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8-K
ALTRIA GROUP, INC. filed this Form 8-K on 02/01/2018
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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): January 31, 2018
________________________________________________________________________________________________________________
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))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o






Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On January 31, 2018, the Board of Directors (the “Board”) of Altria Group, Inc. (“Altria”) elected Mark E. Newman to the Board effective February 1, 2018. Mr. Newman is not being named to any committee of the Board at this time.
The Board made an affirmative determination that Mr. Newman qualifies as an independent director under the New York Stock Exchange listing standards and Altria’s standards for director independence.
Mr. Newman will be compensated for his service on the Board pursuant to the existing compensation program for non-employee directors, which is described in Altria’s proxy statement for its 2017 Annual Meeting of Shareholders (filed with the Securities and Exchange Commission on April 6, 2017).
A copy of the press release issued by Altria announcing the appointment of Mr. Newman is attached as Exhibit 99.1 and is incorporated by reference in this Current Report on Form 8-K.
Item 8.01.
Other Events.
Filed as part of this Current Report on Form 8-K are the consolidated balance sheets of Altria and subsidiaries as of December 31, 2017 and 2016, 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, 2017 (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, 2017.

Item 9.01.
Financial Statements and Exhibits.
(d)
Exhibits

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, 2018


3
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,
 
2017
 
2016
 
2015
 
2014
 
2013
Earnings before income taxes
$
9,828

 
$
21,852

 
$
8,078

 
$
7,774

 
$
6,942

 
 
 
 
 
 
 
 
 
 
Add (deduct):
 
 
 
 
 
 
 
 
 
Equity in net earnings of less than 50% owned affiliates
(537
)
 
(800
)
 
(755
)
 
(1,011
)
 
(993
)
Dividends from less than 50% owned affiliates
806

 
739

 
495

 
459

 
443

Fixed charges
740

 
768

 
821

 
879

 
1,104

Interest capitalized, net of amortization

 

 
14

 
6

 
(7
)
Earnings available for fixed charges
$
10,837

 
$
22,559

 
$
8,653

 
$
8,107

 
$
7,489

 
 
 
 
 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
 
 
 
 
Interest incurred (1)
$
726

 
$
750

 
$
805

 
$
861

 
$
1,087

Portion of rent expense deemed to represent interest factor
14

 
18

 
16

 
18

 
17

Fixed charges
$
740

 
$
768

 
$
821

 
$
879

 
$
1,104

 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges (2)
14.6

 
29.4

 
10.5

 
9.2

 
6.8

 
 
 
 
 
 
 
 
 
 
(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.



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. 333-221133) 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, 2018 relating to the 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, 2018



Exhibit

Exhibit 99.1


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12016607&doc=8


FOR IMMEDIATE RELEASE
Contact: Altria Client Services
Media Relations
(804) 484-8897


Mark E. Newman Elected to Altria’s Board of Directors

RICHMOND, Va. (Feb. 1, 2018) - Altria Group, Inc. (Altria) (NYSE:MO) announced that yesterday its Board of Directors elected Mark E. Newman to the Board.
Mr. Newman is Senior Vice President and Chief Financial Officer of The Chemours Company (“Chemours”), a global chemical company. He is also the executive sponsor of the Chemours Black Employee Network. Mr. Newman joined Chemours, then a subsidiary of DuPont, in 2014. From 2011 to 2014, he was Senior Vice President and Chief Financial Officer for SunCoke Energy Inc. Prior to 2011, Mr. Newman held financial and operational leadership positions at General Motors Corporation, GMAC Financial Services, LLC and Ally Financial Inc.


# # #



Exhibit
Exhibit 99.2







Altria Group, Inc. and Subsidiaries
Consolidated Financial Statements as of
December 31, 2017 and 2016, and for Each of the
Three Years in the Period Ended December 31, 2017


1




Altria Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions of dollars)
________________________
 
at December 31,
2017

 
2016

Assets
 
 
 
Cash and cash equivalents
$
1,253

 
$
4,569

Receivables
142

 
151

Inventories:
 
 
 
Leaf tobacco
941

 
892

Other raw materials
170

 
164

Work in process
560

 
512

Finished product
554

 
483

 
2,225

 
2,051

Income taxes
461

 
269

Other current assets
263

 
220

Total current assets
4,344

 
7,260

 
 
 
 
Property, plant and equipment, at cost:
 
 
 
Land and land improvements
302

 
316

Buildings and building equipment
1,437

 
1,481

Machinery and equipment
2,975

 
2,917

Construction in progress
165

 
121

 
4,879

 
4,835

Less accumulated depreciation
2,965

 
2,877

 
1,914

 
1,958

 
 
 
 
Goodwill
5,307

 
5,285

Other intangible assets, net
12,400

 
12,036

Investment in AB InBev
17,952

 
17,852

Finance assets, net
899

 
1,028

Other assets
386

 
513

Total Assets
$
43,202

 
$
45,932


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,
2017

 
2016

Liabilities
 
 
 
