Edgar Filing: ALTRIA GROUP, INC.

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¨ (Do not check if a smaller reporting company)

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Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-08940

Altria Group, Inc.

(Exact name of registrant as specified in its charter)




Virginia		13-3260245
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6601 West Broad Street, Richmond, Virginia		23230
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (804) 274-2200

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

At July 18, 2016, there were 1,953,854,575 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

Table of Contents

ALTRIA GROUP, INC.

TABLE OF CONTENTS




		Page No.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015	3

	Condensed Consolidated Statements of Earnings for the Six Months Ended June 30, 2016 and 2015	5

	Three Months Ended June 30, 2016 and 2015	6

	Condensed Consolidated Statements of Comprehensive Earnings for the Six Months Ended June 30, 2016 and 2015	7

	Three Months Ended June 30, 2016 and 2015	8

	Condensed Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2015 and the Six Months Ended June 30, 2016	9

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	10

	Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	103

Item 4.	Controls and Procedures	103

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	104

Item 1A.	Risk Factors	104

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104

Item 6.	Exhibits	105

Signature	Signature	106

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)



	June 30, 2016		December 31, 2015
Assets
Cash and cash equivalents	$	819	$	2,369
Receivables	122		124
Inventories:
Leaf tobacco	836		957
Other raw materials	180		181
Work in process	391		444
Finished product	563		449
	1,970		2,031
Deferred income taxes	1,188		1,175
Other current assets	501		387
Total current assets	4,600		6,086
Property, plant and equipment, at cost	4,866		4,877
Less accumulated depreciation	2,904		2,895
	1,962		1,982
Goodwill	5,285		5,285
Other intangible assets, net	12,047		12,028
Investment in SABMiller	5,877		5,483
Finance assets, net	1,155		1,239
Other assets	398		360
Total Assets	$	31,324	$	32,463

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

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

(Unaudited)



	June 30, 2016			December 31, 2015
Liabilities
Current portion of long-term debt	$	—		$	4
Accounts payable	193			400
Accrued liabilities:
Marketing	726			695
Employment costs	169			198
Settlement charges	2,264			3,590
Other	1,053			1,081
Dividends payable	1,107			1,110
Total current liabilities	5,512			7,078
Long-term debt	12,837			12,843
Deferred income taxes	5,659			5,663
Accrued pension costs	1,426			1,277
Accrued postretirement health care costs	2,296			2,245
Other liabilities	415			447
Total liabilities	28,145			29,553
Contingencies (Note 11)
Redeemable noncontrolling interest	36			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	5,851			5,813
Earnings reinvested in the business	27,915			27,257
Accumulated other comprehensive losses	(3,340		)	(3,280		)
Cost of repurchased stock (851,955,312 shares at June 30, 2016 and 845,901,836 shares at December 31, 2015)	(28,221		)	(27,845		)
Total stockholders’ equity attributable to Altria Group, Inc.	3,140			2,880
Noncontrolling interests	3			(7		)
Total stockholders’ equity	3,143			2,873
Total Liabilities and Stockholders’ Equity	$	31,324		$	32,463

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)



	For the Six Months Ended June 30,
	2016			2015
Net revenues	$	12,587		$	12,417
Cost of sales	3,798			3,801
Excise taxes on products	3,176			3,270
Gross profit	5,613			5,346
Marketing, administration and research costs	1,105			1,253
Asset impairment and exit costs	121			4
Operating income	4,387			4,089
Interest and other debt expense, net	392			404
Loss on early extinguishment of debt	—			228
Earnings from equity investment in SABMiller	(265		)	(359		)
Gain on derivative financial instrument	(157		)	—
Earnings before income taxes	4,417			3,816
Provision for income taxes	1,545			1,349
Net earnings	2,872			2,467
Net earnings attributable to noncontrolling interests	(2		)	(1		)
Net earnings attributable to Altria Group, Inc.	$	2,870		$	2,466
Per share data:
Basic and diluted earnings per share attributable to Altria Group, Inc.	$	1.47		$	1.25
Dividends declared	$	1.13		$	1.04

