0000764180-17-000014.txt : 20170201 0000764180-17-000014.hdr.sgml : 20170201 20170201102223 ACCESSION NUMBER: 0000764180-17-000014 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20170201 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20170201 DATE AS OF CHANGE: 20170201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTRIA GROUP, INC. CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 17563463 BUSINESS ADDRESS: STREET 1: 6601 WEST BROAD STREET CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: (804) 274-2200 MAIL ADDRESS: STREET 1: 6601 WEST BROAD STREET CITY: RICHMOND STATE: VA ZIP: 23230 FORMER COMPANY: FORMER CONFORMED NAME: ALTRIA GROUP INC DATE OF NAME CHANGE: 20030127 FORMER COMPANY: FORMER CONFORMED NAME: PHILIP MORRIS COMPANIES INC DATE OF NAME CHANGE: 19920703 8-K 1 form8-k2016fs.htm FORM 8-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
FORM 8-K
_____________________________________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 1, 2017
________________________________________________________________________________________________________________
ALTRIA GROUP, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________________________________
 
 
 
 
 
Virginia
 
1-08940
 
13-3260245
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)

6601 West Broad Street, Richmond, Virginia
 
23230
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (804) 274-2200
(Former name or former address, if changed since last report.)
___________________________________________________________________________________________________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




Item 8.01.
Other Events.
Filed as part of this Current Report on Form 8-K are the consolidated balance sheets of Altria Group, Inc. (“Altria”) and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016 (the “Financial Statements”); report of management on internal control over financial reporting; the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting; and the statements regarding computation of ratios of earnings to fixed charges. The Financial Statements, report of management on internal control over financial reporting and the independent registered public accounting firm’s report on the Financial Statements and the effectiveness of internal control over financial reporting will also be filed as part of Altria’s Annual Report on Form 10-K for the year ended December 31, 2016.
Item 9.01.
Financial Statements and Exhibits.
(d)
Exhibits
 
12
 
Statements regarding computation of ratios of earnings to fixed charges
 
 
 
 
 
23
 
Consent of independent registered public accounting firm
 
 
 
 
 
99.1
 
Financial Statements
 
 
 
 
 
99.2
 
Report of management on internal control over financial reporting
 
 
 
 
 
99.3
 
Report of independent registered public accounting firm
 
 
 
 

2



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
ALTRIA GROUP, INC.
 
 
 
 
 
By:
 
/s/ WILLIAM F. GIFFORD, JR.
 
Name:
 
William F. Gifford, Jr.
 
Title:
 
Executive Vice President and Chief Financial Officer

DATE: February 1, 2017

3



EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
12
 
Statements regarding computation of ratios of earnings to fixed charges
 
 
 
23
 
Consent of independent registered public accounting firm
 
 
 
99.1
 
Financial Statements
 
 
 
99.2
 
Report of management on internal control over financial reporting
 
 
 
99.3
 
Report of independent registered public accounting firm
 



4
 EX-12 2 exhibit12computationofrati.htm STATEMENTS REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Exhibit
  

Exhibit 12

 
 
 
 
 
 
 
 
 
Altria Group, Inc. and Subsidiaries
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Earnings before income taxes
$
21,852

 
$
8,078

 
$
7,774

 
$
6,942

 
$
6,477

 
 
 
 
 
 
 
 
 
 
Add (deduct):
 
 
 
 
 
 
 
 
 
Equity in net earnings of less than 50% owned affiliates
(800
)
 
(755
)
 
(1,011
)
 
(993
)
 
(1,229
)
Dividends from less than 50% owned affiliates
739

 
495

 
459

 
443

 
404

Fixed charges
768

 
821

 
879

 
1,104

 
1,165

Interest capitalized, net of amortization
—

 
14

 
6

 
(7
)
 
(4
)
Earnings available for fixed charges
$
22,559

 
$
8,653

 
$
8,107

 
$
7,489

 
$
6,813

 
 
 
 
 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
 
 
 
 
Interest incurred (1)
$
750

 
$
805

 
$
861

 
$
1,087

 
$
1,148

Portion of rent expense deemed to represent interest factor
18

 
16

 
18

 
17

 
17

Fixed charges
$
768

 
$
821

 
$
879

 
$
1,104

 
$
1,165

 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges (2)
29.4

 
10.5

 
9.2

 
6.8

 
5.8

 
 
 
 
 
 
 
 
 
 
(1) Altria Group, Inc. includes interest relating to uncertain tax positions in its provision for income taxes, therefore such amounts are not included in fixed charges in the computation.
(2) The ratio of earnings to fixed charges for the year ended December 31, 2016 includes the Gain on AB InBev/SABMiller business combination. Excluding this gain, the ratio of earnings to fixed charges would have been 11.3 for the year ended December 31, 2016.


 EX-23 3 exhibit23consentofindepend.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit


Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement on Form S-14 (File No. 2-96149) and in the Registration Statements on Form S-3 (File No. 333-199694) and Form S-8 (File Nos. 333-28631, 33-10218, 33-13210, 33-14561, 33-48781, 33-59109, 333-43478, 333-43484, 333-128494, 333-139523, 333-148070, 333-156188, 333-167516, 333-170185, 333-204477 and 333-209701) of Altria Group, Inc. of our report dated February 1, 2017 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 1, 2017



EX-99.1 4 exhibit9912016financialsta.htm FINANCIAL STATEMENTS Exhibit
Exhibit 99.1




 




Altria Group, Inc. and Subsidiaries
Consolidated Financial Statements as of
December 31, 2016 and 2015, and for Each of the
Three Years in the Period Ended December 31, 2016



1


Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
 
at December 31,
2016

 
2015

Assets
 
 
 
Cash and cash equivalents
$
4,569

 
$
2,369

Receivables
151

 
124

Inventories:
 
 
 
Leaf tobacco
892

 
957

Other raw materials
164

 
181

Work in process
512

 
444

Finished product
483

 
449

 
2,051

 
2,031

Other current assets
489

 
387

Total current assets
7,260

 
4,911

 
 
 
 
Property, plant and equipment, at cost:
 
 
 
Land and land improvements
316

 
295

Buildings and building equipment
1,481

 
1,406

Machinery and equipment
2,917

 
2,969

Construction in progress
121

 
207

 
4,835

 
4,877

Less accumulated depreciation
2,877

 
2,895

 
1,958

 
1,982

 
 
 
 
Goodwill
5,285

 
5,285

Other intangible assets, net
12,036

 
12,028

Investment in AB InBev/SABMiller
17,852

 
5,483

Finance assets, net
1,028

 
1,239

Other assets
513

 
531

Total Assets
$
45,932

 
$
31,459


See notes to consolidated financial statements.
 


2


Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
____________________________________________

at December 31,
2016

 
2015

Liabilities
 
 
 
Current portion of long-term debt
$
—

 
$
4

Accounts payable
425

 
400

Accrued liabilities:
 
 
 
Marketing
747

 
695

Employment costs
289

 
198

Settlement charges
3,701

 
3,590

Other
1,025

 
1,073

Dividends payable
1,188

 
1,110

Total current liabilities
7,375

 
7,070

 
 
 
 
Long-term debt
13,881

 
12,843

Deferred income taxes
8,416

 
4,667

Accrued pension costs
805

 
1,277

Accrued postretirement health care costs
2,217

 
2,245

Other liabilities
427

 
447

Total liabilities
33,121

 
28,549

Contingencies (Note 19)

 

Redeemable noncontrolling interest
38

 
37

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

 
935

Additional paid-in capital
5,893

 
5,813

Earnings reinvested in the business
36,906

 
27,257

Accumulated other comprehensive losses
(2,052
)
 
(3,280
)
Cost of repurchased stock
(862,689,093 shares at December 31, 2016 and
845,901,836 shares at December 31, 2015)
(28,912
)
 
(27,845
)
Total stockholders’ equity attributable to Altria Group, Inc.
12,770

 
2,880

Noncontrolling interests
3

 
(7
)
Total stockholders’ equity
12,773

 
2,873

Total Liabilities and Stockholders’ Equity
$
45,932

 
$
31,459

 
See notes to consolidated financial statements.




3

Altria Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
____________________________________
 
for the years ended December 31,
2016

 
2015

 
2014

Net revenues
$
25,744

 
$
25,434

 
$
24,522

Cost of sales
7,746

 
7,740

 
7,785

Excise taxes on products
6,407

 
6,580

 
6,577

Gross profit
11,591

 
11,114

 
10,160

Marketing, administration and research costs
2,650

 
2,708

 
2,539

Reductions of PMI and Mondelēz tax-related receivables
—

 
41

 
2

Asset impairment and exit costs
179

 
4

 
(1
)
Operating income
8,762

 
8,361

 
7,620

Interest and other debt expense, net
747

 
817

 
808

Loss on early extinguishment of debt
823

 
228

 
44

Earnings from equity investment in SABMiller
(795
)
 
(757
)
 
(1,006
)
Gain on AB InBev/SABMiller business combination
(13,865
)
 
(5
)
 
—

Earnings before income taxes
21,852

 
8,078

 
7,774

Provision for income taxes
7,608

 
2,835

 
2,704

Net earnings
14,244

 
5,243

 
5,070

Net earnings attributable to noncontrolling interests
(5
)
 
(2
)
 
—

Net earnings attributable to Altria Group, Inc.
$
14,239

 
$
5,241

 
$
5,070

Per share data:
 
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
$
7.28

 
$
2.67

 
$
2.56


See notes to consolidated financial statements.




4

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

 
 
 
 
 
 
 
for the years ended December 31,
 
2016

 
2015

 
2014

Net earnings
 
$
14,244

 
$
5,243

 
$
5,070

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

 
(3
)
 
(2
)
Benefit plans
 
(38
)
 
30

 
(767
)
SABMiller
 
1,265

 
(625
)
 
(535
)
Other comprehensive earnings (losses), net of deferred income taxes
 
1,228

 
(598
)
 
(1,304
)
 
 
 
 
 
 
 
Comprehensive earnings
 
15,472

 
4,645

 
3,766

Comprehensive earnings attributable to noncontrolling interests
 
(5
)
 
(2
)
 
—

Comprehensive earnings attributable to Altria Group, Inc.
 
$
15,467

 
$
4,643

 
$
3,766


See notes to consolidated financial statements.




5

Altria Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of dollars)
__________________
 
for the years ended December 31,
2016

 
2015

 
2014

Cash Provided by (Used in) Operating Activities
 
 
 
 
 
Net earnings
$
14,244

 
$
5,243

 
$
5,070

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
 
Depreciation and amortization
204

 
225

 
208

Deferred income tax provision (benefit)
3,119

 
(132
)
 
(129
)
Earnings from equity investment in SABMiller
(795
)
 
(757
)
 
(1,006
)
Gain on AB InBev/SABMiller business combination
(13,865
)
 
(5
)
 
—

Dividends from AB InBev/SABMiller
739

 
495

 
456

Asset impairment and exit costs, net of cash paid
106

 
1

 
(9
)
Loss on early extinguishment of debt
823

 
228

 
44

Cash effects of changes, net of the effects from acquisition of Green Smoke:
 
 
 
 
 
Receivables
(27
)
 
3

 
(8
)
Inventories
(34
)
 
(33
)
 
(184
)
Accounts payable
(6
)
 
(7
)
 
(5
)
Income taxes
(231
)
 
(12
)
 
1

Accrued liabilities and other current assets
(113
)
 
184

 
(107
)
Accrued settlement charges
111

 
90

 
109

Pension plan contributions
(531
)
 
(28
)
 
(15
)
Pension provisions and postretirement, net
(73
)
 
114

 
21

Other
120

 
201

 
217

Net cash provided by operating activities
3,791

 
5,810

 
4,663

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
Capital expenditures
(189
)
 
(229
)
 
(163
)
Acquisition of Green Smoke, net of acquired cash
—

 
—

 
(102
)
Proceeds from finance assets
231

 
354

 
369

Proceeds from AB InBev/SABMiller business combination
4,773

 
—

 
—

Purchase of AB InBev ordinary shares
(1,578
)
 
—

 
—

Payment for derivative financial instruments
(3
)
 
(132
)
 
—

Proceeds from derivative financial instruments
510

 
—

 
—

Other
(36
)
 
(8
)
 
73

Net cash provided by (used in) investing activities
3,708

 
(15
)
 
177

Cash Provided by (Used in) Financing Activities
 
 
 
 
 
Long-term debt issued
1,976

 
—

 
999

Long-term debt repaid
(933
)
 
(1,793
)
 
(825
)
Repurchases of common stock
(1,030
)
 
(554
)
 
(939
)
Dividends paid on common stock
(4,512
)
 
(4,179
)
 
(3,892
)
Premiums and fees related to early extinguishment of debt
(809
)
 
(226
)
 
(44
)
Other
9

 
5

 
7

Net cash used in financing activities
(5,299
)
 
(6,747
)
 
(4,694
)
Cash and cash equivalents:
 
 
 
 
 
Increase (decrease)
2,200

 
(952
)
 
146

Balance at beginning of year
2,369

 
3,321

 
3,175

Balance at end of year
$
4,569

 
$
2,369

 
$
3,321

Cash paid:    Interest
 
                                                  
$
775

 
$
776

 
$
820

  Income taxes
                                                     
$
4,664

 
$
3,029

 
$
2,765

See notes to consolidated financial statements.


6

Altria Group, Inc. and Subsidiaries
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

 
Non-
controlling
Interests

 
Total
Stockholders’
Equity

Balances, December 31, 2013
$
935

 
$
5,714

 
$
25,168

 
$
(1,378
)
 
$
(26,320
)
 
$
(1
)
 
$
4,118

Net earnings (losses) (1)
—

 
—

 
5,070

 
—

 
—

 
(3
)
 
5,067

Other comprehensive losses, net
of deferred income taxes
—

 
—

 
—

 
(1,304
)
 
—

 
—

 
(1,304
)
Stock award activity
—

 
21

 
—

 
—

 
8

 
—

 
29

Cash dividends declared ($2.00 per share)
—

 
—

 
(3,961
)
 
—

 
—

 
—

 
(3,961
)
Repurchases of common stock
—

 
—

 
—

 
—

 
(939
)
 
—

 
(939
)
Balances, December 31, 2014
935

 
5,735

 
26,277

 
(2,682
)
 
(27,251
)
 
(4
)
 
3,010

Net earnings (losses) (1)
—

 
—

 
5,241

 
—

 
—

 
(3
)
 
5,238

Other comprehensive losses, net
of deferred income taxes
—

 
—

 
—

 
(598
)
 
—

 
—

 
(598
)
Stock award activity
—

 
78

 
—

 
—

 
(40
)
 
—

 
38

Cash dividends declared ($2.17 per share)
—

 
—

 
(4,261
)
 
—

 
—

 
—

 
(4,261
)
Repurchases of common stock
—

 
—

 
—

 
—

 
(554
)
 
—

 
(554
)
Balances, December 31, 2015
935

 
5,813

 
27,257

 
(3,280
)
 
(27,845
)
 
(7
)
 
2,873

Net earnings (1)
—

 
—

 
14,239

 
—

 
—

 
—

 
14,239

Other comprehensive earnings, net
of deferred income taxes
—

 
—

 
—

 
1,228

 
—

 
—

 
1,228

Stock award activity
—

 
90

 
—

 
—

 
(37
)
 
—

 
53

Cash dividends declared ($2.35 per share)
—

 
—

 
(4,590
)
 
—

 
—

 
—

 
(4,590
)
Repurchases of common stock
—

 
—

 
—

 
—

 
(1,030
)
 
—

 
(1,030
)
Other
—

 
(10
)
 
—

 
—

 
—

 
10

 
—

Balances, December 31, 2016
$
935

 
$
5,893

 
$
36,906

 
$
(2,052
)
 
$
(28,912
)
 
$
3

 
$
12,773

   
(1) Amounts attributable to noncontrolling interests for the years ended December 31, 2016, 2015 and 2014 exclude net earnings of $5 million, $5 million and $3 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 2016, 2015 and 2014, respectively. See Note 19.

See notes to consolidated financial statements.


7

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Note 1.     Background and Basis of Presentation
▪Background: At December 31, 2016, Altria Group, Inc.’s wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco and is a wholly-owned subsidiary of PM USA; and UST LLC (“UST”), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), a wholly-owned subsidiary that is engaged in the manufacture and sale of innovative tobacco products, and Philip Morris Capital Corporation (“PMCC”), a wholly-owned subsidiary that maintains a portfolio of finance assets, substantially all of which are leveraged leases. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and consumer engagement services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries. Altria Group, Inc.’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, 2016, Altria Group, Inc.’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.
At September 30, 2016, Altria Group, Inc. had an approximate 27% ownership of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounted for under the equity method of accounting. On October 10, 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed a business combination with SABMiller in a cash and stock transaction (the “Transaction”). A newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), became the holding company for the combined SABMiller and Legacy AB InBev businesses. Upon completion of the Transaction, Altria Group, Inc. had a 9.6% ownership of AB InBev based on AB InBev’s shares outstanding at October 10, 2016. Following completion of the Transaction, Altria Group, Inc. purchased 12,341,937 ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership to approximately 10.2%. At December 31, 2016, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev, which Altria Group, Inc. accounts for under the equity method of accounting using a one-quarter lag. As a result of the one-quarter lag and the timing of the completion of the Transaction, no earnings from Altria Group, Inc.’s equity investment in AB InBev were recorded for the year ended
 
December 31, 2016. Altria Group, Inc. receives cash dividends on its interest in AB InBev if and when AB InBev pays such dividends. For further discussion, see Note 7. Investment in AB InBev/SABMiller.
▪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. has the ability to exercise 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 losses and estimated residual values of finance leases. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the current year’s presentation due primarily to Altria Group, Inc.’s 2016 adoptions of Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”) and ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”). For further discussion, see Note 15. Income Taxes and Note 10. Long-Term Debt.
Note 2. Summary of Significant Accounting Policies
▪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.
▪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.
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



8

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
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. If the carrying value of goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the implied fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value.
▪Derivative Financial Instruments: Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated other comprehensive earnings (losses) or in earnings, depending on the type of derivative and whether the derivative qualifies for hedge accounting treatment. Gains and losses on derivative instruments reported in accumulated other comprehensive earnings (losses) are reclassified to the consolidated statements of earnings in the periods in which operating results are affected by the respective hedged item. Cash flows from hedging instruments are classified in the same manner as the respective hedged item in the consolidated statements of cash flows. Altria Group, Inc. does not enter into or hold derivative financial instruments for trading or speculative purposes.
▪Employee Benefit Plans: Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pension, postretirement health care and postemployment benefits. Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates.
Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. The gains or losses and prior service costs or credits recorded as components of other comprehensive earnings (losses) are subsequently amortized into net periodic benefit cost in future years.
▪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 results of operations, capital expenditures, financial position or cash flows (see Note 19. Contingencies - Environmental Regulation).
▪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 to sell 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.
▪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.
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 at least 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.
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.



9

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

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.
▪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.
▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions.
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. Altria Group, Inc. records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
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% 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 in its consolidated statements of earnings.
▪Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to determine the cost of 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 used within one year.
▪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 in the consolidated statements of earnings.
▪Marketing Costs: Altria Group, Inc.’s businesses promote their products with consumer engagement programs, consumer incentives and trade promotions. Such programs include 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, a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of a period, based principally on historical volume, 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.
▪Revenue Recognition: Altria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment 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 businesses also include excise taxes billed to customers in net revenues. Shipping and handling costs are classified as part of cost of sales.
▪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 restricted stock units is determined based on the number of shares granted and the market value at date of grant.



▪New Accounting Standards: The following table provides a description of the recently issued accounting guidance that Altria Group, Inc. has not yet adopted:
Standards
Description
Effective Date for Public Entity
Effect on Financial Statements
ASU Nos. 2014-09; 2015-14; 2016-08; 2016-10; 2016-12; 2016-20
Revenue from Contracts with Customers (Topic 606)
The guidance establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
The adoption of this guidance is not expected to have a material impact on the amount or timing of revenue recognized on Altria Group, Inc.’s financial statements based on current contracts with customers. The guidance will result in expanded footnote disclosures. Altria Group, Inc. plans to retrospectively adopt this guidance by the first quarter of 2018.



10

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Standards
Description
Effective Date for Public Entity
Effect on Financial Statements
ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption of the guidance is not permitted, except for a certain provision of the guidance.
The adoption of this guidance is not expected to have a material impact on Altria Group, Inc.’s consolidated financial statements.

ASU No. 2016-02
Leases (Topic 842)
The guidance increases transparency and comparability among organizations by requiring entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.
The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted.
Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures, including identifying and analyzing all contracts that contain a lease. As a lessor, PMCC maintains a portfolio of finance assets, substantially all of which are leveraged leases, the accounting of which will be unchanged under the new guidance and is not expected to change unless there is a contract modification to an existing lease. As a lessee, Altria Group, Inc.’s various leases under existing guidance are classified as operating leases that are not recorded on the balance sheet but are recorded in the statement of earnings as expense is incurred. Upon adoption of the new guidance, Altria Group, Inc. will be required to record substantially all leases on the balance sheet as a right-of-use asset and a lease liability. The timing of expense recognition and classification in the statement of earnings could change based on the classification of leases as either operating or financing.
ASU No. 2016-09 Improvements to Employee Share-Based Payment Accounting (Topic 718)
The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period.
The adoption of this guidance is not expected to have a material impact on Altria Group, Inc.’s consolidated financial statements. Altria Group, Inc. expects to adopt this guidance effective January 1, 2017.
ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments (Topic 326)

The guidance replaces the current incurred loss impairment methodology for recognizing credit losses for financial assets with a methodology that reflects the entity’s current estimate of all expected credit losses and requires consideration of a broader range of reasonable and supportable information for estimating credit losses.
The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.
Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures. Altria Group, Inc.’s financial assets that are within the scope of the new guidance are approximately 3% of Altria Group, Inc.’s total assets at December 31, 2016.
ASU No. 2016-15 Classification of Certain Cash Receipts and Cash Payments (Topic 230)

The guidance addresses how eight specific cash flow issues are to be presented and classified in the statement of cash flows.

The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

ASU No. 2016-18 Restricted Cash
(Topic 230)

The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents.

The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.

Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.



11

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Note 3. Acquisition of Green Smoke
In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”) for a total purchase price of approximately $130 million. The acquisition complements Nu Mark’s capabilities and enhances its competitive position by adding e-vapor experience, broadening product offerings and strengthening supply chain capabilities.
Green Smoke’s financial position and results of operations have been consolidated with Altria Group, Inc. as of April 1, 2014. The purchase price allocation was completed in 2015.
Pro forma results, as well as net revenues and net earnings for Green Smoke subsequent to the acquisition, have not been
 
presented because the acquisition of Green Smoke is not material to Altria Group, Inc.’s consolidated results of operations.
Costs incurred to effect the acquisition, as well as integration costs, were recognized as expenses in the periods in which the costs were incurred. For the years ended December 31, 2015 and 2014, Altria Group, Inc. incurred $7 million and $28 million, respectively, of pre-tax integration and acquisition-related costs, consisting primarily of contract termination costs, transaction costs and inventory adjustments, which were included in Altria Group, Inc.’s consolidated statements of earnings.

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, 2016

 
December 31, 2015

 
December 31, 2016

 
December 31, 2015

Smokeable products
$
77

 
$
77

 
$
2,901

 
$
2,919

Smokeless products
5,023

 
5,023

 
8,829

 
8,831

Wine
74

 
74

 
295

 
267

Other
111

 
111

 
11

 
11

Total
$
5,285

 
$
5,285

 
$
12,036

 
$
12,028

Goodwill relates to the 2014 acquisition of Green Smoke, 2009 acquisition of UST and 2007 acquisition of Middleton.
Other intangible assets consisted of the following: 
 
December 31, 2016
 
December 31, 2015
(in millions)
Gross Carrying Amount

 
Accumulated Amortization

 
Gross Carrying Amount

 
Accumulated Amortization

Indefinite-lived intangible assets
$
11,740

 
$
—

 
$
11,711

 
$
—

Definite-lived intangible assets
465

 
169

 
465

 
148

Total other intangible assets
$
12,205

 
$
169

 
$
12,176

 
$
148

Indefinite-lived intangible assets consist substantially of trademarks from Altria Group, Inc.’s 2009 acquisition of UST ($9.1 billion) and 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets, which consist primarily of customer relationships and certain cigarette trademarks, are amortized over periods up to 25 years. Pre-tax amortization expense for definite-lived intangible assets during the years ended December 31, 2016, 2015 and 2014, was $21 million, $21 million and $20 million, respectively. Annual amortization expense for each of the next five years is estimated to be approximately $20 million, assuming no additional transactions occur that require the amortization of intangible assets.
During 2016, 2015 and 2014, Altria Group, Inc. completed its quantitative annual impairment test of goodwill and indefinite-lived intangible assets, and no impairment charges resulted.
For the years ended December 31, 2016, 2015 and 2014, there have been no changes in goodwill and the gross carrying amount of other intangible assets except for Ste. Michelle’s 2016 purchase of substantially all of the assets of Patz & Hall Wine Company, Inc. and the 2014 acquisition of Green Smoke. In addition, there were no accumulated impairment losses related to goodwill and other intangible assets, net at December 31, 2016 and 2015.
 
Note 5. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs for the year ended December 31, 2016 consisted of the following:
(in millions)
Asset Impairment
and Exit Costs (1)

 
Implementation
Costs

 
Total

Smokeable products
$
125

 
$
9

 
$
134

Smokeless products
42

 
15

 
57

All other
7

 
—

 
7

General corporate
5

 
—

 
5

Total
$
179

 
$
24

 
$
203

(1) Includes termination, settlement and curtailment costs of $27 million. See Note 17. Benefit Plans.



