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ALTRIA GROUP INC (MO)

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ALTRIA : Management's Discussion and Analysis of Financial Condition and Results of Operations. Description of the Company (form 10-Q)

07/22/2014 | 10:52am US/Eastern

At June 30, 2014, Altria Group, Inc.'s wholly-owned subsidiaries included Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless tobacco products in the United States; John Middleton Co. ("Middleton"), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC ("UST"), which through its wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC ("USSTC") and Ste. Michelle Wine Estates Ltd. ("Ste. Michelle"), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.'s other operating companies included Nu Mark LLC ("Nu Mark"), a wholly-owned subsidiary, which is engaged in the manufacture and sale of innovative tobacco products, and Philip Morris Capital Corporation ("PMCC"), a wholly-owned subsidiary, which maintains a portfolio of leveraged and direct finance leases. Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and consumer engagement services to Altria Group, Inc.'s operating subsidiaries, and Altria Client Services Inc., which provides various support services, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc.'s operating subsidiaries. In addition, Nu Mark and its subsidiaries, and Middleton use third-party contract manufacturing arrangements in the manufacture of their products. Altria Group, Inc.'s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At June 30, 2014, Altria Group, Inc.'s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

At June 30, 2014, Altria Group, Inc. also held approximately 27% of the economic and voting interest of SABMiller plc ("SABMiller"), which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.

Altria Group, Inc.'s reportable segments are smokeable products, smokeless products and wine. The financial services and the alternative products businesses are included in an all other category.

Certain prior-period amounts have been reclassified to conform with the current-period presentation, due primarily to the reclassification of changes in book overdrafts on Altria Group, Inc.'s condensed consolidated statements of cash flows to operating activities. These amounts were previously classified as financing activities.



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Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows. Consolidated Results of Operations for the Six Months Ended June 30, 2014: The changes in Altria Group, Inc.'s net earnings and diluted earnings per share ("EPS") attributable to Altria Group, Inc. for the six months ended June 30, 2014, from the six months ended June 30, 2013, were due primarily to the following:


                                                          Net Earnings              Diluted EPS
                                                          (in millions, except per share data)
For the six months ended June 30, 2013                $            2,651         $           1.32

2013 NPM Adjustment Items                                           (334 )                  (0.16 )
2013 Asset impairment and exit costs                                   1                        -
2013 Tobacco and health litigation items                               4                        -
2013 SABMiller special items                                           7                        -
Subtotal 2013 special items                                         (322 )                  (0.16 )

2014 NPM Adjustment Items                                             56                     0.03
2014 Asset impairment, exit, integration and
acquisition-related costs                                             (1 )                      -
2014 Tobacco and health litigation items                             (23 )                  (0.01 )
2014 SABMiller special items                                         (21 )                  (0.01 )
Subtotal 2014 special items                                           11                     0.01

Fewer shares outstanding                                               -                     0.01
Change in tax rate                                                    21                     0.01
Operations                                                            76                     0.04
For the six months ended June 30, 2014                $            2,437         $           1.23



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

Fewer Shares Outstanding: Fewer shares outstanding during the six months ended June 30, 2014 compared with the prior-year period were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase programs.

Operations: The increase of $76 million in operations shown in the table above was due primarily to the following: • higher income from the smokeable products and smokeless products segments; and

• lower interest and other debt expense, net;



partially offset by:
• lower income from the financial services business;


• higher investment spending in the alternative products businesses; and

• lower earnings from Altria Group, Inc.'s equity investment in SABMiller.

