For the Nine Months Ended September 30, 2017
(in millions)
Balances at December 31, 2016 $ 79
Charges 17
Cash spent (54 )
Balances at September 30, 2017 $ 42

In January 2016, Altria Group, Inc. announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness. The initiative reduces spending on certain selling, general and administrative infrastructure and implements a leaner organizational structure. As a result of the initiative, for the nine and three months ended September 30, 2016, Altria Group, Inc. incurred pre-tax asset impairment, exit and implementation costs of $130 million and $6 million, respectively. At December 31, 2016, total pre-tax charges related to this initiative were substantially completed.

⁽¹⁾ For the nine and three months ended September 30, 2017, other comprehensive earnings/losses related to Altria Group, Inc.’s investment in AB InBev consisted primarily of currency translation adjustments.

⁽²⁾ Amounts are primarily included in earnings from equity investment in AB ~~InBev/SABMiller.~~InBev.

jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. States, including Florida, may also seek to repeal or alter bond cap statutes through legislation. Although Altria ~~Group, Inc.~~ cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, ~~Group, Inc.,~~ or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

July 22, 2016:

Engle progeny judgments (and related costs and fees) totaling approximately ~~$99~~$179 million, interest totaling approximately ~~$22~~$32 million and payment of approximately $43 million in connection with the Federal Engle Agreement, discussed below.

~~of appellate review was denied by the Florida Third District Court of Appeal.~~ In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court, which ~~the United States Supreme Court denied later in 2007.~~

was denied. In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and would receive no credit at that time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former ~~Engle~~ ~~class members.~~class.

Engle Progeny Cases

~~court ruled that it will not apply the comparative fault reduction to the compensatory damages.~~ In August 2017, the trial court denied defendants’ post-trial motions and entered final judgment in favor of plaintiff. In September 2017, defendants filed a notice of appeal to the Florida Second District Court of Appeal and posted a bond in the amount of $2.5 million.

~~Date:~~ ~~November 2016~~

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

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

~~Plaintiff:~~ Oshinsky-Blacker

~~Date:~~ ~~April 2016~~

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

In May 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, all of which the court denied and entered final judgment in favor of plaintiff with a deduction for plaintiff’s comparative fault. In June 2016, defendants filed a notice of appeal to the Florida Fourth District Court of Appeal and PM USA posted a bond in the amount of approximately $1.5 million. In August 2017, the Florida Fourth District Court of Appeal affirmed the final judgment in favor of plaintiff. In September 2017, defendants petitioned the Florida Fourth District Court of Appeal for panel rehearing or for rehearing ~~en banc, which the court denied in October 2017~~.

~~Plaintiff:~~ McCall

~~Plaintiff:~~ ~~Ahrens~~

~~Date:~~ ~~February 2016~~

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

~~In February 2016, the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for~~

plaintiff’s comparative fault and defendants filed various post-trial motions, including motions to set aside the verdict and for a new trial. In March 2016, the trial court denied defendants’ post-trial motions. In April 2016, defendants filed a notice of appeal to the Florida Second District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In May 2017, the Florida Second District Court of Appeal issued a ~~per curiam~~ affirmance of the final judgment against defendants and defendants filed a motion for rehearing. In July 2017, the Second District Court of Appeal withdrew its prior decision and replaced it with a written opinion affirming the trial court’s judgment, but certifying to the Florida Supreme Court a conflict with ~~Schoeff, discussed below under~~ ~~Engle Progeny Appellate Issues. In August 2017, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme Court stayed the case pending~~ ~~Schoeff~~.

~~Plaintiff:~~ ~~Ledoux~~

~~Date:~~ ~~December 2015~~

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

In January 2016, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, and the trial court entered final judgment against PM USA and R.J. Reynolds without any deduction for plaintiff’s comparative fault. In February 2016, the trial court denied defendants’ post-trial motions. In March 2016, defendants filed a notice of appeal to the Florida Third District Court of Appeal and PM USA posted a bond in the amount of $2.5 million. In October 2017, the Florida Third District Court of Appeal affirmed the final judgment in favor of plaintiff.

~~Plaintiff:~~ ~~Barbose~~

~~Date:~~ ~~November 2015~~

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

In November 2015, the court entered final judgment in favor of plaintiff without any deduction for plaintiff’s comparative fault and in December 2015, PM USA and R.J. Reynolds filed various post-trial motions, including motions to set aside the verdict and for a new trial, which the court denied in January 2016. In February 2016, PM USA posted a bond in the amount of $2.5 million and filed a notice of appeal to the Florida Second District Court of Appeal. In August 2017, the Florida Second District Court of Appeal issued a ~~per curiam~~ ~~affirmance of the final judgment against defendants and defendants filed a motion seeking a written opinion with a citation to~~ ~~Schoeff, discussed below under~~ ~~Engle Progeny Appellate Issues. In October 2017, the Florida Second District Court of Appeal issued a written opinion with a citation to~~ ~~Schoeff~~.

~~Plaintiff:~~ ~~Tognoli~~

~~Date:~~ ~~November 2015~~

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

In December 2015, PM USA filed a motion to set aside the verdict and for judgment in accordance with its motion for directed verdict. In January 2016, the trial court entered final judgment against PM USA with a deduction for plaintiff’s comparative fault and plaintiff filed an appeal to the Florida Fourth District Court of Appeal. Additionally, the trial court denied PM USA’s post-trial motions and PM USA cross-appealed. In June 2017, the Florida Fourth District Court of Appeal ~~issued a~~ ~~per curiam~~ ~~affirmance of~~reversed the ~~final~~ judgment ~~against PM USA. In July 2017, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court~~ and ~~in August 2017, the Florida Supreme Court stayed~~remanded the case ~~pending~~ ~~Schoeff, discussed below under~~ ~~Engle Progeny Appellate Issues~~.for a new trial on an appellate finding that the trial judge erred in instructing the jury on the warning labels on cigarette packs.

~~Date:~~ ~~October 2015~~

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

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

~~Plaintiff:~~ Duignan

cross-appealed. Also in March 2016, PM USA posted a bond in the amount of approximately $300,000. In January 2018, the Florida Fourth District Court of Appeal affirmed the judgment in favor of plaintiff and granted plaintiff a new trial on punitive damages.

damages.

a notice of appeal to the Florida Fourth District Court of Appeal and plaintiff cross-appealed. PM USA subsequently posted a bond in the amount of $460,000. In February 2018, the Florida Fourth District Court of Appeal affirmed the judgment in favor of plaintiff and granted plaintiff leave to seek a new trial on punitive damages. In the first quarter of 2018, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $1 million for the judgment and interest. In July 2018, the trial court entered final judgment on the compensatory damages award and reserved jurisdiction for plaintiff to seek punitive damages.

~~Plaintiff:~~ ~~Zamboni~~

~~Date:~~ ~~February 2015~~

~~Verdict:~~

~~A jury in~~Court, which the ~~U.S.~~Florida Fourth District Court ~~for~~of Appeal denied in November 2017. In December 2017, plaintiff filed a notice to invoke the ~~Middle District of Florida returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds awarding $340,000 in compensatory damages and allocating 10%~~discretionary jurisdiction of the ~~fault to PM USA (an amount of $34,000).~~

~~In April 2015, PM USA and R.J. Reynolds filed a motion for judgment in defendants’ favor in accordance with the Eleventh Circuit’s decision in~~ ~~Graham, discussed below under~~ ~~Engle Progeny Appellate Issues.~~ ~~In June 2015, the trial court stayed the case pending the Eleventh Circuit’s final disposition in the~~ ~~Graham~~ ~~case.~~Florida Supreme Court.

Verdict:

~~Date:~~ ~~November 2014~~

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

In December 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial, which the court denied in July 2015. In August 2015, the trial court entered final judgment without any deduction for plaintiff’s comparative fault. Defendants filed a notice of appeal to the Florida First District Court of Appeal in September 2015 and PM USA posted a bond in the amount of approximately $2.5 million. In February 2017, the Florida First District Court of Appeal affirmed the trial court’s judgment. In March 2017, defendants filed a motion for rehearing ~~en banc~~ ~~with the Florida First District Court of Appeal or for certification to the Florida Supreme Court. In June 2017, the Florida First District Court of Appeal granted defendants’ motion for rehearing~~ ~~en banc. In October 2017, the Florida First District Court of Appeal dissolved the~~ ~~en banc~~ ~~proceeding.~~

~~Plaintiff:~~ Perrotto

~~Plaintiff:~~ ~~Lourie~~

~~Date:~~ ~~October 2014~~

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

~~In October 2014, defendants filed a motion for judgment and a motion for a new trial. In November 2014, the trial court~~June 2018, denied defendants’ post-trial ~~motions and entered final judgment with a deduction for plaintiff’s comparative fault. Later in November 2014,~~motions. In July 2018, defendants filed a notice of appeal to the ~~Florida Second District~~U.S. Court of Appeal, and PM USA posted a bond in the amount of $370,318. In August 2016, the Florida Second District Court of Appeal affirmed the judgment entered in favor of the plaintiff. In September 2016, defendants filed a petition to invoke the discretionary jurisdiction of the Florida Supreme Court and the Florida Supreme Court stayed the proceedings pending final disposition in the ~~Marotta~~ ~~case, discussed below under~~ ~~Engle Progeny Appellate Issues~~. In June 2017, the Florida Supreme Court denied PM USA’s petition to invoke the court’s discretionary jurisdiction. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $2.3 millionAppeals for the ~~judgment plus interest and associated costs. In September 2017, defendants filed a petition for~~ ~~writ of certiorari~~ ~~with the United States Supreme Court on due process and federal preemption grounds.~~Eleventh Circuit.

damages.

~~Plaintiff:~~ ~~Griffin~~

~~Date:~~ ~~June 2014~~

The trial court entered final judgment against PM USA in July 2014 with a deduction for plaintiff’s comparative fault. In August 2014, PM USA filed a motion to amend the judgment to reduce plaintiff’s damages by the amount paid by collateral sources, which the court denied in September 2014. In October 2014, PM USA posted a bond in the amount of $640,543 and filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. In May 2015, the Eleventh Circuit stayed the appeal pending final disposition in the ~~Graham~~ case, discussed below under Engle Progeny Appellate Issues. In February 2018, the ~~second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $1.1 million for the judgment plus interest and associated costs.~~

~~Plaintiff:~~ ~~Burkhart~~

~~Date:~~ ~~May 2014~~

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

~~In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or~~ ~~remittitur~~ ~~of the damages awards, which the court denied in September 2014. The~~ trial court ~~entered final judgment without any deduction for plaintiff’s comparative fault. In October 2014, defendants filed a notice of appeal to~~lifted the ~~U.S. Court of Appeals for~~stay on the ~~Eleventh Circuit. In April 2017, the Eleventh Circuit stayed the appeal pending final disposition in the~~ ~~Graham~~ ~~case, discussed below under~~ ~~Engle Progeny Appellate Issues~~.post-trial proceedings.

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

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

~~Plaintiff:~~ ~~Graham~~

~~Date:~~ ~~May 2013~~

~~Plaintiff:~~ ~~Searcy~~

~~Date:~~April 2013

which the court denied. In January 2016, a panel of the Florida Fourth District Court of Appeal vacated the punitive damages award and remanded the case for retrial on plaintiff’s claims of concealment and conspiracy, and punitive damages. The court also found that the trial court should have applied the comparative fault deduction, reducing the compensatory damages against PM USA to $4.025 million. In February 2016, defendants and plaintiff filed respective motions for rehearing and rehearing en banc. In March 2016, plaintiff filed a notice of supplemental authority citing the Soffer decision, discussed below under Engle Progeny Appellate Issues. In September 2016, the Florida Fourth District Court of Appeal, ruling en banc, reversed the judgment against PM USA and R.J. Reynolds in its entirety on the grounds that improper arguments by plaintiff’s counsel deprived defendants of a fair trial, and ordered a new trial. In October 2016, plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court, which the court denied in March 2017. In June 2017, plaintiff filed a petition for writ of certiorari with the United States Supreme Court seeking review of the 2016 en banc ruling by the Florida Fourth District Court of Appeal, which the court denied in October 2017.

~~Plaintiff:~~ ~~Naugle~~

~~Date:~~ ~~November 2009~~

A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.

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

conduct a juror interview. In April 2016, PM USA moved for a new trial following the juror interview, which the court denied. In May 2016, PM USA filed a notice of appeal to the Fourth District Court of Appeal. In April 2017, the Fourth District Court of Appeals issued a ~~per curiam~~ decision affirming the trial court’s judgment against PM USA. In the second quarter of 2017, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $13.2 million for the judgment plus interest and associated costs, and increased its bond by $6.2 million. In September 2017, PM USA filed a petition for ~~writ of certiorari~~ ~~with the United States Supreme Court on due process and federal preemption grounds.~~

damages against each defendant.

The jury also awarded plaintiff $250,000 in punitive damages against each defendant.

~~Plaintiff:~~ ~~Hancock~~

~~Date:~~ ~~August 2012~~

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

In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012, the trial court entered final judgment ~~with a deduction for plaintiff’s~~in favor of plaintiff. In May 2016, the court denied defendants’ post-trial motions and amended the final judgment to apply the comparative fault ~~(PM USA’s portion of the damages was approximately $700) and PM USA~~deduction. In June 2016, defendants filed a ~~motion to amend the judgment to award PM USA attorneys’ fees of approximately $20,000. In November 2012, both sides filed notices~~notice of appeal to the Florida Fourth District Court of ~~Appeal. Plaintiff agreed to waive~~Appeal and plaintiff cross-appealed. Also in June 2016, PM USA posted a bond in the ~~bond for the appeal.~~amount of approximately $475,000. In ~~April 2015,~~November 2017, the Florida Fourth District Court of Appeal ~~affirmed~~rejected defendants’ appeal, granted plaintiff’s cross-appeal finding that the trial ~~court’s verdict.~~court erred in applying the comparative fault deduction and remanded the case to the trial court with directions to enter an amended final judgment. In ~~May 2015, plaintiff filed~~the fourth quarter of 2017, PM USA recorded a ~~motion~~provision of approximately $1 million on its consolidated balance sheet for ~~rehearing and for a written opinion and rehearing~~ en

~~banc, which the Court of Appeal denied in June 2015. In December 2016, plaintiff agreed not to pursue~~ the judgment and interest and paid this amount in ~~exchange for PM USA not pursuing its fee award, thereby resolving the case.~~January 2018.