12

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The movement in the restructuring liabilities (excluding termination, settlement and curtailment costs), substantially all of which are severance liabilities, was as follows:
(in millions)
For the Year Ended December 31, 2016

Charges
$
152

Cash spent
(73
)
Balances at December 31, 2016
$
79

The pre-tax asset impairment, exit and implementation costs for 2016 shown above are related to the facilities consolidation and productivity initiative discussed below.
▪Facilities Consolidation: In October 2016, Altria Group, Inc. announced the consolidation of certain of its operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. Middleton will transfer its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”). USSTC will transfer its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. Separation benefits will be paid to non-relocating employees. The consolidation is expected to be completed by the first quarter of 2018.
As a result of the consolidation, Altria Group, Inc. expects to record total pre-tax charges of approximately $150 million, or $0.05 per share. Of this amount, during 2016, Altria Group, Inc. incurred pre-tax charges of $71 million, or approximately $0.03 per share, and expects to record approximately $70 million in 2017 and the remainder in 2018. The total estimated charges relate primarily to accelerated depreciation ($55 million), employee separation costs ($45 million) and other exit and implementation costs ($50 million). Approximately $90 million of the total pre-tax charges are expected to result in cash expenditures.
For the year ended December 31, 2016, total pre-tax asset impairment and exit costs for the consolidation of $54 million were recorded in the smokeable products segment ($25 million) and smokeless products segment ($29 million). In addition, for the year ended December 31, 2016, pre-tax implementation costs of $17 million were recorded in the smokeable products segment ($3 million) and smokeless products segment ($14 million). The pre-tax implementation costs were included in cost of sales in Altria Group, Inc.’s consolidated statement of earnings.
Cash payments related to the consolidation of $4 million were made during the year ended December 31, 2016.
▪Productivity Initiative: In January 2016, Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. The initiative reduces spending on certain selling, general and administrative infrastructure and implements a leaner organizational structure. As a result of the initiative, during 2016, Altria Group, Inc. incurred total pre-tax restructuring charges of $132 million, or $0.04 per share, substantially all of which result in cash expenditures. The charges consist of employee separation
 
costs of $117 million and other associated costs of $15 million. Total pre-tax charges related to the initiative have been substantially completed.
For the year ended December 31, 2016, total pre-tax asset impairment and exit costs for the initiative of $125 million were recorded in the smokeable products segment ($100 million), smokeless products segment ($13 million), all other ($7 million) and general corporate ($5 million). In addition, for the year ended December 31, 2016, pre-tax implementation costs of $7 million were recorded in the smokeable products segment ($6 million) and smokeless products segment ($1 million). The pre-tax implementation costs were included in marketing, administration and research costs in Altria Group, Inc.’s consolidated statement of earnings.
Cash payments related to the initiative of $69 million were made during the year ended December 31, 2016.
▪Other Programs: During 2014, PM USA sold its Cabarrus, North Carolina manufacturing facility for approximately $66 million in connection with the previously completed manufacturing optimization program associated with PM USA’s closure of the manufacturing facility in 2009. As a result, during 2014, PM USA recorded a pre-tax gain of $10 million.
Note 6. Inventories
The cost of approximately 62% and 65% of inventories at December 31, 2016 and 2015, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.7 billion lower than the current cost of inventories at December 31, 2016 and 2015.
Note 7. Investment in AB InBev/SABMiller
Prior to the completion of the Transaction on October 10, 2016, Altria Group, Inc. held an approximate 27% ownership of SABMiller that was accounted for under the equity method of accounting.
Pre-tax earnings from Altria Group, Inc.’s equity investment in SABMiller were $795 million, $757 million and $1,006 million for the years ended December 31, 2016, 2015 and 2014, respectively. Altria Group, Inc.’s earnings from its equity investment in SABMiller for the year ended December 31, 2016 included a pre-tax non-cash gain of $309 million, reflecting Altria Group, Inc.’s share of SABMiller’s increase to shareholders’ equity, resulting from the completion of the SABMiller, The Coca-Cola Company and Gutsche Family Investments transaction, combining bottling operations in Africa. As a result of the timing of the completion of the Transaction, Altria Group, Inc.’s pre-tax earnings from its equity investment in SABMiller for the year ended December 31, 2016 included its share of approximately nine months of SABMiller’s earnings.
 



13

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Summary financial data of SABMiller is as follows:
 
For the Years Ended December 31,
(in millions)
2016 (1)

 
2015

 
2014

Net revenues
$
14,543

 
$
20,188

 
$
22,380

Operating profit
$
2,099

 
$
3,690

 
$
4,478

Net earnings
$
1,803

 
$
2,838

 
$
3,532

(in millions)
At December 31, 2015

Current assets
$
4,266

Long-term assets
$
38,425

Current liabilities
$
6,282

Long-term liabilities
$
13,960

Noncontrolling interests
$
1,235

(1) As a result of the timing of the completion of the Transaction, summary financial data of SABMiller for the year ended December 31, 2016 included approximately nine months of SABMiller’s results.
The fair value of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2015 was based on unadjusted quoted prices in active markets and was classified in Level 1 of the fair value hierarchy. The fair value of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2015 was $25.8 billion as compared with its carrying value of $5.5 billion.
▪AB InBev and SABMiller Business Combination: On October 10, 2016, Legacy AB InBev completed the Transaction, and AB InBev became the holding company for the combined SABMiller and Legacy AB InBev businesses. Under the terms of the Transaction, SABMiller shareholders received 45 British pounds (“GBP”) in cash for each SABMiller share held, with a partial share alternative (“PSA”), which was subject to proration, available for approximately 41% of the SABMiller shares.
Pursuant to the terms and conditions of an Irrevocable Undertaking, previously delivered by Altria Group, Inc. in November 2015, Altria Group, Inc. elected the PSA.
Upon completion of the Transaction and taking into account proration, Altria Group, Inc. received, in respect of its 430,000,000 SABMiller shares, (i) an interest that was converted into 185,115,417 restricted shares of AB InBev (the “Restricted Shares”), representing a 9.6% ownership of AB InBev based on AB InBev’s shares outstanding at October 10, 2016, and (ii) approximately $4.8 billion in pre-tax cash as the cash component of the PSA. Additionally, Altria Group, Inc. received pre-tax cash proceeds of approximately $0.5 billion from exercising the derivative financial instruments discussed below, which, together with the pre-tax cash from the Transaction, totaled approximately $5.3 billion in pre-tax cash. Following completion of the Transaction, Altria Group, Inc. purchased 12,341,937 ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria Group, Inc.’s ownership of AB InBev to approximately 10.2%. At December 31, 2016, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev.
The Restricted Shares:
▪
are unlisted and not admitted to trading on any stock exchange;
 
▪
are subject to a five-year lock-up (subject to limited exceptions) ending October 10, 2021;
▪
are convertible into ordinary shares of AB InBev on a one-for-one basis after the end of this five-year lock-up period;
▪
rank equally with ordinary shares of AB InBev with regards to dividends and voting rights; and
▪
have director nomination rights with respect to AB InBev.
As a result of the Transaction, for the year ended December 31, 2016, Altria Group, Inc. recorded a pre-tax gain of approximately $13.9 billion, or $9.0 billion after-tax, which was based on the following:
▪
the Legacy AB InBev share price as of October 10, 2016;
▪
the book value of Altria Group, Inc.’s investment in SABMiller, including Altria Group, Inc.’s accumulated other comprehensive losses directly attributable to SABMiller, at October 10, 2016;
▪
the gains on the derivative financial instruments discussed below; and
▪
the impact of AB InBev’s divestitures of certain SABMiller assets and businesses in connection with Legacy AB InBev obtaining necessary regulatory clearances for the Transaction (“AB InBev divestitures”) that occurred by December 31, 2016.
Altria Group, Inc. expects to record additional pre-tax gains of approximately $445 million related to the remaining AB InBev divestitures when those divestitures occur.
Altria Group, Inc.’s gain on the Transaction is deferred for United States corporate income tax purposes, except to the extent of the cash consideration received.
Altria Group, Inc. accounts for its investment in AB InBev under the equity method of accounting because Altria Group, Inc. has the ability to exercise significant influence over the operating and financial policies of AB InBev, including having active representation on AB InBev’s Board of Directors (“AB InBev Board”) and certain AB InBev Board Committees. Through this representation, Altria Group, Inc. participates in AB InBev policy making processes. Altria Group, Inc. reports its share of AB InBev’s results using a one-quarter lag because AB InBev’s results are not available in time for Altria Group, Inc. to record them in the concurrent period. As a result of the one-quarter lag and the timing of the completion of the Transaction, no earnings from Altria Group, Inc.’s equity investment in AB InBev were recorded for the year ended December 31, 2016.
Summary financial data of AB InBev at October 10, 2016 representing preliminary purchase price accounting for the Transaction is as follows:
(in millions)
At October 10, 2016
Current assets
$
40,086

 
Long-term assets
$
223,701

 
Current liabilities
$
44,272

 
Long-term liabilities
$
139,112

 
Noncontrolling interests
$
9,177

 



14

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

At December 31, 2016, Altria Group, Inc.’s carrying amount of its equity investment in AB InBev exceeded its share of AB InBev’s net assets attributable to equity holders of AB InBev by approximately $10.7 billion. Substantially all of this difference is comprised of goodwill and other indefinite-lived intangible assets (consisting primarily of trademarks).
The fair value of Altria Group, Inc.’s equity investment in AB InBev is based on: (i) unadjusted quoted prices in active markets for AB InBev’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria Group, Inc. may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder forecloses on the Restricted Shares, the relevant Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share. The fair value of Altria Group, Inc.’s equity investment in AB InBev at December 31, 2016 was $20.9 billion, compared with its carrying value of $17.9 billion.
▪
Derivative Financial Instruments: In November 2015
and August 2016, Altria Group, Inc. entered into a derivative financial instrument, each in the form of a put option (together the “options”) to hedge Altria Group, Inc.’s exposure to foreign currency exchange rate movements in the GBP to the United States dollar, in relation to the pre-tax cash consideration that Altria Group, Inc. expected to receive under the PSA pursuant to the revised and final offer announced by Legacy AB InBev on July 26, 2016. The notional amounts of the November 2015 and August 2016 options were $2,467 million (1,625 million GBP) and $480 million (378 million GBP), respectively. The options did not qualify for hedge accounting; therefore, changes in the fair values of the options were recorded as gains or losses in Altria Group, Inc.’s consolidated statements of earnings in the periods in which the changes occurred. For the year ended December 31, 2016, Altria Group, Inc. recorded pre-tax gains associated with the November 2015 and August 2016 options of $330 million and $19 million, respectively, for the changes in the fair values of the options in Gain on AB InBev/SABMiller business combination in Altria Group, Inc.’s consolidated statement of earnings. For the year ended December 31, 2015, Altria Group, Inc. recorded a pre-tax gain of $20 million for the change in the fair value of the November 2015 option. Exercising the options in October 2016 resulted in approximately $0.5 billion in pre-tax cash proceeds.
The fair values of the options were determined using binomial option pricing models, which reflect the contractual terms of the options and other observable market-based inputs, and were classified in Level 2 of the fair value hierarchy. At December 31, 2015, the fair value of the November 2015 option of $152 million was recorded in other current assets on Altria Group, Inc.’s consolidated balance sheet.
 
Note 8. Finance Assets, net
In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold.
     At December 31, 2016, finance assets, net, of $1,028 million were comprised of investments in finance leases of $1,060 million, reduced by the allowance for losses of $32 million. At December 31, 2015, finance assets, net, of $1,239 million were comprised of investments in finance leases of $1,281 million, reduced by the allowance for losses of $42 million.
A summary of the net investments in finance leases, substantially all of which were leveraged leases, at December 31, 2016 and 2015, before allowance for losses was as follows:
(in millions)
 
2016

 
2015

Rents receivable, net
 
$
805

 
$
923

Unguaranteed residual values
 
495

 
674

Unearned income
 
(240
)
 
(316
)
Investments in finance leases
 
1,060

 
1,281

Deferred income taxes
 
(717
)
 
(928
)
Net investments in finance leases
 
$
343

 
$
353

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 $0.8 billion and $1.2 billion at December 31, 2016 and 2015, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 2016 and 2015.
In 2016, 2015 and 2014 PMCC’s review of estimated residual values resulted in a decrease of $28 million, $65 million and $63 million, respectively, to unguaranteed residual values. These decreases in unguaranteed residual values resulted in a reduction to PMCC’s net revenues of $18 million, $41 million and $26 million in 2016, 2015 and 2014, respectively.
At December 31, 2016, PMCC’s investments in finance leases were principally comprised of the following investment categories: aircraft (43%), electric power (28%), railcar (12%), real estate (9%) and manufacturing (8%). There were no investments located outside the United States at December 31, 2016 and 2015.



15

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Rents receivable in excess of debt service requirements on third-party nonrecourse debt at December 31, 2016 were as follows:
(in millions)
 
2017
$
33

2018
129

2019
186

2020
128

2021
100

Thereafter
229

Total
$
805

Included in net revenues for the years ended December 31, 2016, 2015 and 2014 were leveraged lease revenues of $48 million, $46 million and $80 million, respectively. Income tax expense on leveraged lease revenues for the years ended December 31, 2016, 2015 and 2014 was $16 million, $17 million and $30 million, respectively.
PMCC maintains an allowance for losses that provides for estimated credit losses on its investments in finance leases. PMCC’s portfolio consists substantially of leveraged leases to a diverse base of lessees participating in a 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 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 underlying collateral value, other forms of credit support, and legal/structural considerations impacting each lease. Using available information, PMCC calculates potential losses for each lease in its portfolio based on its default and recovery rating assumptions 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. During 2016 and 2014, PMCC determined that its allowance for losses exceeded the amount required based on management’s assessment of the credit quality and size of PMCC’s leasing portfolio. As a result, PMCC reduced its allowance for losses by $10 million for each of the years ended December 31, 2016 and 2014, respectively. There was no such adjustment for the year ended December 31, 2015. These decreases to the allowance for losses were recorded as a reduction to marketing, administration and research costs in Altria Group,
 
Inc.’s consolidated statements of earnings. PMCC believes that, as of December 31, 2016, the allowance for losses of $32 million was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may increase or decrease its allowance for losses if such conditions change in the future.
The activity in the allowance for losses on finance assets for the years ended December 31, 2016, 2015 and 2014 was as follows:
(in millions)
2016

 
2015

 
2014

Balance at beginning of year
$
42

 
$
42

 
$
52

Decrease to allowance
(10
)
 
—

 
(10
)
Balance at end of year
$
32

 
$
42

 
$
42

All PMCC lessees were current on their lease payment obligations as of December 31, 2016.
The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at December 31, 2016 and 2015 was as follows:
(in millions)
2016

 
2015

Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
“AAA/Aaa” to “A-/A3”
$
218

 
$
212

“BBB+/Baa1” to “BBB-/Baa3”
559

 
702

“BB+/Ba1” and Lower
283

 
367

Total
$
1,060

 
$
1,281

Note 9. Short-Term Borrowings and Borrowing Arrangements
At December 31, 2016 and December 31, 2015, Altria Group, Inc. had no short-term borrowings. The credit line available to Altria Group, Inc. at December 31, 2016 under the Credit Agreement (as defined below) was $3.0 billion.
At December 31, 2016, Altria Group, Inc. had in place 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 August 19, 2020. 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 based on the higher of the ratings of Altria Group, Inc.’s long-term senior unsecured debt from Moody’s and Standard & Poor’s. The applicable percentage based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, 2016 for borrowings under the Credit Agreement was 1.125%. 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. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated earnings before interest, taxes,



16

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

depreciation and amortization (“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, 2016, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.4 to 1.0 and 13.5 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 as further discussed in Note 20. Condensed Consolidating Financial Information.
Note 10. Long-Term Debt
At December 31, 2016 and 2015, Altria Group, Inc.’s long-term debt consisted of the following:
(in millions)
2016

 
2015

Notes, 2.625% to 10.20%, interest payable semi-annually, due through 2046 (1)
$
13,839

 
$
12,789

Debenture, 7.75%, interest payable semi-annually, due 2027
42

 
42

Other
—

 
16

 
13,881

 
12,847

Less current portion of long-term debt
—

 
4

 
$
13,881

 
$
12,843

(1) Weighted-average coupon interest rate of 4.9% and 5.5% at December 31, 2016 and 2015, respectively.
At December 31, 2016, aggregate maturities of Altria Group, Inc.’s long-term debt were as follows:
(in millions)
 
 
2018
$
864

 
2019
1,144

 
2020
1,000

 
2021
1,500

 
2022
1,900

 
Thereafter
7,609

 
 
14,017

 
Less: debt issuance costs
77

 
debt discounts
59

 
 
$
13,881

 

On January 1, 2016, Altria Group, Inc. adopted ASU No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as a deferred charge (an asset). As a result of the adoption, $77 million of debt issuance costs have been presented on Altria Group, Inc.’s consolidated balance sheet at December 31, 2016 as a deduction
 
from the carrying amount of long-term debt. In addition, $72 million of debt issuance costs were reclassified from other assets to long-term debt on Altria Group, Inc.’s consolidated balance sheet at December 31, 2015.
Altria Group, Inc.’s estimate of the fair value of its debt is based on observable market information derived from a third party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.’s total long-term debt at December 31, 2016 and 2015, was $15.1 billion and $14.5 billion, respectively, as compared with its carrying value of $13.9 billion and $12.8 billion, respectively.
▪Altria Group, Inc. Senior Notes: In September 2016, Altria Group, Inc. issued $0.5 billion aggregate principal amount of 2.625% senior unsecured long-term notes due 2026 and $1.5 billion aggregate principal amount of 3.875% senior unsecured long-term notes due 2046. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used to repurchase certain of its senior unsecured notes in connection with the 2016 debt tender offer described below and for other general corporate purposes, including voluntary contributions to Altria Group, Inc.’s pension plans.
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. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.
With respect to $2.5 billion aggregate principal amount of Altria Group, Inc.’s senior unsecured long-term notes issued in 2008 and 2009, the interest rate payable on each series of notes was subject to adjustment from time to time if the rating assigned to the notes of such series by Moody’s or Standard & Poor’s was downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes. As a result of credit rating upgrades by both Moody’s and Standard & Poor’s in the first quarter of 2016, this interest rate adjustment provision terminated in accordance with its terms.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA as further discussed in Note 20. Condensed Consolidating Financial Information.
▪Debt Tender Offers and Redemption: During 2016 and 2015, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $0.9 billion and $0.8 billion, respectively.



17

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Details of these debt tender offers were as follows:
(in millions)
2016

 
2015

Notes Purchased
 
 
 
9.95% Notes due 2038
$
441

 
$
—

10.20% Notes due 2039
492

 
—

9.70% Notes due 2018
—

 
793

Total
$
933

 
$
793

During 2014, UST redeemed in full its $300 million (aggregate principal amount) 5.75% senior notes due 2018.
As a result of the Altria Group, Inc. debt tender offers and the UST debt redemption, pre-tax losses on early extinguishment of debt were recorded as follows:
(in millions)
2016

 
2015

 
2014

Premiums and fees
$
809

 
$
226

 
$
44

Write-off of unamortized debt discounts and debt issuance costs
14

 
2

 
—

Total
$
823

 
$
228

 
$
44

Note 11. Capital Stock
At December 31, 2016, Altria Group, Inc. had 12 billion shares of authorized common stock; issued, repurchased and outstanding shares of common stock were as follows:
 
Shares Issued

 
Shares
Repurchased

 
Shares
Outstanding

Balances, December 31, 2013
2,805,961,317

 
(812,482,035
)
 
1,993,479,282

Stock award activity
—

 
447,840

 
447,840

Repurchases of
common stock
—

 
(22,452,599
)
 
(22,452,599
)
Balances, December 31, 2014
2,805,961,317

 
(834,486,794
)
 
1,971,474,523

Stock award activity
—

 
(732,623
)
 
(732,623
)
Repurchases of
common stock
—

 
(10,682,419
)
 
(10,682,419
)
Balances, December 31, 2015
2,805,961,317

 
(845,901,836
)
 
1,960,059,481

Stock award activity
—

 
(566,256
)
 
(566,256
)
Repurchases of
common stock
—

 
(16,221,001
)
 
(16,221,001
)
Balances, December 31, 2016
2,805,961,317

 
(862,689,093
)
 
1,943,272,224

At December 31, 2016, 41,952,545 shares of common stock were reserved for stock-based 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.
 
▪Dividends: During the third quarter of 2016, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved an 8.0% increase in the quarterly dividend rate to $0.61 per share of Altria Group, Inc. common stock versus the previous rate of $0.565 per share. The current annualized dividend rate is $2.44 per share. Future dividend payments remain subject to the discretion of the Board of Directors.
▪Share Repurchases:     In April 2013, the Board of Directors authorized a $300 million share repurchase program and expanded it to $1.0 billion in August 2013 (as expanded, the “April 2013 share repurchase program”). During the third quarter of 2014, Altria Group, Inc. completed the April 2013 share repurchase program, under which Altria Group, Inc. repurchased a total of 27.1 million shares of its common stock at an average price of $36.97 per share.
In July 2014, the Board of Directors authorized a $1.0 billion share repurchase program (the “July 2014 share repurchase program”). During the third quarter of 2015, Altria Group, Inc. completed the July 2014 share repurchase program, under which Altria Group, Inc. repurchased a total of 20.4 million shares of its common stock at an average price of $48.90 per share.
In July 2015, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to $3.0 billion in October 2016 (as expanded, the “July 2015 share repurchase program”). During 2016 and 2015, Altria Group, Inc. repurchased 16.2 million shares and 0.6 million shares, respectively, of its common stock (at an aggregate cost of approximately $1,030 million and $35 million, respectively, and at an average price of $63.48 per share and $57.66 per share, respectively) under the July 2015 share repurchase program. At December 31, 2016, Altria Group, Inc. had approximately $1,935 million remaining in the July 2015 share repurchase program. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.
For the years ended December 31, 2016, 2015 and 2014, Altria Group, Inc.’s total share repurchase activity was as follows:
 
 
2016

2015

2014

 
 
(in millions, except per share data)
Total number of shares
repurchased
16.2

10.7

22.5

Aggregate cost of shares
repurchased
$
1,030

$
554

$
939

Average price per share of shares repurchased
$
63.48

$
51.83

$
41.79




18

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Note 12. Stock Plans
Under the Altria Group, Inc. 2015 Performance Incentive Plan (the “2015 Plan”), Altria Group, Inc. may grant 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 to employees of Altria Group, Inc. or any of its subsidiaries or affiliates. Up to 40 million shares of common stock may be issued under the 2015 Plan. In addition, under the 2015 Stock Compensation Plan for Non-Employee Directors (the “Directors Plan”), 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.
Shares available to be granted under the 2015 Plan and the Directors Plan at December 31, 2016, were 39,046,757 and 954,574, respectively.
▪Restricted Stock and Restricted Stock Units: Altria Group, Inc. may grant shares of restricted stock and restricted stock units to employees of Altria Group, Inc. or any of its subsidiaries or affiliates. During the vesting period, these shares include nonforfeitable rights to dividends or dividend equivalents and may not be sold, assigned, pledged or otherwise encumbered. Such shares are subject to forfeiture if certain employment conditions are not met. Shares of restricted stock and restricted stock units generally vest three years after the grant date.
The fair value of the shares of restricted stock and restricted stock units 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 restricted stock units granted to employees for the years ended December 31, 2016, 2015 and 2014 of $44 million, $51 million and $46 million, respectively. The deferred tax benefit recorded related to this compensation expense was $17 million, $20 million and $18 million for the years ended December 31, 2016, 2015 and 2014, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and restricted stock units was $64 million at December 31, 2016 and is expected to be recognized over a weighted-average period of approximately two years.
 
Altria Group, Inc.’s restricted stock and restricted stock units activity was as follows for the year ended December 31, 2016:
 
Number of
Shares

 
Weighted-Average
Grant Date Fair 
Value Per Share

Balance at December 31, 2015
3,937,685

 
$
40.86

Granted
947,725

 
59.38

Vested
(1,305,351
)
 
33.90

Forfeited
(334,525
)
 
46.83

Balance at December 31, 2016
3,245,534

 
48.45

The weighted-average grant date fair value of Altria Group, Inc. restricted stock and restricted stock units granted during the years ended December 31, 2016, 2015 and 2014 was $56 million, $65 million and $53 million, respectively, or $59.38, $54.54 and $36.75 per restricted share or restricted stock unit, respectively. The total fair value of Altria Group, Inc. restricted stock and restricted stock units that vested during the years ended December 31, 2016, 2015 and 2014 was $78 million, $85 million and $86 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)
2016

 
2015

 
2014

Net earnings attributable to Altria Group, Inc.
$
14,239

 
$
5,241

 
$
5,070

Less: Distributed and undistributed earnings attributable to unvested restricted shares and restricted stock units
(24
)
 
(10
)
 
(12
)
Earnings for basic and diluted EPS
$
14,215

 
$
5,231

 
$
5,058

Weighted-average shares for basic and diluted EPS
1,952

 
1,961

 
1,978






19

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Note 14. Other Comprehensive Earnings/Losses
The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:
(in millions)
 
Currency
Translation
Adjustments

 
Benefit Plans

 
SABMiller

 
Accumulated
Other
Comprehensive
Losses

Balances, December 31, 2013
 
$
—

 
$
(1,273
)
 
$
(105
)
 
$
(1,378
)
Other comprehensive losses before reclassifications
 
(2
)
 
(1,411
)
 
(881
)
 
(2,294
)
Deferred income taxes
 
—

 
550

 
308

 
858

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(2
)
 
(861
)
 
(573
)
 
(1,436
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
—

 
154

 
59

 
213

Deferred income taxes
 
—

 
(60
)
 
(21
)
 
(81
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
—

 
94

 
38

 
132

 
 
 
 
 
 
 
 
 
Other comprehensive losses, net of deferred income taxes
 
(2
)
 
(767
)
 
(535
)
(1) 
(1,304
)
Balances, December 31, 2014
 
(2
)
 
(2,040
)
 
(640
)
 
(2,682
)
Other comprehensive losses before reclassifications
 
(4
)
 
(223
)
 
(983
)
 
(1,210
)
Deferred income taxes
 
1

 
86

 
344

 
431

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(3
)
 
(137
)
 
(639
)
 
(779
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
—

 
272

 
21

 
293

Deferred income taxes
 
—

 
(105
)
 
(7
)
 
(112
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
—

 
167

 
14

 
181

 
 
 
 
 
 
 
 
 
Other comprehensive (losses) earnings, net of deferred income taxes
 
(3
)
 
30

 
(625
)
(1) 
(598
)
Balances, December 31, 2015
 
(5
)
 
(2,010
)
 
(1,265
)
 
(3,280
)
Other comprehensive earnings (losses) before reclassifications
 
1

 
(247
)
 
787

 
541

Deferred income taxes
 
—

 
96

 
(276
)
 
(180
)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 
1

 
(151
)
 
511

(2) 
361

 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
—

 
178

 
1,160

 
1,338

Deferred income taxes
 
—

 
(65
)
 
(406
)
 
(471
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
—

 
113

 
754

(3) 
867

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

 
(38
)
 
1,265

 
1,228

Balances, December 31, 2016
 
$
(4
)
 
$
(2,048
)
 
$
—

 
$
(2,052
)
(1) For the years ended December 31, 2015 and 2014, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments.
(2) As a result of the Transaction, Altria Group, Inc. reversed to Investment in AB InBev/SABMiller $414 million of its accumulated other comprehensive losses directly attributable to SABMiller; the remaining $97 million consisted primarily of currency translation adjustments.  
(3) As a result of the Transaction, Altria Group, Inc. recognized $737 million of its accumulated other comprehensive losses directly attributable to SABMiller.