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



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Consolidated Results of Operations for the Three Months Ended June 30, 2014: The changes in Altria Group, Inc.'s net earnings and diluted EPS attributable to Altria Group, Inc. for the three months ended June 30, 2014, from the three months ended June 30, 2013, were due primarily to the following:


                                             Net Earnings            Diluted EPS
                                            (in millions, except per share data)
For the three months ended June 30, 2013 $            1,266       $           0.63

2013 NPM Adjustment Items                               (23 )                (0.01 )
2013 SABMiller special items                             (2 )                    -
Subtotal 2013 special items                             (25 )                (0.01 )

2014 NPM Adjustment Items                                15                   0.01
2014 Tobacco and health litigation items                (20 )                (0.01 )
2014 SABMiller special items                            (15 )                (0.01 )
Subtotal 2014 special items                             (20 )                (0.01 )

Fewer shares outstanding                                  -                   0.01
Change in tax rate                                       11                      -
Operations                                               30                   0.02
For the three months ended June 30, 2014 $            1,262       $           0.64




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

Fewer Shares Outstanding: Fewer shares outstanding during the three months ended June 30, 2014 compared with the prior-year period were due primarily to shares repurchased by Altria Group, Inc. under its April 2013 share repurchase program.

Operations: The increase of $30 million in operations shown in the table above was due primarily to the following: • higher income from the smokeable products and smokeless products segments; and

• lower interest and other debt expense, net;



partially offset by:
• higher investment spending in the alternative products businesses; and


• lower income from the financial services business.

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

2014 Forecasted Results: In July 2014, Altria Group, Inc. revised its 2014 full-year forecast for reported diluted EPS to a range of $2.54 to $2.59 from a range of $2.53 to $2.60. The 2014 full-year reported diluted EPS forecast reflects the impact of the items detailed in the table below, as compared with 2013 full-year reported diluted EPS of $2.26, which included $0.12 per share of net expenses, as detailed in the table below. In addition, in July 2014, Altria Group, Inc. revised its 2014 full-year forecast for adjusted diluted EPS, which excludes the impact of the items detailed in the table below, representing a growth rate of 7% to 9% over 2013 full-year adjusted diluted EPS. Altria Group, Inc. expects higher adjusted diluted EPS growth in the second half of 2014, particularly in the fourth quarter, driven by various factors. These include lower fourth-quarter costs in the smokeable products segment due to the end of the federal tobacco quota buy-out payments and a lower fourth-quarter of 2014 effective tax rate on operations compared to the fourth quarter of 2013 resulting from Altria Group, Inc's 2013 debt tender offer.

The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast and to the other forward-looking statements made in this Quarterly Report on Form 10-Q ("Form 10-Q").



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                (Income) Expense, Net Included in Reported Diluted EPS
                                                           2014               2013
NPM Adjustment Items                                  $      (0.03 )$    (0.21 )
Asset impairment, exit, integration and
acquisition-related costs                                     0.01                 -
Tobacco and health litigation items                           0.01              0.01
SABMiller special items                                       0.01              0.01
Loss on early extinguishment of debt                             -              0.34
Tax items                                                        -             (0.03 )
                                                      $          -        $     0.12

Adjusted diluted EPS is a financial measure that is not consistent with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Altria Group, Inc.'s management reviews diluted EPS on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items may include, for example: loss on early extinguishment of debt; restructuring charges; SABMiller special items; certain tax items; tobacco and health litigation items; and settlements of, and determinations made in connection with, disputes with certain states and territories related to the non-participating manufacturer ("NPM") adjustment provision under the 1998 Master Settlement Agreement (the "MSA") for the years 2003 - 2012 (such settlements and determinations are referred to collectively as "NPM Adjustment Items" and are more fully described in Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2013 in Note 9. Contingencies to the condensed consolidated financial statements in Item 1. Financial Statements in this Form 10-Q ("Item 1"). Altria Group, Inc.'s management does not view any of these special items to be part of its sustainable results as they may be highly variable and difficult to predict and can distort underlying business trends and results. Altria Group, Inc.'s management believes it is appropriate to disclose this non-GAAP financial measure to provide useful insight into underlying business trends and results, and to provide a more meaningful comparison of year-over-year results. Adjusted measures are used by management and regularly provided to Altria Group, Inc.'s chief operating decision maker for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. This information should be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.


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