~~In July 2010, the Eleventh Circuit ruled in~~ ~~B. Brown~~ ~~that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original~~ ~~Engle~~ ~~trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the~~ ~~Engle~~ findings violates defendants’ due process rights. Rather, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original ~~Engle~~ ~~jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the~~ ~~Engle~~ ~~jury actually made.~~

~~After the remand of~~ ~~B. Brown, several state appellate rulings superseded the Eleventh Circuit’s ruling on Florida state law. These cases include~~ ~~B. Martin, a case against R.J. Reynolds in Escambia County, and~~ ~~J. Brown, a case against R.J. Reynolds in Broward County. In December 2011, petitions for~~ ~~writ of certiorari~~ ~~were filed with the United States Supreme Court by R.J. Reynolds in~~ ~~Campbell~~, ~~B. Martin~~, ~~Gray~~ ~~and~~ ~~Hall~~ ~~and by PM USA and Liggett Group in~~ ~~Campbell. The United States Supreme Court denied defendants’~~ ~~certiorari~~ ~~petitions in March 2012.~~

In Douglas, an Engle progeny case against PM USA and R.J. Reynolds, in March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings with respect to strict liability claims but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of plaintiff upholding the use of the Engle jury findings with respect to strict liability and negligence claims. PM ~~USA filed its~~USA’s subsequent petition for writ of certiorari with the United States Supreme Court ~~in August 2013, which the court denied in October 2013.~~

~~Meanwhile, in the~~ ~~Waggoner~~ ~~case, the U.S. District Court for the Middle District of Florida ruled in December 2011 that application of the~~ ~~Engle~~ ~~findings to establish the wrongful conduct elements of plaintiffs’ claims consistent with~~ ~~Martin~~ or ~~J. Brown~~ did not violate defendants’ due process rights. PM USA and the other defendants sought appellate review of the due process ruling. In February 2012, the district court denied the motion for interlocutory appeal, but did apply the ruling to all active pending federal ~~Engle~~ ~~progeny cases. As a result, R.J. Reynolds appealed the rulings in the~~ ~~Walker~~ ~~and~~ ~~Duke~~ ~~cases to the Eleventh Circuit, which ultimately rejected the due process defense. In March 2014, R.J. Reynolds filed petitions for~~ ~~writ of certiorari~~ ~~to the United States Supreme Court in the~~ ~~Walker~~ ~~and~~ ~~Duke~~ ~~cases, as well as in~~ ~~J. Brown. Defendants filed petitions for~~ ~~writ of certiorari~~ ~~in eight other~~ ~~Engle~~ ~~progeny cases that were tried in Florida state courts, including one case,~~ ~~Barbanell, in which PM USA~~ was ~~the defendant. In these eight petitions, defendants asserted questions similar to those in~~ ~~Walker~~, ~~Duke~~ ~~and~~ ~~J. Brown. In June 2014, the United States Supreme Court denied defendants’ petitions for~~ ~~writ of certiorari~~ ~~in all 11 cases.~~unsuccessful.

In Searcyand Burkhart, an Engle progeny ~~case~~cases against PM USA and R.J. Reynolds on appeal to the Eleventh Circuit, defendants argued that application of the Engle findings to the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. ~~The appeal is pending.~~In January 2018, in Searcy, a panel of the Eleventh Circuit ordered supplemental briefing on the due process issues. In March 2018, in Burkhart, a different panel of the Eleventh Circuit rejected defendants’ due process arguments and affirmed the final judgment entered in plaintiff’s favor. Defendants filed a motion for rehearing challenging that decision, which the Eleventh Circuit denied.

In Schoeff, an Engle progeny case against R.J. Reynolds, the Florida Fourth District Court of Appeal held that comparative fault findings should apply to reduce all compensatory damage awards, including awards based on intentional fraud claims. The Florida Supreme Court accepted jurisdiction over plaintiff’s appeal of the Florida Fourth District Court of Appeal’s decision. ~~Oral argument was held in March 2017.~~In December 2017, the Florida Supreme Court reversed the Court of Appeal’s decision, finding that comparative fault does not reduce compensatory damages awards for intentional torts.

Fontem Ventures B.V. and Fontem Holdings 1 B.V., both subsidiaries of ITG, sued Nu Mark for alleged patent infringement in the U.S. District Court for the Central District of California of one or more claims under various Fontem patents for e-vapor products. The suit sought recovery of an unspecified amount of money damages for alleged past infringement and an injunction against future infringement, which injunction may have resulted in Nu Mark being enjoined from marketing one or more of the products at issue in the suit. In December 2016, the parties entered into a settlement and license agreement, resulting in the dismissal of the litigation. Under the terms of the agreement, in January 2017, Nu Mark made an upfront payment of $21 million and will make future royalty payments in amounts that Altria Group, Inc. does not expect Trial is currently scheduled to ~~be material. In the fourth quarter of 2016, Nu Mark recorded a provision on its consolidated balance sheet of $21 million.~~ begin September 20, 2019.

Altria:

~~Altria Group, Inc.’s~~Altria’s management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, on ~~Altria Group, Inc.’s~~Altria’s reported diluted EPS and reported effective tax rate because these items, which could be significant, may be infrequent, are difficult to predict and may be highly variable. As a result, Altria ~~Group, Inc.~~ does not provide a corresponding United States generally accepted accounting principles (“U.S. GAAP”) measure for, or reconciliation to, its adjusted diluted EPS guidance or its adjusted effective tax rate ~~on operations~~ forecast.

~~Altria Group, Inc.’s income tax rate decreased 4.2 percentage points to 31.2% due primarily to~~the Tax Reform Act, partially offset by tax benefits ~~resulting from the 2017 release~~ of ~~a valuation allowance related to deferred income tax assets for foreign tax credit carryforwards and tax benefits in 2017~~$152 million related primarily to the effective settlement in June 2017 of the IRS 2010-2013 Audit, ~~partially offset by 2017~~ tax expense ~~for tax reserves~~of $82 million in 2018 related to the ~~calculation~~deemed repatriation tax and tax expense of ~~certain foreign tax credits.~~$34 million in 2018 for a valuation allowance. For further discussion, see Note 8.

Net earnings attributable to Altria ~~Group, Inc.~~ of ~~$1,866~~$1,876 million ~~increased $773~~decreased $113 million ~~(70.7%~~(5.7%), due primarily to a ~~loss~~2017 gain on ~~early extinguishment of debt in 2016,~~AB InBev/SABMiller business combination and lower operating income, partially offset by a lower income tax rate and higher ~~operating income, partially offset by lower~~ earnings from ~~Altria Group, Inc.’s~~Altria’s equity investment in AB ~~InBev/SABMiller.~~InBev. Diluted and basic EPS attributable to Altria ~~Group, Inc.~~ of ~~$0.97,~~$0.99, each ~~increased~~decreased by ~~73.2%~~3.9%, due to ~~higher~~lower net earnings attributable to Altria, ~~Group, Inc. and~~partially offset by fewer shares outstanding.

15, 2007 and March 22, 2011 (“provisional products”) for which a manufacturer submitted substantial equivalence reports that the FDA determines are not “substantially equivalent” to products commercially marketed as of February 15, 2007, the FDA could require the removal of such products from the marketplace (see FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways below).

discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect our tobacco subsidiaries’ ability to market and sell regulated tobacco products in those states, territories and localities.

Since enactment in 2009, several lawsuits have been filed challenging various provisions of the FSPTCA, the Final Tobacco Marketing Rule and the deeming regulations, including their constitutionality and the scope of the FDA’s authority thereunder. As a result of one such challenge (~~Commonwealth Brands~~), the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising is unenforceable by the FDA. For a further discussion of the Final Tobacco Marketing Rule and the status of graphic warnings for cigarette packages and advertising, see ~~FDA Regulatory Actions - Graphic Warnings~~ ~~below.~~

will apply its guidance to their various respective substantial equivalence reports or seek to enforce the law and regulations consistent with its guidance.

In September 2015, after industry objections to the Substantial Equivalence Guidance, the FDA issued a second edition of the guidance (the “Revised SE Guidance”), which continued to require FDA pre-authorization for certain label changes and for product quantity changes. PM USA, USSTC and other tobacco product manufacturers initiated litigation challenging the Revised SE Guidance. In August 2016, the court held that a modification to an existing product’s label does not result in a “new tobacco product” and therefore such a label change does not give rise to the substantial equivalence review process. However, the court upheld the Revised SE Guidance in all other respects, including its treatment of product quantity changes as modifications that give rise to a new tobacco product requiring substantial equivalence review.

those products. For further details, see FSPTCA and FDA Regulation - FDA Regulatory Actions - Substantial Equivalence and Other New Product Processes/Pathways above.

~~Menthol in cigarettes:~~ As required by the FSPTCA, the tobacco product scientific advisory committee established by the FDA submitted a report on the impact of the use of menthol in cigarettes on the public health and related recommendations to the FDA in March 2011. It recommended, among other things, that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States” and also noted that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences. Also in March 2011, PM USA submitted a report to the FDA outlining its position that regulatory actions related to the use of menthol cigarettes are not warranted based on available science and evidence and that any significant restrictions on the use of menthol in cigarettes would have unintended consequences detrimental to public health and society.

In July 2013, the FDA released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” At the same time, the FDA also issued an ANPRM requesting comments on the FDA’s preliminary scientific evaluation and information that may inform potential regulatory actions regarding menthol in cigarettes. PM USA submitted comments to the FDA raising a number of concerns about the preliminary scientific evidence and unintended consequences.

The July 2017 Comprehensive Plan contemplates the issuance of an ANPRM seeking comments on the role that flavors including menthol in tobacco products play in attracting youth. No future action can be taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of a full rulemaking process.

~~Nicotine and Flavors: As noted above, the FDA announced in the July 2017 Comprehensive Plan its intent to seek comments through an ANPRM on the following matters, among others:~~


▪	Nicotine and Flavors: Pursuant to the July 2017 Comprehensive Plan, in March 2018 the FDA issued an ANPRM on the following matters:

▪

Nicotine in ~~cigarettes:~~cigarettes and potentially other combustible tobacco products: The potential public health benefits and any possible adverse effects of lowering nicotine in combustible cigarettes to non-addictive or minimally addictive levels through achievable product standards. Specifically, the FDA ~~intends to seek~~is seeking comments on the ~~potential unintended~~ consequences of such product standard, including (i) smokers compensating by smoking more cigarettes to obtain the same level of nicotine as with their current product and (ii) the illicit trade of cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the ~~FDA; and~~FDA. The FDA is also seeking comments on whether a nicotine product standard should apply to other combustible tobacco products, including cigars.

PM USA, Middleton and Nat Sherman submitted public comments in response to the ANPRM regarding nicotine in cigarettes and potentially other combustible tobacco products in July 2018. This ANPRM process may ultimately lead to the FDA’s development of product standards for nicotine in combustible tobacco products such as cigarettes and cigars. If such regulations were to become final and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria, PM USA, Middleton and Nat Sherman.

▪

Flavors in all tobacco products: The role that flavors (including menthol) in tobacco products play in attracting youth and may play in helping some smokers switch to potentially less harmful forms of nicotine delivery. The FDA previously released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” FDA’s evaluation followed an earlier report to the FDA from TPSAC on the impact of the use of menthol in cigarettes on the public health and included a recommendation that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States” and an observation that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences. No future action can be taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of a full rulemaking process.

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~~These~~Altria’s tobacco subsidiaries submitted public comments in response to the ANPRM ~~processes~~regarding flavors in tobacco products in July 2018. This ANPRM process may ultimately lead to the FDA’s development of product standards for ~~nicotine~~characterizing flavors in all tobacco products, including menthol in cigarettes. If such regulations were to become final and ~~flavors.~~ upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and its tobacco subsidiaries.

The July 2017 Comprehensive Plan also includes the FDA’s intent to develop e-vapor product standards to protect against known public health risks such as battery issues and concerns about children’s exposure to liquid nicotine.


▪	NNN in Smokeless Tobacco: In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (“NNN”) levels in finished smokeless tobacco products. USSTC submitted comments to the FDA in July 2017. If the

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proposed rule as presently proposed were to become final and upheld in the courts, it could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria and USSTC.

Good Manufacturing Practices

The FSPTCA requires that the FDA promulgate good manufacturing practice regulations (referred to by the FDA as “Requirements for Tobacco Product Manufacturing Practice”) for tobacco product manufacturers, but does not specify a timeframe for such regulations.

Excise Taxes

Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.

