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MO > SEC Filings for MO > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for ALTRIA GROUP, INC.

Form 10-Q for ALTRIA GROUP, INC.


30-Oct-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Company

At September 30, 2012, Altria Group, Inc.'s direct and indirect wholly-owned subsidiaries included Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; John Middleton Co. ("Middleton"), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC ("UST"), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC ("USSTC") and Ste. Michelle Wine Estates Ltd. ("Ste. Michelle"), is engaged in the manufacture and sale of smokeless products and wine. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held an approximate 27.0% economic and voting interest in SABMiller plc ("SABMiller") at September 30, 2012, which is accounted for under the equity method of accounting. Altria Group, Inc.'s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends. At September 30, 2012, Altria Group, Inc.'s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

Altria Group, Inc.'s chief operating decision maker has been evaluating the operating results of the former cigarettes and cigars segments as a single smokeable products segment since January 1, 2012. The combination of these two formerly separate segments is related to the restructuring associated with a cost reduction program announced in October 2011 (the "2011 Cost Reduction Program"). Also, in connection with the 2011 Cost Reduction Program, effective January 1, 2012, Middleton became a wholly-owned subsidiary of PM USA, reflecting management's goal to achieve efficiencies in the management of these businesses. Effective with the first quarter of 2012, Altria Group, Inc.'s reportable segments are smokeable products, smokeless products, wine and financial services. As a result of the revised reportable segments and Middleton becoming a wholly-owned subsidiary of PM USA, certain prior period amounts have been recast to conform with the current-period presentation. For further discussion on the 2011 Cost Reduction Program, see Note 2. Asset Impairment, Exit, Implementation and Integration Costs to the condensed consolidated financial statements ("Note 2").

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Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.

Consolidated Results of Operations for the Nine Months Ended September 30, 2012:
The changes in Altria Group, Inc.'s net earnings and diluted earnings per share ("EPS") attributable to Altria Group, Inc. for the nine months ended September 30, 2012, from the nine months ended September 30, 2011, were due primarily to the following:

                                                         Net Earnings              Diluted EPS
                                                         (in millions, except per share data)
For the nine months ended September 30, 2011         $            2,554         $           1.23

2011 Asset impairment, exit and integration costs                     4                        -
2011 SABMiller special items                                         24                     0.01
2011 PMCC leveraged lease charge                                    627                     0.30
2011 Tobacco and health judgments                                    24                     0.01
2011 UST acquisition-related costs                                    4                        -
2011 Tax items (*)                                                  (24 )                  (0.01 )
Subtotal 2011 special items                                         659                     0.31

2012 Asset impairment, exit and implementation costs                (25 )                  (0.01 )
2012 SABMiller special items                                        172                     0.08
2012 PMCC leveraged lease benefit                                    68                     0.03
2012 Tobacco and health judgments                                    (3 )                      -
2012 Loss on early extinguishment of debt                          (559 )                  (0.28 )
2012 Tax items (*)                                                   51                     0.03
Subtotal 2012 special items                                        (296 )                  (0.15 )

Fewer shares outstanding                                              -                     0.04
Change in tax rate                                                  (84 )                  (0.04 )
Operations                                                          244                     0.12
For the nine months ended September 30, 2012         $            3,077         $           1.51

(*) Excludes the tax impact included in the PMCC leveraged lease benefit/charge.

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

Fewer Shares Outstanding: Fewer shares outstanding during the nine months ended September 30, 2012 compared with the prior-year period were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase programs.

Change in Tax Rate: The change in tax rate was due primarily to a reduction in certain consolidated tax benefits resulting from the third quarter of 2012 debt tender offer.

Operations: The increase of $244 million shown in the table above was due primarily to the following:

higher income from the smokeable products, financial services and smokeless products segments; and

higher equity earnings from SABMiller.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

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Consolidated Results of Operations for the Three Months Ended September 30, 2012: The changes in Altria Group, Inc.'s net earnings and diluted EPS attributable to Altria Group, Inc. for the three months ended September 30, 2012, from the three months ended September 30, 2011, were due primarily to the following:

                                                         Net Earnings              Diluted EPS
                                                         (in millions, except per share data)
For the three months ended September 30, 2011        $            1,173         $           0.57

2011 Integration costs                                                1                        -
2011 SABMiller special items                                          8                        -
2011 UST acquisition-related costs                                    1                        -
2011 Tax items                                                      (24 )                  (0.01 )
Subtotal 2011 special items                                         (14 )                  (0.01 )

