CERTAIN CASES
Below is a schedule, as of February 13, 2012, setting forth by month the number of individual smoking and health cases against PM USA that are scheduled for trial through the end of 2012.
2012
Engle progeny
February (3) | May (3) | August (4) | November (4) | |||
March (2) | June (4) | September (6) | December (4) | |||
April (5) | July (1) | October (13) |
As of February 13, 2012, 3 Engle progeny cases were in trial.
Other Individual Smoking & Health
February (0) |
May (0) | August (0) | November (0) | |||
March (0) | June (0) | September (1) | December (0) | |||
April (1) | July (0) | October (0) |
As of February 13, 2012, one non-Engle progeny case was in trial.
Exhibit 99.3
DEFINITIONS OF TERMS RELATED TO FINANCIAL COVENANTS INCLUDED IN ALTRIA GROUP, INC.S 5-YEAR REVOLVING CREDIT AGREEMENT
The following definitions have been extracted from Altria Group, Inc.s Credit Agreement relating to a 5-Year Revolving Credit Facility, dated as of June 30, 2011, which was attached as an exhibit to Altria Group, Inc.s Form 8-K filed on June 30, 2011.
Consolidated EBITDA means, for any accounting period, the consolidated net earnings (or loss) of Altria and its Subsidiaries plus, without duplication and to the extent included as a separate item on Altrias consolidated statements of earnings or consolidated statements of cash flows in the case of clauses (a) through (e) for such period, the sum of (a) provision for income taxes, (b) interest and other debt expense, net, (c) depreciation expense, (d) amortization of intangibles, (e) any extraordinary, unusual or non-recurring expenses or losses or any similar expense or loss subtracted from Gross profit in the calculation of Operating income and (f) the portion of loss included on Altrias consolidated statements of earnings of any Person (other than a Subsidiary of Altria) in which Altria or any of its Subsidiaries has an ownership interest and any cash that is actually received by Altria or such Subsidiary from such Person in the form of dividends or similar distributions, and minus, without duplication, the sum of (x) to the extent included as a separate item on Altrias consolidated statements of earnings for such period, any extraordinary, unusual or non-recurring income or gains or any similar income or gain added to Gross profit in the calculation of Operating income, and (y) the portion of income included on Altrias consolidated statements of earnings of any Person (other than a Subsidiary of Altria) in which Altria or any of its Subsidiaries has an ownership interest, except to the extent that any cash is actually received by Altria or such Subsidiary from such Person in the form of dividends or similar distributions, all as determined on a consolidated basis in accordance with accounting principles generally accepted in the United States for such period, except that if there has been a material change in an accounting principle as compared to that applied in the preparation of the financial statements of Altria and its Subsidiaries as at and for the year ended December 31, 2010, then such new accounting principle shall not be used in the determination of Consolidated EBITDA. A material change in an accounting principle is one that, in the year of its adoption, changes Consolidated EBITDA for any quarter in such year by more than 10%.
Consolidated Interest Expense means, for any accounting period, total interest expense of Altria and its Subsidiaries with respect to all outstanding Debt of Altria and its Subsidiaries during such period, all as determined on a consolidated basis for such period and in accordance with accounting principles generally accepted in the United States for such period, except that if there has been a material change in an accounting principle as compared to that applied in the preparation of the financial statements of Altria and its Subsidiaries as at and for the year ended December 31, 2010, then such new accounting principle shall not be used in the determination of Consolidated Interest Expense. A material change in an accounting principle is one that, in the year of its adoption, changes Consolidated Interest Expense for any quarter in such year by more than 10%.
Debt means, without duplication, (a) indebtedness for borrowed money or for the deferred purchase price of property or services, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) obligations as lessee under leases that, in accordance with accounting principles generally accepted in the United States, are recorded as capital leases as of the Effective Date (Capital Lease Obligations), (c) obligations as an account party or applicant under letters of credit (other than trade letters of credit incurred in the ordinary course of business) to the extent such letters of credit are drawn and not reimbursed within five Business Days of such drawing, (d) the aggregate principal (or equivalent) amount of financing raised through outstanding securitization financings of accounts receivable, and (e) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss (including by way of (i) granting a security interest or other Lien on property or (ii) having a reimbursement obligation under or in respect of a letter of credit or similar arrangement (to the extent such letter of credit is not collateralized by assets (other than Operating Assets) having a fair value equal to the amount of such reimbursement obligation), in any case in respect of, indebtedness or obligations of any other Person of the kinds referred to in clause (a), (b), (c) or (d) above). For the avoidance of doubt, the following shall not constitute Debt for purposes of this Agreement: (A) any obligation that is fully non-recourse to Altria or any of its Subsidiaries, (B) intercompany debt of Altria or any of its Subsidiaries, (C) any appeal bond or other arrangement to secure a stay of execution on a judgment or order, provided that any such appeal bond or other arrangement issued by a third party in connection with such arrangement shall constitute Debt to the extent Altria or any of its Subsidiaries has a reimbursement obligation to such third party that is not collateralized by assets (other than Operating Assets) having a fair value equal to the amount of such reimbursement obligation, (D) unpaid judgments, or (E) defeased indebtedness.
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