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)



	For the Three Months Ended June 30,
	2016			2015
Net revenues	$	6,521		$	6,613
Cost of sales	1,924			2,004
Excise taxes on products	1,640			1,738
Gross profit	2,957			2,871
Marketing, administration and research costs	546			643
Asset impairment and exit costs	1			4
Operating income	2,410			2,224
Interest and other debt expense, net	192			195
Earnings from equity investment in SABMiller	(199		)	(225		)
Gain on derivative financial instrument	(117		)	—
Earnings before income taxes	2,534			2,254
Provision for income taxes	880			805
Net earnings	1,654			1,449
Net earnings attributable to noncontrolling interests	(1		)	(1		)
Net earnings attributable to Altria Group, Inc.	$	1,653		$	1,448
Per share data:
Basic and diluted earnings per share attributable to Altria Group, Inc.	$	0.84		$	0.74
Dividends declared	$	0.565		$	0.52

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

(Unaudited)



	For the Six Months Ended June 30,
	2016			2015
Net earnings	$	2,872		$	2,467
Other comprehensive earnings (losses), net of deferred income taxes:
Currency translation adjustments	1			(1		)
Benefit plans	(144		)	81
SABMiller	83			(276		)
Other comprehensive losses, net of deferred income taxes	(60		)	(196		)

Comprehensive earnings	2,812			2,271
Comprehensive earnings attributable to noncontrolling interests	(2		)	(1		)
Comprehensive earnings attributable to Altria Group, Inc.	$	2,810		$	2,270

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

(Unaudited)



	For the Three Months Ended June 30,
	2016			2015
Net earnings	$	1,654		$	1,449
Other comprehensive earnings (losses), net of deferred income taxes:
Benefit plans	30			39
SABMiller	(43		)	28
Other comprehensive (losses) earnings, net of deferred income taxes	(13		)	67

Comprehensive earnings	1,641			1,516
Comprehensive earnings attributable to noncontrolling interests	(1		)	(1		)
Comprehensive earnings attributable to Altria Group, Inc.	$	1,640		$	1,515

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the Year Ended December 31, 2015 and

the Six Months Ended June 30, 2016

(in millions of dollars, except per share data)

(Unaudited)



	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, 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⁾	—		—			2,870			—			—			—			2,870
Other comprehensive losses, net of deferred income taxes	—		—			—			(60		)	—			—			(60		)
Stock award activity	—		48			—			—			(35		)	—			13
Cash dividends declared ($1.13 per share)	—		—			(2,212		)	—			—			—			(2,212		)
Repurchases of common stock	—		—			—			—			(341		)	—			(341		)
Other	—		(10		)	—			—			—			10			—
Balances, June 30, 2016	$	935	$	5,851		$	27,915		$	(3,340	)	$	(28,221	)	$	3		$	3,143

⁽¹⁾

Amounts attributable to noncontrolling interests for the six months ended June 30, 2016 and for the year ended December 31, 2015 exclude net earnings of $2 million and $5 million, respectively, due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015.

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)



	For the Six Months Ended June 30,
	2016			2015
Cash Provided by (Used in) Operating Activities
Net earnings	$	2,872		$	2,467
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization	98			100
Deferred income tax provision	15			28
Earnings from equity investment in SABMiller	(265		)	(359		)
Gain on derivative financial instrument	(157		)	—
Asset impairment and exit costs, net of cash paid	91			2
Loss on early extinguishment of debt	—			228
Cash effects of changes:
Receivables	3			19
Inventories	72			105
Accounts payable	(233		)	(154		)
Income taxes	(53		)	(153		)
Accrued liabilities and other current assets	(133		)	74
Accrued settlement charges	(1,326		)	(1,294		)
Pension plan contributions	(6		)	(9		)
Pension provisions and postretirement, net	(43		)	55
Other	123			138
Net cash provided by operating activities	1,058			1,247
Cash Provided by (Used in) Investing Activities
Capital expenditures	$	(77	)	$	(99	)
Proceeds from finance assets	56			185
Other	(42		)	1
Net cash (used in) provided by investing activities	(63		)	87
Cash Provided by (Used in) Financing Activities
Long-term debt repaid	—			(793		)
Repurchases of common stock	(341		)	(455		)
Dividends paid on common stock	(2,215		)	(2,050		)
Premiums and fees related to early extinguishment of debt	—			(226		)
Other	11			(8		)
Net cash used in financing activities	(2,545		)	(3,532		)
Cash and cash equivalents:
Decrease	(1,550		)	(2,198		)
Balance at beginning of period	2,369			3,321
Balance at end of period	$	819		$	1,123