20

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:
 
 
For the Years Ended December 31,
(in millions)
 
2016

 
2015

 
2014

Benefit Plans: (1)
 
 
 
 
 
 
Net loss
 
$
223

 
$
304

 
$
187

Prior service cost/credit
 
(45
)
 
(32
)
 
(33
)
 
 
178

 
272

 
154

SABMiller (2)
 
1,160

 
21

 
59

Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
1,338

 
$
293

 
$
213

(1) Amounts are included in net defined benefit plan costs. For further details, see Note 17. Benefit Plans.
(2) Substantially all of the amount for the year ended December 31, 2016 is included in Gain on AB InBev/SABMiller business combination. For the years ended December 31, 2015 and 2014, amounts are included in earnings from equity investment in SABMiller. For further information, see Note 7. Investment in AB InBev/SABMiller.
Note 15. Income Taxes
Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2016, 2015 and 2014: 
(in millions)
2016

 
2015

 
2014

Earnings before income taxes:
 
 
 
 
 
United States
$
21,867

 
$
8,078

 
$
7,763

Outside United States
(15
)
 
—

 
11

Total
$
21,852

 
$
8,078

 
$
7,774

Provision for income taxes:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
4,093

 
$
2,516

 
$
2,350

State and local
390

 
451

 
480

Outside United States
6

 
—

 
3

 
4,489

 
2,967

 
2,833

Deferred:
 
 
 
 
 
Federal
3,102

 
(140
)
 
(124
)
State and local
20

 
8

 
(5
)
Outside United States
(3
)
 
—

 
—

 
3,119

 
(132
)
 
(129
)
Total provision for income taxes
$
7,608

 
$
2,835

 
$
2,704

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 2010 and forward, with years 2010 to 2013 currently under examination by the Internal Revenue Service (“IRS”) as part of an audit conducted in the ordinary course of business. With the exception of corresponding federal audit adjustments, state statutes of limitations generally remain open for the year 2012 and forward. 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, 2016, 2015 and 2014 was as follows: 
(in millions)
2016

 
2015

 
2014

Balance at beginning of year
$
158

 
$
258

 
$
227

Additions based on tax positions
related to the current year
15

 
15

 
15

Additions for tax positions of
prior years
29

 
57

 
29

Reductions for tax positions due to
lapse of statutes of limitations
(4
)
 
(4
)
 
(2
)
Reductions for tax positions of
prior years
(28
)
 
(86
)
 
—

Settlements
(1
)
 
(82
)
 
(11
)
Balance at end of year
$
169

 
$
158

 
$
258

     Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, 2016 and 2015 were as follows:
(in millions)
2016

 
2015

Unrecognized tax benefits
$
169

 
$
158

Accrued interest and penalties
23

 
14

Tax credits and other indirect benefits
(6
)
 
(3
)
Liability for tax contingencies
$
186

 
$
169

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2016 was $67 million, along with $102 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2015 was $76 million, along with $82 million affecting deferred taxes.



21

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
For the years ended December 31, 2016, 2015 and 2014, Altria Group, Inc. recognized in its consolidated statements of earnings $9 million, $(36) million and $14 million, respectively, of gross interest expense (income) associated with uncertain tax positions.
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, and 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 $116 million.
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, 2016, 2015 and 2014:
 
2016

 
2015

 
2014

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
1.2

 
3.7

 
4.0

Uncertain tax positions
—

 
(0.8
)
 
0.5

AB InBev/SABMiller dividend
benefit
(0.6
)
 
(0.5
)
 
(2.3
)
Domestic manufacturing deduction
(0.8
)
 
(2.0
)
 
(2.4
)
Other
—

 
(0.3
)
 
—

Effective tax rate
34.8
 %
 
35.1
 %
 
34.8
 %
The tax provision in 2016 included increased tax benefits associated with the cumulative SABMiller and AB InBev dividends and tax expense of $4.9 billion (approximately 35%) for the gain on the Transaction.
The tax provision in 2015 included net tax benefits of (i) $59 million from the reversal of tax reserves and associated interest due primarily to the closure in the third quarter of 2015 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years (“IRS 2007-2009 Audit”); and (ii) $41 million for Philip Morris International Inc. (“PMI”) tax matters discussed below, partially offset by the reversal of foreign tax credits primarily associated with SABMiller dividends that were recorded during the third quarter of 2015 ($41 million) and the fourth quarter of 2015 ($24 million). The tax provision in 2015 also included decreased recognition of foreign tax credits associated with SABMiller dividends.
The tax provision in 2014 included net tax benefits of (i) $14 million from the reversal of tax accruals no longer required that was recorded during the third quarter of 2014 ($19 million), partially offset by additional tax provisions recorded during the fourth quarter of 2014 ($5 million); and (ii) $2 million for
 
Mondelēz International, Inc. (“Mondelēz”) tax matters discussed below.
Under tax sharing agreements between Altria Group, Inc. and its former subsidiaries Kraft Foods Inc. (now known as Mondelēz) and PMI, entered into in connection with the 2007 and 2008 spin-offs, respectively, Mondelēz and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remained severally liable for Mondelēz’s and PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continued to include the pre-spin-off federal income tax reserves of Mondelēz and PMI in its liability for uncertain tax positions. As of December 31, 2015, there were no remaining pre-spin-off tax reserves for Mondelēz and PMI.
During 2015 and 2014, Altria Group, Inc. recorded net tax benefits of $41 million and $2 million, respectively, for PMI and Mondelēz tax matters, primarily relating to the IRS 2007-2009 Audit. These net tax benefits were offset by reductions of PMI and Mondelēz tax-related receivables, which were recorded as decreases to operating income in Altria Group, Inc.’s consolidated statements of earnings. Due to the respective offsets, the PMI and Mondelēz tax matters had no impact on Altria Group, Inc.’s net earnings for the years ended December 31, 2015 and 2014.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2016 and 2015:
(in millions)
2016

 
2015

Deferred income tax assets:
 
 
 
Accrued postretirement and postemployment benefits
$
952

 
$
953

Settlement charges
1,446

 
1,393

Accrued pension costs
330

 
512

Net operating losses and tax credit carryforwards
288

 
335

Total deferred income tax assets
3,016

 
3,193

Deferred income tax liabilities:
 
 
 
Property, plant and equipment
(429
)
 
(441
)
Intangible assets
(4,032
)
 
(3,968
)
Investment in AB InBev/SABMiller
(5,546
)
 
(1,794
)
Finance assets, net
(708
)
 
(909
)
Other
(125
)
 
(116
)
Total deferred income tax liabilities
(10,840
)
 
(7,228
)
Valuation allowances
(240
)
 
(260
)
Net deferred income tax liabilities
$
(8,064
)
 
$
(4,295
)
At December 31, 2016, Altria Group, Inc. had estimated gross state tax net operating losses of $532 million that, if unused, will expire in 2017 through 2036, state tax credit carryforwards of $14 million that, if unused, will expire in 2017, and foreign tax credit carryforwards of $296 million that, if unused, will expire in 2020 through 2025. Realization of these benefits is dependent upon various factors such as generating sufficient taxable income in the applicable states and receiving sufficient amounts of lower-



22

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

taxed foreign dividends from AB InBev. A valuation allowance of $240 million has been established for those benefits that more-likely-than-not will not be realized. Altria Group, Inc. may be required to change the valuation allowance with respect to foreign tax credit carryforwards, based upon additional information to be received from AB InBev in 2017.
In the fourth quarter of 2016, Altria Group, Inc. retroactively adopted ASU No. 2015-17, which requires that deferred tax assets and liabilities be classified as noncurrent on a classified statement of financial position. As a result of the adoption, at December 31, 2015, current deferred income tax assets of approximately $1.2 billion were reclassified to noncurrent deferred income tax liabilities ($1.0 billion) and noncurrent deferred income tax assets ($0.2 billion) on Altria Group, Inc.’s consolidated balance sheet.
Note 16. Segment Reporting
At December 31, 2016, the products of Altria Group, Inc.’s subsidiaries include smokeable tobacco products, consisting of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; smokeless tobacco products, which are manufactured and sold by USSTC; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in all other.
Altria Group, Inc.’s chief operating decision maker (the “CODM”) reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before general corporate expenses and amortization of intangibles. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the CODM. Information about total assets by segment is not disclosed because such information is not reported to or used by the CODM. 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)
2016

 
2015

 
2014

Net revenues:
 
 
 
 
 
Smokeable products
$
22,851

 
$
22,792

 
$
21,939

Smokeless products
2,051

 
1,879

 
1,809

Wine
746

 
692

 
643

All other
96

 
71

 
131

Net revenues
$
25,744

 
$
25,434

 
$
24,522

Earnings before income taxes:
 
 
 
 
 
Operating companies
income (loss):
 
 
 
 
 
Smokeable products
$
7,768

 
$
7,569

 
$
6,873

Smokeless products
1,177

 
1,108

 
1,061

Wine
164

 
152

 
134

All other
(99
)
 
(169
)
 
(185
)
Amortization of intangibles
(21
)
 
(21
)
 
(20
)
General corporate expenses
(222
)
 
(237
)
 
(241
)
Reductions of PMI and Mondelēz tax-related receivables
—

 
(41
)
 
(2
)
Corporate asset impairment and exit costs
(5
)
 
—

 
—

Operating income
8,762

 
8,361

 
7,620

Interest and other debt expense, net
(747
)
 
(817
)
 
(808
)
Loss on early extinguishment of debt
(823
)
 
(228
)
 
(44
)
Earnings from equity investment in SABMiller
795

 
757

 
1,006

Gain on AB InBev/SABMiller business combination
13,865

 
5

 
—

Earnings before income taxes
$
21,852

 
$
8,078

 
$
7,774

The smokeable products segment included net revenues of $22,199 million, $22,193 million and $21,363 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to cigarettes and net revenues of $652 million, $599 million and $576 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to cigars.
PM USA, USSTC and Middleton’s largest customer, McLane Company, Inc., accounted for approximately 25%, 26% and 27% of Altria Group, Inc.’s consolidated net revenues for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, Core-Mark Holding Company, Inc. accounted for approximately 14% and 10% of Altria Group, Inc.’s consolidated net revenues for the years ended December 31, 2016 and 2015, respectively. Substantially all of these net revenues were reported in the smokeable products and smokeless products segments. Sales to three distributors accounted for approximately 69%, 66% and 67% of net revenues for the wine segment for the years ended December 31, 2016, 2015 and 2014, respectively.



23

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Details of Altria Group, Inc.’s depreciation expense and capital expenditures were as follows:
 
For the Years Ended December 31,
(in millions)
2016

 
2015

 
2014

Depreciation expense:
 
 
 
 
 
Smokeable products
$
93

 
$
117

 
$
112

Smokeless products
26

 
27

 
22

Wine
36

 
32

 
30

General corporate and other
28

 
28

 
24

Total depreciation expense
$
183

 
$
204

 
$
188

Capital expenditures:
 
 
 
 
 
Smokeable products
$
55

 
$
56

 
$
49

Smokeless products
52

 
113

 
40

Wine
59

 
42

 
46

General corporate and other
23

 
18

 
28

Total capital expenditures
$
189

 
$
229

 
$
163

The comparability of operating companies income for the reportable segments was affected by the following:
▪Non-Participating Manufacturer (“NPM”) Adjustment Items: For the years ended December 31, 2016, 2015 and 2014, pre-tax expense (income) for NPM adjustment items was recorded in Altria Group, Inc.’s consolidated statements of earnings as follows:
(in millions)
 
2016

 
2015

 
2014

Smokeable products segment
 
$
12


$
(97
)

$
(43
)
Interest and other debt expense, net
 
6


13


(47
)
Total
 
$
18

 
$
(84
)
 
$
(90
)
NPM adjustment items result from the settlement of, and determinations made in connection with, disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (such settlements and determinations are referred to collectively as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 19. Contingencies). The amounts shown in the table above for the smokeable products segment were recorded by PM USA as increases (reductions) to cost of sales, which decreased (increased) operating companies income in the smokeable products segment.
 
▪Tobacco and Health Litigation Items: For the years ended December 31, 2016, 2015 and 2014, pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’s consolidated statements of earnings as follows:
(in millions)
 
2016

 
2015

 
2014

Smokeable products segment
 
$
88

 
$
127

 
$
27

General corporate
 
—

 
—

 
15

Interest and other debt expense, net
 
17

 
23

 
2

Total
 
$
105

 
$
150

 
$
44

During 2016, PM USA recorded pre-tax charges of $88 million in marketing, administration and research costs, primarily related to settlements in the Miner and Aspinall cases totaling approximately $67 million, and $16 million related to a judgment in the Merino case. In addition, during 2016, PM USA recorded $17 million in interest costs primarily related to Aspinall. For further discussion, see Note 19. Contingencies.
During 2015, PM USA recorded pre-tax charges in marketing, administration and research costs related to tobacco and health judgments in seven state Engle progeny lawsuits and Schwarz of $59 million and $25 million, respectively, as well as $14 million and $9 million, respectively, in interest costs related to these cases. Additionally in 2015, PM USA and certain other cigarette manufacturers reached an agreement to resolve approximately 415 pending federal Engle progeny cases. As a result of the agreement, PM USA recorded a pre-tax provision of approximately $43 million in marketing, administration and research costs. For further discussion, see Smoking and Health Litigation in Note 19. Contingencies.
During 2014, Altria Group, Inc. and PM USA recorded an aggregate pre-tax charge of $31 million in marketing, administration and research costs for the estimated costs of implementing the corrective communications remedy in connection with the federal government’s lawsuit against Altria Group, Inc. and PM USA. For further discussion, see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit in Note 19. Contingencies.
▪Asset Impairment and Exit Costs: See Note 5. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.
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. and its subsidiaries. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST’s subsidiaries and Middleton who were participants in noncontributory defined benefit pension plans



24

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

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 postretirement 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. Altria Group, Inc.’s postretirement plans are not funded.
The discount rates for Altria Group, Inc.’s plans were based on a yield curve developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the pension and postretirement benefit obligations.
    

▪
Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and postretirement plans at December 31, 2016 and 2015 were as follows:
 
              Pension
 
             Postretirement
(in millions)
2016

 
2015

 
2016

 
2015

Change in benefit obligation:
 
 
 
 
 
 
 
    Benefit obligation at beginning of year
$
8,011

 
$
8,330

 
$
2,392

 
$
2,613

   Service cost
76

 
86

 
17

 
18

   Interest cost
281

 
337

 
77

 
100

   Benefits paid
(440
)
 
(431
)
 
(135
)
 
(141
)
   Actuarial losses (gains)
367

 
(317
)
 
24

 
(192
)
       Termination and curtailment
13

 
—

 
5

 
—

       Other
4

 
6

 
(16
)
 
(6
)
    Benefit obligation at end of year
8,312

 
8,011

 
2,364

 
2,392

Change in plan assets:
 
 
 
 
 
 
 
    Fair value of plan assets at beginning of year
6,706

 
7,297

 
—

 
—

   Actual return on plan assets
678

 
(188
)
 
—

 
—

   Employer contributions
531

 
28

 
—

 
—

   Benefits paid
(440
)
 
(431
)
 
—

 
—

    Fair value of plan assets at end of year
7,475

 
6,706

 
—

 
—

    Funded status at December 31
$
(837
)
 
$
(1,305
)
 
$
(2,364
)
 
$
(2,392
)
Amounts recognized on Altria Group, Inc.’s consolidated balance sheets were as follows:
 
 
 
 
 
 
 
    Other accrued liabilities
$
(32
)
 
$
(28
)
 
$
(147
)
 
$
(147
)
    Accrued pension costs
(805
)
 
(1,277
)
 
—

 
—

    Accrued postretirement health care costs
—

 
—

 
(2,217
)
 
(2,245
)
 
$
(837
)
 
$
(1,305
)
 
$
(2,364
)
 
$
(2,392
)
The table above presents the projected benefit obligation for Altria Group, Inc.’s pension plans. The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8.0 billion and $7.7 billion at December 31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, the accumulated benefit obligations were in excess of plan assets for all pension plans.
The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, mandates health care reforms with staggered effective dates from 2010 to 2020, including the imposition of an excise tax on high cost health care plans effective in 2020. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been
 
included in Altria Group, Inc.’s accumulated postretirement benefit obligation at December 31, 2016 and 2015. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.
The following assumptions were used to determine Altria Group, Inc.’s pension benefit obligations at December 31:
 
2016

 
2015

Discount rate
4.1
%
 
4.4
%
Rate of compensation increase
4.0

 
4.0





25

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31:
 
2016

 
2015

Discount rate
4.1
%
 
4.4
%
Health care cost trend rate assumed for next year
7.0


6.5

    Ultimate trend rate
5.0


5.0

 Year that the rate reaches the ultimate trend rate
2022


2019

▪
Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31, 2016, 2015 and 2014:
 
             Pension
 
               Postretirement
(in millions)
2016

 
2015

 
2014

 
2016

 
2015

 
2014

Service cost
$
76

 
$
86

 
$
68

 
$
17

 
$
18

 
$
15

Interest cost
281

 
337

 
345

 
77

 
100

 
107

Expected return on plan assets
(553
)
 
(539
)
 
(518
)
 
—

 
—

 
—

Amortization:
 
 
 
 
 
 
 
 
 
 
 
Net loss
171

 
234

 
147

 
25

 
43

 
22

Prior service cost (credit)
5

 
7

 
10

 
(39
)
 
(39
)
 
(43
)
Termination, settlement and curtailment
34

 
8

 
—

 
(2
)
 
—

 
—

Net periodic benefit cost
$
14

 
$
133

 
$
52

 
$
78

 
$
122

 
$
101

Termination, settlement and curtailment shown in the table above primarily relate to the productivity initiative and facilities consolidation discussed in Note 5. Asset Impairment, Exit and Implementation Costs.
The amounts included in termination, settlement and curtailment in the table above were comprised of the following changes:
 
      Pension
 
Postretirement
(in millions)
2016

 
2015

 
2016
Benefit obligation
$
23

 
$
—

 
$
11

Other comprehensive earnings/losses:
 
 
 
 
 
Net loss (earnings)
9

 
8

 
—

Prior service cost (credit)
2

 
—

 
(13
)
 
$
34

 
$
8

 
$
(2
)

Beginning in 2016, Altria Group, Inc. began using a spot rate approach to estimate the service and interest cost components of net periodic benefit costs by applying the specific spot rates along the yield curve to the relevant projected cash flows, as Altria Group, Inc. believes that this approach is a more precise estimate of service and interest cost. This change resulted in a decrease of
 
approximately $70 million and $20 million to its 2016 pre-tax pension and postretirement net periodic benefit cost, respectively. Prior to 2016, Altria Group, Inc. estimated the service and interest cost components of net periodic benefit cost using a single weighted-average discount rate derived from the yield curve used to measure the pension and postretirement plans benefit obligations.
At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its pension plan and postretirement plan participants, resulting in an increase of approximately $60 million and $10 million to its 2015 pre-tax pension and postretirement net periodic benefit cost, respectively.
The estimated net loss and prior service cost (credit) that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2017 is as follows:
(in millions)
Pension

 
Postretirement

Net loss
$
200

 
$
32

Prior service cost (credit)
4

 
(38
)





26

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The following assumptions were used to determine Altria Group, Inc.’s net periodic benefit cost for the years ended December 31:
 
             Pension
 
              Postretirement
 
2016

 
2015

 
2014

 
2016

 
2015

 
2014

Discount rates:


 


 


 


 


 


     Service cost
4.7
%
 
4.1
%
 
4.9
%
 
4.5
%
 
4.0
%
 
4.8
%
     Interest cost
3.6

 
4.1

 
4.9

 
3.4

 
4.0

 
4.8

Expected rate of return on plan assets
8.0

 
8.0

 
8.0

 
—

 
—

 
—

Rate of compensation increase
4.0

 
4.0

 
4.0

 
—

 
—

 
—

Health care cost trend rate
—

 
—

 
—

 
6.5

 
7.0

 
7.0

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one-percentage-point change in assumed health care cost trend
rates would have had the following effects as of December 31, 2016:
 
One-Percentage-Point Increase

 
One-Percentage-Point Decrease

Effect on total of postretirement service and interest cost
8.0
%
 
(6.7
)%
Effect on postretirement benefit obligation
6.4
%
 
(5.4
)%
▪Defined Contribution Plans: 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 $93 million, $85 million and $82 million in 2016, 2015 and 2014, respectively.
▪Pension 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. believes that it 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%. The composition of Altria Group, Inc.’s plan assets at December 31, 2016 was broadly characterized as an allocation between equity securities (57%), corporate bonds (32%), U.S. Treasury and foreign government securities (8%) and all other types of investments (3%). Virtually all pension assets can be used to make monthly benefit payments.
Altria Group, Inc.’s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard
 
& Poor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index (“RAFI”) Low Volatility U.S. Index, and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria Group, Inc.’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include corporate bonds of companies from diversified industries. The allocation to below investment grade securities represented 18% of the fixed income holdings or 8% of total plan assets at December 31, 2016. The allocation to emerging markets represented 3% of the equity holdings or 2% of total plan assets at December 31, 2016.
Altria Group, Inc.’s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and 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.
On January 1, 2016, Altria Group, Inc. retrospectively adopted ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (“NAV”) per share as a practical expedient. As a result of the adoption, certain investments have not been classified by level in the fair value table but are disclosed to permit reconciliation to the fair value of plan assets. Certain investments in the fair value table at December 31, 2015 have been reclassified to conform with the current year’s presentation.




27

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2016 and 2015 were as follows:
 
2016
 
2015
(in millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
Level 1

 
Level 2

 
Level 3

 
Total

U.S. and foreign government securities or
their agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
—

 
$
444

 
$
—

 
$
444

 
$
—

 
$
331

 
$
—

 
$
331

U.S. municipal bonds
—

 
102

 
—

 
102

 
—

 
102

 
—

 
102

Foreign government and agencies
—

 
185

 
—

 
185

 
—

 
252

 
—

 
252

Corporate debt instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Above investment grade
—

 
1,735

 
—

 
1,735

 
—

 
1,660

 
—

 
1,660

Below investment grade and no rating
—

 
602

 
—

 
602

 
—

 
502

 
—

 
502

Common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International equities
1,076

 
—

 
—

 
1,076

 
907

 
—

 
2

 
909

U.S. equities
760

 
—

 
—

 
760

 
605

 
—

 
—

 
605

Registered investment companies
51

 
—

 
—

 
51

 
58

 
—

 
—

 
58

Other, net
91

 
33

 
13

 
137

 
16

 
58

 
13

 
87

 
$
1,978

 
$
3,101

 
$
13

 
$
5,092

 
$
1,586

 
$
2,905

 
$
15

 
$
4,506

Investments measured at NAV as a practical expedient for fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common/collective trusts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. large cap
 
 
 
 
 
 
1,940

 
 
 
 
 
 
 
1,762

U.S. small cap
 
 
 
 
 
 
363

 
 
 
 
 
 
 
360

International developed markets
 
 
 
 
 
 
80

 
 
 
 
 
 
 
78

Fair value of plan assets, net
 
 
 
 
 
 
$
7,475

 
 
 
 
 
 
 
$
6,706

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2016 and 2015.
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.
▪
U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities and municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.
▪
Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.
▪
Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date.
▪
Registered Investment Companies: Investments in registered investment companies are valued at the closing NAV publicly reported on the last business day of the year.
 
▪
Common/Collective Trusts: Common/collective trusts consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index, Russell Small Cap Completeness Index and MSCI EAFE Index. 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 NAV, which is provided by the investment account manager as a practical expedient to estimate fair value. In accordance with ASU No. 2015-07, these investments have not been classified by level but are disclosed to permit reconciliation to the fair value of plan assets.
▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. In September 2016, Altria Group, Inc. made voluntary contributions totaling $500 million to its pension plans. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $30 million to $50 million in 2017 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.