Federal, state and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. By way of example, in 2009, the federal excise tax (“FET”) on cigarettes increased from $0.39 per pack to approximately $1.01 per ~~pack,~~pack; in 2010, the New York state excise tax increased by $1.60 to $4.35 per ~~pack,~~pack; in October 2014, Philadelphia, Pennsylvania enacted a $2.00 per pack local cigarette excise ~~tax~~tax; and in November 2016, California passed a ballot measure to increase its cigarette excise tax by $2.00 per pack and its smokeless tobacco ad valorem excise tax from 27.30% to 65.08%, which went into effect on April 1, 2017 and July 1, 2017, respectively. Between the end of 1998 and ~~October~~July 23, ~~2017,~~2018, the weighted-average state and certain local cigarette excise taxes increased from $0.36 to ~~$1.75~~$1.78 per pack. As of ~~October~~July 23, ~~2017, Rhode Island, Delaware,~~2018, Kentucky and Oklahoma ~~and Puerto Rico~~ have enacted cigarette excise tax increases, which went into effect July 1, 2018. Various other proposed increases are pending in 2017. However, PM USA, R.J. Reynolds, and Oklahoma retailers and wholesalers brought suit arguing the Oklahoma tax violated the state’s constitution. In August 2017, the Oklahoma Supreme Court ruled in favor of the plaintiffs, finding the tax unconstitutional.other states.

Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of tobacco products of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries.

A majority of states currently tax smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. ~~Altria Group, Inc.’s~~Altria’s subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of ~~October~~July 23, ~~2017,~~2018, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco.

International Treaty on Tobacco Control

The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of ~~October~~July 23, ~~2017,~~2018, 180 countries, as well as the European Community, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things: establish specific actions to prevent youth tobacco product use; restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship; initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting; implement regulations imposing product testing, disclosure and performance standards; impose health warning requirements on packaging; adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products, including tracking and tracing of tobacco products through the distribution chain; and restrict smoking in public places.

There are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. In addition, the Protocol to Eliminate Illicit Trade in Tobacco Products (the “Protocol”) was approved by the Conference of Parties to the FCTC in

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November 2012. It includes provisions related to the tracking and tracing of tobacco products through the distribution chain

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and numerous other provisions regarding the regulation of the manufacture, distribution and sale of tobacco products. The Protocol has not yet entered into force, but in any event will not apply to the United States until the Senate ratifies the FCTC and until the President signs, and the Senate ratifies, the Protocol. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either indirectly or as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.

State Settlement Agreements

As discussed in Note 9, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, operating income, market share and industry volume. For a discussion of the impact of the State Settlement Agreements on Altria, ~~Group, Inc.,~~ see Financial Review - Debt and Liquidity - Payments Under State Settlement Agreements and FDA Regulation below and Note 9. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.

Other Federal, State and Local Regulation and Activity

Federal, State and Local Regulation

A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including innovative tobacco products, such as e-vapor products), such as legislation that (1) prohibits the sale of certain tobacco products with certain characterizing flavors, including menthol cigarettes, (2) requires the disclosure of health information separate from or in addition to federally-mandated health warnings and (3) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales). The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products.

Whether other states or localities will enact legislation in these areas, and the precise nature of such legislation if enacted, cannot be predicted. ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries have challenged and will continue to challenge certain state and local legislation, including through litigation.

State and Local Legislation to Increase the Legal Age to Purchase Tobacco Products

An increasing number of states and localities have proposed legislation to increase the minimum age to purchase tobacco products above the current ~~Federal~~federal minimum age of 18. The following states have enacted such legislation: California (21), Hawaii (21), Alabama (19), Alaska (19), New Jersey (21), Utah (19), Oregon (21) and Maine (21). ~~Various~~Many localities ~~(such as~~(including New York City (21) and Chicago (21)) have taken similar actions. As of July 23, 2018, minimum age legislation is under consideration in various states, but no state has enacted such legislation in 2018.

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Health Effects of Tobacco Product Consumption and Exposure to Environmental Tobacco Smoke (“ETS”)

Reports with respect to the health effects of smoking have been publicized for many years, including various reports by the U.S. Surgeon General. Altria ~~Group, Inc.~~ and its tobacco subsidiaries believe that the public should be guided by the messages of the ~~United States~~U.S. Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.

Reports with respect to the health effects of smoking have been publicized for many years, including in a January 2014 United States Surgeon General report titled “The Health Consequences of Smoking - 50 Years of Progress” and in a June 2006 United States Surgeon General report on ETS titled “The Health Consequences of Involuntary Exposure to Tobacco Smoke.”

Most jurisdictions within the United States have restricted smoking in public places. Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking in outdoor places, in private apartments and in cars transporting minors. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on regulation.

Other Legislation or Governmental Initiatives

In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards (such as reduced cigarette ignition propensity standards); establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; require tax stamping of moist smokeless tobacco (“MST”) products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and Other Tobacco Products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.

It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that could have a material adverse impact on the business and volume of our tobacco subsidiaries and the consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its tobacco subsidiaries.

Governmental Investigations

From time to time, Altria ~~Group, Inc.~~ and its subsidiaries are subject to governmental investigations on a range of matters. Altria ~~Group, Inc.~~ and its subsidiaries cannot predict whether new investigations may be commenced.

Illicit Trade in Tobacco Products

Illicit trade in tobacco products can have an adverse impact on the businesses of Altria ~~Group, Inc.~~ and its tobacco subsidiaries. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the United States that are intended for sale outside the country; the sale of untaxed tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of our tobacco subsidiaries’ products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact ~~Altria Group, Inc.’s~~Altria’s consolidated results of operations and cash flows and the businesses of its tobacco subsidiaries; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.

Altria ~~Group, Inc.~~ and its tobacco subsidiaries devote significant resources to help prevent illicit trade in tobacco products and to protect legitimate trade channels. For example, ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries ~~are engaged~~engage in a number of initiatives to help prevent illicit trade in tobacco products, including communication with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforcement of wholesale and retail

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trade programs and policies that address illicit trade in tobacco products; engagement with and support of law enforcement and regulatory agencies; litigation to protect their trademarks; and support for a variety of federal and state legislative initiatives. Legislative initiatives to address illicit trade in tobacco products are designed to protect the legitimate channels of distribution, impose more stringent penalties for the violation of illegal trade laws and provide additional tools for law enforcement. Regulatory measures and related

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governmental actions to prevent the illicit manufacture and trade of tobacco products continue to evolve as the nature of illicit tobacco products evolves.

Price, Availability and Quality of ~~Agricultural Products~~Tobacco, Other Raw Materials and Component Parts

Shifts in crops (such as those driven by economic conditions and adverse weather patterns), government mandated prices, economic trade sanctions, import duties and tariffs, geopolitical instability and production control programs may increase or decrease the cost or reduce the supply or quality of tobacco, ~~and~~ other ~~agricultural products~~raw materials or component parts used to manufacture our companies’ products. AsAny significant change in the price, quality or availability of tobacco, other raw materials or component parts used to manufacture our products, could restrict our subsidiaries’ ability to continue marketing existing products or impact adult consumer product acceptability and adversely affect our subsidiaries’ profitability and businesses.

With respect to tobacco, as with other agriculture commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. ~~Certain types of tobacco are also only available in limited geographies.~~ Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could impact tobacco leaf prices and tobacco supply. Certain types of tobacco are only available in limited geographies, including geographies experiencing political instability, and loss of their availability could impact adult tobacco consumer product acceptability. Any significant change in the price, quality or availability of tobacco leaf or other agricultural products used to manufacture our products could restrict our subsidiaries’ ability to continue marketing existing products or impact adult consumer product acceptability, adversely affecting our subsidiaries’ profitability and businesses.

Timing of Sales

In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

~~Operating Results~~

~~The following discussion compares operating results for the smokeable and smokeless products segments for the~~ ~~nine and three months endedSeptember 30, 2017, with the~~ ~~nine and three months endedSeptember 30, 2016~~.

For the Nine Months Ended September 30,
Net Revenues Operating Companies Income
2017 2016 2017 2016
(in millions)
Smokeable products $ 17,355
$ 17,398
$ 6,564
$ 5,955
Smokeless products 1,580
1,530
951
930
Total smokeable and smokeless products $ 18,935
$ 18,928
$ 7,515
$ 6,885

For the Three Months Ended September 30,
Net Revenues Operating Companies Income
2017 2016 2017 2016
(in millions)
Smokeable products $ 5,975
$ 6,147
$ 2,290
$ 2,086
Smokeless products 550
528
352
312
Total smokeable and smokeless products $ 6,525
$ 6,675
$ 2,642
$ 2,398

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~~Smokeable products segment~~

The smokeable products segment’s operating companies income increased during the nine and three months ended September 30, 2017, due primarily to higher pricing and lower costs, partially offset by lower shipment volume. Shipment volume and retail share have been negatively impacted in 2017 by a large cigarette excise tax increase in California.

~~The following table summarizes the smokeable products segment shipment volume performance:~~

Shipment Volume
For the Nine Months Ended September 30, For the Three Months Ended September 30,
2017 2016 Change 2017 2016 Change
(sticks in millions)
Cigarettes:
     Marlboro 77,307
80,446
(3.9 )% 26,455
28,152
(6.0 )%
     Other premium 4,567
4,858
(6.0 )% 1,567
1,684
(6.9 )%
     Discount 8,250
8,569
(3.7 )% 2,806
3,028
(7.3 )%
Total cigarettes 90,124
93,873
(4.0 )% 30,828
32,864
(6.2 )%
Cigars:
     Black & Mild 1,146
1,028
11.5 % 381
357
6.7 %
     Other 12
19
(36.8 )% 4
4
— %
Total cigars 1,158
1,047
10.6 % 385
361
6.6 %
Total smokeable products 91,282
94,920
(3.8 )% 31,213
33,225
(6.1 )%

~~Cigarettes shipment volume includes~~ ~~Marlboro; Other premium brands, such as~~ ~~Virginia Slims~~, ~~Parliament~~ ~~and~~ ~~Benson & Hedges; and Discount brands, which include~~ ~~L&M~~ ~~and~~ ~~Basic.~~ Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.

~~The following table summarizes cigarettes retail share performance:~~

Retail Share
For the Nine Months Ended September 30, For the Three Months Ended September 30,
2017 2016 Percentage Point Change 2017 2016 Percentage Point Change
Cigarettes:
     Marlboro 43.4 % 43.7 % (0.3 ) 43.2 % 43.7 % (0.5 )
     Other premium 2.7
2.8
(0.1 ) 2.7
2.8
(0.1 )
     Discount 4.7
4.6
0.1
4.6
4.6
—
Total cigarettes 50.8 % 51.1 % (0.3 ) 50.5 % 51.1 % (0.6 )

Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service.

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~~PM USA and Middleton executed the following pricing and promotional allowance actions during 2017 and 2016:~~


▪	~~Effective September 24, 2017, PM USA increased the list price on all of its cigarette brands by $0.10 per pack.~~


▪	~~Effective May 21, 2017, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.10 per five-pack.~~


▪	~~Effective March 19, 2017, PM USA increased the list price on~~ ~~Parliament~~ ~~by $0.12 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.08 per pack.~~


▪	~~Effective November 13, 2016, PM USA reduced its wholesale promotional allowance on~~ ~~Marlboro~~ ~~by $0.02 per pack and~~ ~~L&M~~ ~~by $0.08 per pack. In addition, PM USA increased the list price on~~ ~~Marlboro~~ ~~by $0.06 per pack and on all of its other cigarette brands by $0.08 per pack, except for~~ ~~L&M, which had no list price change.~~


▪	~~Effective May 15, 2016, PM USA increased the list price on all of its cigarette brands by $0.07 per pack.~~

Net revenues, which include excise taxes billed to customers, for the nine months ended September 30, 2017 were essentially unchanged as higher pricing ($676 million), which includes higher promotional investments, was offset by lower shipment volume. Operating companies income for the nine months ended September 30, 2017 increased $609 million (10.2%), due primarily to higher pricing ($672 million), which includes higher promotional investments, lower marketing, administration and research costs ($207 million), which includes 2016 state excise tax ballot initiative spending and lower tobacco and health litigation items, and lower asset impairment and exit costs ($97 million), partially offset by lower shipment volume ($396 million).

Net revenues, which include excise taxes billed to customers, for the three months ended September 30, 2017 decreased $172 million (2.8%), due primarily to lower shipment volume ($426 million), partially offset by higher pricing ($250 million). Operating companies income for the three months ended September 30, 2017 increased $204 million (9.8%), due primarily to higher pricing ($246 million), lower marketing, administration and research costs ($181 million), which includes 2016 state excise tax ballot initiative spending and lower tobacco and health litigation items, and lower per unit settlement charges, partially offset by lower shipment volume ($229 million).

For the nine months ended September 30, 2017, total cigarette industry volumes declined by an estimated 3.5%. The smokeable products segment’s reported domestic cigarettes shipment volume decreased 4.0% for the the nine months ended September 30, 2017, primarily driven by the industry’s rate of decline, retail share declines and one fewer shipping day, partially offset by trade inventory movements. When adjusted for trade inventory movements and calendar differences, PM USA’s domestic cigarettes shipment volume decreased an estimated 4%.

For the third quarter of 2017, total cigarette industry volumes declined by an estimated 3.5%. The smokeable products segment’s reported domestic cigarettes shipment volume decreased 6.2% in the third quarter, driven primarily by the industry’s rate of decline, trade inventory movements, retail share declines and one fewer shipping day, After adjusting for trade inventory movements and calendar differences, PM USA’s domestic cigarettes shipment volume decreased an estimated 4.5% for the third quarter.

~~Shipments of premium cigarettes accounted for 90.8% and 90.9% of smokeable products’ reported domestic cigarettes shipment volume for the~~ ~~nine and three months endedSeptember 30, 2017, respectively, versus 90.9% and 90.8% for the nine and three months ended September 30, 2016.~~

~~The smokeable products segment’s reported cigars shipment volume for the nine and three months ended September 30, 2017 increased 10.6% and 6.6%, respectively.~~

~~For the nine months ended September 30, 2017,~~ ~~Marlboro’s retail share declined 0.3 share points. For the three months ended September 30, 2017,~~ ~~Marlboro~~’s retail share declined 0.5 share points, primarily driven by the cigarette excise tax increase in California and increased competitive activity. PM USA expects the California excise tax increase will continue to negatively impact ~~Marlboro’s retail share through the remainder of the year. PM USA’s total retail share for the nine and three months ended September 30, 2017 decreased 0.3 and 0.6 share points, respectively.~~

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~~Smokeless products segment~~

For the nine and three months ended September 30, 2017, the smokeless products segment grew net revenues and operating companies income, primarily through higher pricing, partially offset by unfavorable mix and lower shipment volume.