2012 Asset impairment, exit and implementation costs                 (7 )                      -
2012 SABMiller special items                                        (12 )                  (0.01 )
2012 Tobacco and health judgments                                    (2 )                      -
2012 Loss on early extinguishment of debt                          (559 )                  (0.28 )
2012 Tax items                                                       62                     0.03
Subtotal 2012 special items                                        (518 )                  (0.26 )

Fewer shares outstanding                                              -                     0.01
Change in tax rate                                                  (60 )                  (0.03 )
Operations                                                           76                     0.04
For the three months ended September 30, 2012        $              657         $           0.32

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

Fewer Shares Outstanding: Fewer shares outstanding during the three months ended September 30, 2012 compared with the prior-year period were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase programs.

Change in Tax Rate: The change in tax rate was due primarily to a reduction in certain consolidated tax benefits resulting from the third quarter of 2012 debt tender offer.

Operations: The increase of $76 million shown in the table above was due primarily to the following:

higher income from the smokeable products and smokeless products segments;

higher equity earnings from SABMiller; and

lower interest and other debt expense, net.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

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2012 Forecasted Results: In August 2012, Altria Group, Inc. revised its 2012 full-year reported diluted EPS forecast to a range of $2.01 to $2.05 from a range of $2.29 to $2.33, reflecting the loss on early extinguishment of debt related to a debt tender offer completed during the third quarter of 2012. In September 2012, Altria Group, Inc. revised its 2012 full-year reported diluted EPS forecast to a range of $2.03 to $2.07, reflecting an income tax benefit primarily attributable to the reversal of tax reserves and associated interest related to the closure of the Internal Revenue Service ("IRS") audit of the 2004-2006 tax years. In October 2012, Altria Group, Inc. reaffirmed its 2012 full-year reported diluted EPS forecast. The 2012 full-year reported diluted EPS forecast includes total estimated net expenses of $0.16 per share as detailed in the table below, as compared with 2011 full-year reported diluted EPS of $1.64, which included $0.41 per share of net expenses as detailed in the table below. In addition, in October 2012, Altria Group, Inc. reaffirmed its 2012 full-year forecast for adjusted diluted EPS, which excludes the net expenses in the table below, representing a growth rate of 7% to 9% over 2011 full-year adjusted diluted EPS.

The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.

(Income) Expense, Net, Included in Reported Diluted EPS

                                                         2012                 2011
Loss on early extinguishment of debt               $          0.28        $         -
Asset impairment, exit, implementation and
integration costs                                             0.02               0.07
SABMiller special items                                      (0.08 )             0.03
PMCC leveraged lease (benefit) charge                        (0.03 )             0.30
Tobacco and health judgments                                     -               0.05
Tax items*                                                   (0.03 )            (0.04 )
                                                   $          0.16        $      0.41


* Excludes the tax impact included in the PMCC leveraged lease (benefit) charge.

Adjusted diluted EPS is a financial measure that is not consistent with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Altria Group, Inc.'s management reviews diluted EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items include loss on early extinguishment of debt, restructuring charges, SABMiller special items, certain PMCC leveraged lease items, certain tax items and tobacco and health judgments. Altria Group, Inc.'s management does not view any of these special items to be part of its sustainable results as they may be highly variable and difficult to predict and can distort underlying business trends and results. Altria Group, Inc.'s management believes it is appropriate to disclose this non-GAAP financial measure to provide useful insight into underlying business trends and results, and to provide a more meaningful comparison of year-over-year results. Adjusted measures are used by management and regularly provided to Altria Group, Inc.'s chief operating decision maker for planning, forecasting and evaluating the performances of Altria Group, Inc.'s businesses, including allocating resources and evaluating results relative to employee compensation targets. This information should be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.