See notes to condensed consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Background and Basis of Presentation:

Background

At June 30, 2016, Altria Group, Inc.’s wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged predominantly 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 June 30, 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 June 30, 2016, Altria Group, Inc. also held approximately 27% of the economic and voting interest of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends. In November 2015, Anheuser-Busch InBev SA/NV (“AB InBev”) announced its firm offer to effect a business combination with SABMiller in a cash and stock transaction. For further discussion, see Note 4. Investment in SABMiller.

Share Repurchases

In July 2014, Altria Group, Inc.’s Board of Directors (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 (the “July 2015 share repurchase program”). At June 30, 2016, Altria Group, Inc. had approximately $624 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.

Altria Group, Inc.’s share repurchase activity was as follows:



	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2016		2015		2016		2015
	(in millions, except per share data)
Total number of shares repurchased	5.5		8.8		2.7		5.2
Aggregate cost of shares repurchased	$	341	$	455	$	173	$	263
Average price per share of shares repurchased	$	61.90	$	51.63	$	64.06	$	50.64

Basis of Presentation

The interim condensed consolidated financial statements of Altria Group, Inc. are unaudited. It is the opinion of Altria Group, Inc.’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected in the interim condensed consolidated financial statements. All such adjustments were of a normal recurring

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

On January 1, 2016, Altria Group, Inc. adopted Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“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, $69 million of debt issuance costs have been presented on Altria Group, Inc.’s condensed consolidated balance sheet at June 30, 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 condensed consolidated balance sheet at December 31, 2015.

For a description of recently issued accounting guidance that Altria Group, Inc. has not yet adopted, see Note 13. Recent Accounting Guidance Not Yet Adopted.

Note 2. Asset Impairment, Exit and Implementation Costs:

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 this initiative, Altria Group, Inc. expects to incur total pre-tax restructuring charges of approximately $140 million, or $0.05 per share, substantially all of which are expected to be recorded in 2016 and result in cash expenditures. The charges consist of employee separation costs of approximately $120 million and other associated costs of approximately $20 million.

Pre-tax restructuring charges for the six and three months ended June 30, 2016 of $124 million, or $0.04 per share, and $2 million, respectively, recorded in connection with the productivity initiative consisted of the following:



	For the Six Months Ended June 30, 2016						For the Three Months Ended June 30, 2016
	Asset Impairment and Exit Costs ⁽¹⁾		Implementation Costs		Total		Asset Impairment and Exit Costs		Implementation Costs		Total
	(in millions)
Smokeable products	$	98	$	3	$	101	$	1	$	1	$	2
Smokeless products	13		—		13		—		—		—
All other	5		—		5		—		—		—
General corporate	5		—		5		—		—		—
Total	$	121	$	3	$	124	$	1	$	1	$	2

⁽¹⁾ Includes termination and curtailment costs of $20 million. See Note 3. Benefit Plans.

The movement in the restructuring liabilities (excluding termination and curtailment costs), substantially all of which are severance liabilities, was as follows:



	For the Six Months Ended June 30, 2016
	(in millions)
Charges	$	101
Cash spent	(29		)
Balances at June 30, 2016	$	72

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3. 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 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.