~~During the first quarter of~~2017, USSTC voluntarily recalled certain smokeless tobacco products manufactured at its Franklin Park, Illinois facility due to a product tampering incident (the “Recall”). USSTC has concluded the Recall and trade inventories have been replenished. USSTC estimates that the Recall-related costs and the share impact from the Recall reduced smokeless products segment operating companies income by approximately $60 million in the first quarter of 2017.

~~The following table summarizes smokeless products segment shipment volume performance:~~

Shipment Volume
For the Nine Months Ended September 30, For the Three Months Ended September 30,
2017 2016 Change 2017 2016 Change
(cans and packs in millions)
Copenhagen 396.1
392.3
1.0 % 134.1
133.5
0.4 %
Skoal 183.0
197.3
(7.2 )% 61.6
66.2
(6.9 )%
Copenhagen and Skoal
579.1
589.6
(1.8 )% 195.7
199.7
(2.0 )%
Other 50.3
50.8
(1.0 )% 16.9
16.7
1.2 %
Total smokeless products 629.4
640.4
(1.7 )% 212.6
216.4
(1.8 )%

Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is not material to the smokeless products segment. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST.

~~The following table summarizes smokeless products segment retail share performance (excluding international volume):~~

Retail Share
For the Nine Months Ended September 30, For the Three Months Ended September 30,
2017 2016 Percentage Point Change 2017 2016 Percentage Point Change
Copenhagen 33.6 % 33.0 % 0.6
33.9 % 33.7 % 0.2
Skoal 16.8
18.3
(1.5 ) 16.5
17.9
(1.4 )
Copenhagen and Skoal
50.4
51.3
(0.9 ) 50.4
51.6
(1.2 )
Other 3.4
3.4
—
3.4
3.3
0.1
Total smokeless products 53.8 % 54.7 % (0.9 ) 53.8 % 54.9 % (1.1 )

Retail share results for smokeless products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.

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~~USSTC executed the following pricing actions during 2017 and 2016:~~


▪	~~Effective September 26, 2017, USSTC increased the list price on~~ ~~Copenhagen~~ ~~and~~ ~~Skoal~~ ~~popular price products by $0.12 per can. In addition, USSTC increased the list price on all its brands, except for~~ ~~Copenhagen~~ ~~and~~ ~~Skoal~~ ~~popular price products, by $0.07 per can.~~


▪	~~Effective April 25, 2017, USSTC increased the list price on all its brands by $0.07 per can.~~


▪	~~Effective December 6, 2016, USSTC increased the list price on~~ ~~Copenhagen~~ ~~and~~ ~~Skoal~~ ~~popular price products by $0.12 per can. In addition, USSTC increased the list price on all its brands, except for~~ ~~Copenhagen~~ ~~and~~ ~~Skoal~~ ~~popular price products, by $0.07 per can.~~


▪	~~Effective May 10, 2016, USSTC increased the list price on all its brands by $0.07 per can.~~

Net revenues, which include excise taxes billed to customers, for the nine months ended September 30, 2017 increased $50 million (3.3%), primarily driven by higher pricing ($106 million), partially offset by unfavorable mix and lower shipment volume ($19 million). Operating companies income for the nine months ended September 30, 2017 increased $21 million (2.3%), due primarily to higher pricing ($106 million), partially offset by higher restructuring charges ($38 million), unfavorable mix and lower shipment volume ($15 million).

Net revenues, which include excise taxes billed to customers, for the three months ended September 30, 2017 increased $22 million (4.2%), due primarily to higher pricing ($47 million), which includes lower promotional investments, partially offset by lower shipment volume ($13 million) and unfavorable mix. Operating companies income for the three months ended September 30, 2017 increased $40 million (12.8%), due primarily to higher pricing ($47 million), which includes lower promotional investments, and lower costs, partially offset by lower shipment volume ($11 million), unfavorable mix and costs in connection with the facilities consolidation ($10 million).

~~USSTC’s reported domestic shipment volume decreased 1.7% and 1.8% for the nine and three months ended September 30, 2017, respectively, driven primarily by declines in~~ ~~Skoal~~.

After adjusting for trade inventory movements and other factors, USSTC estimates that its domestic smokeless products shipment volume declined approximately 1.5% and 3% for the nine and three months ended September 30, 2017, respectively. USSTC estimates that the smokeless products category volume grew approximately 0.5% over the six months ended September 30, 2017.

~~For the nine months ended September 30, 2017,~~ ~~Copenhagen~~ ~~grew0.6 retail share points offset by~~ ~~Skoal’s 1.5 share point loss, contributing to a combined share decline of 0.9 share points.~~

~~Copenhagen~~ ~~grew 0.2 retail share points in the third quarter of 2017.~~ ~~Copenhagen~~ ~~and~~ ~~Skoal’s combined retail share decreased 1.2 share points in the quarter, driven by~~ ~~Skoal’s 1.4 share point decline.~~

~~Wine segment~~

~~Business Environment~~

~~Ste. Michelle is a leading producer of Washington state wines, primarily~~ ~~Chateau Ste. Michelle~~, ~~Columbia Crest~~ ~~and~~ ~~14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns~~ ~~Stag’s Leap Wine Cellars~~ ~~in Napa Valley. Ste. Michelle also owns~~ ~~Conn Creek~~ ~~in Napa Valley,~~ ~~Patz & Hall~~ ~~in Sonoma and~~ ~~Erath~~ ~~in Oregon. In addition, Ste. Michelle imports and markets~~ ~~Antinori~~, ~~Torres~~ ~~and~~ ~~Villa Maria Estate~~ ~~wines and~~ ~~Champagne Nicolas Feuillatte~~ in the United States. Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.

Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.

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Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business.

Operating Results

Ste. Michelle’s results for the nine and three months ended September 30, 2017 were negatively impacted by increased competitive activity, continued trade inventory reductions and slower premium wine category growth.

The following discussion compares ~~wine segment~~operating results for the smokeable and smokeless products segments for the ~~nine~~six and three months ended ~~September~~June 30, ~~2017~~2018, with the ~~nine~~six and three months ended ~~September~~June 30, ~~2016~~2017.

For the Nine Months Ended September 30, For the Three Months Ended September 30,
2017 2016 2017 2016
(in millions)
Net revenues $ 471
$ 498
$ 181
$ 182
Operating companies income $ 82
$ 100
$ 36
$ 38



	For the Six Months Ended June 30,
	Net Revenues				Operating Companies Income
	2018		2017		2018		2017
	(in millions)
Smokeable products	$	10,960	$	11,380	$	4,239	$	4,260
Smokeless products	1,104		1,030		715		593
Total smokeable and smokeless products	$	12,064	$	12,410	$	4,954	$	4,853



	For the Three Months Ended June 30,
	Net Revenues				Operating Companies Income
	2018		2017		2018		2017
	(in millions)
Smokeable products	$	5,546	$	5,922	$	2,201	$	2,224
Smokeless products	579		564		377		347
Total smokeable and smokeless products	$	6,125	$	6,486	$	2,578	$	2,571

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Smokeable products segment

The smokeable products segment’s net revenues and operating companies income decreased during the six and three months ended June 30, 2018, due primarily to lower shipment volume, partially offset by higher pricing.

The following table summarizes the smokeable products segment shipment volume performance:



	Shipment Volume
	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2018	2017	Change		2018	2017	Change
	(sticks in millions)
Cigarettes:
Marlboro	47,182	50,852	(7.2	)%	23,529	26,157	(10.0	)%
Other premium	2,813	3,000	(6.2	)%	1,404	1,550	(9.4	)%
Discount	4,793	5,444	(12.0	)%	2,333	2,862	(18.5	)%
Total cigarettes	54,788	59,296	(7.6	)%	27,266	30,569	(10.8	)%
Cigars:
Black & Mild	789	765	3.1	%	414	402	3.0	%
Other	6	8	(25.0	)%	3	4	(25.0	)%
Total cigars	795	773	2.8	%	417	406	2.7	%
Total smokeable products	55,583	60,069	(7.5	)%	27,683	30,975	(10.6	)%

Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedges; and Discount brands, which include L&M and Basic. Cigarettes volume includes units sold as well as promotional units, but excludes units sold for distribution to Puerto Rico, and units sold in U.S. Territories, to overseas military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.

The following table summarizes cigarettes retail share performance:



	Retail Share
	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2018		2017		Percentage Point Change		2018		2017		Percentage Point Change
Cigarettes:
Marlboro	43.2	%	43.6	%	(0.4	)	43.2	%	43.5	%	(0.3	)
Other premium	2.6		2.7		(0.1	)	2.6		2.7		(0.1	)
Discount	4.4		4.7		(0.3	)	4.4		4.7		(0.3	)
Total cigarettes	50.2	%	51.0	%	(0.8	)	50.2	%	50.9	%	(0.7	)

Retail share results for cigarettes are based on data from IRI/Management Science Associates, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through the Store Tracking Analytical Reporting System (“STARS”). This service is not designed to capture sales through other channels, including the internet, direct mail and some illicitly tax-advantaged outlets. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in this service.

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PM USA and Middleton executed the following pricing and promotional allowance actions during 2018 and 2017:

Effective May 6, 2018, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.11 per five-pack.


▪	Effective March 25, 2018, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.


▪	Effective September 24, 2017, PM USA increased the list price on all of its cigarette brands by $0.10 per pack.


▪	Effective May 21, 2017, Middleton increased various list prices across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.10 per five-pack.


▪	Effective March 19, 2017, PM USA increased the list price on Parliament by $0.12 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.08 per pack.

Net revenues, which include excise taxes billed to customers, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 decreased ~~$27~~$420 million ~~(5.4%~~(3.7%), due primarily to lower shipment volume ($967 million), partially offset by ~~improved premium mix.~~higher pricing ($549 million), which includes lower promotional investments. Operating companies income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 decreased ~~$18~~$21 million ~~(18.0%~~(0.5%), due primarily to lower shipment volume ($537 million), higher costs ($157 million, which includes higher tobacco and health litigation items and investments in strategic initiatives) and higher ~~costs.~~per unit settlement charges, mostly offset by higher pricing ($543 million), which includes lower promotional investments, and higher NPM Adjustment Items ($137 million).

Net revenues, which include excise taxes billed to customers, for the three months ended ~~September~~June 30, ~~2017 were essentially unchanged.~~2018 decreased $376 million (6.3%), due primarily to lower shipment volume ($715 million), partially offset by higher pricing ($349 million), which includes lower promotional investments. Operating companies income for the three months ended ~~September~~June 30, 2018 decreased $23 million (1.0%), due primarily to lower shipment volume ($399 million) and higher tobacco and health litigation items ($45 million), mostly offset by higher pricing ($343 million), which includes lower promotional investments, and NPM Adjustment Items in 2018 ($77 million).

The smokeable products segment’s reported domestic cigarettes shipment volume for the six months ended June 30, 2018 decreased 7.6%, driven primarily by the industry’s rate of decline, trade inventory movements and retail share losses. When adjusted for trade inventory movements, the smokeable products segment’s domestic cigarettes shipment volume for the six months ended June 30, 2018 decreased an estimated 5.5%. Total domestic cigarette industry volumes for the six months ended June 30, 2018 declined by an estimated 4.5%.

The smokeable products segment’s reported domestic cigarettes shipment volume for the three months ended June 30, 2018 decreased 10.8%, driven primarily by trade inventory movements, the industry’s rate of decline and retail share losses. When adjusted for trade inventory movements, the smokeable products segment’s domestic cigarettes shipment volume for the three months ended June 30, 2018 decreased an estimated 5%. Total domestic cigarette industry volumes for the three months ended June 30, 2018 declined by an estimated 3.5%.

Shipments of premium cigarettes accounted for 91.3% and 91.4% of smokeable products’ reported domestic cigarettes shipment volume for the six and three months ended June 30, 2018, respectively, versus 90.8% and 90.6% for the six and three months ended June 30, 2017, ~~decreased $2~~respectively.

The smokeable products segment’s reported cigars shipment volume for the six and three months ended June 30, 2018 increased 2.8% and 2.7%, respectively.

In the first half of 2018, Marlboro’s retail share declined 0.4 share points to 43.2%, driven in part by continued effects from the April 2017 California state excise tax increase. Marlboro’s retail share declined 0.3 share points in the second quarter of 2018 and was unchanged sequentially. The smokeable products segment’s total cigarette retail share for the six and three months ended June 30, 2018 declined 0.8 and 0.7 share points, respectively, and declined 0.1 share point sequentially for the quarter.

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Smokeless products segment

For the first half of 2018, the smokeless products segment grew net revenues and operating companies income, due primarily to higher pricing and the impact of the Recall in 2017, partially offset by lower volume. In the second quarter of 2018, the smokeless products segment grew net revenues and operating companies income primarily through higher pricing, partially offset by lower volume.

The following table summarizes smokeless products segment shipment volume performance:



	Shipment Volume
	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2018	2017	Change		2018	2017	Change
	(cans and packs in millions)
Copenhagen	262.5	262.0	0.2	%	138.1	137.5	0.4	%
Skoal	114.8	121.4	(5.4	)%	59.8	65.8	(9.1	)%
Copenhagen and Skoal	377.3	383.4	(1.6	)%	197.9	203.3	(2.7	)%
Other	34.1	33.4	2.1	%	17.8	17.7	0.6	%
Total smokeless products	411.4	416.8	(1.3	)%	215.7	221.0	(2.4	)%

Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is not material to the smokeless products segment. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST.