28

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Estimated future benefit payments at December 31, 2016 were as follows:
(in millions)
Pension

 
Postretirement

2017
$
456

 
$
147

2018
461

 
149

2019
449

 
145

2020
456

 
143

2021
459

 
141

2022-2026
2,395

 
655

Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2016 consisted of the following:
(in millions)
Pension

 
Post-
retirement

 
Post-
employment

 
Total

Net loss
$
(2,857
)
 
$
(581
)
 
$
(99
)
 
$
(3,537
)
Prior service (cost) credit
(19
)
 
195

 
—

 
176

Deferred income taxes
1,124

 
153

 
36

 
1,313

Amounts recorded in accumulated other comprehensive losses
$
(1,752
)
 
$
(233
)
 
$
(63
)
 
$
(2,048
)
The amounts recorded in accumulated other comprehensive losses at December 31, 2015 consisted of the following:
(in millions)
Pension

 
Post-
retirement

 
Post-
employment

 
Total

Net loss
$
(2,805
)
 
$
(588
)
 
$
(108
)
 
$
(3,501
)
Prior service (cost) credit
(22
)
 
231

 
—

 
209

Deferred income taxes
1,101

 
141

 
40

 
1,282

Amounts recorded in accumulated other comprehensive losses
$
(1,726
)
 
$
(216
)
 
$
(68
)
 
$
(2,010
)
The movements in other comprehensive earnings/losses during the year ended December 31, 2016 were as follows:
(in millions)
Pension

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
171

 
$
25

 
$
18

 
$
214

Prior service cost/credit
5

 
(39
)
 
—

 
(34
)
Other expense (income):
 
 
 
 
 
 
 
Net loss
9

 
—

 
—

 
9

Prior service cost/credit
2

 
(13
)
 
—

 
(11
)
Deferred income taxes
(69
)
 
11

 
(7
)
 
(65
)
 
118

 
(16
)
 
11

 
113

Other movements during the year:
 
 
 
 
 
 
 
Net loss
(232
)
 
(18
)
 
(9
)
 
(259
)
Prior service cost/credit
(4
)
 
16

 
—

 
12

Deferred income taxes
92

 
1

 
3

 
96

 
(144
)
 
(1
)
 
(6
)
 
(151
)
Total movements in other comprehensive earnings/losses
$
(26
)
 
$
(17
)
 
$
5

 
$
(38
)


29

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:
(in millions)
Pension

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
234

 
$
43

 
$
19

 
$
296

Prior service cost/credit
7

 
(39
)
 
—

 
(32
)
Other expense:
 
 
 
 
 
 
 
Net loss
8

 
—

 
—

 
8

Deferred income taxes
(96
)
 
(2
)
 
(7
)
 
(105
)
 
153

 
2

 
12

 
167

Other movements during the year:
 
 
 
 
 
 
 
Net loss
(410
)
 
192

 
(5
)
 
(223
)
Prior service cost/credit
(6
)
 
6

 
—

 
—

Deferred income taxes
160

 
(75
)
 
1

 
86

 
(256
)
 
123

 
(4
)
 
(137
)
Total movements in other comprehensive earnings/losses
$
(103
)
 
$
125

 
$
8

 
$
30

The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:
(in millions)
Pension

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
147

 
$
22

 
$
18

 
$
187

Prior service cost/credit
10

 
(43
)
 
—

 
(33
)
Deferred income taxes
(61
)
 
8

 
(7
)
 
(60
)
 
96

 
(13
)
 
11

 
94

Other movements during the year:
 
 
 
 
 
 
 
Net loss
(1,093
)
 
(306
)
 
(12
)
 
(1,411
)
Deferred income taxes
425

 
120

 
5

 
550

 
(668
)
 
(186
)
 
(7
)
 
(861
)
Total movements in other comprehensive earnings/losses
$
(572
)
 
$
(199
)
 
$
4

 
$
(767
)


30

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Note 18. Additional Information
 
For the Years Ended December 31,
(in millions)
2016

 
2015

 
2014

Research and development expense
$
203

 
$
186

 
$
167

Advertising expense
$
27

 
$
25

 
$
30

Interest and other debt expense, net:
 
 
 
 
 
Interest expense
$
754

 
$
808

 
$
857

Interest income
(13
)
 
(4
)
 
(2
)
   Interest related to NPM Adjustment Items
6

 
13

 
(47
)
 
$
747

 
$
817

 
$
808

Rent expense
$
53

 
$
48

 
$
52

     Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, 2016 were as follows:
(in millions)
Rental Commitments

 
Sublease Income

2017
$
52

 
$
5

2018
46

 
5

2019
35

 
5

2020
30

 
6

2021
24

 
6

Thereafter
72

 
15

 
$
259

 
$
42

The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2016, 2015 and 2014 was as follows:
(in millions)
 
2016
 
2015
 
2014
 
 
Discounts

 
Returned Goods

 
Discounts

 
Returned Goods

 
Discounts

 
Returned Goods

Balance at beginning of year
 
$
—

 
$
68

 
$
—

 
$
46

 
$
—

 
$
41

Charged to costs and expenses
 
628

 
133

 
618

 
217

 
599

 
179

Deductions (1)
 
(628
)
 
(152
)
 
(618
)
 
(195
)
 
(599
)
 
(174
)
Balance at end of year
 
$
—

 
$
49

 
$
—

 
$
68

 
$
—

 
$
46

(1) Represents the recording of discounts and returns for which allowances were created.

Note 19. Contingencies
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors or distributors.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple
 
jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment.  As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.
Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief



31

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. Although Altria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.
Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 19. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred.
Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.

Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation

Types and Number of Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be
 
brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”); and (v) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” cases are discussed below.
The table below lists the number of certain tobacco-related cases pending in the United States against PM USA(1) and, in some instances, Altria Group, Inc. as of December 31, 2016, 2015 and 2014:
 
2016
 
2015
 
2014
Individual Smoking and Health Cases (2)
70
 
65
 
67
Smoking and Health Class Actions and Aggregated Claims Litigation (3)
5
 
5
 
5
Health Care Cost Recovery Actions (4)
1
 
1
 
1
“Lights/Ultra Lights” Class Actions
8
 
11
 
12
(1) Does not include 25 cases filed on the asbestos docket in the Circuit Court for Baltimore City, Maryland, which seek to join PM USA and other cigarette-manufacturing defendants in complaints previously filed against asbestos companies.
(2) Does not include 2,485 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allowed class members to file individual lawsuits seeking compensatory damages, but prohibited them from seeking punitive damages. Also, does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (discussed below in Smoking and Health Litigation - Engle Class Action).
(3) Includes as one case the 600 civil actions (of which 344 were actions against PM USA) that were to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals ruled that the United States Constitution did not preclude a trial in two phases in this case. Issues related to defendants’ conduct and whether punitive damages are permissible were tried in the first phase. Trial in the first phase of this case began in April 2013. In May 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase will consist of trials to determine liability and compensatory damages. In November 2014, the West Virginia Supreme Court of Appeals affirmed the final judgment. In July 2015, the trial court entered an order that will result in the entry of final judgment in favor of defendants and against all but 30 plaintiffs who potentially have a claim against one or more defendants that may be pursued in a second phase of trial. The court intends to try the claims of these 30 plaintiffs in six consolidated trials, each with a group of five plaintiffs. The first trial is currently scheduled to begin May 1, 2018. Dates for the five remaining consolidated trials have not been scheduled.
(4) See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.



32

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

▪International Tobacco-Related Cases: As of January 27, 2017, PM USA is a named defendant in 10 health care cost recovery actions in Canada, eight of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

▪Tobacco-Related Cases Set for Trial: As of January 27, 2017, nine Engle progeny cases are set for trial through March 31, 2017. There are no individual smoking and health cases and no “Lights/Ultra Lights” class actions or medical monitoring cases against PM USA set for trial during this period. Cases against other companies in the tobacco industry are scheduled for trial during this period. Trial dates are subject to change.

▪Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 61 smoking and health, “Lights/Ultra Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 41 of the 61 cases. These 41 cases were tried in Alaska (1), California (7), Florida (10), Louisiana (1), Massachusetts (2), Mississippi (1), Missouri (4), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska. In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. In December 2015, the Alaska Supreme Court reversed the trial court decision and remanded the case with directions for the trial court to reassess whether to grant a new trial. In March 2016, the trial court granted a new trial and PM USA filed a petition for review of that order with the Alaska Supreme Court, which the court denied in July 2016. The retrial began in October 2016. In November 2016, the court declared a mistrial after the jury failed to reach a verdict. The plaintiff subsequently moved for a new trial, which is scheduled to begin October 16, 2017. See Types and Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).
Of the 20 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 18 have reached final resolution. A verdict against PM USA in a purported “Lights” class action in Illinois (Price) was reversed and ultimately resolved in PM USA’s favor. See “Lights/Ultra Lights” Cases - State Trial Court Class Certifications Concluded in 2016 below for further discussion.
As of January 27, 2017, 105 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision as follows: 58 verdicts were returned in favor of plaintiffs; 44 verdicts were returned in favor of PM USA. Three verdicts in favor of plaintiffs were partially or entirely reversed on appeal. See Smoking and Health
 
Litigation - Engle Progeny Trial Court Results below for a discussion of these verdicts.

▪Judgments Paid and Provisions for Tobacco and Health Litigation Items (Including Engle Progeny Litigation): After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments and settlements (including related costs and fees) totaling approximately $473 million and interest totaling approximately $183 million as of December 31, 2016. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $82 million, interest totaling approximately $21 million and payment of approximately $43 million in connection with the Federal Engle Agreement, discussed below.
The changes in Altria Group, Inc.’s accrued liability for tobacco and health litigation items, including related interest costs, for the periods specified below are as follows:

(in millions)
2016

 
2015

 
2014

Accrued liability for tobacco and health litigation items at beginning of year
$
132

 
$
39

 
$
3

Pre-tax charges for:
 
 
 
 
 
Tobacco and health judgments
21

 
84

 
11

Related interest costs
7

 
23

 
2

Agreement to resolve federal Engle progeny cases
—

 
43

 
—

Agreement to resolve Aspinall including related interest costs
32

 
—

 
—

Agreement to resolve Miner 
45

 
—

 
—

Implementation of corrective communications remedy pursuant to the federal government’s lawsuit
—

 
—

 
31

Payments
(190
)
 
(57
)
 
(8
)
Accrued liability for tobacco and health litigation items at end of year
$
47

 
$
132

 
$
39


The accrued liability for tobacco and health litigation items, including related interest costs, was included in liabilities on Altria Group, Inc.’s consolidated balance sheets. Pre-tax charges for tobacco and health judgments, the agreement to resolve federal Engle progeny cases, the agreement to resolve the Aspinall case (excluding related interest costs of approximately $10 million), the agreement to resolve the Miner case and the implementation of the corrective communications remedy pursuant to the federal government’s lawsuit were included in marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria Group, Inc.’s consolidated statements of earnings.



33

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

▪Security for Judgments: To obtain stays of judgments pending current appeals, as of December 31, 2016, PM USA has posted various forms of security totaling approximately $82 million, the majority of which has been collateralized with cash deposits that are included in other assets on the consolidated balance sheet.

Smoking and Health Litigation

▪Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

▪Non-Engle Progeny Litigation: Summarized below are the non-Engle progeny smoking and health cases pending during 2016 in which verdicts were returned in favor of plaintiffs and against PM USA. Charts listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Results below.

Bullock: In December 2015, a jury in the U.S. District Court for the Central District of California returned a verdict in favor of plaintiff, awarding $900,000 in compensatory damages. In January 2016, the plaintiff moved for a new trial, which the district court denied in February 2016. In March 2016, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit and plaintiff cross-appealed.

Schwarz: In March 2002, an Oregon jury awarded $168,500 in compensatory damages and $150 million in punitive damages against PM USA. In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2010, the Oregon Supreme Court affirmed the court of appeals’ decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. Upon retrial, in February 2012, the jury awarded plaintiff $25 million in punitive damages, which was ultimately upheld on appeal. In the fourth quarter of 2015, PM USA recorded a provision on its consolidated balance sheet of
 
approximately $34 million for the judgment plus interest and associated costs. In June 2016, PM USA paid the final judgment plus interest and associated costs of approximately $34 million, concluding this litigation.

Federal Government’s Lawsuit: See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America health care cost recovery case.

▪Engle Class Action: In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.
In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.
In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to



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the two individual plaintiffs identified in the Florida Supreme Court’s order.
In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court, which the United States Supreme Court denied later in 2007.
In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and would receive no credit at that time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.
In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.

▪Engle Progeny Cases: The deadline for filing Engle progeny cases, as required by the Florida Supreme Court’s Engle decision, expired in January 2008. As of January 27, 2017, approximately 2,600 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on
 
behalf of approximately 3,500 state court plaintiffs.  Because of a number of factors, including, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates. While the Federal Engle Agreement (discussed below) resolved nearly all Engle progeny cases pending in federal court, as of January 27, 2017, approximately 14 cases were pending against PM USA in federal court representing the cases excluded from that agreement.

▪Agreement to Resolve Federal Engle Progeny Cases: In 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and Lorillard Tobacco Company (“Lorillard”) resolved approximately 415 pending federal Engle progeny cases (the “Federal Engle Agreement”). Under the terms of the Federal Engle Agreement, PM USA paid approximately $43 million. Federal cases that were in trial and those that previously reached final verdict were not included in the Federal Engle Agreement.

▪Engle Progeny Trial Results: As of January 27, 2017, 105 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Fifty-eight verdicts were returned in favor of plaintiffs and three verdicts (Graham, Skolnick and Calloway) that were initially returned in favor of plaintiffs were reversed on appeal and remain pending. Graham is now subject to en banc appellate review; Skolnick was remanded for a new trial; Calloway was reversed on an appellate finding that improper arguments by plaintiff’s counsel deprived defendants of a fair trial.
Forty-four verdicts were returned in favor of PM USA, of which 35 were state cases (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious, Szymanski, Hancock, D. Cohen, LaMotte, J. Campbell, Dombey, Haldeman, Blasco, Gonzalez, Banks, Surico, Baum, Bishop, Vila, McMannis, Collar, Suarez, Shulman, Ewing, E. Smith, Mooney, Chacon and Dubinsky) and 9 were federal cases (Gollihue, McCray, Denton, Wilder, Jacobson, Reider, Davis, Starbuck and Sowers). In addition, there have been a number of mistrials, only some of which have resulted in new trials as of January 27, 2017. The judgment in D. Cohen was subsequently reversed for a new trial. The juries in the Reider and Banks cases returned zero damages verdicts in favor of PM USA. The juries in the Weingart and Hancock cases returned verdicts against PM USA awarding no damages, but the trial court in each case granted an additur.
The charts below list the verdicts and post-trial developments in certain Engle progeny cases in which verdicts were returned in favor of plaintiffs (including Hancock, where the verdict originally was returned in favor of PM USA). The first chart lists such cases that are pending as of January 27, 2017; the second chart lists such cases that were pending within the previous 12 months, but that are now concluded.





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Currently-Pending Engle Cases
________________________________________________________________________________________________________________________________
Plaintiff: Pardue
Date:     December 2016

Verdict:
An Alachua County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of approximately $5.9 million and allocating 25% of the fault to PM USA. The jury also awarded plaintiff $6.75 million in punitive damages against PM USA.

Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff without a deduction for plaintiff’s comparative fault. In January 2017, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial or, in the alternative, for remittitur of the jury’s damages awards.
________________________________________________________________________________________________________________________________
Plaintiff: Martin
Date:     November 2016

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of approximately $5.4 million and allocating 46% of the fault to PM USA (an amount of approximately $2.48 million). The jury also awarded plaintiff $450,000 in punitive damages against PM USA.

Post-Trial Developments:
In December 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault and PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial. In January 2017, the trial court denied all post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: Howles
Date:     November 2016

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $4 million and allocating 50% of the fault to PM USA (an amount of $2 million). The jury also awarded plaintiff $3 million in punitive damages against PM USA.

Post-Trial Developments:
In November 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in December 2016. Also in December 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal.
________________________________________________________________________________________________________________________________
Plaintiff: Oshinsky-Blacker
Date:     September 2016

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $6.155 million and allocating 60% of the fault to PM USA (an amount of $3.7 million). The jury also awarded plaintiff $1 million in punitive damages against PM USA.

Post-Trial Developments:
In October 2016, PM USA and R.J. Reynolds filed motions to set aside the verdict and for a directed verdict.
________________________________________________________________________________________________________________________________
Plaintiff: Varner
Date:     July 2016

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $1.5 million and


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allocating 25% of the fault to PM USA (an amount of $375,000).

Post-Trial Developments:
In July 2016, the trial court entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In August 2016, PM USA filed motions to set aside the verdict and for a directed verdict, and plaintiff filed a motion for a new trial. In January 2017, the trial court denied all post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: Sermons
Date:     July 2016

Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $65,000 and allocating 15% of the fault to PM USA (an amount of $9,750). The jury also awarded plaintiff $51,225 in punitive damages against PM USA.

Post-Trial Developments:
In July 2016, plaintiff filed a motion for a new trial or, in the alternative, for an additur.
________________________________________________________________________________________________________________________________
Plaintiff: Purdo
Date:     April 2016

Verdict:
A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding compensatory damages of $21 million and allocating 12% of the fault to PM USA (an amount of $2.52 million). The jury also awarded plaintiff $6.25 million in punitive damages against each defendant.

Post-Trial Developments:
In May 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, all of which the court denied and entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In June 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of approximately $1.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: McCall
Date:     March 2016

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding compensatory damages of $350,000 and allocating 25% of the fault to PM USA (an amount of $87,500).

Post-Trial Developments:
In March 2016, PM USA filed a motion to set aside the verdict and to enter judgment in its favor, which the court denied in May 2016. Also in March 2016, plaintiff filed a motion for a new trial on punitive damages, citing the Soffer decision (allowing Engle progeny plaintiffs to seek punitive damages on their negligence and strict liability claims) discussed below under Engle Progeny Appellate Issues, which the court granted in May 2016. In June 2016, PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Ahrens
Date:     February 2016

Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $9 million in compensatory damages and allocating 24% of the fault to PM USA. The jury also awarded plaintiff $2.5 million in punitive damages against each defendant.

Post-Trial Developments:
In February 2016, the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s


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comparative fault and defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In March 2016, the trial court denied defendants’ post-trial motions. In April 2016, defendants filed a notice of appeal to the Florida Second District Court of Appeal and PM USA posted a bond in the amount of $2.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: Ledoux
Date:     December 2015

Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 47% of the fault to PM USA. The jury also awarded plaintiff $12.5 million in punitive damages against each defendant.

Post-Trial Developments:
In January 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s comparative fault. In February 2016, the trial court denied defendants’ post-trial motions. In March 2016, defendants filed a notice of appeal to the Florida Third District Court of Appeal and PM USA posted a bond in the amount of $2.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: Barbose
Date:     November 2015

Verdict:
A Pasco County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 42.5% of the fault to PM USA. The jury also awarded plaintiff $500,000 in punitive damages against each defendant.

Post-Trial Developments:
In November 2015, the court entered final judgment in favor of plaintiff without any deduction for plaintiff’s comparative fault and in December 2015, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in January 2016. In February 2016, PM USA posted a bond in the amount of $2.5 million and filed a notice of appeal to the Florida Second District Court of Appeal.
________________________________________________________________________________________________________________________________
Plaintiff: Tognoli
Date:     November 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding $1.05 million in compensatory damages and allocating 15% of the fault to PM USA (an amount of $157,500).

Post-Trial Developments:
In December 2015, PM USA filed a motion to set aside the verdict and for judgment in accordance with its motion for directed verdict. In January 2016, the trial court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault and plaintiff filed an appeal to the Florida Fourth District Court of Appeal. Additionally, the trial court denied PM USA’s post-trial motions and PM USA cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Danielson
Date:     November 2015

Verdict:
An Escambia County jury returned a verdict in favor of plaintiff and against PM USA awarding $325,000 in compensatory damages and allocating 49% of the fault to PM USA. The jury also awarded plaintiff $325,000 in punitive damages.

Post-Trial Developments:
In November 2015, plaintiff filed a motion to enforce the parties’ pretrial stipulation of $2.3 million in economic damages, which the trial court granted. The plaintiff also filed a motion for an additur or, in the alternative, for a new trial and PM USA filed post-trial motions, including a motion concerning the proper form of judgment and for a new trial. In December 2015, the trial court granted


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plaintiff’s motion for a new trial on damages and denied PM USA’s post-trial motions. In January 2016, PM USA filed a notice of appeal to the Florida First District Court of Appeal.
________________________________________________________________________________________________________________________________
Plaintiff: Marchese
Date:     October 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $1 million in compensatory damages and allocating 22.5% of the fault to PM USA (an amount of $225,000). The jury also awarded plaintiff $250,000 in punitive damages against each defendant.

Post-Trial Developments:
In October 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In November 2015, the court entered final judgment in favor of plaintiff. In May 2016, the court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. In June 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in June 2016, PM USA posted a bond in the amount of approximately $475,000.
________________________________________________________________________________________________________________________________
Plaintiff: Duignan
Date:     September 2015

Verdict:
A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $6 million in compensatory damages and allocating 37% of the fault to PM USA. The jury also awarded plaintiff $3.5 million in punitive damages against PM USA.

Post-Trial Developments:
In September 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in October 2015. In November 2015, PM USA and R.J. Reynolds filed a notice of appeal to the Florida Second District Court of Appeal and PM USA posted a bond in the amount of approximately $2.7 million.
________________________________________________________________________________________________________________________________
Plaintiff: Cooper
Date:     September 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $4.5 million in compensatory damages and allocating 10% of the fault to PM USA (an amount of $450,000).

Post-Trial Developments:
In September 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a directed verdict. In January 2016, the trial court denied PM USA’s post-trial motions. In February 2016, the trial court entered final judgment in favor of plaintiff, reducing the compensatory damages award against PM USA to approximately $300,000. In March 2016, PM USA and R.J. Reynolds filed a notice of appeal in the Florida Fourth District Court of Appeal and plaintiff cross-appealed. Also in March 2016, PM USA posted a bond in the amount of approximately $300,000.
________________________________________________________________________________________________________________________________
Plaintiff: Jordan
Date:     August 2015

Verdict:
A Duval County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $7.8 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded approximately $3.2 million in punitive damages.

Post-Trial Developments:
In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, but reduced the compensatory damages to approximately $6.4 million. PM USA filed various post-trial motions, including motions to set aside the


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verdict and for a new trial, which the court denied in December 2015. PM USA subsequently filed a notice of appeal to the Florida First District Court of Appeal and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Merino
Date:     July 2015

Verdict:
A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA awarding $8 million in compensatory damages and allocating 70% of the fault to PM USA. The jury also awarded $6.5 million in punitive damages.

Post-Trial Developments:
In August 2015, the trial court denied all post-trial motions, including motions to set aside the verdict and for a new trial, and entered final judgment without any deduction for plaintiff’s comparative fault. In September 2015, PM USA filed a notice of appeal to the Florida Third District Court of Appeal and posted a bond in the amount of $5 million. In November 2016, the Florida Third District Court of Appeal issued a per curiam decision affirming the trial court’s judgment against PM USA. PM USA subsequently filed a motion seeking a written opinion, which the court denied in December 2016. In the fourth quarter of 2016, PM USA recorded a provision on its consolidated balance sheet of $16.9 million for the judgment plus interest and associated costs and increased the bond to $14.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: McCoy
Date:     July 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $1.5 million in compensatory damages and allocating 20% of the fault to PM USA (an amount of $300,000). The jury also awarded $3 million in punitive damages against each defendant.

Post-Trial Developments:
In July 2015, defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In January 2016, the trial court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. Subsequently, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, PM USA posted a bond in the amount of approximately $1.65 million and plaintiff filed a notice of cross-appeal.
________________________________________________________________________________________________________________________________
Plaintiff: M. Brown
Date:     May 2015

Verdict:
In May 2015, a Duval County jury returned a verdict in favor of plaintiff and against PM USA in a partial retrial. In 2013, a jury returned a partial verdict against PM USA, but was deadlocked as to (i) the amount of compensatory damages, (ii) whether punitive damages should be awarded and, if so, (iii) the amount of punitive damages. In the partial retrial, the jury was asked to address these issues. In May 2015, the jury awarded $6.375 million in compensatory damages, but did not award any punitive damages.

Post-Trial Developments:
In May 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault, and PM USA posted a bond in the amount of $5 million. Additionally, PM USA filed post-trial motions, including motions to set aside the verdict and for a new trial, as well as filed a notice of appeal to the Florida First District Court of Appeal. In August 2015, the trial court denied the last of PM USA’s post-trial motions and plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Gore
Date:     March 2015

Verdict:
An Indian River County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $2 million in compensatory damages and allocating 23% of the fault to PM USA (an amount of $460,000).



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Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In September 2015, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2015, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA subsequently posted a bond in the amount of $460,000.
________________________________________________________________________________________________________________________________
Plaintiff: Pollari
Date:     March 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $10 million in compensatory damages and allocating 42.5% of the fault to PM USA (an amount of $4.25 million). The jury also awarded $1.5 million in punitive damages against each defendant.

Post-Trial Developments:
In April 2015, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In January 2016, the trial court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault deduction. Also in January 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In February 2016, plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Zamboni
Date:     February 2015

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $340,000 in compensatory damages and allocating 10% of the fault to PM USA (an amount of $34,000).

Post-Trial Developments:
In April 2015, PM USA and R.J. Reynolds filed a motion for judgment in defendants’ favor in accordance with the Eleventh Circuit’s decision in Graham. In June 2015, the trial court stayed the case pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Caprio
Date:     February 2015

Verdict:
A Broward County jury returned a partial verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group LLC (“Liggett Group”). The jury found against defendants on class membership, allocating 25% of the fault to PM USA. The jury also found $559,172 in economic damages. The jury deadlocked with respect to the intentional torts, certain elements of compensatory damages and punitive damages.