Components of Net Periodic Benefit Cost

Net periodic benefit cost (income) consisted of the following:



	For the Six Months Ended June 30,												For the Three Months Ended June 30,
	Pension						Postretirement						Pension						Postretirement
	2016			2015			2016			2015			2016			2015			2016			2015
	(in millions)
Service cost	$	37		$	43		$	8		$	9		$	19		$	22		$	4		$	5
Interest cost	141			168			40			51			70			84			19			25
Expected return on plan assets	(277		)	(270		)	—			—			(139		)	(135		)	—			—
Amortization:
Net loss	87			117			16			23			43			58			9			11
Prior service cost (credit)	2			4			(19		)	(20		)	1			2			(9		)	(10		)
Termination and curtailment	20			—			—			—			—			—			—			—
Net periodic benefit cost (income)	$	10		$	62		$	45		$	63		$	(6	)	$	31		$	23		$	31

Termination and curtailment costs shown in the table above were related to the productivity initiative discussed in Note 2. Asset Impairment, Exit and Implementation Costs. In conjunction with the curtailment, in the first quarter of 2016 Altria Group, Inc. remeasured the pension benefit obligations, pension plan assets and postretirement benefit obligations of its impacted benefit plans. This remeasurement resulted in an increase to the liabilities for accrued pension costs and accrued postretirement health care costs of approximately $250 million and $70 million, respectively, and a corresponding increase to accumulated other comprehensive losses.

Employer Contributions

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 Internal Revenue Service regulations. Employer contributions of $6 million were made to Altria Group, Inc.’s pension plans during the six months ended June 30, 2016. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans during the remainder of 2016 of approximately $25 million to $70 million, 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.

Note 4. Investment in SABMiller:

At June 30, 2016, Altria Group, Inc. held approximately 27% of the economic and voting interest of SABMiller. Altria Group, Inc. accounts for its investment in SABMiller under the equity method of accounting.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

AB InBev and SABMiller Business Combination

In November 2015, AB InBev announced its firm offer to effect a business combination with SABMiller in a cash and stock transaction valued at approximately $107 billion. Under the November 2015 terms of the transaction, SABMiller shareholders would have received 44 British pounds (“GBP”) in cash for each SABMiller share, with a partial share alternative (“PSA”) available for approximately 41% of the SABMiller shares.

On July 26, 2016, AB InBev announced its revised and final offer to SABMiller for the proposed business combination (the “Revised and Final Offer”) under which the all-cash offer was increased from 44 GBP to 45 GBP per SABMiller share and the cash element of the PSA was increased from 3.7788 GBP to 4.6588 GBP per SABMiller share. The equity component of the PSA remains unchanged.

Altria Group, Inc. has committed to elect the PSA. Under the Revised and Final Offer of the PSA, SABMiller shareholders may elect to receive for each SABMiller share held (i) 0.483969 restricted shares (the “Restricted Shares”) in a newly formed Belgian company (“NewCo”) that will own the combined SABMiller and AB InBev business plus (ii) 4.6588 GBP in cash.

If the transaction is completed, NewCo will acquire SABMiller and, following the closing of that acquisition, AB InBev will merge into NewCo. Under the Revised and Final Offer, Altria Group, Inc. expects to exchange its approximate 27% economic and voting interest in SABMiller for an interest that will be converted into Restricted Shares representing an approximate 10.5% economic and voting interest in NewCo plus, including the anticipated impact of the derivative financial instrument discussed below, approximately $3.0 billion in pre-tax cash (subject to proration as described in the 2015 Form 10-K). The Revised and Final Offer increases the cash element of the PSA for Altria Group, Inc. by approximately $500 million based on the July 26, 2016 GBP to United States dollar (“USD”) exchange rate.

Upon closing of the transaction, Altria Group, Inc. estimates, based on the Revised and Final Offer, that it will record a one-time pre-tax accounting gain of approximately $13 billion, or $8.5 billion after-tax. This estimate is based on the AB InBev share price, GBP to USD exchange rate and book value of Altria Group, Inc.’s investment in SABMiller at June 30, 2016. The actual gain recorded at closing may vary significantly from this estimate based on changes to these factors, the impact of dispositions related to the transaction and any proration of Restricted Shares.