The following table summarizes smokeless products segment retail share performance (excluding international volume):



	Retail Share
	For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2018		2017		Percentage Point Change		2018		2017		Percentage Point Change
Copenhagen	34.3	%	33.8	%	0.5		34.3	%	34.3	%	—
Skoal	16.3		17.0		(0.7	)	16.4		16.8		(0.4	)
Copenhagen and Skoal	50.6		50.8		(0.2	)	50.7		51.1		(0.4	)
Other	3.4		3.2		0.2		3.4		3.2		0.2
Total smokeless products	54.0	%	54.0	%	—		54.1	%	54.3	%	(0.2	)

Retail share results for smokeless products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. This service tracks sales in the food, drug, mass merchandisers, convenience, military, dollar store and club trade classes on the number of cans and packs sold. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. For example, one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.

USSTC executed the following pricing actions during 2018 and 2017:


▪	Effective June 5, 2018, USSTC increased the list price onall its brands by $0.07 per can.


▪	Effective September 26, 2017, USSTC increased the list price on Copenhagen and Skoal popular price products by $0.12 per can. In addition, USSTC increased the list price on all its brands, except for Copenhagen and Skoal popular price products, by $0.07 per can.

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▪	Effective April 25, 2017, USSTC increased the list price on all its brands by $0.07 per can.

Net revenues, which include excise taxes billed to customers, for the six months ended June 30, 2018 increased $74 million ~~(5.3%~~(7.2%), due primarily to higher ~~costs.~~pricing and the impact of the Recall during the three months ended March 31, 2017, partially offset by lower volume. Operating companies income for the six months ended June 30, 2018 increased $122 million (20.6%), due primarily to higher pricing ($62 million), the impact of the Recall during the three months ended March 31, 2017 ($60 million) and lower costs in connection with the facilities consolidation ($36 million), partially offset by lower volume.

Net revenues, which include excise taxes billed to customers, for the three months ended June 30, 2018 increased $15 million (2.7%), due primarily to higher pricing, partially offset by lower shipment volume. Operating companies income for the three months ended June 30, 2018 increased $30 million (8.6%), due primarily to higher pricing ($30 million) and lower costs in connection with the facilities consolidation ($17 million), partially offset by lower volume.

USSTC’s reported domestic shipment volume declined 1.3% for the six months ended June 30, 2018, driven primarily by the industry’s rate of decline. When adjusted for calendar differences, USSTC estimates that its domestic smokeless products shipment volume declined approximately 1.5%.

USSTC’s reported domestic shipment volume declined 2.4% for the three months ended June 30, 2018, driven primarily by the industry’s rate of decline and retail share losses. Adjusted shipment volume comparisons are not provided due to the unusual effects of the Recall in 2017.

The smokeless products category volume declined an estimated 1% over the six months ended June 30, 2018.

For the first half of 2018, Copenhagen’s retail share grew 0.5 share points to 34.3% and Skoal’s retail share declined 0.7 share points to 16.3%. Copenhagen and Skoal’s combined retail share decreased 0.2 share points to 50.6%.

Copenhagen’sretail share was unchanged at 34.3% in the second quarter of 2018 and Skoal’s retail share declined 0.4 share points to 16.4%. Copenhagen and Skoal’s combined retail share decreased 0.4 share points to 50.7%.

Total smokeless products retail share was unchanged at 54.0% for the six months ended June 30, 2018 and declined 0.2 share points to 54.1% for the three months ended June 30, 2018.

Wine segment

Business Environment

Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest and 14 Hands, and owns wineries in or distributes wines from several other domestic and foreign wine regions. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley, Patz & Hall in Sonoma and Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori, Torres and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.

Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur in the United States through state-licensed distributors. Ste. Michelle also sells to domestic consumers through retail and e-commerce channels and exports wines to international distributors.

Federal, state and local governmental agencies regulate the beverage alcohol industry through various means, including licensing requirements, pricing rules, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business.

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Operating Results

Ste. Michelle’s operating companies income declined for the six months ended June 30, 2018, due primarily to higher selling, general and administrative costs, partially offset by higher shipment volume, but increased for the three months ended June 30, 2018, driven by higher volume.

The following discussion compares wine segment results for the six and three months ended June 30, 2018, with the six and three months ended June 30, 2017.



	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2018		2017		2018		2017
	(in millions)
Net revenues	$	308	$	290	$	166	$	150
Operating companies income	$	44	$	46	$	27	$	25

Net revenues, which include excise taxes billed to customers, for the six months ended June 30, 2018 increased $18 million (6.2%), due primarily to higher shipment volume. Operating companies income for the six months ended June 30, 2018 decreased $2 million (4.3%), due primarily to higher selling, general and administrative expenses (including one-time employee bonuses), partially offset by higher shipment volume.

Net revenues, which include excise taxes billed to customers, increased $16 million (10.7%), due primarily to favorable premium mix and higher shipment volume. Operating companies income for the three months ended June 30, 2018 increased $2 million (8.0%), due primarily to higher shipment volume and favorable premium mix, mostly offset by higher selling, general and administrative expenses.

For the ~~nine~~six and three months ended ~~September~~June 30, ~~2017,~~2018, Ste. Michelle’s reported wine shipment volume of ~~5,728~~3,698 and ~~2,247~~1,930 thousand cases, ~~decreased 8.1%~~increased 6.2% and ~~0.4%~~6.3%, respectively.

Financial Review

Net Cash Provided by Operating Activities

During the first ~~nine~~six months of ~~2017~~,2018, net cash provided by operating activities was ~~$4,165~~$3,850 million compared with ~~$3,530~~$1,945 million during the first ~~nine~~six months of ~~2016.~~2017. This increase was due primarily to ~~voluntary contributions totaling $500 million to Altria Group, Inc.’s pension plans in 2016 and~~ lower payments ~~for tobacco~~of settlement charges and ~~health litigation items~~income taxes in ~~2017.~~2018.

Altria ~~Group, Inc.~~ had a working capital deficit at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016. Altria Group, Inc.’s~~2017. Altria’s management believes that itAltria has the ability to fund these working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program as discussed in the Debt and Liquidity section below.

Net Cash Used ~~in/Provided by~~In Investing Activities

During the first ~~nine~~six months of ~~2017~~,2018, net cash used in investing activities was ~~$202~~$81 million compared with ~~net cash provided by investing activities of~~ ~~$35~~$246 million during the first ~~nine~~six months of ~~2016~~.2017. This ~~change~~decrease was due primarily to the acquisition of a business in 2017 and proceeds from asset sales in the financial services business in 2017.

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~~Net~~ Cash Used in Financing Activities

During the first ~~nine~~six months of ~~2017, net~~2018, cash used in financing activities was ~~$5,950~~$3,560 million compared with ~~$3,636~~$4,016 million during the first ~~nine~~six months of ~~2016.~~2017. This ~~increase~~decrease was due primarily to lower repurchases of common stock during the ~~following:~~


▪	debt issuance of $2.0 billion of senior unsecured notes during the first nine months of 2016 used in part to repurchase senior unsecured notes in connection with the 2016 debt tender offer, as more fully described in Note 7;


▪	~~higher repurchases of common stock during the first nine months of 2017; and~~


▪	~~higher dividends paid during the first nine months of 2017;~~

first six months of 2018, partially offset ~~by:~~by higher dividends paid during the first six months of 2018.


▪	~~debt repayments of $0.9 billion and premiums and fees of $0.8 billion in connection with the debt tender offer during the first nine months of 2016.~~

Debt and Liquidity

Credit Ratings - ~~Altria Group, Inc.’s~~Altria’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. The impact of credit ratings on the cost of borrowings under ~~Altria Group, Inc.’s~~Altria’s credit agreement is discussed below. See the discussion below regarding the potential adverse impact of certain events on ~~Altria Group, Inc.’s~~Altria’s credit ratings in Cautionary Factors That May Affect Future Results.

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At ~~September~~June 30, ~~2017,~~2018, the credit ratings and outlook for ~~Altria Group, Inc.’s~~Altria’s indebtedness by major credit rating agencies were:



	Short-term Debt	Long-term Debt	Outlook

Moody’s Investors Service, Inc. (“Moody’s”)	P-2	A3	Stable
Standard & Poor’s Ratings Services (“Standard & Poor’s”)	A-1	A-	Stable
Fitch Ratings Ltd. ~~(“Fitch”)~~¹	F2	A-	Stable

¹~~On April 3, 2017, Fitch~~ ~~raised the long-term debt credit rating for Altria Group, Inc. to A- from BBB+.~~

Credit Lines - From time to time, Altria ~~Group, Inc.~~ has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. At ~~September~~June 30, ~~2017~~2018 and ~~2016~~,2017, and at December 31, ~~2016,~~2017, Altria ~~Group, Inc.~~ had no short-term borrowings.

At ~~September~~June 30, ~~2017,~~2018, 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 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~~Altria’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~~Altria’s long-term senior unsecured debt from Moody’s and Standard & Poor’s. The applicable percentage based on ~~Altria Group, Inc.’s~~Altria’s long-term senior unsecured debt ratings at ~~September~~June 30, ~~2017~~2018 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. At ~~September~~June 30, ~~2017~~,2018, credit available to Altria ~~Group, Inc.~~ under the Credit Agreement was $3.0 billion.

The Credit Agreement is used for general corporate purposes and to support ~~Altria Group, Inc.’s~~Altria’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 ~~September~~June 30, ~~2017~~,2018, 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 ~~14.6~~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

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certain adjustments. Exhibit 99.3 to ~~Altria Group, Inc.’s~~Altria’s Form 10-Q for the period ended September 30, 2013 sets forth the definitions of these terms as they appear in the Credit Agreement and is incorporated herein by reference.

Any commercial paper issued by Altria ~~Group, Inc.~~ and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 10. Condensed Consolidating Financial Information to the condensed consolidated financial statements in Item 1 (“Note 10”).

Financial Market Environment - Altria ~~Group, Inc.~~ believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria ~~Group, Inc.~~ continues to monitor the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group. Altria ~~Group, Inc.~~ believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations. See the discussion below regarding access to debt capital markets in Cautionary Factors That May Affect Future Results for certain risk factors associated with the foregoing discussion.

Tax Reform Act - As a result of the Tax Reform Act’s reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, Altria expects increased liquidity. Altria plans to make strategic long-term investments with the increased liquidity, reinvesting approximately one-third of the total tax reform benefit in 2018, with a moderating level of investment in subsequent years.

Debt - At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016, Altria Group, Inc.’s~~2017, Altria’s total debt was $13.9 billion.

Guarantees and Other Similar Matters - As discussed in Note 9,, Altria ~~Group, Inc.~~ and certain of its subsidiaries had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at ~~September~~June 30, ~~2017~~.2018. From time to time, subsidiaries of Altria ~~Group, Inc.~~ also issue lines of credit to affiliated entities. In addition, as discussed in Note 10, PM USA has issued guarantees relating to ~~Altria Group, Inc.’s~~Altria’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not expected to have, a significant impact on ~~Altria Group, Inc.’s~~Altria’s liquidity.

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Payments Under State Settlement Agreements and FDA Regulation - As discussed previously and in Note 9,, PM USA ~~has~~and Nat Sherman have entered into State Settlement Agreements with the states and territories of the United States that call for certain payments. In addition, ~~in June 2009,~~ PM USA, Middleton, Nat Sherman and USSTC ~~became~~are subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. Payments under the State Settlement Agreements and the FDA user fees are based on variable factors, such as volume, operating income, market share and inflation, depending on the subject payment. ~~Altria Group, Inc.’s~~Altria’s subsidiaries account for the cost of the State Settlement Agreements and FDA user fees as a component of cost of sales. ~~As a result of the State Settlement Agreements and FDA user fees, Altria Group, Inc.’s~~Altria’s subsidiaries recorded approximately ~~$3.6~~$2.1 billion and ~~$3.8~~$2.4 billion of charges to cost of sales for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and approximately ~~$1.2~~$1.0 billion and ~~$1.3~~$1.2 billion of charges to cost of sales for the three months ended ~~September~~June 30, 2018 and 2017, ~~and 2016, respectively. For a detailed discussion of settlements of, and determinations made~~respectively, in connection with the State Settlement Agreements and FDA user fees. For further discussion of the resolutions of certain disputes with ~~certain~~ states and territories related to the NPM Adjustment provision under the MSA, ~~for the years 2003-2012,~~ see Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 9.

Based on current agreements, ~~2016~~2017 market share and historical annual industry volume decline rates, the estimated amounts that ~~Altria Group, Inc.’s~~Altria’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements and FDA user fees approximate ~~$4.9~~$4.6 billion in ~~2017~~2018 and $4.8 billion each year thereafter. These amounts exclude the potential impact of the NPM Adjustment provision applicable under the MSA and the revised NPM Adjustment provisions applicable under the ~~settlements~~resolutions of the NPM Adjustment disputes.

The estimated amounts due under the State Settlement Agreements charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements and FDA user fees are subject to adjustment for several factors, including volume, operating income, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.

Litigation-Related Deposits and Payments - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of ~~September~~June 30, ~~2017~~,2018, PM USA ~~had~~has posted ~~various forms of security~~appeal bonds totaling approximately ~~$61~~$93 million, ~~the majority of~~ which have been collateralized with cash deposits. These cash deposits are included in ~~other~~ assets on the condensed consolidated balance sheet.

Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST or Altria ~~Group, Inc.~~ in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 9 and in Cautionary Factors That May Affect Future Results,

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management expects cash flow from operations, together with ~~Altria Group, Inc.’s~~Altria’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.