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Discussion and Analysis

Consolidated Operating Results

See pages 98-101 for a discussion of Cautionary Factors That May Affect Future
Results.
                                            For the Nine Months Ended          For the Three Months Ended
                                                  September 30,                       September 30,
                                             2012               2011             2012               2011
                                                                    (in millions)
Net revenues:
Smokeable products                      $     16,616       $     16,500     $      5,613       $      5,499
Smokeless products                             1,243              1,209              437                426
Wine                                             381                349              140                132
Financial services                               136               (387 )             52                 51
Net revenues                            $     18,376       $     17,671     $      6,242       $      6,108

Excise taxes on products:
Smokeable products                      $      5,239       $      5,304     $      1,742       $      1,747
Smokeless products                                83                 81               29                 28
Wine                                              14                 13                5                  5
Excise taxes on products                $      5,336       $      5,398     $      1,776       $      1,780

Operating income:
   Operating companies income (loss):
Smokeable products                      $      4,716       $      4,527     $      1,637       $      1,575
Smokeless products                               678                660              246                245
Wine                                              63                 54               26                 23
Financial services                               166               (359 )             79                 83
   Amortization of intangibles                   (15 )              (16 )             (5 )               (5 )
   General corporate expenses                   (167 )             (173 )            (61 )              (62 )
   Changes to Mondel?z and PMI
tax-related receivables                           48                 19               48                 19
   Corporate asset impairment and
exit costs                                        (1 )                -               (1 )                -
Operating income                        $      5,488       $      4,712     $      1,969       $      1,878

As discussed further in Note 7. Segment Reporting to the condensed consolidated financial statements, Altria Group, Inc.'s chief operating decision maker reviews operating companies income to evaluate the performance of and allocate resources to the segments. Operating companies income for the segments is defined as operating income before amortization of intangibles and general corporate expenses. Management believes it is appropriate to disclose this measure to help investors analyze business performance and trends of the various business segments.

The following events that occurred during the nine and three months ended September 30, 2012 and 2011 affected the comparability of statement of earnings amounts.

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Asset Impairment, Exit, Implementation and Integration Costs: For the nine and three months ended September 30, 2012, pre-tax asset impairment, exit and implementation costs consisted of the following:

                                   For the Nine Months Ended                                For the Three Months Ended
                                      September 30, 2012                                        September 30, 2012
                         Asset                                                    Asset
                     Impairment and    Implementation (Gain)                 Impairment and
                       Exit Costs              Costs               Total       Exit Costs       Implementation Costs        Total
                                                                      (in millions)
Smokeable products   $         24     $             (11 )        $    13     $           1     $                   1     $        2
Smokeless products             22                     5               27                 8                         -              8
General corporate               1                    (1 )              -                 1                         -              1
Total                $         47     $              (7 )        $    40     $          10     $                   1     $       11

For the nine months ended September 30, 2011, total pre-tax asset impairment and exit costs were $3 million, all of which were reported in the smokeable products segment. There were no asset impairment and exit costs incurred during the three months ended September 30, 2011. In addition, total pre-tax integration costs of $3 million and $1 million for the nine and three months ended September 30, 2011, respectively, were reported in the smokeless products segment. There were no implementation costs incurred during the nine months ended September 30, 2011.

In October 2011, Altria Group, Inc. announced the 2011 Cost Reduction Program for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.'s objective to reduce cigarette-related infrastructure ahead of PM USA's cigarettes volume declines. As a result of this program, Altria Group, Inc. expects to incur total net pre-tax charges of approximately $300 million (concluding by the end of 2012). Total pre-tax charges, net, incurred since the inception of this program through September 30, 2012 were $264 million. Altria Group, Inc. believes that the program remains on track to deliver $400 million in annualized savings against previously planned spending by the end of 2013.

Altria Group, Inc. had a severance liability balance of $68 million at September 30, 2012 related to its restructuring programs, substantially all of which is expected to be paid out by June 30, 2013.

For further details on asset impairment, exit, implementation and integration costs, see Note 2.

SABMiller Special Items: Altria Group, Inc.'s earnings from its equity investment in SABMiller for the nine months ended September 30, 2012 included gains resulting from SABMiller's strategic alliance transactions with Anadolu Efes and Castel, and a gain related to SABMiller's Australian joint venture, partially offset by costs for SABMiller's "business capability programme," costs related to SABMiller's acquisition of Foster's Group Limited and costs related to SABMiller's economic and social development program in South Africa. Altria Group, Inc.'s earnings from its equity investment in SABMiller for the three months ended September 30, 2012 included costs for SABMiller's "business capability programme" and costs related to SABMiller's acquisition of Foster's Group Limited. Altria Group, Inc.'s earnings from its equity investment in SABMiller for the nine months ended September 30, 2011 included costs for SABMiller's "business capability programme" and asset impairment charges related to the disposal of a distribution business in Italy, partially offset by pre-tax gains resulting from SABMiller's hotel and gaming transaction. Altria Group, Inc.'s earnings from its equity investment in SABMiller for the three months ended September 30, 2011 included costs for SABMiller's "business capability programme."