Altria Group, Inc. expects to account for its economic and voting interest in NewCo under the equity method of accounting because Altria Group, Inc. anticipates having the ability to exercise significant influence over the operating and financial policies of NewCo. This conclusion is based on the fact that Altria Group, Inc. expects to have active representation on NewCo’s Board of Directors (“NewCo Board”) and its Committees. In addition, through NewCo Board and Committee representation, Altria Group, Inc. anticipates participating in NewCo policy making processes.

The transaction is subject to certain closing conditions, including shareholder approvals of both SABMiller and AB InBev, and receipt of the required regulatory approvals.

Derivative Financial Instrument

In November 2015, Altria Group, Inc. entered into a derivative financial instrument in the form of a put option (the “option”) to hedge Altria Group, Inc.’s exposure to foreign currency exchange rate movements for the GBP, in relation to the initial USD pre-tax cash consideration of approximately $2.5 billion that Altria Group, Inc. expected to receive under the PSA. Altria Group, Inc. has the ability to exercise or terminate the option up to its expiration date of May 11, 2017. The notional amount of the option is $2,467 million (1,625 million GBP). The option does not qualify for hedge accounting; therefore, changes in the fair value of the option will be recorded as a pre-tax gain or loss in Altria Group, Inc.’s consolidated statement of earnings for the periods in which the changes occur. For the six and three months ended June 30, 2016, Altria Group, Inc. recorded a pre-tax gain of $157 million and $117 million, respectively, for the change in the fair value of the option, which was included in gain on derivative financial instrument in Altria Group, Inc.’s condensed consolidated statements of earnings.

The fair value of the option is determined using a binomial option pricing model, which reflects the contractual terms of the option and other observable market-based inputs, and is classified in Level 2 of the fair value hierarchy. At June 30, 2016 and December 31, 2015, the fair value of the option of $309 million and $152 million, respectively, was recorded in other current assets on Altria Group, Inc.’s condensed consolidated balance sheets.

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Note 5. Earnings Per Share:

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



	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Net earnings attributable to Altria Group, Inc.	$	2,870		$	2,466		$	1,653		$	1,448
Less: Distributed and undistributed earnings attributable to unvested restricted shares and restricted stock units	(5		)	(5		)	(3		)	(3		)
Earnings for basic and diluted EPS	$	2,865		$	2,461		$	1,650		$	1,445

Weighted-average shares for basic and diluted EPS	1,955			1,964			1,954			1,962

Note 6. 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.:



	For the Six Months Ended June 30, 2016
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses
	(in millions)
Balances, December 31, 2015	$	(5	)	$	(2,010	)	$	(1,265	)		$	(3,280	)

Other comprehensive earnings (losses) before reclassifications	1			(318		)	110				(207		)
Deferred income taxes	—			122			(39		)		83
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes	1			(196		)	71				(124		)

Amounts reclassified to net earnings	—			85			19				104
Deferred income taxes	—			(33		)	(7		)		(40		)
Amounts reclassified to net earnings, net of deferred income taxes	—			52			12				64

Other comprehensive earnings (losses), net of deferred income taxes	1			(144		)	83			⁽¹⁾	(60		)

Balances, June 30, 2016	$	(4	)	$	(2,154	)	$	(1,182	)		$	(3,340	)

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	For the Three Months Ended June 30, 2016
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses
	(in millions)
Balances, March 31, 2016	$	(4	)	$	(2,184	)	$	(1,139	)		$	(3,327	)

Other comprehensive losses before reclassifications	—			—			(72		)		(72		)
Deferred income taxes	—			—			25				25
Other comprehensive losses before reclassifications, net of deferred income taxes	—			—			(47		)		(47		)

Amounts reclassified to net earnings	—			49			7				56
Deferred income taxes	—			(19		)	(3		)		(22		)
Amounts reclassified to net earnings, net of deferred income taxes	—			30			4				34