Current portion of long-term debt
$
864

 
$

Accounts payable
374

 
425

Accrued liabilities:
 
 
 
Marketing
695

 
747

Employment costs
188

 
289

Settlement charges
2,442

 
3,701

Other
971

 
1,025

Dividends payable
1,258

 
1,188

Total current liabilities
6,792

 
7,375

 
 
 
 
Long-term debt
13,030

 
13,881

Deferred income taxes
5,247

 
8,416

Accrued pension costs
445

 
805

Accrued postretirement health care costs
1,987

 
2,217

Other liabilities
283

 
427

Total liabilities
27,784

 
33,121

Contingencies (Note 18)

 

Redeemable noncontrolling interest
38

 
38

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

 
935

Additional paid-in capital
5,952

 
5,893

Earnings reinvested in the business
42,251

 
36,906

Accumulated other comprehensive losses
(1,897
)
 
(2,052
)
Cost of repurchased stock
(904,702,125 shares at December 31, 2017 and
862,689,093 shares at December 31, 2016)
(31,864
)
 
(28,912
)
Total stockholders’ equity attributable to Altria Group, Inc.
15,377

 
12,770

Noncontrolling interests
3

 
3

Total stockholders’ equity
15,380

 
12,773

Total Liabilities and Stockholders’ Equity
$
43,202

 
$
45,932

 
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,
2017

 
2016

 
2015

Net revenues
$
25,576

 
$
25,744

 
$
25,434

Cost of sales
7,543

 
7,746

 
7,740

Excise taxes on products
6,082

 
6,407

 
6,580

Gross profit
11,951

 
11,591

 
11,114

Marketing, administration and research costs
2,362

 
2,650

 
2,708

Reduction of PMI tax-related receivable

 

 
41

Asset impairment and exit costs
33

 
179

 
4

Operating income
9,556

 
8,762

 
8,361

Interest and other debt expense, net
705

 
747

 
817

Loss on early extinguishment of debt

 
823

 
228

Earnings from equity investment in AB InBev/SABMiller
(532
)
 
(795
)
 
(757
)
Gain on AB InBev/SABMiller business combination
(445
)
 
(13,865
)
 
(5
)
Earnings before income taxes
9,828

 
21,852

 
8,078

(Benefit) provision for income taxes
(399
)
 
7,608

 
2,835

Net earnings
10,227

 
14,244

 
5,243

Net earnings attributable to noncontrolling interests
(5
)
 
(5
)
 
(2
)
Net earnings attributable to Altria Group, Inc.
$
10,222

 
$
14,239

 
$
5,241

Per share data:
 
 
 
 
 
Basic and diluted earnings per share attributable to Altria Group, Inc.
$
5.31

 
$
7.28

 
$
2.67


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,
 
2017

 
2016

 
2015

Net earnings
 
$
10,227

 
$
14,244

 
$
5,243

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

 
1

 
(3
)
Benefit plans
 
209

 
(38
)
 
30

AB InBev/SABMiller
 
(54
)
 
1,265

 
(625
)
Other comprehensive earnings (losses), net of deferred income taxes
 
155

 
1,228

 
(598
)
 
 
 
 
 
 
 
Comprehensive earnings
 
10,382

 
15,472

 
4,645

Comprehensive earnings attributable to noncontrolling interests
 
(5
)
 
(5
)
 
(2
)
Comprehensive earnings attributable to Altria Group, Inc.
 
$
10,377

 
$
15,467

 
$
4,643


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,
2017

 
2016

 
2015

Cash Provided by (Used in) Operating Activities
 
 
 
 
 
Net earnings
$
10,227

 
$
14,244

 
$
5,243

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
 
Depreciation and amortization
209

 
204

 
225

Deferred income tax (benefit) provision
(3,126
)
 
3,119

 
(132
)
Earnings from equity investment in AB InBev/SABMiller
(532
)
 
(795
)
 
(757
)
Gain on AB InBev/SABMiller business combination
(445
)
 
(13,865
)
 
(5
)
Dividends from AB InBev/SABMiller
806

 
739

 
495

Asset impairment and exit costs, net of cash paid
(38
)
 
106

 
1

Loss on early extinguishment of debt

 
823

 
228

Cash effects of changes:
 
 
 
 
 
Receivables
10

 
(27
)
 
3

Inventories
(171
)
 
(34
)
 
(33
)
Accounts payable
(55
)
 
24

 
26

Income taxes
(294
)
 
(231
)
 
(12
)
Accrued liabilities and other current assets
(85
)
 
(113
)
 
184

Accrued settlement charges
(1,259
)
 
111

 
90

Pension and postretirement plans contributions
(294
)
 
(531
)
 
(28
)
Pension provisions and postretirement, net
(11
)
 
(73
)
 
114

Other
(20
)
 
120

 
201

Net cash provided by operating activities
4,922

 
3,821

 
5,843

Cash Provided by (Used in) Investing Activities
 
 
 
 
 
Capital expenditures
(199
)
 
(189
)
 