PMCC Leveraged Lease Benefit/Charge: During the second quarter of 2012, Altria Group, Inc. entered into a closing agreement (the "Closing Agreement") with the IRS that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012 due primarily to lower than estimated interest on tax underpayments.

During the second quarter of 2011, Altria Group, Inc. recorded a charge of $627 million related to the federal income tax treatment of these transactions (the "2011 PMCC Leveraged Lease Charge"). Approximately 50% of the charge ($315 million) represented a reduction in cumulative lease earnings recorded to date that will be recaptured over the

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remainder of the terms of the affected leases. The remaining portion of the charge ($312 million) primarily represented a permanent charge for interest on tax underpayments.

For the nine months ended September 30, 2012 and 2011, the benefit/charge associated with PMCC's leveraged lease transactions was recorded in Altria Group, Inc.'s condensed consolidated statements of earnings as follows:

                                   For the Nine Months Ended                          For the Nine Months Ended
                                      September 30, 2012                                  September 30, 2011
                                        Benefit for Income                    Net       (Benefit) Provision for
                        Net Revenues          Taxes             Total      Revenues          Income Taxes           Total
                                                                   (in millions)
Reduction to
cumulative lease
earnings                $        7     $           (2 )       $     5     $     490     $           (175 )        $    315
Interest on tax
underpayments                    -                (73 )           (73 )           -                  312               312
Total                   $        7     $          (75 )       $   (68 )   $     490     $            137          $    627

For further discussions of the Closing Agreement and the PMCC leveraged lease benefit/charge, see Note 8. Finance Assets, net to the condensed consolidated financial statements ("Note 8"), Note 10. Income Taxes to the condensed consolidated financial statements ("Note 10") and Note 11. Contingencies to the condensed consolidated financial statements ("Note 11").

PMCC Recoveries and Allowance for Losses: During the third quarter of 2012, PMCC recorded pre-tax income of $33 million primarily related to recoveries from the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American Airlines, Inc. ("American"), which filed for bankruptcy on November 29, 2011. In addition, during the second quarter of 2012 and the third quarter of 2011, PMCC decreased its allowance for losses by $10 million and $35 million, respectively, which was recorded as income during each respective period. For further discussion, see Note 8.

Tobacco and Health Judgments: For the nine and three months ended September 30, 2012, Altria Group, Inc. recorded pre-tax charges of $4 million and $3 million, respectively, in the smokeable products segment related to certain tobacco and health judgments. For the nine months ended September 30, 2011, Altria Group, Inc. recorded pre-tax charges of $36 million in the smokeable products segment related to certain tobacco and health judgments. These charges were included in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statements of earnings. In addition, for the nine months ended September 30, 2011, Altria Group, Inc. recorded interest costs related to these judgments of $5 million. For further discussion, see Note 11.

Loss on Early Extinguishment of Debt: During the third quarter of 2012, Altria Group, Inc. completed a tender offer to purchase for cash $2.0 billion aggregate principal amount of certain of its senior unsecured notes. As a result of the tender offer, during the third quarter of 2012, Altria Group, Inc. recorded a pre-tax loss on early extinguishment of debt of $874 million, which included debt tender premiums and fees of $864 million and the write off of related unamortized debt discounts and debt issuance costs of $10 million. For further discussion, see Note 9. Debt to the condensed consolidated financial statements ("Note 9").

Tax Items: Tax items for the nine and three months ended September 30, 2012 included the reversal of tax reserves and associated interest due primarily to the closure in August 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries' 2004 - 2006 tax years. Tax items for the nine and three months ended September 30, 2011 included the reversal of tax accruals no longer required and the expiration of statutes of limitations. For further discussion, see Note 10.

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Consolidated Results of Operations for the Nine Months Ended September 30, 2012

The following discussion compares consolidated operating results for the nine months ended September 30, 2012, with the nine months ended September 30, 2011.

Net revenues, which include excise taxes billed to customers, increased $705 million (4.0%), due to higher net revenues from the financial services (which included the 2011 PMCC Leveraged Lease Charge), smokeable products, smokeless products and wine segments.

Excise taxes on products decreased $62 million (1.1%), due primarily to lower excise taxes for Middleton and lower smokeable products shipment volume.

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