Other comprehensive earnings (losses), net of deferred income taxes	—			30			(43		)	⁽¹⁾	(13		)

Balances, June 30, 2016	$	(4	)	$	(2,154	)	$	(1,182	)		$	(3,340	)



	For the Six Months Ended June 30, 2015
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses
	(in millions)
Balances, December 31, 2014	$	(2	)	$	(2,040	)	$	(640	)		$	(2,682	)

Other comprehensive losses before reclassifications	(1		)	—			(434		)		(435		)
Deferred income taxes	—			—			151				151
Other comprehensive losses before reclassifications, net of deferred income taxes	(1		)	—			(283		)		(284		)

Amounts reclassified to net earnings	—			134			9				143
Deferred income taxes	—			(53		)	(2		)		(55		)
Amounts reclassified to net earnings, net of deferred income taxes	—			81			7				88

Other comprehensive (losses) earnings, net of deferred income taxes	(1		)	81			(276		)	⁽¹⁾	(196		)

Balances, June 30, 2015	$	(3	)	$	(1,959	)	$	(916	)		$	(2,878	)

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	For the Three Months Ended June 30, 2015
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses
	(in millions)
Balances, March 31, 2015	$	(3	)	$	(1,998	)	$	(944	)		$	(2,945	)

Other comprehensive earnings before reclassifications	—			—			37				37
Deferred income taxes	—			—			(13		)		(13		)
Other comprehensive earnings before reclassifications, net of deferred income taxes	—			—			24				24

Amounts reclassified to net earnings	—			66			5				71
Deferred income taxes	—			(27		)	(1		)		(28		)
Amounts reclassified to net earnings, net of deferred income taxes	—			39			4				43

Other comprehensive earnings, net of deferred income taxes	—			39			28			⁽¹⁾	67

Balances, June 30, 2015	$	(3	)	$	(1,959	)	$	(916	)		$	(2,878	)

⁽¹⁾ For the six and three months ended June 30, 2016 and 2015, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments.

The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:



	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Benefit Plans: ⁽¹⁾
Net loss	$	112		$	150		$	57		$	74
Prior service cost/credit	(27		)	(16		)	(8		)	(8		)
	85			134			49			66

SABMiller ⁽²⁾	19			9			7			5

Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings	$	104		$	143		$	56		$	71

⁽¹⁾ Amounts are included in net defined benefit plan costs. For further details, see Note 3. Benefit Plans.

⁽²⁾ Amounts are included in earnings from equity investment in SABMiller.

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Note 7. Segment Reporting:

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, substantially all of 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 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 Altria Group, Inc.’s chief operating decision maker.

Segment data were as follows:



	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Net revenues:
Smokeable products	$	11,251		$	11,195		$	5,829		$	5,974
Smokeless products	1,002			911			523			481
Wine	316			295			171			161
All other	18			16			(2		)	(3		)
Net revenues	$	12,587		$	12,417		$	6,521		$	6,613
Earnings before income taxes:
Operating companies income (loss):
Smokeable products	$	3,869		$	3,710		$	2,118		$	2,024
Smokeless products	618			544			338			293
Wine	62			62			34			35
All other	(54		)	(104		)	(33		)	(63		)
Amortization of intangibles	(10		)	(10		)	(5		)	(5		)
General corporate expenses	(93		)	(113		)	(42		)	(60		)
Corporate asset impairment and exit costs	(5		)	—			—			—
Operating income	4,387			4,089			2,410			2,224
Interest and other debt expense, net	(392		)	(404		)	(192		)	(195		)
Loss on early extinguishment of debt	—			(228		)	—			—
Earnings from equity investment in SABMiller	265			359			199			225
Gain on derivative financial instrument	157			—			117			—
Earnings before income taxes	$	4,417		$	3,816		$	2,534		$	2,254

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The comparability of operating companies income for the reportable segments was affected by the following:

Non-Participating Manufacturer (“NPM”) Adjustment Items - Pre-tax expense for NPM adjustment items was recorded in Altria Group, Inc.’s condensed consolidated statement of earnings as follows:



	For the Six Months Ended June 30, 2016
	(in millions)
Smokeable products segment	$	12
Interest and other debt expense, net	6
Total	$	18

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 11. Contingencies). The amount shown in the table above for the smokeable products segment was recorded by PM USA as an increase to cost of sales, which decreased operating companies income in the smokeable products segment.