Post-Trial Developments:
In March 2015, PM USA filed post-trial motions, including motions to set aside the partial verdict and for a new trial. In May 2015, the court denied all of PM USA’s post-trial motions and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In January 2017, the defendants agreed to voluntarily dismiss their appeal in exchange for a full retrial and the court dismissed the case.
________________________________________________________________________________________________________________________________
Plaintiff: McKeever
Date:     February 2015

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA awarding approximately $5.8 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded plaintiff approximately $11.63 million in punitive damages. However, the jury found in favor of PM USA on the statute of repose defense to plaintiff’s intentional tort and punitive damages claims.
 


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Post-Trial Developments:
In March 2015, PM USA filed various post-trial motions, including motions to set aside the verdict and motions for a new trial. In April 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In June 2015, the trial court denied PM USA’s post-trial motions, and PM USA posted a bond in the amount of $5 million. PM USA also filed a notice of appeal to the Florida Fourth District Court of Appeal in June 2015. In January 2017, the Florida Fourth District Court of Appeal issued a decision largely affirming the trial court’s judgment against PM USA, but remanded the case to the trial court to amend the final judgment to apply the comparative fault deduction to the compensatory damages award.
________________________________________________________________________________________________________________________________
Plaintiff: D. Brown
Date:     January 2015

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff approximately $8.3 million in compensatory damages and allocating 55% of the fault to PM USA. The jury also awarded plaintiff $9 million in punitive damages.

Post-Trial Developments:
In February 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In March 2015, PM USA filed various post-trial motions, including motions to alter or amend the judgment and for a new trial or, in the alternative, remittitur of the damages awards, all of which the court denied. In July 2015, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In August 2015, the Court of Appeals granted PM USA’s motion to stay the appeal pending final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Allen
Date:     November 2014

Verdict:
A Duval County jury returned a verdict against PM USA and R.J. Reynolds awarding plaintiff approximately $3.1 million in compensatory damages and allocating 6% of the fault to PM USA. The jury also awarded approximately $7.76 million in punitive damages against each defendant. This was a retrial of a 2011 trial that awarded plaintiff $6 million in compensatory damages and $17 million in punitive damages against each defendant.

Post-Trial Developments:
In December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial, which the court denied in July 2015. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. Defendants filed a notice of appeal to the Florida First District Court of Appeal in September 2015 and PM USA posted a bond in the amount of approximately $2.5 million.
________________________________________________________________________________________________________________________________
Plaintiff: Perrotto
Date:     November 2014

Verdict:
A Palm Beach County jury returned a verdict against PM USA, R.J. Reynolds, Lorillard and Liggett Group awarding plaintiff approximately $4.1 million in compensatory damages and allocating 25% of the fault to PM USA (an amount of approximately $1.02 million).

Post-Trial Developments:
In December 2014, the trial court entered final judgment with a deduction for plaintiff’s comparative fault, and plaintiff filed a motion for a new trial. In May 2016, the court granted plaintiff’s motion for a new trial on punitive damages, citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the court denied defendants’ post-trial motions.
________________________________________________________________________________________________________________________________
Plaintiff: Boatright
Date:     November 2014

Verdict:
A Polk County jury returned a verdict against PM USA and Liggett Group awarding plaintiff $15 million in compensatory damages and


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allocating 85% of the fault to PM USA (an amount of approximately $12.75 million). In addition, in November 2014, the jury awarded plaintiff approximately $19.7 million in punitive damages against PM USA and $300,000 in punitive damages against Liggett Group.

Post-Trial Developments:
In November 2014, PM USA filed various post-trial motions and, in January 2015, the trial court denied PM USA’s motions for a new trial and for remittitur, but entered final judgment with a deduction for plaintiff’s comparative fault. In February 2015, defendants filed a notice of appeal to the Florida Second District Court of Appeal, and PM USA posted a bond in the amount of $3.98 million.
________________________________________________________________________________________________________________________________
Plaintiff: Kerrivan
Date:     October 2014

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA and R.J. Reynolds awarding plaintiff $15.8 million in compensatory damages and allocating 50% of the fault to PM USA. The jury also awarded plaintiff $25.3 million in punitive damages and allocated $15.7 million to PM USA.

Post-Trial Developments:
The trial court entered final judgment without any deduction for plaintiff’s comparative fault. In December 2014, defendants filed various post-trial motions, including a renewed motion for judgment or for a new trial. Plaintiff agreed to waive the bond for the appeal. In May 2015, the trial court deferred further briefing on the post-trial motions pending the Eleventh Circuit’s final disposition in the Graham and Searcy cases, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Lourie
Date:     October 2014

Verdict:
A Hillsborough County jury returned a verdict against PM USA, R.J. Reynolds and Lorillard awarding plaintiff approximately $1.37 million in compensatory damages and allocating 27% of the fault to PM USA (an amount of approximately $370,000).

Post-Trial Developments:
In October 2014, defendants filed a motion for judgment and a motion for a new trial. In November 2014, the trial court denied defendants’ post-trial motions and entered final judgment with a deduction for plaintiff’s comparative fault. Later in November 2014, defendants filed a notice of appeal to the Florida Second District Court of Appeal, and PM USA posted a bond in the amount of $370,318. In August 2016, the Florida Second District Court of Appeal affirmed the judgment entered in favor of the plaintiff. In September 2016, defendants filed a petition to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme Court stayed the proceedings pending final disposition in the Marotta case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Berger
Date:     September 2014

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff $6.25 million in compensatory damages and allocating 60% of the fault to PM USA. The jury also awarded $20.76 million in punitive damages.

Post-Trial Developments:
The trial court entered final judgment in September 2014 without any deduction for plaintiff’s comparative fault. In October 2014, plaintiff agreed to waive the bond for the appeal. Also in October 2014, PM USA filed a motion for a new trial or, in the alternative, remittitur of the jury’s damages awards. In April 2015, the trial court granted PM USA’s post-verdict motion in part and vacated the punitive damages award. In November 2015, the court entered final judgment with a deduction for plaintiff’s comparative fault. In April 2016, plaintiff filed a motion to reinstate the jury’s punitive damages award or, alternatively, for a new trial on punitive damages, citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. Also in April 2016, PM USA filed a motion to stay post-trial proceedings pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues. In May 2016, (i) the trial court denied PM USA’s remaining post-trial motions and (ii) PM USA filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit and a motion to stay the appeal pending Graham, which the court granted in June 2016. In August 2016, the trial court denied plaintiff’s motion to reinstate the jury’s punitive damages or to order a new trial and, in September 2016,


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Notes to Consolidated Financial Statements
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plaintiff cross-appealed.
________________________________________________________________________________________________________________________________
Plaintiff: Harris
Date:    July 2014

Verdict:
The U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding approximately $1.73 million in compensatory damages and allocating 15% of the fault to PM USA.

Post-Trial Developments:
Defendants filed motions for a defense verdict because the jury’s findings indicated that plaintiff was not a member of the Engle class. In December 2014, the trial court entered final judgment without any deduction for plaintiff’s comparative fault and, in January 2015, defendants filed a renewed motion for judgment as a matter of law or, in the alternative, a motion for a new trial. Defendants also filed a motion to alter or amend the final judgment. In April 2015, the trial court stayed the post-trial proceedings pending the Eleventh Circuit’s final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Griffin
Date:    June 2014

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA awarding approximately $1.27 million in compensatory damages and allocating 50% of the fault to PM USA (an amount of approximately $630,000).

Post-Trial Developments:
The trial court entered final judgment against PM USA in July 2014 with a deduction for plaintiff’s comparative fault. In August 2014, PM USA filed a motion to amend the judgment to reduce plaintiff’s damages by the amount paid by collateral sources, which the court denied in September 2014. In October 2014, PM USA posted a bond in the amount of $640,543 and filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In May 2015, the Eleventh Circuit stayed the appeal pending final disposition in the Graham case, discussed below under Engle Progeny Appellate Issues.
________________________________________________________________________________________________________________________________
Plaintiff: Burkhart
Date:    May 2014

Verdict:
A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $5 million in compensatory damages and allocating 15% of the fault to PM USA. The jury also awarded plaintiff $2.5 million in punitive damages, allocating $750,000 to PM USA.

Post-Trial Developments:
In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or remittitur of the damages awards, which the court denied in September 2014. The trial court entered final judgment without any deduction for plaintiff’s comparative fault. In October 2014, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
________________________________________________________________________________________________________________________________
Plaintiff: Skolnick
Date:    June 2013

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

Post-Trial Developments:
In June 2013, defendants and plaintiff filed post-trial motions. The trial court entered final judgment with a deduction for plaintiff’s comparative fault. In November 2013, the trial court denied plaintiff’s post-trial motion and, in December 2013, denied defendants’ post-trial motions. Defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, and plaintiff cross-appealed in December 2013. Also in December 2013, PM USA posted a bond in the amount of $766,500. In July 2015, the District Court of Appeal


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Notes to Consolidated Financial Statements
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reversed the compensatory damages award and ordered judgment in favor of defendants on the strict liability and negligence claims, but remanded plaintiff’s conspiracy and concealment claims for a new trial. In August 2015, defendants filed a motion for rehearing, and plaintiff filed a motion for clarification, which the District Court of Appeal denied in September 2015.
________________________________________________________________________________________________________________________________
Plaintiff: Starr-Blundell
Date:    June 2013

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

Post-Trial Developments:
In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict or, in the alternative, for a new trial, which was denied in October 2013. In November 2013, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In December 2013, plaintiff filed a notice of appeal to the Florida First District Court of Appeal. Plaintiff agreed to waive the bond for the appeal. In May 2015, the Florida First District Court of Appeal affirmed the final judgment. In June 2015, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In July 2015, the Florida Supreme Court stayed the case pending the outcome of Soffer, discussed below under Engle Progeny Appellate Issues. In April 2016, the Florida Supreme Court ordered defendants to show cause as to why the case should not be remanded in light of the Soffer decision. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $55,000 for the judgment plus interest and associated costs. In May 2016, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review and remanded the case for reconsideration in light of the Soffer decision. In September 2016, the Florida First District Court of Appeal further remanded the case in light of Soffer.
________________________________________________________________________________________________________________________________
Plaintiff: Graham
Date:    May 2013

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

Post-Trial Developments:
In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which the trial court denied in September 2013. The trial court entered final judgment with a deduction for plaintiff’s comparative fault. In October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit arguing that Engle progeny plaintiffs’ product liability claims are impliedly preempted by federal law, and PM USA posted a bond in the amount of $277,750. In April 2015, the U.S. Court of Appeals for the Eleventh Circuit found in favor of defendants on the basis of federal preemption, reversed the trial court’s denial of judgment as a matter of law, and plaintiff filed a petition for rehearing en banc or panel rehearing. In January 2016, the Eleventh Circuit granted a rehearing en banc on both the preemption and due process issues.
________________________________________________________________________________________________________________________________
Plaintiff: Searcy
Date:    April 2013

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

Post-Trial Developments:
In June 2013, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. In July 2013, defendants filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court denied all other post-trial motions. Plaintiff filed a motion to reconsider the district court’s remittitur and, in the alternative, to certify the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied in October 2013. In November 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In December 2013, defendants filed an


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Notes to Consolidated Financial Statements
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amended notice of appeal after the district court corrected a clerical error in the final judgment, and PM USA posted a bond in the amount of approximately $2.2 million.
________________________________________________________________________________________________________________________________
Plaintiff: Calloway
Date:     May 2012

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group.

Post-Trial Developments:
In May and June 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions, reduced the compensatory damages to $16.1 million and entered final judgment without any deduction for plaintiff’s comparative fault. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in the trial court on the ground that the bond cap statute is unconstitutional, which the court denied. In January 2016, a panel of the Florida Fourth District Court of Appeal vacated the punitive damages award and remanded the case for retrial on plaintiff’s claims of concealment and conspiracy, and punitive damages. The court also found that the trial court should have applied the comparative fault deduction, reducing the compensatory damages against PM USA to $4.025 million. In February 2016, defendants and plaintiff filed respective motions for rehearing and rehearing en banc. In March 2016, plaintiff filed a notice of supplemental authority citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the Florida Fourth District Court of Appeal, ruling en banc, reversed the judgment against PM USA and R.J. Reynolds in its entirety on the grounds that improper arguments by plaintiff’s counsel deprived defendants of a fair trial, and ordered a new trial. In October 2016, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. ________________________________________________________________________________________________________________________________
Plaintiff: Putney
Date:     April 2010

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA.

Post-Trial Developments:
In August 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and, in November 2010, posted a $1.6 million bond. In June 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings, holding that the trial court erred in (1) not reducing the compensatory damages award as excessive and (2) not instructing the jury on the statute of repose in connection with plaintiff’s conspiracy claim that resulted in the $2.5 million punitive damages award. In July 2013, plaintiff filed a motion for rehearing, which the Fourth District Court of Appeal denied in August 2013. In September 2013, both parties filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. In December 2013, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In February 2016, the Florida Supreme Court upheld the trial court’s decision in favor of plaintiff and, in March 2016, clarified that its February 2016 order reinstated the trial court’s decision on the statute of repose only. In August 2016, the Florida Fourth District Court of Appeal reinstated the jury’s punitive damages verdict and reaffirmed that the compensatory damages award was excessive, remanding the case to the trial court to reduce the compensatory damages.
________________________________________________________________________________________________________________________________
Plaintiff: Naugle
Date:     November 2009

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in


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Notes to Consolidated Financial Statements
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compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.

Post-Trial Developments:
In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages, but without any deduction for plaintiff’s comparative fault. In April 2010, PM USA filed its notice of appeal and posted a $5 million bond. In June 2012, the Fourth District Court of Appeal affirmed the final judgment (as amended to correct a clerical error) in the amount of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages. In December 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive damages and returned the case to the trial court for a new trial on the question of damages. Upon retrial, in October 2013, the new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. PM USA filed post-trial motions, which the trial court denied in April 2014. In May 2014, PM USA filed a notice of appeal to the Fourth District Court of Appeal and plaintiff cross-appealed. Also in May 2014, PM USA filed a rider with the Florida Supreme Court to make the previously-posted Naugle bond applicable to the retrial judgment. In January 2016, the Fourth District Court of Appeal reversed the trial court’s decision and remanded the case to the trial court to conduct a juror interview. In April 2016, PM USA moved for a new trial following the juror interview, which the court denied. In May 2016, PM USA filed a notice of appeal to the Fourth District Court of Appeal.
_______________________________________________________________________________________________________________________________

Engle Cases Concluded Within Past 12 Months
________________________________________________________________________________________________________________________________
Plaintiff: Hancock
Date:     August 2012

Verdict:
A Broward County jury returned a verdict in the amount of zero damages and allocated 5% of the fault to each of the defendants (PM USA and R.J. Reynolds). The trial court granted an additur of approximately $110,000, which is subject to the jury’s comparative fault finding.

Post-Trial Developments:
In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012, the trial court entered final judgment with a deduction for plaintiff’s comparative fault (PM USA’s portion of the damages was approximately $700) and PM USA filed a motion to amend the judgment to award PM USA attorneys’ fees of approximately $20,000. In November 2012, both sides filed notices of appeal to the Florida Fourth District Court of Appeal. Plaintiff agreed to waive the bond for the appeal. In April 2015, the Florida Fourth District Court of Appeal affirmed the trial court’s verdict. In May 2015, plaintiff filed a motion for rehearing and for a written opinion and rehearing en banc, which the Court of Appeal denied in June 2015. In December 2016, plaintiff agreed not to pursue the judgment in exchange for PM USA not pursuing its fee award, thereby resolving the case.
________________________________________________________________________________________________________________________________
Plaintiff: R. Cohen
Date:     March 2010

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant.

Post-Trial Developments:
In July 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. In August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million bond. In September 2012, the Florida Fourth District Court of Appeal affirmed the compensatory damages award but reversed and remanded the punitive damages verdict. The Fourth District returned the case to the trial court for a new jury trial on plaintiff’s fraudulent concealment claim. In January 2013, plaintiff and defendants each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2013, the Fourth District granted defendants’ motion to stay the mandate. In March 2013, plaintiff filed a motion for review of the stay order with the Florida Supreme Court, which was denied in April 2013. In June 2013, plaintiff moved to consolidate with Hess and Kayton, which defendants did not oppose, but in October 2013, plaintiff withdrew the motion for consolidation. In February 2014, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess,


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Notes to Consolidated Financial Statements
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and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $17.9 million for the judgment plus interest and associated costs. In January 2016, the Florida Supreme Court upheld the trial court’s decision in favor of plaintiff. In February 2016, PM USA posted a rider increasing the amount of its bond to $7.5 million. In April 2016, PM USA filed a motion in the trial court with regard to Florida’s bond cap statute, seeking to confirm that the stay on executing the judgment remains in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired, which the court granted. See additional discussion below under Florida Bond Statute. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $19.1 million.
________________________________________________________________________________________________________________________________
Plaintiff: Buchanan
Date:     December 2012

Verdict:
A Leon County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded $5.5 million in compensatory damages and allocated 37% of the fault to each of the defendants.

Post-Trial Developments:
In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March 2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group without any deduction for plaintiff’s comparative fault. In April 2013, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in the amount of $2.5 million. In July 2014, the Florida First District Court of Appeal affirmed the judgment, but certified to the Florida Supreme Court the issue of the statute of repose, which was before the court in Hess. In August 2014, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In September 2014, the Florida Supreme Court stayed the case pending the outcome of Hess. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $4.1 million for the judgment plus interest and associated costs. In February 2016, the Florida Supreme Court declined to accept jurisdiction of PM USA’s petition for review and PM USA posted a rider increasing the amount of its bond to $5.5 million. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $4.4 million.
________________________________________________________________________________________________________________________________
Plaintiff: Hallgren
Date:     January 2012

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

Post-Trial Developments:
The trial court entered final judgment in March 2012 with a deduction for plaintiff’s comparative fault. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In October 2013, the Second District Court of Appeal affirmed the judgment. In November 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme Court stayed the case pending the outcome of Russo (presenting the same statute of repose issue as Hess). In April 2015, the Florida Supreme Court rejected the statute of repose defense in the Hess and Russo cases, and defendants moved for a rehearing. Additionally, in April 2015, the Florida Supreme Court stayed the case pending the outcome of Soffer, discussed below under Engle Progeny Appellate Issues. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess and Russo. In October 2015, the Florida Supreme Court lifted its stay of the case and ordered defendants to show cause why the court should not decline to exercise jurisdiction, to which defendants responded. In January 2016, the Florida Supreme Court denied defendants’ petition for discretionary review, and PM USA amended its bond to post an additional amount of approximately $500,000. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.2 million for the judgment plus interest and associated costs. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.3 million.
________________________________________________________________________________________________________________________________


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Notes to Consolidated Financial Statements
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Plaintiff: Kayton (formerly Tate)
Date:     July 2010

Verdict:
A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately $5.1 million). The jury also awarded approximately $16.2 million in punitive damages against PM USA.

Post-Trial Developments:
In August 2010, the trial court entered final judgment with a deduction for plaintiff’s comparative fault, and PM USA filed its notice of appeal and posted a $5 million bond. In November 2012, the Florida Fourth District Court of Appeal reversed the punitive damages award and remanded the case for a new trial on plaintiff’s conspiracy claim. PM USA filed a motion for rehearing, which was denied in January 2013. In January 2013, plaintiff and defendant each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2013, the Florida Supreme Court stayed the appeal pending the outcome of Hess. In April 2015, the Florida Supreme Court rejected the statute of repose defense in Hess, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition in Hess. In the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $28.2 million for the judgment plus interest and associated costs. In February 2016, the Florida Supreme Court upheld the trial court’s decision in favor of plaintiff, and PM USA posted a rider increasing the amount of its bond to $15 million. In April 2016, PM USA filed a motion in the trial court with regard to Florida’s bond cap statute, seeking to confirm that the stay on executing the judgment remains in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired, which the court granted. See additional discussion below under Florida Bond Statute. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $30.1 million.
________________________________________________________________________________________________________________________________
Plaintiff: Bowden
Date:    March 2014

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

Post-Trial Developments:
The trial court entered final judgment in March 2014 with a deduction for plaintiff’s comparative fault. In April 2014, defendants filed post-trial motions, including motions for a new trial and to set aside the verdict. In May 2014, the court denied defendants’ post-trial motions. In June 2014, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in the amount of $1.5 million. In February 2016, the Florida First District Court of Appeal affirmed the trial court’s decision in favor of plaintiff. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $1.6 million for the judgment plus interest. In June 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.7 million.
________________________________________________________________________________________________________________________________
Plaintiff: Hess
Date:     February 2009

Verdict:
A Broward County jury found in favor of plaintiff and against PM USA. The jury awarded $3 million in compensatory damages and allocated 42% of the fault to PM USA (an amount of approximately $1.2 million). The jury also awarded $5 million in punitive damages.

Post-Trial Developments:
In June 2009, the trial court entered final judgment with a deduction for plaintiff’s comparative fault. PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal and posted a $7 million bond in July 2009. In May 2012, the Fourth District reversed and vacated the punitive damages award on the basis that it was barred by the statute of repose and affirmed the judgment in all other respects, upholding the compensatory damages award of $1.26 million. In June 2012, both parties filed rehearing motions with the Fourth District, which were denied in September 2012. In October 2012, PM USA and plaintiff filed notices to invoke the Florida Supreme Court’s discretionary jurisdiction. In the first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $3.2 million for the compensatory damages component of the judgment plus interest and associated


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Notes to Consolidated Financial Statements
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costs. In June 2013, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review, but declined to accept jurisdiction of PM USA’s petition. In April 2015, the Florida Supreme Court rejected the statute of repose defense and reinstated the punitive damages award against PM USA, and PM USA moved for a rehearing. In September 2015, the Florida Supreme Court denied PM USA’s rehearing petition. In the third quarter of 2015, PM USA recorded an additional provision on its condensed consolidated balance sheet of approximately $6.6 million for the punitive damages component of the judgment plus interest and associated costs. In February 2016, PM USA paid the judgment plus interest and associated costs in the amount of approximately $10.6 million. In June 2016, PM USA paid an additional $843,261 in interest on the judgment, an amount that had been disputed between the parties.
________________________________________________________________________________________________________________________________
Plaintiff: Greene (formerly Rizzuto)
Date:    August 2013

Verdict:
A Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded plaintiff $12.55 million in compensatory damages and allocated 55% of the fault to PM USA.

Post-Trial Developments:
In September 2013, defendants filed post-trial motions, including a motion to reduce damages. In September 2013, the trial court granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1 million in compensatory damages. The trial court entered final judgment without a deduction for plaintiff’s comparative fault. In July 2015, the Florida Fifth District Court of Appeal found that the trial court should have applied the comparative fault deduction to the compensatory damages award. As a result, the judgment against PM USA was reduced to approximately $6.1 million. In September 2015, the Fifth District Court of Appeal denied PM USA’s motion for rehearing. In October 2015, PM USA posted a bond in the amount of $6.1 million. In the third quarter of 2015, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $6.7 million for the judgment plus interest and associated costs. In February 2016, PM USA paid the judgment plus interest in the amount of approximately $6.8 million. In April 2016, PM USA paid fees of approximately $1.45 million.
________________________________________________________________________________________________________________________________

▪Engle Progeny Appellate Issues: Three Florida federal district courts (in the Merlob, B. Brown and Burr cases) ruled in 2008 that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs’ claims, and two of those rulings (B. Brown and Burr) were certified by the trial court for interlocutory review. The certification in both cases was granted by the U.S. Court of Appeals for the Eleventh Circuit and the appeals were consolidated. The appeal in Burr was dismissed for lack of prosecution, and the case was ultimately dismissed on statute of limitations grounds.
In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates defendants’ due process rights. Rather, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made.
After the remand of B. Brown, several state appellate rulings superseded the Eleventh Circuit’s ruling on Florida state law. These cases include Martin, a case against R.J. Reynolds in Escambia County, and J. Brown, a case against R.J. Reynolds in Broward County. In December 2011, petitions for writ of certiorari were filed with the United States Supreme Court by R.J. Reynolds in Campbell, Martin, Gray and Hall and by PM
 
USA and Liggett Group in Campbell. The United States Supreme Court denied defendants’ certiorari petitions in March 2012.
In Douglas, in March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings with respect to strict liability claims but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of plaintiff upholding the use of the Engle jury findings with respect to strict liability and negligence claims. PM USA filed its petition for writ of certiorari with the United States Supreme Court in August 2013, which the court denied in October 2013.
Meanwhile, in the Waggoner case, the U.S. District Court for the Middle District of Florida ruled in December 2011 that application of the Engle findings to establish the wrongful conduct elements of plaintiffs’ claims consistent with Martin or J. Brown did not violate defendants’ due process rights.  PM USA and the other defendants sought appellate review of the due process ruling. In February 2012, the district court denied the motion for interlocutory appeal, but did apply the ruling to all active pending federal Engle progeny cases. As a result, R.J. Reynolds appealed the rulings in the Walker and Duke cases to the Eleventh Circuit, which ultimately rejected the due process defense. In March 2014, R.J. Reynolds filed petitions for writ of certiorari to the United States Supreme Court in the Walker and Duke cases, as well as in J. Brown. Defendants filed petitions for writ of certiorari in eight other Engle progeny cases that were



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tried in Florida state courts, including one case, Barbanell, in which PM USA was the defendant. In these eight petitions, defendants asserted questions similar to those in Walker, Duke and J. Brown. In June 2014, the United States Supreme Court denied defendants’ petitions for writ of certiorari in all 11 cases.
In Graham, an Engle progeny case against PM USA and R.J. Reynolds on appeal to the U.S. Court of Appeals for the Eleventh Circuit, in April 2015 the court, found in favor of defendants on the basis of federal preemption, reversing the trial court’s denial of judgment as a matter of law. Thereafter, plaintiff filed a petition for rehearing en banc, which the Eleventh Circuit granted in January 2016. The Eleventh Circuit directed the parties to file briefs and argue both the federal preemption and due process issues. Also in January 2016, in Marotta, a case against R.J. Reynolds on appeal to the Florida Fourth District Court of Appeal, the court rejected R.J. Reynolds’s federal preemption defense, but noted the conflict with Graham and certified the preemption question to the Florida Supreme Court. In March 2016, the Florida Supreme Court accepted review of Marotta. Argument was held in November 2016.
In Searcy, an Engle progeny case against PM USA and R.J. Reynolds on appeal to the Eleventh Circuit, defendants argued that application of the Engle findings to the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. The appeal is pending.
In Soffer, an Engle progeny case against R.J. Reynolds, the Florida First District Court of Appeal held that Engle progeny plaintiffs can recover punitive damages only on their intentional tort claims. The Florida Supreme Court accepted jurisdiction over plaintiff’s appeal from the Florida First District Court of Appeal’s decision and, in March 2016, held that Engle progeny plaintiffs can recover punitive damages in connection with all of their claims. Plaintiffs have increasingly relied on this Florida Supreme Court decision at the trial and appellate court levels in seeking punitive damages in connection with all of their claims.
In Ciccone, an Engle progeny case against R.J. Reynolds, the Florida Fourth District Court of Appeal held that Engle progeny plaintiffs could establish class membership by showing that they developed symptoms during the Engle class period that could, in hindsight, be attributed to their smoking-related disease. The court certified a conflict with Castleman, a Florida First District Court of Appeal decision, which held that manifestation requires Engle progeny plaintiffs to have been aware during the class period that they had a disease caused by smoking in order to establish class membership. The Florida Supreme Court accepted jurisdiction in the Ciccone case and, in March 2016, ruled in favor of plaintiff, approving the Fourth District Court of Appeal’s definition.
In Schoeff, an Engle progeny case against R.J. Reynolds, the Florida Fourth District Court of Appeal held that comparative fault findings should apply to reduce all compensatory damage awards, including awards based on intentional fraud claims. The Florida Supreme Court accepted jurisdiction over plaintiff’s appeal of the Florida Fourth District Court of Appeal’s decision. Oral argument is scheduled for March 8, 2017.