(229
)
Acquisitions of businesses and assets
(415
)
 
(45
)
 

Proceeds from finance assets
133

 
231

 
354

Proceeds from AB InBev/SABMiller business combination

 
4,773

 

Purchase of AB InBev ordinary shares

 
(1,578
)
 

Payment for derivative financial instruments
(5
)
 
(3
)
 
(132
)
Proceeds from derivative financial instruments

 
510

 

Other
19

 
9

 
(8
)
Net cash (used in) provided by investing activities
(467
)
 
3,708

 
(15
)
Cash Provided by (Used in) Financing Activities
 
 
 
 
 
Long-term debt issued

 
1,976

 

Long-term debt repaid

 
(933
)
 
(1,793
)
Repurchases of common stock
(2,917
)
 
(1,030
)
 
(554
)
Dividends paid on common stock
(4,807
)
 
(4,512
)
 
(4,179
)
Premiums and fees related to early extinguishment of debt

 
(809
)
 
(226
)
Other
(47
)
 
(21
)
 
(28
)
Net cash used in financing activities
(7,771
)
 
(5,329
)
 
(6,780
)
Cash and cash equivalents:
 
 
 
 
 
(Decrease) increase
(3,316
)
 
2,200

 
(952
)
Balance at beginning of year
4,569

 
2,369

 
3,321

Balance at end of year
$
1,253

 
$
4,569

 
$
2,369

Cash paid: Interest
 
 
$
696

 
$
775

 
$
776

                       Income taxes
 
 
$
3,036

 
$
4,664

 
$
3,029

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, 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

Net earnings (1)

 

 
10,222

 

 

 

 
10,222

Other comprehensive earnings, net
of deferred income taxes

 

 

 
155

 

 

 
155

Stock award activity

 
59

 

 

 
(35
)
 

 
24

Cash dividends declared ($2.54 per share)

 

 
(4,877
)
 

 

 

 
(4,877
)
Repurchases of common stock

 

 

 

 
(2,917
)
 

 
(2,917
)
Balances, December 31, 2017
$
935

 
$
5,952

 
$
42,251

 
$
(1,897
)
 
$
(31,864
)
 
$
3

 
$
15,380

   
(1) Amounts attributable to noncontrolling interests for each of the years ended December 31, 2017, 2016 and 2015 exclude net earnings of $5 million 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, 2017, 2016 and 2015. See Note 18.

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, 2017, 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; Sherman Group Holdings, LLC and its subsidiaries (“Nat Sherman”), which are engaged in the manufacture and sale of super premium cigarettes and the sale of premium cigars; 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 and distribution services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services LLC, which provides various support services in areas such as legal, regulatory, consumer engagement, 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, 2017, 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. In October 2016, Anheuser-Busch InBev SA/NV (“Legacy AB InBev”) completed its business combination with SABMiller, and Altria Group, Inc. received cash and shares representing a 9.6% ownership in the combined company (the “Transaction”). The newly formed Belgian company, which retained the name Anheuser-Busch InBev SA/NV (“AB InBev”), became the holding company for the combined businesses. Subsequently, Altria Group, Inc. purchased approximately 12 million ordinary shares of AB InBev, increasing Altria Group, Inc.’s ownership to approximately 10.2% at December 31, 2016. At December 31, 2017, 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 6. Investment in AB InBev/SABMiller.
In January 2017, Altria Group, Inc. acquired Nat Sherman, which joined PM USA and Middleton as part of Altria Group, Inc.’s smokeable products segment.
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 2017 adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”). For further discussion, see Note 11. Stock Plans.
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


8


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


Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.
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: In November 2017, Altria Group, Inc. adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands hedge accounting for both financial and nonfinancial risk components to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the guidance includes certain targeted improvements to simplify the application of hedge accounting. At adoption, Altria Group, Inc. had no derivative or nonderivative financial instruments designated in hedging relationships. Adoption of the guidance had no impact on prior years.
Altria Group, Inc. enters into derivatives to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria Group, Inc. uses various types of derivative financial instruments, including forward contracts, options and swaps.
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Derivative financial instruments that qualify for hedge accounting are designated as either fair value hedges, cash flow hedges or net investment hedges at the inception of the contracts. For fair value hedges, changes in the fair value of the derivative, as well as the offsetting changes in the fair value of the hedged item, are recorded in the consolidated statements of earnings each period. For cash flow hedges, changes in the fair value of the derivative are recorded each period in accumulated other comprehensive earnings (losses) and are reclassified to the consolidated statements of earnings in the same periods in which operating results are affected by the respective hedged item. For net investment hedges, changes in the fair value of the derivative or foreign currency transaction gains or losses on a nonderivative hedging instrument are recorded in accumulated other comprehensive earnings (losses) to offset the change in the value
 
of the net investment being hedged. Such amounts remain in accumulated other comprehensive earnings (losses) until the complete or substantially complete liquidation of the underlying foreign operations occurs or, for investments in foreign entities accounted for under the equity method of accounting, Altria Group, Inc.’s economic interest in the underlying foreign entity decreases. Cash flows from hedging instruments are classified in the same manner as the respective hedged item in the consolidated statements of cash flows.
To qualify for hedge accounting, the hedging relationship, both at inception of the hedge and on an ongoing basis, is expected to be highly effective at achieving the offsetting changes in the fair value of the hedged risk during the period that the hedge is designated. Altria Group, Inc. formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, the strategy for undertaking the hedge transaction and method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, if it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains and losses would be recorded in the consolidated statement of earnings in the current period.
For financial instruments that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of earnings each period. 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,