Equity and Dividends

On January 30, ~~2017,~~2018, Altria ~~Group, Inc.~~ granted an aggregate of 0.6 million restricted stock units and ~~0.2~~0.1 million performance stock units to eligible employees. The service restrictions for the restricted stock units and the performance stock units lapse in the first quarter of ~~2020.~~2021. In addition, the payout of the performance stock units requires the achievement of certain performance measures, which ~~are~~were predetermined at the time of grant, over a three-year performance cycle. These performance measures consist of ~~Altria Group, Inc.’s~~Altria’s adjusted diluted EPS compounded annual growth rate and ~~Altria Group, Inc.’s~~Altria’s total shareholder return relative to a predetermined peer group. The weighted-average market value per share of the restricted stock units and the performance stock units granted on January 30, ~~2017~~2018 was ~~$70.94~~$69.26 on the date of grant.

During the ~~nine~~six months ended~~September~~ June 30, ~~2017, 1.3~~2018, 0.8 million shares of restricted stock units and ~~restricted~~performance stock units vested. The total fair value of restricted stock units and ~~restricted~~performance stock units that vested during the ~~nine~~six months ended~~September~~ June 30, ~~2017~~2018 was ~~$95~~$57 million. The weighted-average grant date fair value per share of these awards was ~~$36.26.~~$55.34.

Dividends paid during the first ~~nine~~six months of ~~2017~~2018 and ~~2016~~2017 were ~~$3,544~~$2,585 million and ~~$3,321~~$2,369 million,, respectively, an increase of ~~6.7%~~9.1%, reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria ~~Group, Inc.~~ under its share repurchase ~~program.~~programs.

During the ~~third~~first quarter of ~~2017, Altria Group, Inc.’s~~2018, Altria’s Board of Directors (the “Board of Directors”) approved ~~an 8.2%~~a 6.1% increase in the quarterly dividend rate to ~~$0.66~~$0.70 per share of Altria ~~Group, Inc.~~ common stock versus the previous rate of ~~$0.61~~$0.66 per share. Altria ~~Group, Inc.~~ expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is ~~$2.64~~$2.80 per share. Future dividend payments remain subject to the discretion of the Board of Directors.

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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”). ~~At September 30, 2017,~~In January 2018, Altria ~~Group, Inc. had approximately $576 million remaining in~~completed the July 2015 share repurchase program. Following the completion of the July 2015 share repurchase program, the Board of Directors authorized a new $1.0 billion share repurchase program in January 2018 that it expanded to $2.0 billion in May 2018 (as expanded, the “January 2018 share repurchase program”), which Altria ~~Group, Inc.~~ expects to complete by the end of the second quarter of ~~2018. 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.~~2019. For further discussion of ~~Altria Group, Inc.’s~~Altria’s share repurchase ~~program,~~programs, see Note 1. Background and Basis of Presentation to the condensed consolidated financial statements in Item 1 and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q.

Recent Accounting Guidance Not Yet Adopted

See Note 11.11. Recent Accounting Guidance Not Yet Adopted to the condensed consolidated financial statements in Item 1 for a discussion of recently issued accounting guidance applicable to, but not yet adopted by, ~~Altria Group, Inc.~~Altria.

Contingencies

See Note 9 for a discussion of contingencies.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

We ⁽¹⁾ may from time to time make written or oral forward-looking statements, including earnings guidance and other statements contained in filings with the Securities and Exchange Commission (“SEC”), reports to security holders, press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

¹ This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.

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We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans, estimates and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying estimates or assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in ~~Altria Group, Inc.’s~~Altria’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in, or implied by, any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this Form 10-Q particularly in the “Business Environment” sections preceding our discussion of the operating results of our subsidiaries’ businesses above. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.

Unfavorable litigation outcomes could materially adversely affect the consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.,~~ or the businesses of one or more of its subsidiaries.

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria ~~Group, Inc.~~ and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband-related claims, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are significant and, in certain cases, have

¹ This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria and its various operating subsidiaries or when any distinction is clear from the context.

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ranged in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria ~~Group, Inc.~~ or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria ~~Group, Inc.~~ or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria ~~Group, Inc.~~ or its subsidiaries may also be required to pay interest and attorneys’ fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 47 states and Puerto Rico now limit the dollar amount of bonds or require no bond at all. As discussed in Note 9, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other

jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria, ~~Group, Inc.,~~ or the businesses of one or more of its subsidiaries, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

In certain litigation, Altria ~~Group, Inc.~~ and its subsidiaries may face potentially significant non-monetary remedies, which may cause reputational harm. For example, in the lawsuit brought by the United States Department of Justice, discussed in detail in Note 9, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of “corrective statements” that Altria ~~Group, Inc.~~ and PM USA ~~will make~~began making in various media ~~beginning~~ in the fourth quarter of 2017.

Altria ~~Group, Inc.~~ and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty, and significant challenges remain.

It is possible that the consolidated results of operations, cash flows or financial position of Altria, ~~Group, Inc.,~~ or the businesses of one or more of its subsidiaries, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria ~~Group, Inc.~~ and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will

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continue to defend, vigorously against litigation challenges. However, Altria ~~Group, Inc.~~ and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria ~~Group, Inc.~~ to do so. See Note 9 and Exhibits 99.1 and 99.2 to this Form 10-Q for a discussion of pending tobacco-related litigation.

Significant federal, state and local governmental actions, including actions by the FDA, and various private sector actions may continue to have an adverse impact on our tobacco subsidiaries’ businesses and sales volumes.

As described in Tobacco Space - Business Environment above,our cigarette subsidiaries face significant governmental and private sector actions, including efforts aimed at reducing the incidence of tobacco use and efforts seeking to hold these subsidiaries responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. These actions, combined with the diminishing social acceptance of smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels.

Actions by the FDA and other federal, state or local governments or agencies, including those specific actions described in Tobacco Space - Business Environment above, may impact the adult tobacco consumer acceptability of or access to tobacco products (for example, through product ~~standards)~~standards that may be proposed by the FDA for nicotine and flavors), limit adult tobacco consumer choices, delay or prevent the launch of new or modified tobacco products or products with claims of reduced risk, require the recall or other removal of tobacco products from the marketplace (for example as a result of product contamination, a determination by the FDA that one or more tobacco products do not satisfy the statutory requirements for substantial equivalence, or because the FDA requires that a modification to a currently-marketed tobacco product proceed through the pre-market review process), restrict communications to adult tobacco consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, interrupt manufacturing or otherwise significantly increase the cost of doing business, or restrict or prevent the use of specified tobacco products in certain locations or the sale of tobacco products by certain retail establishments. Any one or more of these actions may have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its tobacco subsidiaries. See Tobacco Space - Business Environment abovefor a more detailed discussion.

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Tobacco products are subject to substantial taxation, which could have an adverse impact on sales of the tobacco products of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries.

Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the federal, state ~~federal~~ and local levels. Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the reported share performance of tobacco products of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries. For further discussion, see Tobacco Space - Business Environment - Excise Taxes above.

Our tobacco businesses face significant competition and their failure to compete effectively could have an adverse effect on the consolidated results of operations or cash flows of Altria, ~~Group, Inc.,~~ or the business of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries.

Each of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries operates in highly competitive tobacco categories. This competition also exists across categories as adult tobacco consumer preferences evolve. Significant methods of competition include product quality, taste, price, product innovation, marketing, packaging, distribution and promotional activities. A highly competitive environment could negatively impact the profitability, market share and shipment volume of our tobacco subsidiaries, which could have an adverse effect on the consolidated results of operations or cash flows of ~~Altria Group, Inc.~~Altria. See Tobacco Space - Business Environment - Summary above for additional discussion concerning evolving adult tobacco consumer preferences, including e-vapor products. Growth of the e-vapor product category and other innovative tobacco products could further contribute to reductions in cigarette consumption levels and cigarette industry sales volume and could adversely affect the growth rates of other tobacco products.

PM USA also faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to settlements of certain tobacco litigation in the United States. These settlements, among other factors, have resulted in substantial cigarette price increases. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers’ cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and imports of foreign lowest priced brands. USSTC faces significant competition in the smokeless tobacco category and has experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.

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Altria ~~Group, Inc.~~ and its subsidiaries may be unsuccessful in anticipating changes in adult consumer preferences, responding to changes in consumer purchase behavior or managing through difficult competitive and economic conditions.

Each of our tobacco and wine subsidiaries is subject to intense competition and changes in adult consumer preferences. To be successful, they must continue to:


▪	promote brand equity successfully;


▪	anticipate and respond to new and evolving adult consumer preferences;


▪	develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties);


▪	improve productivity; and


▪	protect or enhance margins through cost savings and price increases.

See Tobacco Space - Business Environment - Summary above for additional discussion concerning evolving adult tobacco consumer preferences, including e-vapor products. Growth of this product category could contribute to reductions in cigarette consumption levels and cigarette industry sales volume and could adversely affect the growth rates of other tobacco products.

The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products, which could have a material adverse effect on the business, consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its subsidiaries. While our tobacco and wine subsidiaries work to broaden their brand portfolios to compete effectively with lower-priced products, the failure to do so could negatively impact our companies’ ability to compete in these circumstances.

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Our financial services business (conducted through PMCC) holds investments in finance leases, principally in transportation (including aircraft), power generation, real estate and manufacturing equipment. Its lessees are subject to significant competition and uncertain economic conditions. If parties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.

~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries may be unsuccessful in developing and commercializing adjacent products or processes, including innovative tobacco products that may reduce the health risks associated with current tobacco products and that appeal to adult tobacco consumers, which may have an adverse effect on their ability to grow new revenue streams and/or put them at a competitive disadvantage.

Altria ~~Group, Inc.~~ and its subsidiaries have growth strategies involving moves and potential moves into adjacent products or processes, including innovative tobacco products. Some innovative tobacco products may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and outside the United States) products that meet their taste expectations and evolving preferences. Examples include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as ~~harmful.~~harmful, such as e-vapor products. These efforts may include arrangements with, or investments in, third parties. Our tobacco subsidiaries may not succeed in ~~these~~their efforts to introduce such new products, which would have an adverse effect on the ability to grow new revenue streams.

Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of products with claims of reduced risk to adult consumers, the speed with which they may make such determinations or whether regulators will impose an unduly burdensome regulatory framework on such products. Nor can we predict whether adult tobacco consumers’ purchasing decisions would be affected by ~~such~~reduced risk claims if permitted. Adverse developments on any of these matters could negatively impact the commercial viability of such products.

If our tobacco subsidiaries do not succeed in their efforts to develop and commercialize innovative tobacco products or to obtain regulatory approval for the marketing or sale of products with claims of reduced risk, but one or more of their competitors do succeed, our tobacco subsidiaries may be at a competitive disadvantage.

Significant changes in ~~tobacco leaf~~ price, availability or quality of tobacco, other raw materials or component parts could have an adverse effect on the profitability and business of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries.

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Any significant change in ~~tobacco leaf~~ prices, quality or availability of tobacco, other raw materials or component parts could adversely affect our tobacco subsidiaries’ profitability and business. For further discussion, see Tobacco Space - Business Environment - Price, Availability and Quality of ~~Agricultural Products~~Tobacco, Other Raw Materials and Component Parts above.

Because ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries rely on a few significant facilities and a small number of key suppliers, an extended disruption at a facility or in service by a supplier could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its tobacco subsidiaries.

~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of key suppliers. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries or the operations of any key suppliers of any of ~~Altria Group, Inc.’s~~Altria’s tobacco subsidiaries, including as a result of a key supplier’s unwillingness to supply goods or services to a tobacco company, could adversely impact the operations of the affected subsidiaries. An extended disruption in operations experienced by one or more of ~~Altria Group, Inc.’s~~Altria’s subsidiaries or key suppliers could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its tobacco subsidiaries.

~~Altria Group, Inc.’s~~Altria’s subsidiaries could decide or be required to recall products, which could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~ and its subsidiaries.

In addition to a recall required by the FDA, as referenced above, our subsidiaries could decide, or other laws or regulations could require them, to recall products due to the failure to meet quality standards or specifications, suspected or confirmed and deliberate or unintentional product contamination, or other adulteration, product misbranding or product tampering. In January 2017, USSTC announced that it was voluntarily recalling certain of its smokeless tobacco products manufactured at a USSTC facility due to product tampering. USSTC recorded a charge during the first quarter of 2017 related to this recall. While this charge was not material to ~~Altria Group, Inc.’s~~Altria’s financial statements, future recalls (if any) could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria ~~Group, Inc.~~and its subsidiaries.

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The failure of Altria’s information systems or service providers’ information systems to function as intended, or cyber-attacks or security breaches, could have a material adverse effect on the business, reputation, consolidated results of operations, cash flows or financial position of Altria and its subsidiaries.

Altria ~~Group, Inc.~~and its subsidiaries rely extensively on information systems, many of which are managed by third-party service providers (such as cloud providers), to support a variety of business processes and activities, including: complying with regulatory, legal, financial reporting and tax requirements; engaging in marketing and e-commerce activities; managing and improving the effectiveness of our operations; manufacturing and distributing our products; collecting and storing sensitive data and confidential information; and communicating internally and externally with employees, investors, suppliers, trade customers, adult consumers and others. We continue to make investments in administrative, technical and physical safeguards to protect our information systems and data from cyber-threats, including human error and malicious acts. Our safeguards include employee training, testing and auditing protocols, backup systems and business continuity plans, maintenance of security policies and procedures, monitoring of networks and systems, and third-party risk management.