 
▪Florida Bond Statute: In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three state Engle progeny cases against R.J. Reynolds in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.
Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs’ bond cap statute challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to certify the question of the constitutionality of the bond cap statute in Clay and Alexander. The Florida Supreme Court granted review of the Hall decision, but, in September 2012, the court dismissed the appeal as moot. In October 2012, the Florida Supreme Court denied the plaintiffs’ rehearing petition. In August 2013, in Calloway, discussed further above, plaintiff filed a motion in the trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional, which was denied.
In February 2016, in the Sikes case against R.J. Reynolds, the trial court held that Florida’s bond cap statute does not stay the execution of judgment after a case is final in the Florida judicial system and before the defendant files a petition for writ of certiorari in the United States Supreme Court. The District Court of Appeal for the First District of Florida issued an order staying execution of the judgment and requesting that plaintiff show cause why the stay should not remain in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired. In April 2016, the District Court of Appeal held that the bond cap applies to the period between a Florida Supreme Court ruling and completion of United States Supreme Court writ of certiorari review. In April 2016, PM USA filed motions in the trial court in the R. Cohen and Kayton cases seeking confirmation that the stay on executing the judgment remains in effect through the completion of United States Supreme Court writ of certiorari review or until the time for moving for such review has expired, which the court granted.
No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle progeny cases tried in federal court.
The Florida Legislature is considering legislation that would repeal the 2009 appeal bond cap statute.

Other Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs



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have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.
Class certification has been denied or reversed by courts in 60 smoking and health class actions involving PM USA in Arkansas (1), California (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).
As of January 27, 2017, PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in seven class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

Medical Monitoring Class Actions

In medical monitoring actions, plaintiffs have sought to recover the cost for, or otherwise the implementation of, court-supervised programs for ongoing medical monitoring purportedly on behalf of a class of individual plaintiffs. Plaintiffs in these cases have sought to impose liability under various product-based causes of action and the creation of a court-supervised program providing members of the purported class Low Dose CT scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases have not sought punitive damages, although plaintiffs in Donovan sought permission from the court to seek to treble any damages awarded, which the court denied. The defense of any future medical monitoring cases may be negatively impacted by evolving medical standards and practice.
In Donovan, filed in December 2006 in the U.S. District Court for the District of Massachusetts, plaintiffs purportedly brought the action on behalf of certain residents who had neither been diagnosed with lung cancer nor were under investigation by a physician for suspected lung cancer. The Supreme Judicial Court of Massachusetts, in answering questions certified to it by the district court, held that under certain circumstances state law recognizes a claim by individual smokers for medical monitoring despite the absence of an actual injury. The case was remanded to federal court for further proceedings. The district court granted in part plaintiffs’ motion for class certification, certifying the class as to plaintiffs’ claims for breach of implied warranty and
 
violation of the Massachusetts Consumer Protection Act. As a remedy, plaintiffs proposed a 28-year medical monitoring program with a cost in excess of $190 million.
Both parties filed various motions, including motions for partial summary judgment and to exclude certain evidence. The district court granted PM USA’s motion for partial summary judgment holding that e-vapor products may not be deemed an alternative design for ordinary cigarettes. In 2016, PM USA ultimately prevailed at trial on the warranty claim and the Massachusetts Consumer Protection Act claim with final judgment entered in favor of PM USA in September 2016. Plaintiff did not appeal the judgment, concluding this litigation.

Health Care Cost Recovery Litigation

▪Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.
Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or



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most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five circuit courts of appeals.
Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer (“MSP”) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases were brought in New York (2), Florida (2) and Massachusetts (1). All were dismissed by federal courts.
In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (dismissed), the Marshall Islands (dismissed) and Canada (10), and other entities have stated that they are considering filing such actions.
In September 2005, in the first of several health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA’s and other defendants’ challenge to the British Columbia court’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision.
Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria Group, Inc. and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan, Prince Edward Island and Nova Scotia cases. The Nunavut Territory and Northwest Territory have passed similar legislation. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

▪Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the 1998 Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State
 
Settlement Agreements require that the original participating manufacturers or “OPMs” (now PM USA and R.J. Reynolds and, with respect to the brands it acquired from R.J. Reynolds and Lorillard, ITG Brands, LLC (“ITG”), subject to a dispute discussed below with respect to some of the State Settlement Agreements) make annual payments of approximately $9.4 billion, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the OPMs are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million. For the years ended December 31, 2016, 2015 and 2014, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements and the Fair and Equitable Tobacco Reform Act of 2004, which expired after the third quarter of 2014, was approximately $4.6 billion, $4.5 billion and $4.6 billion, respectively.
The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.

▪NPM Adjustment Disputes: PM USA is participating in proceedings regarding potential downward adjustments (the “NPM Adjustment”) to MSA payments made by manufacturers that are signatories to the MSA (the “participating manufacturers” or “PMs”) for 2003-2015. The NPM Adjustment is a reduction in MSA payments that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers (“NPMs”) between 1997 and the year at issue, subject to certain conditions and defenses. The independent auditor appointed under the MSA calculates the maximum amount, if any, of the NPM Adjustment for any year in respect of which such NPM Adjustment is potentially applicable.

2003-2014 NPM Adjustment Disputes - Settlement with 24 States and Territories and Settlement with New York: PM USA has settled the NPM Adjustment disputes for the years 2003-2012 with 24 of the 52 MSA states and territories (these 24 states and territories are referred to as the “signatory states,” and the remaining MSA states and territories are referred to as the “non-signatory states”). Pursuant to the settlement with these 24 signatory states, PM USA has received a total of $599 million for 2003-2012 in the form of reductions to its MSA payments in 2013, 2014 and 2015.
In addition, the settlement provides that the NPM Adjustment provision will be revised and streamlined as to the signatory states for the years after 2012. Under the revised provision, the 2013 and 2014 NPM Adjustments were “transition years,” for which the PMs received specified payments in settlement of the NPM Adjustments for those years. PM USA received $38 million for the 2013 transition year and $41 million for the 2014 transition year pursuant to this revised provision in the form of reductions to its MSA payments in 2014 and 2015, respectively.
The revised NPM Adjustment provision in the settlement provides that, for 2015 and subsequent years, there is a potential



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downward adjustment to the PMs’ MSA payment relating to NPM sales on which state excise tax (“SET”) is paid.  Pursuant to such adjustment, each signatory state will pay an amount to the OPMs tied to the number of NPM cigarettes sold during the year at issue on which that state collected its SET (or, potentially, on which a comparable tax was collected) but on which that state did not collect escrow (“non-compliant NPM sales”). These payments will be made in the form of future reductions to MSA payments by the OPMs. This adjustment for SET-paid NPM sales is subject to certain exceptions and to a “safe harbor” under which a state does not owe any payment if the number or percentage of non-compliant NPM sales is below certain stated benchmarks.  In addition, the settlement further provides that the NPM Adjustment for 2015 and subsequent years will continue to apply to the signatory states, subject to certain defenses, but that those states will receive a partial liability reduction tied to the percentage of NPM sales nationwide during the year at issue on which either an MSA state has collected SET (or potentially a comparable tax is collected) or, potentially, Mississippi, Florida, Texas or Minnesota collected an equity fee (as defined in the settlement) on cigarettes sold by NPMs in those respective states.  The amount (if any) of the potential adjustments relating to SET-paid NPM sales for 2015 and 2016 and the amount of the partial liability reductions for 2015 and 2016 have not yet been determined. In addition, proceedings to determine the availability of and defenses to the 2015 and 2016 NPM Adjustments as to the signatory states will likely not take place for a considerable period of time. In the meantime, pursuant to the settlement, the OPMs and the signatory states have agreed to split the NPM Adjustment amount for 2015 and each subsequent year thereafter pending the ultimate outcome of the applicable proceedings. As a result, in the second quarter of 2016, approximately $43 million was returned to PM USA related to the 2015 NPM Adjustment. This amount was included in other liabilities on the condensed consolidated balance sheet at June 30, 2016 and, once the proceedings to determine the amount of the 2015 NPM Adjustment are concluded, it will either be paid to the signatory states or retained by PM USA (in each case, without interest) as part of the ultimately determined amount payable. The OPMs have agreed that the amounts they receive under the settlement for the 2013-2014 transition years and for subsequent years from the signatory states will be allocated among them pursuant to a formula that modifies the MSA allocation formula in a manner favorable to PM USA. The extent to which it remains favorable to PM USA will depend upon future developments, as well as upon the resolution of certain disputes among the OPMs discussed below.
Many of the non-signatory states objected to the settlement before the arbitration panel hearing the 2003 NPM Adjustment dispute. In March 2013, the panel issued a stipulated partial settlement and award (the “Stipulated Award”) rejecting the objections and permitting the settlement to proceed. In the Stipulated Award, the arbitration panel also ruled that the total 2003 NPM Adjustment would be reduced pro rata by the aggregate allocable share of the signatory states to determine the maximum amount of the 2003 NPM Adjustment potentially available from the non-signatory states whose diligent
 
enforcement claims the PMs continued to contest (the “pro rata judgment reduction”).
Fourteen of the non-signatory states filed motions in their state courts to vacate and/or modify the Stipulated Award in whole or part. Decisions by the Pennsylvania, Missouri, Maryland and New Mexico courts on such motions, and the subsequent appeals of those rulings, are discussed below.  One state’s motion was denied without an appeal by the state. As for the remaining states, rulings rejecting their motions to vacate the Stipulated Award have been affirmed on appeal, or the motions have been voluntarily dismissed or stayed pending further state action.
In October 2015, PM USA, along with the other PMs, settled the 2004-2014 NPM Adjustment disputes with New York. The New York settlement is separate from the settlement with the 24 signatory states and is different from that settlement in certain respects. Pursuant to the New York settlement, PM USA received approximately $126 million for 2004-2014 in the form of a reduction to its MSA payment in 2016. PM USA previously recorded $126 million as a reduction to cost of sales in the third quarter of 2015 to reflect the New York settlement in its estimate of MSA expenses related to prior years. In addition, the New York settlement provides that the NPM Adjustment provision will be revised as to New York for the years after 2014. The revised provision with respect to NPM cigarettes on which New York SET is paid is largely similar to the revised provision in the settlement with the 24 signatory states with respect to an adjustment relating to SET-paid NPM sales. Based on the information provided by New York, no such adjustment is due for 2015.
As to other NPM cigarettes, the New York settlement provides that, in lieu of the NPM Adjustment provision for years after 2014, New York will make annual payments to the PMs tied to the number of NPM cigarettes on which New York did not collect SET that were sold on or through Native American reservations located in New York (or otherwise met the standard in the settlement agreement) during the year at issue to New York consumers (“Tribal NPM Packs”). These annual payments will be made in the form of reductions to future MSA payments by the PMs, beginning with the MSA payment in 2017. The OPMs have agreed that the amounts they receive under the New York settlement for the years after 2014 will be allocated among them pursuant to a formula that modifies the MSA allocation formula in a manner favorable to PM USA, although the extent to which it remains favorable to PM USA will depend upon future developments, as well as upon the resolution of certain disputes among the OPMs discussed below. Under the New York settlement, in return for the payments described above and other consideration described in the New York settlement, the PMs have released New York from the NPM Adjustment provision for all years except as provided in the New York settlement.
The number of Tribal NPM Packs sold in a given year will be determined by an investigative firm based on information provided by the PMs and New York and by the investigative firm’s own research and activities (the “investigative proceeding”). The investigative firm’s determination of the



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number of Tribal NPM Packs sold in a given year will apply for that year as well as for the following year, with the result that an investigative proceeding is expected to be held every two years. Accordingly, the number of Tribal NPM Packs determined by the investigative firm to have been sold during 2015 (which is expected to result in a reduction of the PMs’ MSA payments due in April 2017) will also apply to 2016 (which is expected to result in a reduction of the PMs’ MSA payments due in April 2018). While an investigative proceeding to determine the number of Tribal NPM Packs sold during 2015 has been commenced, PM USA does not expect a determination by the investigative firm until later in the first quarter of 2017.
In connection with the investigative proceeding, PM USA recorded for the years 2015 and 2016 a $58 million reduction to cost of sales in the fourth quarter of 2016. This amount represents PM USA’s estimate, based on information submitted by the PMs and New York to the investigative firm, of the minimum number of Tribal NPM Packs that the investigative firm is likely to find were sold during 2015 and the related reductions to PM USA’s MSA payments in April 2017 and April 2018. Depending upon whether the investigative firm’s determination of the number of Tribal NPM Packs sold during 2015 is greater or lower than PM USA’s estimate, PM USA will respectively record later in 2017 either an additional reduction in cost of sales or an increase in cost of sales.
2003 and Subsequent NPM Adjustment Disputes - Continuing Disputes with Non-Signatory States other than New York: PM USA has continued to pursue the NPM Adjustments for 2003 and subsequent years with respect to the non-signatory states other than New York. Under the MSA, once all conditions for the NPM Adjustment for a particular year are met (including the condition that the disadvantages of the MSA were a “significant factor” contributing to the PMs’ collective loss of market share), each state may avoid an NPM Adjustment to its share of the PMs’ MSA payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Such a state’s share of the NPM Adjustment would then be reallocated to any states that are found not to have diligently enforced for that year. For 2003-2014, all conditions for the NPM Adjustment have been met, either by determination or agreement among the parties (although the parties’ agreement provides that the “significant factor” condition for 2014 will become effective in February 2017). Whether the “significant factor” condition for 2015 has been met has not yet been resolved.

2003 NPM Adjustment. With one exception (Montana), the courts have ruled that the states’ claims of diligent enforcement are to be submitted to arbitration. PM USA and other PMs entered into an agreement with most of the MSA states and territories concerning the 2003 NPM Adjustment, under which such states and territories would receive a partial liability reduction of 20% for the 2003 NPM Adjustment in the event the arbitration panel determined that they did not diligently enforce during 2003. The Montana state courts ruled that Montana may litigate its diligent enforcement claims in state court, rather than in arbitration. In June 2012, the PMs and Montana entered a
 
consent decree pursuant to which Montana would not be subject to the 2003 NPM Adjustment.
In September 2013, the arbitration panel issued rulings regarding the 15 states and territories whose diligent enforcement the PMs contested that had not as of that time joined the settlement, ruling that six of them (Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania) did not diligently enforce during 2003 and that nine of them did. Based on this ruling, the PMs were entitled to receive from the six non-diligent states the entire 2003 NPM Adjustment remaining after the pro rata judgment reduction. PM USA believed it was entitled to receive an NPM Adjustment for 2003 based on this ruling, after reflecting the 20% partial liability reduction noted above, of approximately $145 million. PM USA recorded this $145 million as a reduction to cost of sales, which increased its reported pre-tax earnings in the third quarter of 2013. In addition, PM USA believed it would be entitled to interest on this amount of approximately $89 million. PM USA recorded $64 million of this amount as interest income, which reduced interest and other debt expense, net in the first quarter of 2014, but did not record the remaining $25 million based on its assessment of certain disputes concerning interest discussed below.
After PM USA recorded these amounts, two of the six non-diligent states (Indiana and Kentucky) joined the settlement and became signatory states.  Those two states account for (i) $37 million of the $145 million NPM Adjustment for 2003 that PM USA recorded and (ii) $17 million of the interest that PM USA recorded.  PM USA has retained those amounts from the two states, and has received additional amounts as part of the settlement recoveries for the 2003-2012 NPM Adjustment disputes described above. The remaining four states account for approximately (i) $108 million of the $145 million 2003 NPM Adjustment that PM USA recorded and (ii) $66 million of the $89 million of interest to which PM USA believed it would be entitled on the $145 million (and $47 million of the $64 million of interest that PM USA recorded). Each of these four states filed a motion in its state court to (i) vacate the panel’s ruling as to its diligence and (ii) modify the pro rata judgment reduction and to substitute a reduction method more favorable to the state. These four states also raised a dispute concerning the independent auditor’s calculation of interest. In addition, another OPM has raised a dispute concerning the allocation of the interest and disputed payments account earnings among the OPMs.
In April 2014, a Pennsylvania state trial court denied Pennsylvania’s motion to vacate the arbitration panel’s ruling that Pennsylvania had not diligently enforced, but granted Pennsylvania’s motion to modify, with respect to Pennsylvania, the pro rata judgment reduction. In April 2015, a Pennsylvania intermediate appellate court affirmed the trial court’s modification, with respect to Pennsylvania, of the pro rata judgment reduction. In December 2015, the Supreme Court of Pennsylvania denied PM USA’s petition for further judicial review of the Pennsylvania intermediate appellate court decision. Because the Pennsylvania state trial court ruling preceded PM USA’s 2014 MSA payment date, the total 2014 MSA payment credit PM USA received on account of the 2003 NPM Adjustment



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from the four states was reduced from $108 million to $79 million, and the interest PM USA received from the four states was $48 million rather than the $66 million in interest to which PM USA believed it would be entitled from those four states. As a result of the denial by the Supreme Court of Pennsylvania of PM USA’s petition for review of the intermediate appellate court ruling on the modification of the pro rata judgment reduction method, PM USA reversed $29 million of the reduction to cost of sales and $13 million of the interest income that had been previously recorded in respect of Pennsylvania for the 2003 NPM Adjustment, which reduced its reported pre-tax earnings by approximately $42 million in the fourth quarter of 2015. In April 2016, PM USA filed a petition for writ of certiorari with the United States Supreme Court, which was denied in October 2016.
In July 2014, a Maryland state trial court denied both Maryland’s motion to vacate the arbitration panel’s ruling that Maryland had not diligently enforced and Maryland’s motion to vacate or modify the pro rata judgment reduction. In October 2015, a Maryland intermediate appellate court reversed the Maryland trial court’s ruling on the pro rata judgment reduction method and applied a judgment reduction method that is more favorable to the state. PM USA sought further discretionary review of this decision in the Maryland Court of Appeals but, in February 2016, the Court of Appeals denied PM USA’s petition. As a result, PM USA returned approximately $12 million of the 2003 NPM Adjustment and $7 million of the interest it received (plus interest on those amounts). In addition, PM USA recorded a corresponding reduction to its pre-tax earnings in the first quarter of 2016. In June 2016, PM USA filed a petition for writ of certiorari with the United States Supreme Court, which was denied in October 2016.
In May 2014, a Missouri state trial court denied Missouri’s motion to vacate the arbitration panel’s ruling that Missouri had not diligently enforced, but granted Missouri’s motion to modify, with respect to Missouri, the pro rata judgment reduction. In September 2015, however, a Missouri intermediate appellate court reversed the Missouri state trial court’s ruling that modified the pro rata judgment reduction, effectively reinstating the application of that reduction method to Missouri. The Supreme Court of Missouri granted Missouri’s request for review of the intermediate appellate court decision. If Missouri is successful on further judicial review of the Missouri intermediate appellate court’s ruling reversing the Missouri trial court ruling, PM USA will be required to return approximately $12 million of the 2003 NPM Adjustment and $7 million of the interest it received (in each case subject to confirmation by the independent auditor), plus applicable interest, and would need to make corresponding reversals to amounts previously recorded. In connection with its appeal of the Missouri state trial court’s ruling, PM USA posted a bond in the amount of $22 million, which will remain in place despite the reversal of the Missouri state trial court’s ruling by the intermediate appellate court until all appeals are exhausted.
In September 2016, a New Mexico state trial court denied New Mexico’s motion to vacate the arbitration panel’s ruling that New Mexico had not diligently enforced, but granted New Mexico’s motion to modify, with respect to New Mexico, the pro
 
rata judgment reduction. PM USA is appealing the New Mexico trial court’s decision regarding the pro rata judgment reduction. If PM USA is not successful on further judicial review of the trial court’s ruling on the judgment reduction issue, PM USA will have to return $3 million of the 2003 NPM Adjustment and $2 million of the interest it received (plus interest on those amounts) and would need to make corresponding revisions to amounts previously recorded. This and the other litigation and disputes discussed above could further reduce PM USA’s recovery on the 2003 NPM Adjustment or recovery of interest and potentially require PM USA to return amounts previously received and/or reverse amounts previously recorded. No assurance can be given that the litigation and disputes discussed above will be resolved in a manner favorable to PM USA.

2004 and Subsequent NPM Adjustments. PM USA believes that the MSA requires the states’ diligent enforcement claims for 2004 and thereafter to be determined in multi-state arbitrations, although a number of non-signatory states filed motions in their state courts contending that the claims are to be determined in separate arbitrations for individual states or that there is no arbitrable dispute for 2004. In September 2015, a Missouri intermediate appellate court ruled that Missouri was entitled to a single-state arbitration to determine whether Missouri diligently enforced for 2004. PM USA appealed this ruling, and the Supreme Court of Missouri granted review. No assurance can be given that the outcome of such appeal will be favorable to PM USA. In December 2015, a Wisconsin trial court ruled that Wisconsin must arbitrate its claim of diligent enforcement for 2004, and Wisconsin has since agreed to join the 2004 diligent enforcement arbitration.
In June 2015, PM USA entered into an agreement with 17 of the non-signatory states to form an arbitration panel to conduct an arbitration regarding the 2004 NPM Adjustment. Pursuant to that agreement, in July 2015 PM USA and the 17 states each appointed its respective side’s arbitrator for that arbitration panel. In December 2015, the two appointed arbitrators selected the third arbitrator for a three-arbitrator panel required by the MSA. Other PMs declined to participate in appointing the arbitrators, and instead filed motions in courts in each of the 17 states seeking to compel these states to participate in an arbitration of the 2004 NPM Adjustment dispute between the states and the PMs that would also include disputes solely between the OPMs regarding the allocation of NPM Adjustments as between them (the “inter-company disputes”). Several of the 17 states and PM USA filed cross-motions objecting to the motions filed by the other PMs and seeking to confirm the arbitrators selected by them in July 2015 as properly selected pursuant to the MSA to resolve the 2004 NPM Adjustment dispute between the 17 states and the PMs. PM USA, the 17 states and the other PMs resolved these disputes, and the 2004 diligent enforcement arbitration is underway before two separate arbitration panels, with certain states’ claims of diligent enforcement to be decided by one panel and certain other states’ claims of diligent enforcement decided by the other panel. These two arbitration panels have two arbitrators in common. As part of the resolution of these disputes, the OPMs have agreed that the



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inter-company disputes will be heard by a separate arbitration panel. In addition, Wisconsin, Pennsylvania and Maryland have agreed to join in the 2004 diligent enforcement arbitration. In November 2016, New Mexico was ordered by its trial court to join the arbitration. New Mexico has appealed the decision.
Proceedings regarding diligent enforcement claims for 2005 and subsequent years have not yet been scheduled. No assurance can be given as to when proceedings for 2005 and subsequent years will be scheduled or the precise form those proceedings will take.
The independent auditor has calculated that PM USA’s share of the maximum potential NPM Adjustments for 2004-2015 is (exclusive of interest or earnings): $388 million for 2004, $181 million for 2005, $154 million for 2006, $185 million for 2007, $250 million for 2008, $211 million for 2009, $218 million for 2010, $166 million for 2011, $210 million for 2012, $218 million for 2013, $241 million for 2014 and $289 million for 2015. These maximum amounts will be reduced by a judgment reduction to reflect the settlement with the signatory states (for 2004-2014) and the New York settlement. The judgment reduction for the 2004 and subsequent NPM Adjustments has not yet been determined. In addition, these maximum amounts may also be further reduced by other developments, including agreements that may be entered in the future, disputes that may arise or recalculation of the NPM Adjustment amounts by the independent auditor. Further, the maximum amount for 2004 may also be reduced due to a dispute raised by another OPM regarding the allocation of the maximum potential 2004 NPM Adjustment among the OPMs. In addition, as discussed below, PM USA believes that the amount shown above as PM USA’s share of the maximum potential NPM Adjustment for 2015 was incorrectly calculated by the independent auditor, and that PM USA’s correct share is higher. Finally, PM USA’s recovery of these amounts, even as reduced, is dependent upon subsequent determinations of state diligent enforcement claims, and is subject (in the case of signatory states found non-diligent) to the partial liability reduction under the settlement. The availability and amount of any NPM Adjustment for 2004 and subsequent years will not be finally determined in the near term. There is no assurance that PM USA will ultimately receive any adjustment as a result of these proceedings. PM USA’s receipt of amounts on account of the 2003 NPM Adjustment and interest from non-signatory states does not provide any assurance that PM USA will receive any NPM Adjustment amounts (or associated interest or earnings) for 2004 or any subsequent year. PM USA may enter into settlement discussions regarding the NPM Adjustment disputes with any state if PM USA believes it is in its best interests to do so.