Tobacco and Health Litigation Items - Pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’s condensed consolidated statements of earnings as follows:



	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Smokeable products segment	$	27	$	48	$	1	$	5
Interest and other debt expense, net	16		—		4		—
Total	$	43	$	48	$	5	$	5

During the first quarter of 2016, PM USA recorded pre-tax charges, primarily related to the Aspinall case, of $26 million in marketing, administration and research costs and $12 million in interest costs. During the first quarter of 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, during the first quarter of 2015, PM USA recorded a pre-tax provision of approximately $43 million in marketing, administration and research costs. For further discussion, see Note 11. Contingencies.

Asset Impairment, Exit and Implementation Costs - See Note 2. Asset Impairment, Exit and Implementation Costs for a breakdown of these costs by segment.

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 June 30, 2016, finance assets, net, of $1,155 million were comprised of investments in finance leases of $1,191 million, reduced by the allowance for losses of $36 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.

During the second quarter of 2016 and 2015, as a result of updated market value information, PMCC determined that the estimated unguaranteed residual values on certain aircraft should be reduced by $28 million and $35 million, respectively. These decreases in unguaranteed residual values resulted in a reduction to PMCC’s net revenues of $18 million and $29 million in the second quarter of 2016 and 2015, respectively.

PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. PMCC believes that, as of June 30, 2016, the allowance for losses of $36 million was adequate. PMCC continues to monitor

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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 was as follows:



	For the Six Months Ended June 30,
	2016			2015
	(in millions)
Balance at beginning of the year	$	42		$	42
Decrease to allowance	(6		)	—
Balance at June 30	$	36		$	42

All PMCC lessees were current on their lease payment obligations as of June 30, 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 June 30, 2016 and December 31, 2015 was as follows:



	June 30, 2016		December 31, 2015
	(in millions)
Credit Rating by Standard & Poor’s/Moody’s:
“AAA/Aaa” to “A-/A3”	$	214	$	212
“BBB+/Baa1” to “BBB-/Baa3”	584		702
“BB+/Ba1” and Lower	393		367
Total	$	1,191	$	1,281

Note 9. Debt:

At June 30, 2016 and December 31, 2015, Altria Group, Inc. had no short-term borrowings.

Long-term Debt

With respect to $3.4 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 provision terminated in accordance with its terms.

On January 1, 2016, Altria Group, Inc. adopted ASU No. 2015-03. For further discussion, see Note 1. Background and Basis of Presentation.

During the first quarter of 2015, Altria Group, Inc. completed a debt tender offer to purchase for cash $793 million aggregate principal amount of its senior unsecured 9.700% notes due 2018. As a result of the debt tender offer, during the first quarter of 2015, Altria Group, Inc. recorded a pre-tax loss on early extinguishment of debt of $228 million, which included premiums and fees of $226 million and the write-off of the related unamortized debt discount and debt issuance costs of $2 million.

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 June 30, 2016 and December 31, 2015, was $15.8 billion and $14.5 billion, respectively, as compared with its carrying value of $12.8 billion for each period.

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Note 10. Income Taxes:

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. At June 30, 2016, Altria Group, Inc.’s total unrecognized tax benefits were $175 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at June 30, 2016 was $81 million, along with $94 million affecting deferred taxes. 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 $140 million. At December 31, 2015, Altria Group, Inc.’s total unrecognized tax benefits were $158 million. 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.

Note 11. 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 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. 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 condensed 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 11. 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 condensed 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

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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 July 22, 2016, July 24, 2015 and July 18, 2014:



	July 22, 2016	July 24, 2015	July 18, 2014
Individual Smoking and Health Cases⁽²⁾	62	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	9	12	14

⁽¹⁾ Does not include 24 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 2,494 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 has 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.