To date, interruptions of our information systems have been infrequent and have not had a material impact on our operations. However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. Failure of our systems or service providers’ systems to function as intended, or cyber-attacks or security breaches, could result in loss of revenue, assets, personal data, intellectual property, trade secrets or other sensitive and confidential data, violation of applicable privacy and data security laws, damage to the reputation of our companies and their brands, operational disruptions, legal challenges and significant remediation and other costs to Altria and its subsidiaries.

Unfavorable outcomes of any governmental investigations could materially affect the businesses of Altria and its subsidiaries.

From time to time, Altria and its subsidiaries are subject to governmental investigations on a range of matters. We cannot predict whether new investigations may be commenced or the outcome of any such investigation, and it is possible that our business could be materially adversely affected by an unfavorable outcome of a future investigation.

International business operations subject Altria and its subsidiaries to various United States and foreign laws and regulations, and violations of such laws or regulations could result in reputational harm, legal challenges and/or significant costs.

While Altria and its subsidiaries are primarily engaged in business activities in the United States, they do engage (directly or indirectly) in certain international business activities that are subject to various United States and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and other laws prohibiting bribery and corruption. Although we have a Code of Conduct and a compliance system designed to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees or third parties. Violations of these laws, or allegations of such violations, could result in reputational harm, legal challenges and/or significant costs.

Altria may be unable to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions.

Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best talent.

Acquisitions or other events may adversely affect ~~Altria Group, Inc.’s~~Altria’s credit rating, and Altria ~~Group, Inc.~~ may not achieve its anticipated strategic or financial ~~objectives.~~objectives of a transaction.

From time to time, Altria ~~Group, Inc.~~ considers acquisitions and may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or the occurrence of other events could negatively impact our credit ratings or the outlook for those ratings. Any such change in ratings or outlook may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.

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Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to acquire attractive businesses on favorable terms or that we will realize any of the anticipated benefits from an acquisition.

Disruption and uncertainty in the debt capital markets could adversely affect ~~Altria Group, Inc.’s~~Altria’s access to the debt capital markets, earnings and dividend rate.

Access to the debt capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the credit and debt capital markets and any resulting adverse impact on credit availability, pricing, credit terms or credit rating may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.

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Altria ~~Group, Inc.~~ may be required to write down intangible assets, including goodwill, due to impairment, which would reduce earnings.

We periodically calculate the fair value of our reporting units and intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. Certain events can also trigger an immediate review of intangible assets. If an impairment is determined to exist in either situation, we will incur impairment losses, which will reduce our earnings.

Competition, unfavorable changes in grape supply and new governmental regulations or revisions to existing governmental regulations could adversely affect Ste. Michelle’s wine business.

Ste. Michelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. The adequacy of Ste. Michelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business. For further discussion, see Wine Segment - Business Environment above.

The failure of Altria Group, Inc.’s information systems or service providers’ information systems to function as intended, or cyberattacks or security breaches, could result in loss of revenue, assets, personal data, intellectual property, trade secrets or other sensitive data, violation of applicable privacy and data security laws, reputational harm and significant costs.

Altria Group, Inc. and its subsidiaries rely on information systems to help manage business processes, collect and interpret business data, comply with regulatory, financial reporting and tax requirements, engage in marketing and e-commerce activities, collect and store sensitive data and confidential information, and communicate internally and externally with employees, investors, suppliers, trade customers, adult consumers and others. Many of these information systems are managed by third-party service providers. We have implemented administrative, technical and physical safeguards, including testing and auditing protocols, backup systems and business continuity plans, intended to protect our systems and data. However, because the techniques used in cyberattacks and security breaches change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. To date, interruptions of our information systems have been infrequent and have not had a material impact on our operations. Failure of our systems or service providers’ systems to function as intended or cyberattacks or security breaches by parties intent on extracting or corrupting information or otherwise disrupting business processes could result in loss of revenue, assets, personal data, intellectual property, trade secrets or other sensitive and confidential data, violation of applicable privacy and data security laws, damage to the reputation of our companies and their brands, legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.

~~Unfavorable outcomes of any governmental investigations could materially affect the businesses of Altria Group, Inc. and its subsidiaries.~~

From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. We cannot predict whether new investigations may be commenced or the outcome of any such investigation, and it is possible that our business could be materially adversely affected by an unfavorable outcome of a future investigation.

Expanding international business operations subjects Altria Group, Inc. and its subsidiaries to various United States and foreign laws and regulations, and violations of such laws or regulations could result in reputational harm, legal challenges and/or significant costs.

While Altria Group, Inc. and its subsidiaries are primarily engaged in business activities in the United States, they do engage (directly or indirectly) in certain international business activities that are subject to various United States and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and other laws prohibiting bribery and corruption. Although we have a Code of Conduct and a compliance system designed to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees or third parties. Violations of these laws, or allegations of such violations, could result in reputational harm, legal challenges and/or significant costs.

~~Table of Contents~~

~~Altria Group, Inc.’s~~Altria’s reported earnings from and carrying value of its equity investment in AB InBev and the dividends paid by AB InBev on shares owned by Altria ~~Group, Inc.~~ may be adversely affected by ~~unfavorable~~various factors including foreign currency exchange rates and ~~other factors.~~AB InBev’s business results and stock price.

For purposes of financial reporting, the earnings from and carrying value of our equity investment in AB InBev are translated into U.S. dollars from various local currencies. In addition, AB InBev pays dividends in euros, which we convert into U.S. dollars. During times of a strengthening U.S. dollar against these currencies, our reported earnings from and carrying value of our equity investment in AB InBev will be reduced because these currencies will translate into fewer U.S. dollars and the dividends that we receive from AB InBev will convert into fewer U.S. dollars.

Dividends and earnings from and carrying value of our equity investment in AB InBev are also subject to the risks encountered by AB InBev in its business.

We cannot provide any assurance that AB InBev ~~may not achieve the intended benefits of the Transaction, which could have a negative effect on our reported earnings~~will successfully execute its business plans and strategies. Earnings from and carrying value of our equity investment in AB ~~InBev.~~

~~There can be no assurance that AB~~ InBev ~~will be able~~are also subject to ~~successfully integrate SABMiller’s business or otherwise realize the expected benefits of the Transaction. Any of these outcomes could adversely affect~~fluctuations in AB InBev’s stock price, for example through mark-to-market losses on AB InBev’s derivative financial ~~condition, results of operations or cash flows and Altria Group, Inc.’s reported earnings from and carrying value of our equity investment in AB InBev.~~instruments used to hedge certain share commitments.

We received a substantial portion of our consideration from the ~~Transaction~~AB InBev business combination with SABMiller plc (the “Transaction”) in the form of restricted shares subject to a five-year lock-up. Furthermore, if our percentage ownership in AB InBev were to decrease below certain levels, we may be subject to additional tax liabilities, suffer a reduction in the number of directors that we can have appointed to the AB InBev Board of Directors and be unable to account for our investment under the equity method of accounting.

Upon completion of the Transaction, we received a substantial portion of our consideration in the form of restricted shares that cannot be sold or transferred for a period of five years following the Transaction, subject to limited exceptions. These transfer

Table of Contents

restrictions will require us to bear the risks associated with our investment in AB InBev for a five-year period that expires on October 10, 2021. Further, in the event that our ownership percentage in AB InBev were to decrease below certain levels, we may be subject to additional tax liabilities, the number of directors that we have the right to have appointed to the AB InBev Board of Directors could be reduced from two to one or zero and our use of the equity method of accounting for our investment in AB InBev could be challenged.

~~Our~~The tax treatment of the consideration Altria received in the Transaction ~~consideration~~ may be challenged and the tax treatment of the AB InBev ~~dividends~~investment may not be as favorable as Altria ~~Group, Inc.~~ anticipates.

While we expect the equity consideration that we received from the Transaction to qualify for tax-deferred treatment, we cannot provide any assurance that federal and state tax authorities will not challenge the expected tax treatment and, if they do, what the outcome of any such challenge will be. In addition, there is a risk that the tax treatment of ~~the dividends Altria Group, Inc. expects to receive from~~our investment in AB InBev may not be as favorable as ~~Altria Group, Inc. anticipates.~~we anticipate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in ~~Altria Group, Inc.’s~~Altria’s market risk during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. For additional information regarding quantitative and qualitative disclosures about market risk, see Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk of ~~Altria Group, Inc.’s~~Altria’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (the ~~“2016~~“2017 Form 10-K”).

Item 4. Controls and Procedures.

Altria ~~Group, Inc.~~ carried out an evaluation, with the participation of ~~Altria Group, Inc.’s~~its management, including ~~Altria Group, Inc.’s~~its Chief Executive Officer and Chief Financial Officer, of the effectiveness of ~~Altria Group, Inc.’s~~Altria’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, ~~Altria Group, Inc.’s~~Altria’s Chief Executive Officer and Chief Financial Officer concluded that ~~Altria Group, Inc.’s~~Altria’s disclosure controls and procedures are effective.

There have been no changes in ~~Altria Group, Inc.’s~~Altria’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, ~~Altria Group, Inc.’s~~Altria’s internal control over financial reporting.

~~Table of Contents~~

Part II – OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 9 for a discussion of legal proceedings pending against Altria ~~Group, Inc.~~ and its subsidiaries. See also Exhibits 99.1 and 99.2 to this Form 10-Q.

Item 1A. Risk Factors.

Information regarding Risk Factors appears under Cautionary Factors That May Affect Future Results in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q (“Item 2”) and in Part I, Item 1A. Risk Factors of the ~~2016~~2017 Form 10-K. Other than as set forth in Item 2, there have been no material changes from the risk factors previously disclosed in the ~~2016~~2017 Form 10-K.

Table of Contents

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

In ~~July 2015,~~January 2018, the Board of Directors authorized a $1.0 billion share repurchase program that it expanded to ~~$3.0~~$2.0 billion in ~~October 2016 and to $4.0 billion in July 2017.~~May 2018, which Altria ~~Group, Inc.~~ expects to complete ~~the July 2015 share repurchase program~~ by the end of the second quarter of ~~2018.~~2019. The timing of share repurchases under this program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.

~~Altria Group, Inc.’s~~Altria’s share repurchase activity for each of the three months in the period ended ~~September~~June 30, ~~2017~~,2018, was as follows:

Period
Total Number of Shares Purchased
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

July 1 - 31, 2017 4,300,000
$ 73.78
4,300,000
$ 1,018,149,682
August 1 - 31, 2017 3,820,505
$ 65.54
3,820,505
$ 767,742,247
September 1 - 30, 2017 3,051,404
$ 62.90
3,051,404
$ 575,803,508
For the Quarter Ended September 30, 2017 11,171,909
$ 67.99
11,171,909



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

April 1 - 30, 2018	2,106,421	$	61.20	2,106,421	$	376,834,731
May 1 - 31, 2018	2,360,762	$	55.67	2,360,762	$	1,245,415,795
June 1 - 30, 2018	3,124,407	$	56.77	3,124,407	$	1,068,050,544
For the Quarter Ended June 30, 2018	7,591,590	$	57.65	7,591,590

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Item 6. Exhibits.


10.1	Form of Restricted Stock Unit Agreement, dated as of May 17, 2018. Incorporated by reference to Altria’s Current Report on Form 8-K filed on May 17, 2018 (File No. 1-08940).


10.2	Form of Performance Stock Unit Agreement, dated as of May 17. 2018. Incorporated by reference to Altria’s Current Report on Form 8-K filed on May 17, 2018 (File No. 1-08940).


10.3	Time Sharing Agreement between Altria Client Services LLC and Howard A. Willard, dated May 17, 2018.


10.4	Time Sharing Termination Letter from Altria Client Services LLC to Martin J. Barrington, dated May 17, 2018.


10.5	Agreement and General Release between Altria and Martin J. Barrington, dated May 17. 2018.


12	Statements regarding computation of ratios of earnings to fixed charges.


31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


99.1	Certain Litigation Matters.


99.2	Trial Schedule for Certain Cases.


99.3	Definitions of Terms Related to Financial Covenants included in ~~Altria Group, Inc.’s~~Altria’s Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013. Incorporated by reference to ~~Altria Group, Inc.’s~~Altria’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 (File No. 1-08940).

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema.

101.CAL XBRL Taxonomy Extension Calculation Linkbase.

101.DEF XBRL Taxonomy Extension Definition Linkbase.

101.LAB XBRL Taxonomy Extension Label Linkbase.

101.PRE XBRL Taxonomy Extension Presentation Linkbase.

Signature

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 thereunto duly authorized.

ALTRIA GROUP, INC.

/s/ WILLIAM F. GIFFORD, JR.

William F. Gifford, Jr.