▪Other Disputes Under the State Settlement Agreements: The payment obligations of the tobacco product manufacturers that are parties to the State Settlement Agreements, as well as the allocations of any NPM Adjustments received by them pursuant to the MSA or the settlements of NPM Adjustment disputes with certain states described above, as calculated by the independent auditor, have been and may continue to be affected by R.J. Reynolds’s acquisition of Lorillard and the related assignment of
 
certain cigarette brands by R.J. Reynolds to ITG (the “RJR-Lorillard-ITG transaction”). For example, R.J. Reynolds and ITG have taken the position that they do not have to make payments on those brands under the Florida, Minnesota and Texas State Settlement Agreements or include those brands in their reported volumes or profits for purposes of certain calculations under the State Settlement Agreements. PM USA believes that the position taken by R.J. Reynolds and ITG violates the State Settlement Agreements and applicable law. In that regard, PM USA disputes several calculations made by the independent auditor since the RJR-Lorillard-ITG transaction. In particular, PM USA believes that the independent auditor’s calculations incorrectly increased PM USA’s payments for 2015 due to Mississippi, Florida, Texas and Minnesota under their State Settlement Agreements by at least $42 million and for 2016 by an amount that cannot yet be determined because the final 2016 payment amounts have not been calculated by the independent auditor (see below for a discussion of the portion of these improperly increased payments attributable to the Florida Settlement Agreement). PM USA further believes that such payments due to those states for subsequent years may also be incorrectly increased by amounts that will depend on the independent auditor’s future calculations.
In January 2017, PM USA and the State of Florida each filed in Florida state court a motion against R.J. Reynolds and ITG to enforce the Florida State Settlement Agreement with respect to their failure to make payments to Florida on the assigned brands and failure to include those brands in their reported volumes and profits for purposes of certain calculations under the Florida State Settlement Agreement. PM USA believes that, as a result of these failures by R.J. Reynolds and ITG, its settlement payments to Florida have been improperly increased by over $13 million.
In addition to the disputes noted above, PM USA believes that the calculations by the independent auditor have resulted in an improper decrease of PM USA’s share of the 2015 NPM Adjustment pursuant to the MSA and the settlements of the NPM Adjustment disputes and may result in improper decreases of its share for subsequent years, although the amounts of such decreases depend on a number of factors that cannot be determined at this time. PM USA cannot provide any assurance that it will be successful in any such disputes that it has raised or may raise.

▪Other MSA-Related Litigation: Since the MSA’s inception, NPMs and/or their distributors or customers have filed a number of challenges to the MSA and related legislation. They have named as defendants the states and their officials, in an effort to enjoin enforcement of important parts of the MSA and related legislation, and/or participating manufacturers, in an effort to obtain damages. To date, no such challenge has been successful, and the U.S. Courts of Appeals for the Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have affirmed judgments in favor of defendants in 16 such cases.  

▪Federal Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers,



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including PM USA, and others, including Altria Group, Inc., asserting claims under three federal statutes, namely the Medical Care Recovery Act (“MCRA”), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits that arose from defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by defendants, and a declaration that defendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. The case ultimately proceeded only under the civil provisions of RICO.
The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate remedy and the trial court agreed. In February 2005, however, a panel of the U.S. Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of RICO. In October 2005, the United States Supreme Court denied the government’s petition for writ of certiorari.
In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:  

▪
defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;

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defendants hid from the public that cigarette smoking and nicotine are addictive;

▪
defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;

▪
defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;

▪
defendants falsely denied that they intentionally marketed to youth;

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defendants publicly and falsely denied that ETS is hazardous to non-smokers; and

▪
defendants suppressed scientific research.

The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against
 
“committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message or health descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to ETS; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission (“FTC”) for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government’s costs in bringing the action.
Defendants appealed and, in May 2009, a three judge panel of the Court of Appeals for the District of Columbia Circuit issued a per curiam decision largely affirming the trial court’s judgment against defendants and in favor of the government. Although the panel largely affirmed the remedial order that was issued by the trial court, it vacated the following aspects of the order:

▪
its application to defendants’ subsidiaries;

▪
the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application;

▪
its point-of-sale display provisions; and

▪
its application to Brown & Williamson Holdings.




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The Court of Appeals panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly. Furthermore, the Court of Appeals panel rejected all of the government’s and intervenors’ cross-appeal arguments and refused to broaden the remedial order entered by the trial court. The Court of Appeals panel also left undisturbed its prior holding that the government cannot obtain disgorgement as a permissible remedy under RICO.
In July 2009, defendants filed petitions for a rehearing before the panel and for a rehearing by the entire Court of Appeals. Defendants also filed a motion to vacate portions of the trial court’s judgment on the grounds of mootness because of the passage of the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), granting the U.S. Food and Drug Administration (the “FDA”) broad authority over the regulation of tobacco products. In September 2009, the Court of Appeals entered three per curiam rulings. Two of them denied defendants’ petitions for panel rehearing or for rehearing en banc. In the third per curiam decision, the Court of Appeals denied defendants’ suggestion of mootness and motion for partial vacatur. In February 2010, PM USA and Altria Group, Inc. filed their certiorari petitions with the United States Supreme Court. In addition, the federal government and the intervenors filed their own certiorari petitions, asking the court to reverse an earlier Court of Appeals decision and hold that civil RICO allows the trial court to order disgorgement as well as other equitable relief, such as smoking cessation remedies, designed to redress continuing consequences of prior RICO violations. In June 2010, the United States Supreme Court denied all of the parties’ petitions. In July 2010, the Court of Appeals issued its mandate lifting the stay of the trial court’s judgment and remanding the case to the trial court. As a result of the mandate, except for those matters remanded to the trial court for further proceedings, defendants are now subject to the injunction discussed above and the other elements of the trial court’s judgment.
In February 2011, the government submitted its proposed corrective statements and the trial court referred issues relating to a document repository to a special master. Defendants filed a response to the government’s proposed corrective statements and filed a motion to vacate the trial court’s injunction in light of the FSPTCA, which motion was denied in June 2011. Defendants appealed the trial court’s ruling to the U.S. Court of Appeals for the District of Columbia Circuit. In July 2012, the Court of Appeals affirmed the district court’s denial of defendants’ motion to vacate the district court’s injunction.
Remaining issues pending include: (i) the content of the court-ordered corrective communications and (ii) the requirements related to point-of-sale signage. In November 2012, the district court issued its order specifying the content of the corrective communications described above. The district court’s order required the parties to engage in negotiations with the special master regarding implementation of the corrective communications remedy for television, newspapers, cigarette pack onserts and websites. In January 2013, defendants filed a notice of appeal from the order on the content and vehicles of the corrective communications and a motion to hold the appeal in
 
abeyance pending completion of the negotiations, which the U.S. Court of Appeals granted in February 2013. In January 2014, the parties submitted a motion for entry of a consent order in the district court, setting forth their agreement on the implementation details of the corrective communications remedy. The agreement provides that the “trigger date” for implementation is after the appeal on the content of the communications has been exhausted. Also in January 2014, the district court convened a hearing and ordered further briefing. A number of amici who sought modification or rejection of the agreement for a variety of reasons were given leave to appear. In April 2014, the parties filed an amended proposed consent order and accompanying submission in the district court seeking entry of a revised agreement on the implementation details of the corrective communications remedy. In June 2014, the district court approved the April 2014 proposed consent order. Also in June 2014, defendants filed a notice of appeal of the consent order solely for the purpose of perfecting the U.S. Court of Appeals’ jurisdiction over the pending appeal relating to the content and vehicles of the corrective communications and, in July 2014, defendants moved to consolidate this appeal with the appeal filed in January 2013. The U.S. Court of Appeals granted the motion to consolidate in August 2014.
In May 2015, the U.S. Court of Appeals affirmed in part and reversed in part, concluding that certain portions of the statements exceeded the district court’s jurisdiction under RICO, but upheld other portions challenged by defendants. The Court of Appeals remanded the case to the trial court for further proceedings. In July 2015, the government filed a petition for panel rehearing, which the U.S. Court of Appeals denied on August 2015. In October 2015, the district court ordered further briefing on the content of the corrective communications reversed by the U.S. Court of Appeals and any implementation changes the parties propose. In February 2016, the U.S. District Court for the District of Columbia issued an order on the content of the corrective communications and ordered the parties to submit proposed changes to the consent order on the implementation details, which the parties jointly submitted and the court approved in April 2016. Also in April 2016, defendants filed a notice of appeal to the U.S. Court of Appeals for the District of Columbia Circuit on the content of the corrective communications. In May 2016, defendants filed a notice of appeal of the consent order for the purpose of perfecting the appeal of the district court’s February 2016 order on the content of the corrective communications. Oral argument is scheduled for February 14, 2017 on defendants’ appeal.
In the second quarter of 2014, Altria Group, Inc. and PM USA recorded provisions on each of their respective balance sheets totaling $31 million for the estimated costs of implementing the corrective communications remedy.  This estimate is subject to change due to several factors, including the outcome of further proceedings, though Altria Group, Inc. and PM USA do not expect any change in this estimate to be material.
The consent order approved by the district court in June 2014 did not address the requirements related to point-of-sale signage. In May 2014, the district court ordered further briefing by the



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parties on the issue of corrective statements on point-of-sale signage, which was completed in June 2014.
In December 2011, the parties to the lawsuit entered into an agreement as to the issues concerning the document repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million into the district court in installments over a five-year period.

“Lights/Ultra Lights” Cases

▪Overview: Plaintiffs in certain pending matters seek certification of their cases as class actions and allege, among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its other subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. As of January 27, 2017, a total of 8 such cases are pending in various U.S. state courts.

▪The Good Case and Federal Multidistrict Proceeding: In Good, a purported “Lights” class action, the United States Supreme Court ruled in December 2008 that plaintiffs’ claims are not preempted by the Federal Cigarette Labeling and Advertising Act (“FCLAA”). The case was returned to federal court in Maine and consolidated with other federal cases in a multidistrict litigation (“MDL”) proceeding. In June 2011, the plaintiffs voluntarily dismissed the Good case without prejudice. The other multidistrict cases were either voluntarily dismissed or resolved in a manner favorable to PM USA.

▪“Lights” Cases Dismissed, Not Certified or Ordered De-Certified: As of January 27, 2017, in addition to the federal MDL proceeding discussed above, 20 courts in 21 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA.

▪State Trial Court Class Certifications: State trial courts have certified classes against PM USA in several jurisdictions. Over time, several such cases have been dismissed by the courts at the summary judgment stage. One certified class action remains pending on appeal.

Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs’ motion for reconsideration of the period during
 
which potential class members can qualify to become part of the class. The class period remains 1995-2003. In June 2010, PM USA’s motion for partial summary judgment regarding plaintiffs’ request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit described above). The plaintiffs’ motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs’ claims. In August 2011, the trial court granted PM USA’s motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that Marlboro Lights are more dangerous than Marlboro Reds. The trial court denied PM USA’s remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011, the court declared a mistrial after the jury failed to reach a verdict. In January 2014, the trial court reversed its prior ruling granting partial summary judgment against plaintiffs’ “more dangerous” claim and allowed plaintiffs to pursue that claim. In October 2014, PM USA filed motions to decertify the class and for partial summary judgment on plaintiffs’ “more dangerous” claim, which the court denied in June 2015. Upon retrial, in April 2016, the jury returned a verdict in favor of PM USA. In May 2016, plaintiffs filed a motion for a new trial, which PM USA opposed in June 2016. In August 2016, the trial court denied plaintiffs’ motion for a new trial, plaintiffs filed a notice of appeal and PM USA cross-appealed. In November 2016, the court of appeals dismissed PM USA’s cross-appeal without prejudice upon joint motion of the parties.

▪
State Trial Court Class Certifications Concluded in 2016:

Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In September 2013, plaintiffs filed a motion for partial summary judgment on the scope of remedies available in the case, which the Massachusetts Superior Court denied in February 2014, concluding that plaintiffs cannot obtain disgorgement of profits as an equitable remedy and that their recovery is limited to actual damages or $25 per class member if they cannot prove actual damages greater than $25. Trial began in October 2015 and concluded in November 2015. In February 2016, the trial court issued its “Findings of Fact and Conclusions of Law,” and awarded statutory damages of $25 per class member, for a total of $4.9 million, plus interest, attorneys’ fees and costs. In April 2016, subject to the court’s approval, the parties agreed to settle all claims for approximately $32 million. In the first quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $32 million for the judgment plus interest and associated costs. In May 2016, PM USA paid approximately $32 million to plaintiffs’ escrow agent. In September 2016, the court approved the settlement in which PM USA agreed to pay approximately $15.3 million to the class and $16.5 million in attorneys’ fees and costs, and dismissed the case with prejudice, concluding this litigation.



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Miner: In March 2013, plaintiffs filed a class certification motion. In November 2013, the trial court granted class certification. The certified class includes those individuals who, from November 1, 1971 through June 22, 2010, purchased Marlboro Lights and Marlboro Ultra Lights for personal consumption in Arkansas. PM USA filed a notice of appeal of the class certification ruling to the Arkansas Supreme Court in December 2013. In February 2015, the Arkansas Supreme Court affirmed the trial court’s class certification order. In May 2015, PM USA filed a motion for partial summary judgment seeking to foreclose any recovery for cigarette purchases prior to 1999, when a private right of action was added to the consumer protection statute under which plaintiffs are suing. The trial court denied the motion in July 2015. In June 2016, the trial court granted PM USA’s motion for partial summary judgment to limit any damages claimed by the plaintiffs’ class to purchases made prior to May 2003. In July 2016, the parties agreed to settle all claims for $45 million. In the third quarter of 2016, PM USA recorded a provision on its condensed consolidated balance sheet of $45 million. In November 2016, the trial court granted final approval of the settlement, concluding this litigation. In December 2016, PM USA paid $45 million to plaintiff’s escrow agent.

Price: Trial in Price commenced in state court in Illinois in January 2003 and, in March 2003, the judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $3 billion in punitive damages against PM USA. In December 2005, the Illinois Supreme Court reversed the trial court’s judgment in favor of the plaintiffs. In November 2006, the United States Supreme Court denied plaintiffs’ petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County dismissed the case with prejudice. In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment that was entered in favor of PM USA. In February 2012, plaintiffs filed an amended petition asking the trial court to reinstate the original judgment, which the court denied in December 2012. On appeal, in April 2014, the Fifth Judicial District reversed and ordered reinstatement of the original $10.1 billion trial court judgment against PM USA. In September 2014, the Illinois Supreme Court granted PM USA’s motion for leave to appeal. In November 2015, the Illinois Supreme Court vacated the Fifth Judicial District’s decision and dismissed the cause of action without prejudice to plaintiffs to file a motion to recall the mandate in the Illinois Supreme Court. In November 2015, the plaintiffs filed a motion in the Illinois Supreme Court seeking to recall the 2005 mandate issued in PM USA’s favor, which the court denied. The litigation concluded in June 2016 after the United States Supreme Court denied plaintiffs’ petition for writ of certiorari.
 
▪Other Developments: In Oregon (Pearson), a state court in October 2006 denied plaintiffs’ motion for interlocutory review of the trial court’s refusal to certify a class. The denial was ultimately affirmed on appeal and the case was remanded to the trial court to adjudicate the claims of the individual plaintiffs. In April 2016, the parties agreed to settle plaintiffs’ individual
 
claims for an aggregate amount of $30,000 and, pursuant to that settlement, the parties filed a stipulation of voluntary dismissal with prejudice with the Circuit Court of Multnomah County. This litigation has concluded.
In December 2009, the state trial court in Carroll (formerly known as Holmes) (pending in Delaware) denied PM USA’s motion for summary judgment based on an exemption provision in the Delaware Consumer Fraud Act. In January 2011, the trial court allowed the plaintiffs to file an amended complaint substituting class representatives and naming Altria Group, Inc. and PMI as additional defendants. In February 2013, the trial court approved the parties’ stipulation to the dismissal without prejudice of Altria Group, Inc. and PMI, leaving PM USA as the sole defendant in the case. In March 2015, plaintiffs moved for class certification and, in July 2015, PM USA filed a summary judgment motion seeking to dismiss plaintiffs’ claims in their entirety on preemption grounds.

Certain Other Tobacco-Related Litigation

▪Ignition Propensity Cases: PM USA and Altria Group, Inc. are currently facing litigation alleging that a fire caused by cigarettes led to individuals’ deaths.  In a Kentucky case (Walker), the federal district court denied plaintiffs’ motion to remand the case to state court and dismissed plaintiffs’ claims in February 2009. Plaintiffs subsequently filed a notice of appeal. In October 2011, the U.S. Court of Appeals for the Sixth Circuit reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky state court. The Sixth Circuit did not address the merits of the district court’s dismissal order. Defendants’ petition for rehearing with the Sixth Circuit was denied in December 2011. Defendants filed a renewed motion to dismiss in state court in March 2013. Based on new evidence, in June 2013, defendants removed the case for a second time to the U.S. District Court for the Western District of Kentucky and re-filed their motion to dismiss in June 2013. In July 2013, plaintiffs filed a motion to remand the case to Kentucky state court, which was granted in March 2014. In November 2016, defendants filed renewed motions to dismiss the case.

▪False Claims Act Case: PM USA is a defendant in a qui tam action filed in the U.S. District Court for the District of Columbia (United States ex rel. Anthony Oliver) alleging violation of the False Claims Act in connection with sales of cigarettes to the U.S. military. The relator contends that PM USA violated “most favored customer” provisions in government contracts and regulations by selling cigarettes to non-military customers in overseas markets at more favorable prices than it sold to the U.S. military exchange services for resale on overseas military bases in those same markets. The relator has dropped Altria Group, Inc. as a defendant and has dropped claims related to post-MSA price increases on cigarettes sold to the U.S. military. In July 2012, PM USA filed a motion to dismiss, which was granted on jurisdictional grounds in June 2013, and the case was dismissed with prejudice. In July 2013, the relator appealed the dismissal to



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the U.S. Court of Appeals for the District of Columbia Circuit. In August 2014, the U.S. Court of Appeals reversed the jurisdictional issue and remanded the case to the district court for further proceedings, including consideration of PM USA’s alternative grounds for dismissal. In October 2014, PM USA filed a second motion to dismiss in the U.S. District Court for the District of Columbia for lack of subject matter jurisdiction based on issues left unresolved by the opinion of the U.S. Court of Appeals for the District of Columbia Circuit. In April 2015, the district court granted PM USA’s second motion to dismiss for lack of subject matter jurisdiction and again dismissed the case with prejudice. The relator appealed the latest dismissal to the U.S. Court of Appeals for the District of Columbia Circuit in May 2015. In June 2016, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the dismissal of the case on jurisdictional grounds. In July 2016, the relator filed a petition for rehearing or rehearing en banc. In September 2016, the U.S. Court of Appeals for the District of Columbia Circuit denied the petition for rehearing. Plaintiffs did not file a certiorari petition in the United States Supreme Court within the required time, and the case is thus concluded.

▪Argentine Grower Cases: PM USA and Altria Group, Inc. were sued in six cases (Hupan, Chalanuk, Rodriguez Da Silva, Aranda, Taborda and Biglia) filed in Delaware state court against multiple defendants by the parents of Argentine children born with alleged birth defects. Plaintiffs in these cases allege that they grew tobacco in Argentina under contract with Tabacos Norte S.A., an alleged subsidiary of PMI, and that they and their infant children were exposed directly and in utero to Monsanto Company’s (“Monsanto”) Roundup herbicide during the production and cultivation of tobacco. Plaintiffs seek compensatory and punitive damages against all defendants. Altria Group, Inc. and certain other defendants were dismissed from the Hupan, Chalanuk, Rodriguez Da Silva, Aranda, Taborda and Biglia cases. The three remaining defendants in the six cases were PM USA, Philip Morris Global Brands Inc. (a subsidiary of PMI) and Monsanto. Following discussions regarding indemnification for these cases pursuant to the Distribution Agreement between PMI and Altria Group, Inc., PMI and PM USA agreed to resolve conflicting indemnity demands after final judgments are entered. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement. In April 2014, all three defendants in the Hupan case filed motions to dismiss for failure to state a claim, and PM USA and Philip Morris Global Brands filed separate motions to dismiss based on the doctrine of forum non conveniens. All proceedings in the other five cases were stayed pending the court’s resolution of the motions to dismiss filed in Hupan. In November 2015, the trial court granted PM USA’s motion to dismiss on forum non conveniens grounds. Plaintiffs filed a motion for clarification or re-argument in December 2015, which the court denied in August 2016. Later in August 2016, PM USA and Philip Morris Global Brands moved for entry of final judgment in the Hupan case and also moved to lift the stays in the other five cases for the limited purpose of entering final judgment of dismissal in those cases as
 
well based on the forum non conveniens decision in Hupan. The court granted those motions in September 2016, and entered final judgment of dismissal in all six cases. In October 2016, plaintiffs filed their notice of appeal to the Delaware Supreme Court.

UST Litigation

Claims related to smokeless tobacco products generally fall within the following categories:
First, UST and/or its tobacco subsidiaries have been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought by or on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are three individuals alleging use of USSTC’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.
Second, UST and/or its tobacco subsidiaries have been named in a number of other individual tobacco and health suits over time. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs seek various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. In July 2016, USSTC and Altria Group, Inc. were named as defendants, along with other named defendants, in one such case in California (Gwynn).  In August 2016, defendants removed the case to federal court. In September 2016, plaintiffs filed a motion to remand the case back to state court, which the court granted in January 2017.

Nu Mark Patent Litigation

In April 2016, Fontem Ventures B.V. and Fontem Holdings 1 B.V., both subsidiaries of ITG, sued Nu Mark for alleged patent infringement in the U.S. District Court for the Central District of California.  The suit alleged that Nu Mark’s MarkTen, MarkTen XL and Green Smoke products infringe one or more claims under eight separate Fontem patents for e-vapor products.  The suit sought recovery of an unspecified amount of money damages for alleged past infringement and an injunction against future infringement, which injunction may have resulted in Nu Mark being enjoined from marketing one or more of the products at issue in the suit. In June and July 2016, Nu Mark filed multiple inter partes review petitions with the U.S. Patent Trial and Appeal Board challenging the validity of all patents and claims asserted against it in the lawsuit on multiple grounds.



62

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

In June 2016, the same Fontem entities filed a second lawsuit against Nu Mark in the U.S. District Court for the Central District of California asserting infringement of eight additional e-vapor patents that have issued since the filing of the first case in April 2016. The second case involved the same Nu Mark products as the first case, and likewise sought recovery of an unspecified amount of money damages for alleged past infringement and an injunction against future infringement. In June 2016, Nu Mark filed a motion to transfer venue of both lawsuits from California to the Middle District of North Carolina, which the court granted in August 2016. Between August and November 2016, Nu Mark filed multiple inter partes review petitions with the U.S. Patent Trial and Appeal Board challenging the validity of all patents and claims asserted against it in the second lawsuit. In December 2016, the parties entered into a settlement and license agreement, resulting in the dismissal of the litigation and termination of all pending inter partes review proceedings.  Under the terms of the agreement, in January 2017, Nu Mark made an upfront payment of $21 million and will make future royalty payments in amounts that Altria Group, Inc. does not expect to be material.  In the fourth quarter of 2016, Nu Mark recorded a provision on its consolidated balance sheet of $21 million. 

Environmental Regulation

Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.
Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated results of operations, capital expenditures, financial position or cash flows.

 
Guarantees and Other Similar Matters

In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, 2016, Altria Group, Inc. and certain of its subsidiaries (i) had $59 million of unused letters of credit obtained in the ordinary course of business; (ii) were contingently liable for $25 million of guarantees, consisting primarily of surety bonds, related to their own performance; and (iii) had a redeemable noncontrolling interest of $38 million recorded on its consolidated balance sheet. In addition, from time to time, subsidiaries of Altria Group, Inc. issue lines of credit to affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.
Under the terms of a distribution agreement between Altria Group, Inc. and PMI (the “Distribution Agreement”), entered into as a result of Altria Group, Inc.’s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, 2016 as the fair value of this indemnification is insignificant.
As more fully discussed in Note 20. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under its commercial paper program.

Redeemable Noncontrolling Interest

In September 2007, Ste. Michelle completed the acquisition of Stag’s Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California (“Antinori”). In connection with the acquisition of Stag’s Leap Wine Cellars, Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinori’s initial investment of $27 million. The put arrangement became exercisable in September 2010 and has no expiration date. As of December 31, 2016, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized on the consolidated balance sheet for the put arrangement.
The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is



63

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section on the consolidated balance sheets at December 31, 2016 and 2015.
Note 20. Condensed Consolidating Financial Information
PM USA, which is a 100% owned subsidiary of Altria Group, Inc., has guaranteed Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.
The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.
The obligations of PM USA under the Guarantees are limited to the maximum amount as will not result in PM USA’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees. For this purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
PM USA will be unconditionally released and discharged from the Obligations upon the earliest to occur of:
▪the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;
▪the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;
▪the payment in full of the Obligations pertaining to such Guarantees; and
▪the rating of Altria Group, Inc.’s long-term senior unsecured debt by Standard & Poor’s of A or higher.
At December 31, 2016, the respective principal 100% owned subsidiaries of Altria Group, Inc. and PM USA were not limited
 
by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their equity interests.
The following sets forth the condensed consolidating balance sheets as of December 31, 2016 and 2015, condensed consolidating statements of earnings and comprehensive earnings for the years ended December 31, 2016, 2015 and 2014, and condensed consolidating statements of cash flows for the years ended December 31, 2016, 2015 and 2014 for Altria Group, Inc., PM USA and, collectively, Altria Group, Inc.’s other subsidiaries that are not guarantors of Altria Group, Inc.’s debt instruments (the “Non-Guarantor Subsidiaries”). The financial information is based on Altria Group, Inc.’s understanding of the Securities and Exchange Commission (“SEC”) interpretation and application of Rule 3-10 of SEC Regulation S-X.
The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.