International Tobacco-Related Cases

As of July 22, 2016, 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 Philip Morris International Inc. (“PMI”) that provides for indemnities for certain liabilities concerning tobacco products.

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Tobacco-Related Cases Set for Trial

As of July 22, 2016, seven Engle progeny cases are set for trial through September 30, 2016. There is one “Lights/Ultra Lights” class action and no medical monitoring cases or individual smoking and health 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 currently is scheduled to begin October 17, 2016. 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, 17 have reached final resolution. A verdict against defendants in one health care cost recovery case (Blue Cross/Blue Shield) was reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported “Lights” class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December 2006. See “Lights/Ultra Lights” Cases - The Price Case below for a discussion of subsequent developments in Price.

As of July 22, 2016, 100 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision as follows: 56 verdicts were returned in favor of plaintiffs; 42 verdicts were returned in favor of PM USA. Two verdicts that were initially returned in favor of plaintiff were reversed on appeal. One was remanded for a new trial; the other is now subject to en banc review in the appellate court. 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 related costs and fees) totaling approximately $428 million and interest totaling approximately $183 million as of July 22, 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.

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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:



	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Accrued liability for tobacco and health litigation items at beginning of period	$	132		$	39		$	153		$	77
Pre-tax charges for:
Tobacco and health judgments	5			5			1			5
Related interest costs	6			—			4			—
Agreement to resolve federal Engle progeny cases	—			43			—			—
Agreement to resolve Aspinall including related interest costs	32			—			—			—
Payments	(145		)	(10		)	(128		)	(5		)
Accrued liability for tobacco and health litigation items at end of period	$	30		$	77		$	30		$	77

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

Security for Judgments

To obtain stays of judgments pending current appeals, as of June 30, 2016, PM USA has posted various forms of security totaling approximately $104 million, the majority of which has been collateralized with cash deposits that are included in other assets on the condensed 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.

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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. In December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately $500,000 in costs. Trial on the amount of punitive damages began in January 2012. In February 2012, the jury awarded plaintiff $25 million in punitive damages. In July 2015, the Oregon Court of Appeals affirmed the judgment in favor of plaintiff and in September 2015, PM USA filed a petition for review with the Oregon Supreme Court, which the court denied in November 2015. 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 February 2016, PM USA filed a petition for writ of certiorari with the United States Supreme Court, which the court denied in May 2016. 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 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

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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 July 22, 2016, approximately 2,800 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately 3,600 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 July 22, 2016, 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 February 2015, PM USA, R.J. Reynolds Tobacco Company (“R.J. Reynolds”) and Lorillard Tobacco Company (“Lorillard”) reached a tentative agreement to resolve approximately 415 pending federal Engle progeny cases (the “Federal Engle Agreement”). Under the terms of the Federal Engle Agreement, PM USA paid into escrow approximately $43 million in March 2015. PM USA recorded a pre-tax provision of approximately $43 million in the first quarter of 2015. Federal cases that were in trial as of February 25, 2015 and those that previously reached final verdict were not included in the Federal Engle Agreement. The Federal Engle Agreement was conditioned on approval by all federal court plaintiffs in the cases resolved by the Federal Engle Agreement or as the parties otherwise agree. The parties satisfied all conditions and, in December 2015, the cases subject to the Federal Engle Agreement were dismissed, and the escrow funds were moved to the plaintiffs’ settlement fund.

Engle Progeny Trial Results

As of July 22, 2016, 100 federal and state Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court Engle decision. Fifty-six verdicts were returned in favor of plaintiffs and two verdicts (Graham and Skolnick) 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.

Forty-two verdicts were returned in favor of PM USA, of which 33 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 and Mooney) 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

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July 22, 2016. 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 July 22, 2016; the second chart lists such cases that were pending within the previous 12 months, but that are now concluded.

Currently-Pending Cases

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

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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.

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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.

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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.

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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 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.

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Plaintiff: Ledoux