EX-13 4 d239844dex13.htm PAGES 9 TO 101 OF THE 2011 ANNUAL REPORT Pages 9 to 101 of the 2011 Annual Report
Table of Contents

Exhibit 13

Financial Review

 

 

Financial Contents

Selected Financial Data — Five-Year Review

  

page 10

Consolidated Statements of Earnings

  

page 11

Consolidated Balance Sheets

  

page 12

Consolidated Statements of Cash Flows

  

page 14

Consolidated Statements of Stockholders’ Equity

  

page 16

Notes to Consolidated Financial Statements

  

page 17

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

  

page 71

Report of Independent Registered Public Accounting Firm

  

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

Finance Assets, net — Note 8

  

page 23

Goodwill and Other Intangible Assets, net — Note 4

  

page 20

Income Taxes — Note 15

  

page 29

Investment in SABMiller — Note 7

  

page 23

Long-Term Debt — Note 10

  

page 26

Segment Reporting — Note 16

  

page 31

 

 

 

     9


Table of Contents

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     


Table of Contents

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


Table of Contents

Consolidated Balance Sheets

(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     


Table of Contents

 

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
(2,805,961,317 shares issued)

     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
(761,542,032 shares in 2011 and 717,221,651 shares in 2010)

     (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


Table of Contents

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     


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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   
                                    

 

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Table of Contents

Consolidated Statements of Stockholders’ Equity

(in millions of dollars, except per share data)

 

 

 

 

    Attributable to Altria Group, Inc.              
     Common
Stock
    Additional
Paid-in
Capital
   

Earnings
Reinvested in

the Business

    Accumulated
Other
Comprehensive
Losses
   

Cost of
Repurchased

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 SABMiller’s 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 SABMiller’s 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 SABMiller’s 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 Stag’s 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.

 

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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.

 

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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 PMCC’s estimates at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC’s management. 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 PMCC’s 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.

 

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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.

Note 3.

 

 

UST Acquisition:

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

 

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UST’s revolving credit facility), represented a total cash outlay of approximately $11 billion.

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

UST’s financial position and results of operations have been consolidated with Altria Group, Inc. as of January 6, 2009. Pro forma results of Altria Group, Inc., for the year ended December 31, 2009, assuming the acquisition had occurred on January 1, 2009, would not be materially different from the actual results reported for the year ended 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.

Note 4.

 

 

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.

 

Note 5.

 

 

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 USA’s 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
Impairment

and Exit
Costs

     Integration
Costs
     Total  

Smokeless products

   $ 6       $ 16       $ 22   

Wine

        2         2   

General corporate

     4            4   
                            

Total

   $ 10       $ 18       $ 28   
                            

 

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

Asset
Impairment

and Exit
Costs

     Integration
Costs
     Total  

Cigarettes

   $ 18       $       $ 18   

Smokeless products

     193         43         236   

Wine

     3         6         9   

Financial services

     4            4   

General corporate

     61            61   
                            

Total

   $ 279       $ 49       $ 328   
                            

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.

Note 7.

 

 

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.

Note 8.

 

 

Finance Assets, net:

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its existing portfolio of finance assets in order to maximize gains and generate cash flow from asset sales and related activities. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold. During 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.

 

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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. PMCC’s rights to rents receivable are subordinate to the third-party nonrecourse debtholders, and the leased equipment is pledged as collateral to the debtholders. The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt of $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, PMCC’s 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 PMCC’s 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
Finance

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.

 

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

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

PMCC 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 PMCC’s 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 PMCC’s allowance for losses, lowering the investment in finance leases balance from GM to $165 million. General Motors LLC (“New GM”), which is the successor of GM’s North American automobile business, agreed to assume nearly all the remaining leases under same terms as GM, except for a rebate of a portion of future rents. The assignment of the leases to New GM was approved by the bankruptcy court and became effective in March 2010. During the first quarter of 2010, GM rejected another lease that was not assigned to New GM. The impact of the rent rebates and the 2010 lease rejection resulted in a $64 million write-off against PMCC’s allowance for losses in the first quarter of 2010. In the first quarter of 2010, PMCC participated in a transaction pursuant to which the equipment related to the rejected leases was sold to New GM. These transactions resulted in an acceleration of deferred taxes of $34 million in 2010. As of December 31, 2011 and 2010, PMCC’s investment in finance leases from New GM was $101 million.

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

The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Rating Services (“Standard & Poor’s”) and Moody’s Investor Service, Inc. (“Moody’s”) at December 31, 2011 and 2010 was as follows:

 

(in millions)    2011     2010  

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

    

“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   
                  

 

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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 & Poor’s and Moody’s. The applicable minimum and maximum rates based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, 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).

Note 10.

 

 

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
(average coupon interest rate 8.3%), due through 2039

   $ 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 Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be

 

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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 Moody’s or Standard & Poor’s is downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes.

The obligations of Altria Group, Inc. under the notes are 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 UST’s 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 Moody’s and Standard & Poor’s within a specified time period, UST would be required to make an offer to purchase these notes at a price equal to 101% of the aggregate principal amount of such series, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of these notes.

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,                           
December 31,
2008

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

Exercise of stock
options and issuance of other stock awards

        14,657,060          14,657,060   
                                 

Balances,
December 31,
2009

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

Exercise of stock
options and issuance of other stock awards

        12,711,022          12,711,022   
                                 

Balances,
December 31,
2010

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

Exercise of stock
options and issuance of other stock awards

        5,004,502          5,004,502   

Repurchases of
common stock

        (49,324,883       (49,324,883
                                 

Balances,
December 31,
2011

    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
Per Share

 

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   
                 

 

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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
Option

   

Weighted-
Average

Exercise
Price

   

Average

Remaining
Contractual

Term

   

Aggregate
Intrinsic

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.

 

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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 SABMiller’s Other
Comprehensive
Earnings

    

Accumulated

Other
Comprehensive
Losses

 

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
                                     

Note 15.

 

 

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   
                          

 

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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 Kraft’s and PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns. As a result, at December 31, 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 IRS’s 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 IRS’s examination of Altria Group, Inc.’s consolidated federal income tax returns for the years 2000-2003, which resolved various tax matters for Altria Group, Inc. and its subsidiaries, including its former subsidiaries — Kraft and PMI. As a result of the closing agreement, Altria Group, Inc. paid the IRS approximately $945 million of tax and associated interest during the third quarter of 2010 with respect to certain PMCC leveraged lease transactions referred to by the IRS as lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions, entered into during the 1996-2003 years. 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.

 

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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.

Note 16.

 

 

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 Middleton’s 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 PMCC’s 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 American’s bankruptcy filing. During 2009, PMCC increased its allowance for losses by $15 million based on management’s 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

 

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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.

Note 17.

 

 

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.

 

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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 & Poor’s 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   
                                 

 

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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 & Poor’s 500 Index, Russell Small Cap Completeness Index, State Street Global Advisor’s 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

 

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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   <