64

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________
at December 31, 2016
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,521

 
$
1

 
$
47

 
$
—

 
$
4,569

Receivables
—

 
8

 
143

 
—

 
151

Inventories:
 
 
 
 
 
 
 
 
 
Leaf tobacco
—

 
541

 
351

 
—

 
892

Other raw materials
—

 
111

 
53

 
—

 
164

Work in process
—

 
3

 
509

 
—

 
512

Finished product
—

 
112

 
371

 
—

 
483

 
—

 
767

 
1,284

 
—

 
2,051

Due from Altria Group, Inc. and subsidiaries
—

 
3,797

 
1,511

 
(5,308
)
 
—

Other current assets
170

 
118

 
201

 
—

 
489

Total current assets
4,691

 
4,691

 
3,186

 
(5,308
)
 
7,260

Property, plant and equipment, at cost
—

 
2,971

 
1,864

 
—

 
4,835

Less accumulated depreciation
—

 
2,073

 
804

 
—

 
2,877

 
—

 
898

 
1,060

 
—

 
1,958

Goodwill
—

 
—

 
5,285

 
—

 
5,285

Other intangible assets, net
—

 
2

 
12,034

 
—

 
12,036

Investment in AB InBev
17,852

 
—

 
—

 
—

 
17,852

Investment in consolidated subsidiaries
11,636

 
2,632

 
—

 
(14,268
)
 
—

Finance assets, net
—

 
—

 
1,028

 
—

 
1,028

Due from Altria Group, Inc. and subsidiaries
4,790

 
—

 
—

 
(4,790
)
 
—

Other assets
18

 
1,748

 
131

 
(1,384
)
 
513

Total Assets
$
38,987

 
$
9,971

 
$
22,724

 
$
(25,750
)
 
$
45,932





65

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
 
at December 31, 2016
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$
1

 
$
92

 
$
332

 
$
—

 
$
425

Accrued liabilities:
 
 
 
 
 
 
 
 
 
Marketing
—

 
619

 
128

 
—

 
747

Employment costs
104

 
14

 
171

 
—

 
289

Settlement charges
—

 
3,696

 
5

 
—

 
3,701

Other
261

 
438

 
326

 
—

 
1,025

Dividends payable
1,188

 
—

 
—

 
—

 
1,188

Due to Altria Group, Inc. and subsidiaries
5,030

 
237

 
41

 
(5,308
)
 
—

Total current liabilities
6,584

 
5,096

 
1,003

 
(5,308
)
 
7,375

Long-term debt
13,881

 
—

 
—

 
—

 
13,881

Deferred income taxes
5,424

 
—

 
4,376

 
(1,384
)
 
8,416

Accrued pension costs
207

 
—

 
598

 
—

 
805

Accrued postretirement health care costs
—

 
1,453

 
764

 
—

 
2,217

Due to Altria Group, Inc. and subsidiaries
—

 
—

 
4,790

 
(4,790
)
 
—

Other liabilities
121

 
146

 
160

 
—

 
427

Total liabilities
26,217

 
6,695

 
11,691

 
(11,482
)
 
33,121

Contingencies

 

 

 

 

Redeemable noncontrolling interest
—

 
—

 
38

 
—

 
38

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Common stock
935

 
—

 
9

 
(9
)
 
935

Additional paid-in capital
5,893

 
3,310

 
11,585

 
(14,895
)
 
5,893

Earnings reinvested in the business
36,906

 
237

 
1,118

 
(1,355
)
 
36,906

Accumulated other comprehensive losses
(2,052
)
 
(271
)
 
(1,720
)
 
1,991

 
(2,052
)
Cost of repurchased stock
(28,912
)
 
—

 
—

 
—

 
(28,912
)
Total stockholders’ equity attributable to Altria Group, Inc.
12,770

 
3,276

 
10,992

 
(14,268
)
 
12,770

Noncontrolling interests
—

 
—

 
3

 
—

 
3

Total stockholders’ equity
12,770

 
3,276

 
10,995

 
(14,268
)
 
12,773

Total Liabilities and Stockholders’ Equity
$
38,987

 
$
9,971

 
$
22,724

 
$
(25,750
)
 
$
45,932

 



66

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Condensed Consolidating Balance Sheets
(in millions of dollars)
____________________________

at December 31, 2015
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,313

 
$
—

 
$
56

 
$
—

 
$
2,369

Receivables
—

 
7

 
117

 
—

 
124

Inventories:
 
 
 
 
 
 
 
 
 
Leaf tobacco
—

 
562

 
395

 
—

 
957

Other raw materials
—

 
123

 
58

 
—

 
181

Work in process
—

 
5

 
439

 
—

 
444

Finished product
—

 
121

 
328

 
—

 
449

 
—


811


1,220


—


2,031

Due from Altria Group, Inc. and subsidiaries
—

 
3,821

 
1,807

 
(5,628
)
 
—

Other current assets
284

 
65

 
112

 
(74
)
 
387

Total current assets
2,597

 
4,704

 
3,312

 
(5,702
)
 
4,911

Property, plant and equipment, at cost
—

 
3,102

 
1,775

 
—

 
4,877

Less accumulated depreciation
—

 
2,157

 
738

 
—

 
2,895

 
—

 
945

 
1,037

 
—

 
1,982

Goodwill
—

 
—

 
5,285

 
—

 
5,285

Other intangible assets, net
—

 
2

 
12,026

 
—

 
12,028

Investment in SABMiller
5,483

 
—

 
—

 
—

 
5,483

Investment in consolidated subsidiaries
11,648

 
2,715

 
—

 
(14,363
)
 
—

Finance assets, net
—

 
—

 
1,239

 
—

 
1,239

Due from Altria Group, Inc. and subsidiaries
4,790

 
—

 
—

 
(4,790
)
 
—

Other assets
20

 
1,804

 
138

 
(1,431
)
 
531

Total Assets
$
24,538

 
$
10,170

 
$
23,037

 
$
(26,286
)
 
$
31,459

 


67

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Condensed Consolidating Balance Sheets (Continued)
(in millions of dollars)
____________________________
at December 31, 2015
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Liabilities
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
—

 
$
—

 
$
4

 
$
—

 
$
4

Accounts payable
3

 
104

 
293

 
—

 
400

Accrued liabilities:
 
 
 
 
 
 
 
 
 
Marketing
—

 
586

 
109

 
—

 
695

Employment costs
18

 
11

 
169

 
—

 
198

Settlement charges
—

 
3,585

 
5

 
—

 
3,590

Other
255

 
616

 
276

 
(74
)
 
1,073

Dividends payable
1,110

 
—

 
—

 
—

 
1,110

Due to Altria Group, Inc. and subsidiaries
5,427

 
191

 
10

 
(5,628
)
 
—

Total current liabilities
6,813

 
5,093

 
866

 
(5,702
)
 
7,070

Long-term debt
12,831

 
—

 
12

 
—

 
12,843

Deferred income taxes
1,646

 
—

 
4,452

 
(1,431
)
 
4,667

Accrued pension costs
215

 
—

 
1,062

 
—

 
1,277

Accrued postretirement health care costs
—

 
1,460

 
785

 
—

 
2,245

Due to Altria Group, Inc. and subsidiaries
—

 
—

 
4,790

 
(4,790
)
 
—

Other liabilities
153

 
126

 
168

 
—

 
447

Total liabilities
21,658

 
6,679

 
12,135

 
(11,923
)
 
28,549

Contingencies

 

 

 

 

Redeemable noncontrolling interest
—

 
—

 
37

 
—

 
37

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Common stock
935

 
—

 
9

 
(9
)
 
935

Additional paid-in capital
5,813

 
3,310

 
11,456

 
(14,766
)
 
5,813

Earnings reinvested in the business
27,257

 
436

 
1,099

 
(1,535
)
 
27,257

Accumulated other comprehensive losses
(3,280
)
 
(255
)
 
(1,692
)
 
1,947

 
(3,280
)
Cost of repurchased stock
(27,845
)
 
—

 
—

 
—

 
(27,845
)
Total stockholders’ equity attributable to Altria Group, Inc.
2,880

 
3,491

 
10,872

 
(14,363
)
 
2,880

Noncontrolling interests
—

 
—

 
(7
)
 
—

 
(7
)
Total stockholders’ equity
2,880

 
3,491

 
10,865

 
(14,363
)
 
2,873

Total Liabilities and Stockholders’ Equity
$
24,538

 
$
10,170

 
$
23,037

 
$
(26,286
)
 
$
31,459





68

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2016
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Net revenues
$
—

 
$
22,146

 
$
3,633

 
$
(35
)
 
$
25,744

Cost of sales
—

 
6,628

 
1,153

 
(35
)
 
7,746

Excise taxes on products
—

 
6,187

 
220

 
—

 
6,407

Gross profit
—

 
9,331

 
2,260

 
—

 
11,591

Marketing, administration and research costs
165

 
1,996

 
489

 
—

 
2,650

Asset impairment and exit costs
5

 
97

 
77

 
—

 
179

Operating (expense) income
(170
)
 
7,238

 
1,694

 
—

 
8,762

Interest and other debt expense, net
519

 
10

 
218

 
—

 
747

Loss on early extinguishment of debt
823

 
—

 
—

 
—

 
823

Earnings from equity investment in SABMiller
(795
)
 
—

 
—

 
—

 
(795
)
Gain on AB InBev/SABMiller business combination
(13,865
)
 
—

 
—

 
—

 
(13,865
)
Earnings before income taxes and equity earnings of subsidiaries
13,148

 
7,228

 
1,476

 
—

 
21,852

Provision for income taxes
4,453

 
2,631

 
524

 
—

 
7,608

Equity earnings of subsidiaries
5,544

 
268

 
—

 
(5,812
)
 
—

Net earnings
14,239

 
4,865

 
952

 
(5,812
)
 
14,244

Net earnings attributable to noncontrolling interests
—

 
—

 
(5
)
 
—

 
(5
)
Net earnings attributable to Altria Group, Inc.
$
14,239

 
$
4,865

 
$
947

 
$
(5,812
)
 
$
14,239

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
14,239

 
$
4,865

 
$
952

 
$
(5,812
)
 
$
14,244

Other comprehensive earnings (losses), net of deferred income taxes
1,228

 
(16
)
 
(28
)
 
44

 
1,228

Comprehensive earnings
15,467

 
4,849

 
924

 
(5,768
)
 
15,472

Comprehensive earnings attributable to noncontrolling interests
—

 
—

 
(5
)
 
—

 
(5
)
Comprehensive earnings attributable to
Altria Group, Inc.
$
15,467

 
$
4,849

 
$
919

 
$
(5,768
)
 
$
15,467




69

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2015
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Net revenues
$
—

 
$
22,133

 
$
3,342

 
$
(41
)
 
$
25,434

Cost of sales
—

 
6,664

 
1,117

 
(41
)
 
7,740

Excise taxes on products
—

 
6,369

 
211

 
—

 
6,580

Gross profit
—

 
9,100

 
2,014

 
—

 
11,114

Marketing, administration and research costs
189

 
2,094

 
425

 
—

 
2,708

Reduction of PMI tax-related receivable
41

 
—

 
—

 
—

 
41

Asset impairment and exit costs
—

 
—

 
4

 
—

 
4

Operating (expense) income
(230
)
 
7,006

 
1,585

 
—

 
8,361

Interest and other debt expense, net
560

 
33

 
224

 
—

 
817

Loss on early extinguishment of debt
228

 
—

 
—

 
—

 
228

Earnings from equity investment in SABMiller
(757
)
 
—

 
—

 
—

 
(757
)
Gain on AB InBev/SABMiller business combination
(5
)
 
—

 
—

 
—

 
(5
)
(Loss) earnings before income taxes and equity earnings of subsidiaries
(256
)
 
6,973

 
1,361

 
—

 
8,078

(Benefit) provision for income taxes
(184
)
 
2,536

 
483

 
—

 
2,835

Equity earnings of subsidiaries
5,313

 
268

 
—

 
(5,581
)
 
—

Net earnings
5,241

 
4,705

 
878

 
(5,581
)
 
5,243

Net earnings attributable to noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
Net earnings attributable to Altria Group, Inc.
$
5,241

 
$
4,705

 
$
876

 
$
(5,581
)
 
$
5,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
5,241

 
$
4,705

 
$
878

 
$
(5,581
)
 
$
5,243

Other comprehensive (losses) earnings, net of deferred
income taxes
(598
)
 
86

 
(69
)
 
(17
)
 
(598
)
Comprehensive earnings
4,643

 
4,791

 
809

 
(5,598
)
 
4,645

Comprehensive earnings attributable to noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
Comprehensive earnings attributable to
Altria Group, Inc.
$
4,643

 
$
4,791

 
$
807

 
$
(5,598
)
 
$
4,643

 


70

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Condensed Consolidating Statements of Earnings and Comprehensive Earnings
(in millions of dollars)
_____________________________
for the year ended December 31, 2014
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Net revenues
$
—

 
$
21,298

 
$
3,267

 
$
(43
)
 
$
24,522

Cost of sales
—

 
6,722

 
1,106

 
(43
)
 
7,785

Excise taxes on products
—

 
6,358

 
219

 
—

 
6,577

Gross profit
—

 
8,218

 
1,942

 
—

 
10,160

Marketing, administration and research costs
231

 
1,889

 
419

 
—

 
2,539

Reduction of Mondelēz tax-related receivable
2

 
—

 
—

 
—

 
2

Asset impairment and exit costs
—

 
(6
)
 
5

 
—

 
(1
)
Operating (expense) income
(233
)
 
6,335

 
1,518

 
—

 
7,620

Interest and other debt expense (income), net
614

 
(46
)
 
240

 
—

 
808

Loss on early extinguishment of debt
—

 
—

 
44

 
—

 
44

Earnings from equity investment in SABMiller
(1,006
)
 
—

 
—

 
—

 
(1,006
)
Earnings before income taxes and equity earnings of subsidiaries
159

 
6,381

 
1,234

 
—

 
7,774

(Benefit) provision for income taxes
(119
)
 
2,381

 
442

 
—

 
2,704

Equity earnings of subsidiaries
4,792

 
244

 
—

 
(5,036
)
 
—

Net earnings
5,070

 
4,244

 
792

 
(5,036
)
 
5,070

Net earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Net earnings attributable to Altria Group, Inc.
$
5,070

 
$
4,244

 
$
792

 
$
(5,036
)
 
$
5,070

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
5,070

 
$
4,244

 
$
792

 
$
(5,036
)
 
$
5,070

Other comprehensive losses, net of deferred
income taxes
(1,304
)
 
(110
)
 
(642
)
 
752

 
(1,304
)
Comprehensive earnings
3,766

 
4,134

 
150

 
(4,284
)
 
3,766

Comprehensive earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive earnings attributable to
Altria Group, Inc.
$
3,766

 
$
4,134

 
$
150

 
$
(4,284
)
 
$
3,766




71

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________
for the year ended December 31, 2016
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Cash Provided by Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
4,326

 
$
5,138

 
$
319

 
$
(5,992
)
 
$
3,791

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(45
)
 
(144
)
 
—

 
(189
)
Proceeds from finance assets
—

 
—

 
231

 
—

 
231

Proceeds from AB InBev/SABMiller business combination
4,773

 
—

 
—

 
—

 
4,773

Purchase of AB InBev ordinary shares
(1,578
)
 
—

 
—

 
—

 
(1,578
)
Payment for derivative financial instrument
(3
)
 
—

 
—

 
—

 
(3
)
Proceeds from derivative financial instruments
510

 
—

 
—

 
—

 
510

Other
—

 
—

 
(36
)
 
—

 
(36
)
Net cash provided by (used in) investing activities
3,702

 
(45
)
 
51

 
—

 
3,708

Cash Provided by (Used in) Financing Activities
 
 
 
 
 
 
 
 
 
Long-term debt issued
1,976

 
—

 
—

 
—

 
1,976

Long-term debt repaid
(933
)
 
—

 
—

 
—

 
(933
)
Repurchases of common stock
(1,030
)
 
—

 
—

 
—

 
(1,030
)
Dividends paid on common stock
(4,512
)
 
—

 
—

 
—

 
(4,512
)
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
(530
)
 
(28
)
 
558

 
—

 
—

Premiums and fees related to early extinguishment of debt
(809
)
 
—

 
—

 
—

 
(809
)
Cash dividends paid to parent
—

 
(5,064
)
 
(928
)
 
5,992

 
—

Other
18

 
—

 
(9
)
 
—

 
9

Net cash used in financing activities
(5,820
)
 
(5,092
)
 
(379
)
 
5,992

 
(5,299
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Increase (decrease)
2,208

 
1

 
(9
)
 
—

 
2,200

Balance at beginning of year
2,313

 
—

 
56

 
—

 
2,369

Balance at end of year
$
4,521

 
$
1

 
$
47

 
$
—

 
$
4,569




72

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________

for the year ended December 31, 2015
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Cash Provided by Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
5,085

 
$
5,204

 
$
961

 
$
(5,440
)
 
$
5,810

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(51
)
 
(178
)
 
—

 
(229
)
Proceeds from finance assets
—

 
—

 
354

 
—

 
354

Payment for derivative financial instrument
(132
)
 
—

 
—

 
—

 
(132
)
Other
—

 
10

 
(18
)
 
—

 
(8
)
Net cash (used in) provided by investing activities
(132
)
 
(41
)
 
158

 
—

 
(15
)
Cash Provided by (Used in) Financing Activities
 
 
 
 
 
 
 
 
 
Long-term debt repaid
(1,793
)
 
—

 
—

 
—

 
(1,793
)
Repurchases of common stock
(554
)
 
—

 
—

 
—

 
(554
)
Dividends paid on common stock
(4,179
)
 
—

 
—

 
—

 
(4,179
)
Changes in amounts due to/from Altria Group, Inc.
and subsidiaries
814

 
(495
)
 
(319
)
 
—

 
—

Premiums and fees related to early extinguishment of debt
(226
)
 
—

 
—

 
—

 
(226
)
Cash dividends paid to parent
—

 
(4,671
)
 
(769
)
 
5,440

 
—

Other
17

 
—

 
(12
)
 
—

 
5

Net cash used in financing activities
(5,921
)
 
(5,166
)
 
(1,100
)
 
5,440

 
(6,747
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
(Decrease) increase
(968
)
 
(3
)
 
19

 
—

 
(952
)
Balance at beginning of year
3,281

 
3

 
37

 
—

 
3,321

Balance at end of year
$
2,313

 
$
—

 
$
56

 
$
—

 
$
2,369




73

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________


Condensed Consolidating Statements of Cash Flows
(in millions of dollars)
_____________________________

for the year ended December 31, 2014
Altria
Group, Inc.

 
PM USA

 
Non-
Guarantor
Subsidiaries

 
Total
Consolidating
Adjustments

 
Consolidated

Cash Provided by Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
4,924

 
$
4,451

 
$
707

 
$
(5,419
)
 
$
4,663

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(44
)
 
(119
)
 
—

 
(163
)
Acquisition of Green Smoke, net of acquired cash
—

 
—

 
(102
)
 
—

 
(102
)
Proceeds from finance assets
—

 
—

 
369

 
—

 
369

Other
—

 
70

 
3

 
—

 
73

Net cash provided by investing activities
—

 
26

 
151

 
—

 
177

Cash Provided by (Used in) Financing Activities
 
 
 
 
 
 
 
 
 
Long-term debt issued
999

 
—

 
—

 
—

 
999

Long-term debt repaid
(525
)
 
—

 
(300
)
 
—

 
(825
)
Repurchases of common stock
(939
)
 
—

 
—

 
—

 
(939
)
Dividends paid on common stock
(3,892
)
 
—

 
—

 
—

 
(3,892
)
Changes in amounts due to/from Altria Group, Inc. and subsidiaries
(411
)
 
(351
)
 
762

 
—

 
—

Premiums and fees related to early extinguishment of debt
—

 
—

 
(44
)
 
—

 
(44
)
Cash dividends paid to parent
—

 
(4,124
)
 
(1,295
)
 
5,419

 
—

Other
11

 
—

 
(4
)
 
—

 
7

Net cash used in financing activities
(4,757
)
 
(4,475
)
 
(881
)
 
5,419

 
(4,694
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Increase (decrease)
167

 
2

 
(23
)
 
—

 
146

Balance at beginning of year
3,114

 
1

 
60

 
—

 
3,175

Balance at end of year
$
3,281

 
$
3

 
$
37

 
$
—

 
$
3,321





74

Altria Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
_________________________

Note 21. Quarterly Financial Data (Unaudited)
 
2016 Quarters
(in millions, except per share data)
1st

 
2nd

 
3rd

 
4th (1)

Net revenues
$
6,066

 
$
6,521

 
$
6,905

 
$
6,252

Gross profit
$
2,656

 
$
2,957

 
$
3,150

 
$
2,828

Net earnings
$
1,218

 
$
1,654

 
$
1,094

 
$
10,278

Net earnings attributable to Altria Group, Inc.
$
1,217

 
$
1,653

 
$
1,093

 
$
10,276

Per share data:

 

 

 

Basic and diluted EPS attributable to Altria Group, Inc.
$
0.62

 
$
0.84

 
$
0.56

 
$
5.27

 
 
 
 
 
 
 
 
 
2015 Quarters
(in millions, except per share data)
1st

 
2nd

 
3rd

 
4th

Net revenues
$
5,804

 
$
6,613

 
$
6,699

 
$
6,318

Gross profit
$
2,475

 
$
2,871

 
$
3,046

 
$
2,722

Net earnings
$
1,018

 
$
1,449

 
$
1,528

 
$
1,248

Net earnings attributable to Altria Group, Inc.
$
1,018

 
$
1,448

 
$
1,528

 
$
1,247

Per share data:

 

 

 

Basic and diluted EPS attributable to Altria Group, Inc.
$
0.52

 
$
0.74

 
$
0.78

 
$
0.64

During 2016 and 2015, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.:
 
2016 Quarters
(in millions)
1st

 
2nd

 
3rd

 
4th

NPM Adjustment Items
$
18

 
$
—

 
$
—

 
$
—

Tobacco and health litigation items, including accrued interest
38

 
5

 
45

 
17

Patent litigation settlement
—

 
—

 
—

 
21

Asset impairment, exit, implementation and acquisition-related costs
122

 
5

 
6

 
73

Loss on early extinguishment of debt
—

 
—

 
823

 
—

Gain on AB InBev/SABMiller business combination
(40
)
 
(117
)
 
(48
)
 
(13,660
)
SABMiller special items (1)
166

 
21

 
(40
)
 
(236
)
 
$
304

 
$
(86
)
 
$
786


$
(13,785
)
 
 
 
 
 
 
 
 
 
2015 Quarters
(in millions)
1st

 
2nd

 
3rd

 
4th

NPM Adjustment Items
$
—

 
$
—

 
$
(126
)
 
$
42

Tobacco and health litigation items, including accrued interest
43

 
5

 
67

 
35

Asset impairment, exit and integration costs
—

 
7

 
1

 
3

Loss on early extinguishment of debt
228

 
—

 
—

 
—

Gain on AB InBev/SABMiller business combination
—

 
—

 
—

 
(5
)
SABMiller special items
86

 
2

 
8

 
30

 
$
357

 
$
14

 
$
(50
)
 
$
105

(1) During the fourth quarter of 2016, Altria Group, Inc. recorded a non-cash gain, reflecting its share of SABMiller’s increase to shareholders’ equity, resulting from the third quarter of 2016 completion of the SABMiller, The Coca-Cola Company and Gutsche Family Investments transaction, combining bottling operations in Africa. The gain was included in earnings from equity investment in SABMiller, and increased Altria Group, Inc.’s earnings before income taxes ($309 million), net earnings ($201 million), net earnings attributable to Altria Group, Inc. ($201 million) and diluted EPS attributable to Altria Group, Inc. ($0.10) in the fourth quarter of 2016. The impact of recording the gain in the fourth quarter of 2016 rather than the third quarter of 2016 was not material to Altria Group, Inc.’s financial statements in either quarter.

As discussed in Note 15. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated statements of earnings during 2016 and 2015 as a result of various tax events.


75
 EX-99.2 5 exhibit992reportofmanageme.htm REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Exhibit

Exhibit 99.2


Report of Management On Internal Control Over Financial Reporting
 
 
Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Altria Group, Inc.’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:
n  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Altria Group, Inc.;
n  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
n  provide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance with the authorization of management and directors of Altria Group, Inc.; and
n  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, 2016. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of Altria Group, Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
 
Based on this assessment, management determined that, as of December 31, 2016, Altria Group, Inc. maintained effective internal control over financial reporting.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of Altria Group, Inc. included in this report, has audited the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, 2016, as stated in their report herein.

February 1, 2017






 EX-99.3 6 exhibit993reportofindepend.htm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit

Exhibit 99.3


Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and
Stockholders of Altria Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows, present fairly, in all material respects, the financial position of Altria Group, Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Altria Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Altria Group, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on Altria Group, Inc.’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
 
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP

Richmond, Virginia
February 1, 2017