9


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


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 18. 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. 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 18. 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: 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 (“FIFO”) and average cost methods. Inventories that are measured using the LIFO method are stated at the lower of cost or market. Inventories that are measured using the FIFO and average cost methods are stated at the lower of cost and net realizable value. 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


10


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


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, net of estimated forfeitures, and recognizes compensation expense over the service periods for awards expected to vest.
New Accounting Standards: The following table provides a description of the recently issued accounting guidance applicable to, but not yet adopted by, Altria Group, Inc.:
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.
The adoption of this guidance will not have a material impact on the amount or timing of revenue recognized on Altria Group, Inc.’s consolidated financial statements based on current contracts with customers. The guidance will result in expanded footnote disclosures. Altria Group, Inc. will adopt this guidance in the first quarter of 2018, using the modified retrospective transition method.
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.
The adoption of this guidance will not have a material impact on Altria Group, Inc.’s consolidated financial statements. Altria Group, Inc. will adopt this guidance in the first quarter of 2018.
ASU Nos. 2016-02; 2018-01
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 its consolidated balance sheets but are recorded in its consolidated statements of earnings as expense is incurred. Upon adoption of the new guidance, Altria Group, Inc. will record substantially all leases on its balance sheets as a right-of-use asset and a lease liability. The adoption of this guidance is not expected to have a material impact on Altria Group, Inc.’s consolidated financial statements. The guidance will result in expanded footnote disclosures.
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 were approximately 2% of Altria Group, Inc.’s total assets at December 31, 2017.
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.

The adoption of this guidance will not have a material impact on Altria Group, Inc.’s consolidated statements of cash flows. Altria Group, Inc. will adopt this guidance in the first quarter of 2018.



11


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


Standards
Description
Effective Date for Public Entity
Effect on Financial Statements
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.
At December 31, 2017 and December 31, 2016, Altria Group, Inc. had restricted cash of $61 million and $82 million, respectively. Altria Group, Inc. will retrospectively adopt this guidance in the first quarter of 2018 and will comply with the required presentation of restricted cash in its consolidated statements of cash flows upon adoption.


ASU No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)

The guidance requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the statement of earnings separately from the service cost component and outside the subtotal of operating income. Additionally, only the service cost component is eligible for capitalization.
The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The guidance is required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of earnings, and prospectively for the capitalization of the service cost component.

Under the new guidance, the amount of non-service cost components of net periodic benefit cost (income) presented within operating income that would have been presented separately from operating income was $37 million, $(1) million and $151 million for the years ended December 31, 2017, 2016 and 2015, respectively. The prospective adoption of this guidance related to the capitalization of the service cost component will not have a material impact on Altria Group, Inc.’s consolidated financial statements. Altria Group, Inc. will adopt this guidance in the first quarter of 2018.

Note 3. 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, 2017

 
December 31, 2016

 
December 31, 2017

 
December 31, 2016

Smokeable products
$
99

 
$
77

 
$
3,054

 
$
2,901

Smokeless products
5,023

 
5,023

 
8,827

 
8,829

Wine
74

 
74

 
294

 
295

Other
111

 
111

 
225

 
11

Total
$
5,307

 
$
5,285

 
$
12,400

 
$
12,036

Goodwill relates to the 2017 acquisition of Nat Sherman, 2014 acquisition of Green Smoke, 2009 acquisition of UST and 2007 acquisition of Middleton.
Other intangible assets consisted of the following: 
 
December 31, 2017
 
December 31, 2016
(in millions)
Gross Carrying Amount

 
Accumulated Amortization

 
Gross Carrying Amount

 
Accumulated Amortization

Indefinite-lived intangible assets
$
12,125

 
$

 
$
11,740

 
$

Definite-lived intangible assets
465

 
190

 
465

 
169

Total other intangible assets
$
12,590

 
$
190

 
$
12,205

 
$
169

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 each of the years ended December 31, 2017, 2016 and 2015, was $21 million. Annual amortization expense for each of the next five years is estimated to be approximately $20 million, assuming no
 
additional transactions occur that require the amortization of intangible assets.
During 2017, 2016 and 2015, 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, 2017, 2016 and 2015, there have been no changes in goodwill and the gross carrying amount of other intangible assets except for the purchase of certain intellectual property in 2017 primarily related to innovative tobacco products, the 2017 acquisition of Nat Sherman and Ste. Michelle’s 2016 purchase of substantially all of the assets