~~Executive~~ Vice ~~President~~Chairman and

Chief Financial Officer

~~October~~July 26, ~~2017~~2018

~~102~~99



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

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




		Page No.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017	3

	Condensed Consolidated Statements of Earnings for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	5

	Three Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	6

	Condensed Consolidated Statements of Comprehensive Earnings for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	7

	Three Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	8

	Condensed Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, ~~2016~~2017 and the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018	9

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	10

	Notes to Condensed Consolidated Financial Statements	1112

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6865

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	9996

Item 4.	Controls and Procedures	9996

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	~~100~~96

Item 1A.	Risk Factors	~~100~~96

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~100~~97

Item 6.	Exhibits	~~101~~98

Signature	Signature	~~102~~99


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Assets
Cash and cash equivalents	$	2,582	$	4,569	$	1,430	$	1,253
Receivables	148		151		144		142
Inventories:
Leaf tobacco	784		892		810		941
Other raw materials	180		164		191		170
Work in process	432		512		501		560
Finished product	591		483		621		554
	1,987		2,051		2,123		2,225
Income taxes					182		461
Other current assets	439		489		252		263
Total current assets	5,156		7,260		4,131		4,344
Property, plant and equipment, at cost	4,846		4,835		4,818		4,879
Less accumulated depreciation	2,939		2,877		2,940		2,965
	1,907		1,958		1,878		1,914
Goodwill	5,307		5,285		5,307		5,307
Other intangible assets, net	12,196		12,036		12,405		12,400
Investment in AB InBev	18,213		17,852		18,178		17,952
Finance assets, net	901		1,028		856		899
Other assets	480		513		422		386
Total Assets	$	44,160	$	45,932	$	43,177	$	43,202


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Liabilities
Current portion of long-term debt							$	864		$	864
Accounts payable	$	270		$	425		209			374
Accrued liabilities:
Marketing	759			747			699			695
Employment costs	152			289			108			188
Settlement charges	3,383			3,701			2,105			2,442
Other	834			1,025			1,078			971
Dividends payable	1,264			1,188			1,325			1,258
Total current liabilities	6,662			7,375			6,388			6,792
Long-term debt	13,890			13,881			13,036			13,030
Deferred income taxes	8,234			8,416			5,376			5,247
Accrued pension costs	611			805			323			445
Accrued postretirement health care costs	2,185			2,217			1,989			1,987
Other liabilities	372			427			230			283
Total liabilities	31,954			33,121			27,342			27,784
Contingencies (Note 9)
Redeemable noncontrolling interest	37			38			37			38
Stockholders’ Equity
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued)	935			935			935			935
Additional paid-in capital	5,940			5,893			5,948			5,952
Earnings reinvested in the business	38,542			36,906			43,369			42,251
Accumulated other comprehensive losses	(1,946		)	(2,052		)	(1,652		)	(1,897		)
Cost of repurchased stock (896,340,584 shares at September 30, 2017 and 862,689,093 shares at December 31, 2016)	(31,305		)	(28,912		)
Total stockholders’ equity attributable to Altria Group, Inc.	12,166			12,770
Cost of repurchased stock (919,703,864 shares at June 30, 2018 and 904,702,125 shares at December 31, 2017)							(32,804		)	(31,864		)
Total stockholders’ equity attributable to Altria							15,796			15,377
Noncontrolling interests	3			3			2			3
Total stockholders’ equity	12,169			12,773			15,798			15,380
Total Liabilities and Stockholders’ Equity	$	44,160		$	45,932		$	43,177		$	43,202



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



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


	For the Nine Months Ended September 30,						For the Six Months Ended June 30,
	2017			2016			2018			2017
Net revenues	$	19,475		$	19,492		$	12,413		$	12,746
Cost of sales	5,699			5,841			3,472			3,767
Excise taxes on products	4,695			4,888			2,864			3,089
Gross profit	9,081			8,763			6,077			5,890
Marketing, administration and research costs	1,664			1,871			1,259			1,107
Asset impairment and exit costs	24			123			4			16
Operating income	7,393			6,769			4,814			4,767
Interest and other debt expense, net	525			571			344			356
Loss on early extinguishment of debt	—			823
Earnings from equity investment in AB InBev/SABMiller	(332		)	(564		)
Gain on AB InBev/SABMiller business combination	(445		)	(205		)
Net periodic benefit income, excluding service cost							(16		)	(19		)
Earnings from equity investment in AB InBev							(570		)	(163		)
Loss (gain) on AB InBev/SABMiller business combination							33			(408		)
Earnings before income taxes	7,645			6,144			5,023			5,001
Provision for income taxes	2,386			2,178			1,251			1,609
Net earnings	5,259			3,966			3,772			3,392
Net earnings attributable to noncontrolling interests	(3		)	(3		)	(2		)	(2		)
Net earnings attributable to Altria Group, Inc.	$	5,256		$	3,963
Net earnings attributable to Altria							$	3,770		$	3,390
Per share data:
Basic and diluted earnings per share attributable to Altria Group, Inc.	$	2.72		$	2.02
Basic and diluted earnings per share attributable to Altria							$	1.99		$	1.75
Dividends declared	$	1.88		$	1.74		$	1.40		$	1.22


	Attributable to Altria Group, Inc.																				Attributable to Altria
	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			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, 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			$	935	$	5,893		$	36,906		$	(2,052	)	$	(28,912	)	$	3		$	12,773
Net earnings ⁽¹⁾	—		—			5,256			—			—			—			5,256			—		—			10,222			—			—			—			10,222
Other comprehensive earnings, net of deferred income taxes	—		—			—			106			—			—			106			—		—			—			155			—			—			155
Stock award activity	—		47			—			—			(34		)	—			13			—		59			—			—			(35		)	—			24
Cash dividends declared ($1.88 per share)	—		—			(3,620		)	—			—			—			(3,620		)
Cash dividends declared ($2.54 per share)																					—		—			(4,877		)	—			—			—			(4,877		)
Repurchases of common stock	—		—			—			—			(2,359		)	—			(2,359		)	—		—			—			—			(2,917		)	—			(2,917		)
Balances, September 30, 2017	$	935	$	5,940		$	38,542		$	(1,946	)	$	(31,305	)	$	3		$	12,169
Balances, December 31, 2017																					935		5,952			42,251			(1,897		)	(31,864		)	3			15,380
Net earnings ⁽¹⁾																					—		—			3,770			—			—			—			3,770
Other comprehensive earnings, net of deferred income taxes																					—		—			—			245			—			—			245
Stock award activity																					—		(4		)	—			—			10			—			6
Cash dividends declared ($1.40 per share)																					—		—			(2,652		)	—			—			—			(2,652		)
Repurchases of common stock																					—		—			—			—			(950		)	—			(950		)
Other																					—		—			—			—			—			(1		)	(1		)
Balances, June 30, 2018																					$	935	$	5,948		$	43,369		$	(1,652	)	$	(32,804	)	$	2		$	15,798


▪	ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all related ASU amendments (collectively “ASU No. 2014-09”);


▪	ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the related ASU amendment (collectively “ASU No. 2016-01”);


▪	ASU No. 2016-15, Statement of Cash Flows(Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”);


▪	ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”); and


▪	ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU No. 2017-07”).



	For the Nine Months Ended September 30, 2017
	(in millions)
Balances at December 31, 2016	$	79
Charges	17
Cash spent	(54		)
Balances at September 30, 2017	$	42



	For the Nine Months Ended September 30, 2017
	Currency Translation Adjustments			Benefit Plans			AB InBev				Accumulated Other Comprehensive Losses
	(in millions)
Balances, December 31, 2016	$	(4	)	$	(2,048	)	$	—			$	(2,052	)

Other comprehensive earnings before reclassifications	1			—			9				10
Deferred income taxes	—			—			(3		)		(3		)
Other comprehensive earnings before reclassifications, net of deferred income taxes	1			—			6				7

Amounts reclassified to net earnings	—			154			5				159
Deferred income taxes	—			(58		)	(2		)		(60		)
Amounts reclassified to net earnings, net of deferred income taxes	—			96			3				99

Other comprehensive earnings, net of deferred income taxes	1			96			9			⁽¹⁾	106

Balances, September 30, 2017	$	(3	)	$	(1,952	)	$	9			$	(1,946	)



	For the Six Months Ended June 30, 2018
	Benefit Plans			AB InBev					Currency Translation Adjustments and Other			Accumulated Other Comprehensive Losses
	(in millions)
Balances, December 31, 2017	$	(1,839	)	$	(54	)			$	(4	)	$	(1,897	)

Other comprehensive earnings (losses) before reclassifications	—			225					(2		)	223
Deferred income taxes	—			(50		)			—			(50		)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes	—			175					(2		)	173

Amounts reclassified to net earnings	118			(20		)			—			98
Deferred income taxes	(31		)	5					—			(26		)
Amounts reclassified to net earnings, net of deferred income taxes	87			(15		)			—			72

Other comprehensive earnings (losses), net of deferred income taxes	87			160			⁽¹	⁾	(2		)	245

Balances, June 30, 2018	$	(1,752	)	$	106				$	(6	)	$	(1,652	)


	For the Nine Months Ended September 30, 2016													For the Three Months Ended June 30, 2018
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses			Benefit Plans			AB InBev					Currency Translation Adjustments and Other			Accumulated Other Comprehensive Losses
	(in millions)													(in millions)
Balances, December 31, 2015	$	(5	)	$	(2,010	)	$	(1,265	)		$	(3,280	)
Balances, March 31, 2018														$	(1,794	)	$	(129	)			$	(4	)	$	(1,927	)

Other comprehensive earnings (losses) before reclassifications	1			(318		)	158				(159		)	—			306					(2		)	304
Deferred income taxes	—			122			(56		)		66			—			(66		)			—			(66		)
Other comprehensive earnings (losses) before reclassifications, net of deferred income taxes	1			(196		)	102				(93		)	—			240					(2		)	238

Amounts reclassified to net earnings	—			127			24				151			57			(7		)			—			50
Deferred income taxes	—			(47		)	(9		)		(56		)	(15		)	2					—			(13		)
Amounts reclassified to net earnings, net of deferred income taxes	—			80			15				95			42			(5		)			—			37

Other comprehensive earnings (losses), net of deferred income taxes	1			(116		)	117			⁽²⁾	2			42			235			⁽¹	⁾	(2		)	275

Balances, September 30, 2016	$	(4	)	$	(2,126	)	$	(1,148	)		$	(3,278	)
Balances, June 30, 2018														$	(1,752	)	$	106				$	(6	)	$	(1,652	)


	For the Three Months Ended September 30, 2016													For the Six Months Ended June 30, 2017
	Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses			Benefit Plans			AB InBev					Currency Translation Adjustments and Other			Accumulated Other Comprehensive Losses
	(in millions)													(in millions)
Balances, June 30, 2016	$	(4	)	$	(2,154	)	$	(1,182	)		$	(3,340	)
Balances, December 31, 2016														$	(2,048	)	$	—				$	(4	)	$	(2,052	)

Other comprehensive earnings before reclassifications	—			—			48				48			—			225					1			226
Deferred income taxes	—			—			(17		)		(17		)	—			(78		)			—			(78		)
Other comprehensive earnings before reclassifications, net of deferred income taxes	—			—			31				31			—			147					1			148

Amounts reclassified to net earnings	—			42			5				47			106			2					—			108
Deferred income taxes	—			(14		)	(2		)		(16		)	(41		)	(1		)			—			(42		)
Amounts reclassified to net earnings, net of deferred income taxes	—			28			3				31			65			1					—			66

Other comprehensive earnings, net of deferred income taxes	—			28			34			⁽²⁾	62			65			148			⁽¹	⁾	1			214

Balances, September 30, 2016	$	(4	)	$	(2,126	)	$	(1,148	)		$	(3,278	)
Balances, June 30, 2017														$	(1,983	)	$	148				$	(3	)	$	(1,838	)



	For the Three Months Ended June 30, 2017
	Benefit Plans			AB InBev					Currency Translation Adjustments and Other			Accumulated Other Comprehensive Losses
	(in millions)
Balances, March 31, 2017	$	(2,016	)	$	(192	)			$	(4	)	$	(2,212	)

Other comprehensive earnings before reclassifications	—			521					1			522
Deferred income taxes	—			(182		)			—			(182		)
Other comprehensive earnings before reclassifications, net of deferred income taxes	—			339					1			340

Amounts reclassified to net earnings	52			2					—			54
Deferred income taxes	(19		)	(1		)			—			(20		)
Amounts reclassified to net earnings, net of deferred income taxes	33			1					—			34

Other comprehensive earnings, net of deferred income taxes	33			340			⁽¹	⁾	1			374

Balances, June 30, 2017	$	(1,983	)	$	148				$	(3	)	$	(1,838	)


▪	~~tax benefits of $36 million in 2017 for the reversal of tax accruals no longer required;~~Tax Reform Act;


▪	tax ~~expense~~benefits of ~~$114~~$152 million in 2017 ~~for tax reserves~~ related primarily to the ~~calculation~~effective settlement in June 2017 of ~~certain~~the IRS audit of Altria and its consolidated subsidiaries’ 2010-2013 tax years, of which $110 million was recorded in the second quarter of 2017;


▪	tax expense of $82 million in 2018, resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax, of which $41 million was recorded in the second quarter of 2018; and


▪	tax expense of $34 million in the second quarter of 2018 for a valuation allowance on foreign tax ~~credits.~~credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017 for the Tax Reform Act.


	October 23, 2017	October 24, 2016	October 26, 2015	July 23, 2018	July 24, 2017	July 22, 2016
Individual Smoking and Health Cases⁽¹⁾	87	66	65	97	90	62
Smoking and Health Class Actions and Aggregated Claims Litigation ⁽²⁾	4	5	5	3	4	5
Health Care Cost Recovery Actions ⁽³⁾	1	1	1	1	1	1
“Lights/Ultra Lights” Class Actions	4	9	12	3	4	9


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,				For the Six Months Ended June 30,						For the Three Months Ended June 30,
	2017			2016			2017		2016		2018			2017			2018			2017
	(in millions)										(in millions)
Accrued liability for tobacco and health litigation items at beginning of period(1)	$	47		$	132		$	47	$	30	$	106		$	47		$	111		$	47
Pre-tax charges for:
Tobacco and health judgments	16			5			—		—		84			16			60			15
Related interest costs	2			6			—		—		14			2			10			2
Agreement to resolve Aspinall including related interest costs	—			32			—		—
Agreement to resolve Miner	—			45			—		45
Payments	(18		)	(145		)	—		—
Accrued liability for tobacco and health litigation items at end of period	$	47		$	75		$	47	$	75
Payments ⁽¹⁾											(97		)	(18		)	(74		)	(17		)
Accrued liability for tobacco and health litigation items at end of period ⁽¹⁾											$	107		$	47		$	107		$	47


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


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


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


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


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


▪	defendants falsely denied that they intentionally marketed to youth;


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


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


▪	the date, if any, on which PM USA consolidates with or merges into Altria ~~Group, Inc.~~ or any successor;

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