12


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


of Patz & Hall Wine Company, Inc. In addition, there were no accumulated impairment losses related to goodwill and other intangible assets, net at December 31, 2017 and 2016.
Note 4. Asset Impairment, Exit and Implementation Costs
Pre-tax asset impairment, exit and implementation costs consisted of the following:
For the Year Ended December 31, 2017
(in millions)
Asset Impairment
and Exit Costs 

 
Implementation
Costs (1)

 
Total

Smokeable products
$
5

 
$
17

 
$
22

Smokeless products
28

 
28

 
56

Total
$
33

 
$
45

 
$
78

(1) The pre-tax implementation costs were included in cost of sales in Altria Group, Inc.’s consolidated statement of earnings.
For the Year Ended December 31, 2016
(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 16. Benefit Plans.
The pre-tax asset impairment, exit and implementation costs for 2017 are related to the facilities consolidation discussed below, and the pre-tax asset impairment, exit and implementation costs for 2016 are related to both the facilities consolidation and the productivity initiative discussed below.
 
The movement in the restructuring liabilities (excluding termination, settlement and curtailment costs), substantially all of which are severance liabilities, for the years ended December 31, 2017 and 2016 was as follows:
(in millions)
 
Balances at December 31, 2015
$

Charges
152

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

Charges
25

Cash spent
(71
)
Balances at December 31, 2017
$
33

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 is in the process of transferring its Limerick, Pennsylvania operations to the Manufacturing Center site in Richmond, Virginia (“Richmond Manufacturing Center”). USSTC is in the process of transferring its Franklin Park, Illinois operations to its Nashville, Tennessee facility and the Richmond Manufacturing Center. Separation benefits are being paid to non-relocating employees. The consolidation is expected to be substantially completed by the end of 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 2017, Altria Group, Inc. incurred pre-tax charges of $78 million and recorded $71 million in 2016. The total estimated charges relate primarily to accelerated depreciation and asset impairment ($50 million), employee separation costs ($45 million) and other exit and implementation costs ($55 million). Approximately $95 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 $58 million were made during the year ended December 31, 2017, for total cash payments of $63 million since inception.
Productivity Initiative: In January 2016, Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness through reduced spending on certain selling, general and administrative infrastructure and a leaner organizational structure. As a result of the initiative, during 2016, Altria Group, Inc. incurred total pre-


13


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


tax restructuring charges of $132 million, or $0.04 per share, substantially all of which result in cash expenditures. The charges consisted of employee separation costs of $117 million and other associated costs of $15 million. Total pre-tax charges related to the initiative have been 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 $32 million were made during the year ended December 31, 2017, for total cash payments of $106 million since inception.
Note 5. Inventories
On January 1, 2017, Altria Group, Inc. adopted ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires inventory that is measured using the FIFO or average cost methods to be measured at the lower of cost and net realizable value. Previous guidance required inventory that was measured using the FIFO or average cost methods to be measured at the lower of cost or market. The adoption of this guidance did not have a material impact on Altria Group, Inc.’s consolidated financial statements.
The cost of approximately 59% and 62% of inventories at December 31, 2017 and 2016, 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, 2017 and 2016.
Note 6. Investment in AB InBev/SABMiller
At December 31, 2017, Altria Group, Inc. had an approximate 10.2% ownership of AB InBev, consisting of approximately 185 million restricted shares of AB InBev (the “Restricted Shares”) and approximately 12 million ordinary shares of AB InBev. 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.
Pre-tax earnings from Altria Group, Inc.’s equity investment in AB InBev were $532 million for the year ended December 31, 2017. 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.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). Consistent with the one-quarter lag for recording AB InBev’s results, in the first quarter of 2018 Altria Group, Inc. will record its share of AB InBev’s recorded fourth quarter 2017 estimated effect of the Tax Reform Act.
Summary financial data of AB InBev is as follows:
(in millions)
For Altria Group, Inc.’s Year Ended
December 31, 2017 (1)
Net revenues
$
56,004

Gross profit
$
34,376

Earnings from continuing operations
$
6,769

Net earnings
$
6,845

Net earnings attributable to AB InBev
$
5,473

(in millions)
At September 30, 2017 (1)
 
At October 10, 2016 (1)
Current assets
$
30,920

 
$
40,086

Long-term assets
$
213,696

 
$
223,701

Current liabilities
$
37,765

 
$
44,272

Long-term liabilities
$
134,236

 
$
139,112

Noncontrolling interests
$
10,639

 
$
9,177

(1) Reflecting the one-quarter lag: (i) summary financial data of AB InBev’s results for Altria Group, Inc.’s year ended December 31, 2017 include AB InBev’s results for the last three months of 2016 and the first nine months of 2017, and (ii) summary financial data of AB InBev’s financial position is disclosed at September 30, 2017 and October 10, 2016.
At December 31, 2017, 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 $11.7 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, 2017 and 2016 was $22.1 billion and $20.9 billion, respectively, compared


14


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


with its carrying value of $18.0 billion and $17.9 billion, respectively.
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 and $757 million for the years ended December 31, 2016 and 2015, 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.
    Summary financial data of SABMiller is as follows:
 
For the Years Ended December 31,
(in millions)
2016 (1)

 
2015

Net revenues
$
14,543

 
$
20,188

Operating profit
$
2,099

 
$
3,690

Net earnings attributable to SABMiller
$
1,803

 
$
2,838

(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.
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. 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 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. Subsequently, Altria Group, Inc. purchased approximately 12 million 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.
 
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.
For the year ended December 31, 2017, Altria Group, Inc. recorded pre-tax gains of $445 million related to the planned completion of the remaining AB InBev divestitures in gain on AB InBev/SABMiller business combination in Altria Group, Inc.’s consolidated statement of earnings.
Altria Group, Inc.’s gain on the Transaction was deferred for United States corporate income tax purposes, except to the extent of the cash consideration received.
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


15


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


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.
Note 7. 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, 2017, finance assets, net, of $899 million were comprised of investments in finance leases of $922 million, reduced by the allowance for losses of $23 million. 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.
A summary of the net investments in finance leases, substantially all of which were leveraged leases, at December 31, 2017 and 2016, before allowance for losses was as follows:
(in millions)
 
2017

 
2016

Rents receivable, net
 
$
696

 
$
805

Unguaranteed residual values
 
427

 
495

Unearned income
 
(201
)
 
(240
)
Investments in finance leases
 
922

 
1,060

Deferred income taxes
 
(407
)
 
(717
)
Net investments in finance leases
 
$
515

 
$
343

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 $0.6 billion and $0.8 billion at December 31, 2017 and 2016, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in 2017 and 2016.
In 2017, 2016 and 2015 PMCC’s review of estimated residual values resulted in a decrease of $8 million, $28 million and $65 million, respectively, to unguaranteed residual values. These decreases in unguaranteed residual values resulted in a
 
reduction to PMCC’s net revenues of $5 million, $18 million and $41 million in 2017, 2016 and 2015, respectively.
At December 31, 2017, PMCC’s investments in finance leases were principally comprised of the following investment categories: aircraft (40%), electric power (27%), railcar (13%), real estate (10%) and manufacturing (10%). There were no investments located outside the United States at December 31, 2017 and 2016.
Rents receivable in excess of debt service requirements on third-party nonrecourse debt at December 31, 2017 were as follows:
(in millions)
 
2018
$
96

2019
173

2020
116

2021
96

2022
142

Thereafter
73

Total
$
696

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 2017 and 2016, 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 $9 million and $10 million for the years ended December 31, 2017 and 2016, respectively. There was no such adjustment for the year ended December 31, 2015. These


16


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


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, 2017, the allowance for losses of $23 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, 2017, 2016 and 2015 was as follows:
(in millions)
2017

 
2016

 
2015

Balance at beginning of year
$
32

 
$
42

 
$
42

Decrease to allowance
(9
)
 
(10
)
 

Balance at end of year
$
23

 
$
32

 
$
42

All PMCC lessees were current on their lease payment obligations as of December 31, 2017.
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, 2017 and 2016 was as follows:
(in millions)
2017

 
2016

Credit Rating by Standard & Poor’s/Moody’s:
 
 
 
“AAA/Aaa” to “A-/A3”
$
220

 
$
218

“BBB+/Baa1” to “BBB-/Baa3”
550

 
559

“BB+/Ba1” and Lower
152

 
283

Total
$
922

 
$
1,060

Note 8. Short-Term Borrowings and Borrowing Arrangements
At December 31, 2017 and December 31, 2016, Altria Group, Inc. had no short-term borrowings. The credit line available to Altria Group, Inc. at December 31, 2017 under the Credit Agreement (as defined below) was $3.0 billion.
At December 31, 2017, 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, 2017 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, 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, 2017, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were 1.3 to 1.0 and 14.8 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 19. Condensed Consolidating Financial Information.
Note 9. Long-Term Debt
At December 31, 2017 and 2016, Altria Group, Inc.’s long-term debt consisted of the following:
(in millions)
2017

 
2016

Notes, 2.625% to 10.20%, interest payable semi-annually, due through 2046 (1)
$
13,852

 
$
13,839

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

 
42

 
13,894

 
13,881

Less current portion of long-term debt
864

 

 
$
13,030

 
$
13,881

(1) Weighted-average coupon interest rate of 4.9% at December 31, 2017 and 2016.
At December 31, 2017, 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
68

 
debt discounts
55

 
 
$
13,894

 
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, 2017 and 2016, was $15.3 billion and $15.1 billion, respectively, as compared with its carrying value of $13.9 billion for each period.


17


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


Altria Group, Inc. Senior Notes: 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.
The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA as further discussed in Note 19. Condensed Consolidating Financial Information.
Debt Tender Offers: 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.
Details of these debt tender offers and the associated pre-tax losses on early extinguishment of debt recorded by Altria Group, Inc. 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

Pre-tax Loss on Early Extinguishment of Debt
Premiums and fees
$
809

 
$
226

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

 
2

Total
$
823

 
$
228

 
Note 10. Capital Stock
At December 31, 2017, 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, 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

Stock award activity

 
(408,891
)
 
(408,891
)
Repurchases of
common stock

 
(41,604,141
)
 
(41,604,141
)
Balances, December 31, 2017
2,805,961,317

 
(904,702,125
)
 
1,901,259,192

At December 31, 2017, 41,688,666 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 2017, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved an 8.2% increase in the quarterly dividend rate to $0.66 per share of Altria Group, Inc. common stock versus the previous rate of $0.61 per share. The current annualized dividend rate is $2.64 per share. Future dividend payments remain subject to the discretion of the Board of Directors.
Share Repurchases: 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 and to $4.0 billion in July 2017 (as expanded, the “July 2015 share repurchase program”). During 2017, 2016 and 2015, Altria Group, Inc. repurchased 41.6 million shares, 16.2 million shares, and 0.6 million shares, respectively, of its common stock (at an aggregate cost


18


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


of approximately $2,917 million, $1,030 million and $35 million, respectively, and at an average price of $70.10 per share, $63.48 per share and $57.66 per share, respectively) under the July 2015 share repurchase program. At December 31, 2017, Altria Group, Inc. had approximately $18 million remaining in the July 2015 share repurchase program. In January 2018, Altria Group, Inc. completed the July 2015 share repurchase program, under which it purchased a total of 58.7 million shares of its common stock at an average price of $68.15 per share.
In January 2018, the Board of Directors authorized a new $1.0 billion 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, 2017, 2016 and 2015, Altria Group, Inc.’s total share repurchase activity was as follows:
 
 
2017

2016

2015

 
 
(in millions, except per share data)
Total number of shares
repurchased
41.6

16.2

10.7

Aggregate cost of shares
repurchased
$
2,917

$
1,030

$
554

Average price per share of shares repurchased
$
70.10

$
63.48

$
51.83

Note 11. 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. Any awards granted pursuant to the 2015 Plan may be in the form of performance-based awards subject to the achievement or satisfaction of performance goals and performance cycles. 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, 2017, were 38,161,242 and 920,942, respectively.
On January 1, 2017, Altria Group, Inc. adopted ASU No. 2016-09, which 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 adoption of ASU No. 2016-09 did not have a material impact on Altria Group, Inc.’s consolidated financial statements. The portions of the guidance that have an impact on Altria Group, Inc.’s consolidated financial statements have been adopted prospectively, with the exception of the classification of employee
 
taxes paid by Altria Group, Inc. on the consolidated statements of cash flows related to shares withheld by Altria Group, Inc. for tax withholding purposes, which has been applied retrospectively. Altria Group, Inc. has made an accounting policy election to continue to estimate the number of share-based awards that are expected to vest, which includes estimating forfeitures.
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. Altria Group, Inc. estimates the number of awards expected to be forfeited and adjusts this estimate when subsequent information indicates that the actual number of forfeitures is likely to differ from previous estimates. 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, net of estimated forfeitures, 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, 2017, 2016 and 2015 of $49 million, $44 million and $51 million, respectively. The deferred tax benefit recorded related to this compensation expense was $18 million, $17 million and $20 million for the years ended December 31, 2017, 2016 and 2015, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and restricted stock units was $54 million at December 31, 2017 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, 2017:
 
Number of
Shares

 
Weighted-Average
Grant Date Fair 
Value Per Share

Balance at December 31, 2016
3,245,534

 
$
48.45

Granted
641,263

 
$
71.05

Vested
(1,321,620
)
 
$
36.40

Forfeited
(180,676
)
 
$
59.11

Balance at December 31, 2017
2,384,501

 
$
60.40

The weighted-average grant date fair value of Altria Group, Inc. restricted stock and restricted stock units granted during the years ended December 31, 2017, 2016 and 2015 was $46 million, $56 million and $65 million, respectively, or $71.05, $59.38 and $54.54 per restricted stock 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, 2017, 2016 and 2015 was $95 million, $78 million and $85 million, respectively.


19


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


Performance Stock Units: In January 2017, Altria Group, Inc. granted an aggregate of 187,886 performance stock units to eligible employees. The payout of the performance stock units requires the achievement of certain performance measures, which were predetermined at the time of grant, over a three-year performance cycle. These performance measures consist of Altria Group, Inc.’s adjusted diluted earnings per share (“EPS”) compounded annual growth rate and Altria Group, Inc.’s total shareholder return relative to a predetermined peer group. The performance stock units are also subject to forfeiture if certain employment conditions are not met. At December 31, 2017, Altria Group, Inc. had 170,755 performance stock units remaining, with a weighted-average grant date fair value of $70.39 per performance stock unit. The fair value of the performance stock units at the date of grant, net of estimated forfeitures, is amortized to expense over the performance period. Altria Group, Inc. recorded pre-tax compensation expense related to performance stock units for the year ended December 31, 2017 of $6 million. The unamortized compensation expense related to Altria Group, Inc.’s performance stock units was $7 million at December 31, 2017. Altria Group, Inc. did not grant any performance stock units during 2016 and 2015.
 
Note 12. Earnings per Share
Basic and diluted EPS were calculated using the following:
 
For the Years Ended December 31,
(in millions)
2017

 
2016

 
2015

Net earnings attributable to Altria Group, Inc.
$
10,222

 
$
14,239

 
$
5,241

Less: Distributed and undistributed earnings attributable to share-based awards
(14
)
 
(24
)
 
(10
)
Earnings for basic and diluted EPS
$
10,208

 
$
14,215

 
$
5,231

Weighted-average shares for basic and diluted EPS
1,921

 
1,952

 
1,961





20


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


Note 13. 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)
 
Benefit Plans

 
AB InBev/
SABMiller

 
Currency
Translation
Adjustments and Other

 
Accumulated
Other
Comprehensive
Losses

Balances, December 31, 2014
 
$
(2,040
)
 
$
(640
)
 
$
(2
)
 
$
(2,682
)
Other comprehensive losses before reclassifications
 
(223
)
 
(983
)
 
(4
)
 
(1,210
)
Deferred income taxes
 
86

 
344

 
1

 
431

Other comprehensive losses before reclassifications, net of deferred income taxes
 
(137
)
 
(639
)
 
(3
)
 
(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 earnings (losses), net of deferred income taxes
 
30

 
(625
)
(1) 
(3
)
 
(598
)
Balances, December 31, 2015
 
(2,010
)
 
(1,265
)
 
(5
)
 
(3,280
)
Other comprehensive (losses) earnings before reclassifications
 
(247
)
 
787

 
1

 
541

Deferred income taxes
 
96

 
(276
)
 

 
(180
)
Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes
 
(151
)
 
511

(2) 
1

 
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 (losses) earnings, net of deferred income taxes
 
(38
)
 
1,265

 
1

 
1,228

Balances, December 31, 2016
 
(2,048
)
 

 
(4
)
 
(2,052
)
Other comprehensive earnings (losses) before reclassifications
 
52

 
(91
)
 

 
(39
)
Deferred income taxes
 
(21
)
 
32

 

 
11

Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes
 
31

 
(59
)
 

 
(28
)
 
 
 
 
 
 
 
 
 
Amounts reclassified to net earnings
 
291

 
8

 

 
299

Deferred income taxes
 
(113
)
 
(3
)
 

 
(116
)
Amounts reclassified to net earnings, net of
deferred income taxes
 
178

 
5

 

 
183

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (losses), net of deferred income taxes
 
209

 
(54
)
(1) 

 
155

Balances, December 31, 2017
 
$
(1,839
)
 
$
(54
)
 
$
(4
)
 
$
(1,897
)
(1) Altria Group, Inc.’s proportionate share of AB InBev’s and SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments for the years ended December 31, 2017 and 2015, respectively.
(2) As a result of the Transaction, Altria Group, Inc. reversed to investment in 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.



21


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)
 
2017

 
2016

 
2015

Benefit Plans: (1)
 
 
 
 
 
 
Net loss
 
$
325

 
$
223

 
$
304

Prior service cost/credit
 
(34
)
 
(45
)
 
(32
)
 
 
291

 
178

 
272

AB InBev/SABMiller (2)
 
8

 
1,160

 
21

Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings
 
$
299

 
$
1,338

 
$
293

(1) Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.
(2) For the years ended December 31, 2017 and 2015, amounts are included in earnings from equity investment in AB InBev/SABMiller. Substantially all of the amount for the year ended December 31, 2016 is included in gain on AB InBev/SABMiller business combination. For further information, see Note 6. Investment in AB InBev/SABMiller.
Note 14. Income Taxes
As a result of the Tax Reform Act, Altria Group, Inc. recorded net tax benefits of approximately $3.4 billion in the fourth quarter of 2017 as discussed below. The main provisions of the Tax Reform Act that impact Altria Group, Inc. include: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system.
The transition to a modified territorial tax system requires Altria Group, Inc. to record a deemed repatriation tax and an associated tax basis benefit in 2017. Substantially all of the deemed repatriation tax is related to Altria Group, Inc.’s share of AB InBev’s accumulated earnings. As a result of the deemed repatriation tax, no tax was due on the dividends Altria Group, Inc. received from AB InBev in 2017.
 
Earnings before income taxes and (benefit) provision for income taxes consisted of the following for the years ended December 31, 2017, 2016 and 2015: 
(in millions)
2017

 
2016

 
2015

Earnings before income taxes:
 
 
 
 
 
United States
$
9,809

 
$
21,867

 
$
8,078

Outside United States
19

 
(15
)
 

Total
$
9,828

 
$
21,852

 
$
8,078

Provision (benefit) for
income taxes:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
2,346

 
$
4,093

 
$
2,516

State and local
366

 
390

 
451

Outside United States
15

 
6

 

 
2,727

 
4,489