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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009 for Altria Group, Inc. The company operates primarily through its wholly-owned subsidiaries: Philip Morris USA Inc. (cigarettes and smokeless products), UST Inc. (smokeless products and wine, acquired January 6, 2009), and John Middleton Co. (cigars). The reporting period is significantly impacted by the acquisition of UST Inc. and the prior-year spin-off of Philip Morris International Inc. (PMI), which is now reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition of UST Inc.: On January 6, 2009, Altria acquired UST Inc. for approximately $11.7 billion. This transaction added smokeless products and wine segments to the consolidated results, contributing to a 2.6% increase in net revenues despite volume declines in the cigarette segment.
• Discontinued Operations: Net earnings decreased significantly year-over-year ($1.9 billion drop) primarily due to the spin-off of PMI in March 2008. Q1 2008 included $1.9 billion in earnings from discontinued operations, whereas Q1 2009 had none.
• Debt Levels: Total consumer products debt increased from $7.0 billion to $13.2 billion. This increase was driven by the issuance of $4.2 billion in senior unsecured long-term notes and the assumption of UST debt to finance the acquisition.
• One-Time Items: Q1 2008 included a $404 million gain on the sale of the corporate headquarters building and a $393 million loss on the early extinguishment of debt. Q1 2009 incurred $128 million in exit costs and $60 million in UST transaction costs.
• Volume Trends: Cigarette shipment volume decreased 14.2% (5.7 billion units) due to lower consumption and trade inventory depletion ahead of a federal excise tax increase effective April 1, 2009.

Guidance, Outlook, and Risks

• 2009 Guidance: Management forecasts full-year 2009 diluted EPS from continuing operations in the range of $1.47 to $1.52. This includes approximately $0.23 per share of estimated charges. Adjusted diluted EPS (excluding charges) is expected to grow 3% to 6% over 2008.
• Share Repurchases: The company suspended its $4.0 billion share repurchase program in January 2009 to preserve financial flexibility and protect its investment-grade credit rating. No shares were repurchased under the program in Q1 2009.
• Dividends: The quarterly dividend rate was increased to $0.32 per share in Q3 2008. Total dividends paid in Q1 2009 were approximately $0.7 billion.
• Key Risks:
  • Litigation: Significant exposure to tobacco-related litigation, including "Lights/Ultra Lights" class actions and health care cost recovery cases. Management believes the litigation environment has improved but notes the potential for material adverse effects.
  • Regulation: Pending FDA legislation (HR1256) could grant broad regulatory authority over tobacco products, including restrictions on marketing, ingredients, and descriptors.
  • Taxation: Federal excise taxes on cigarettes, snuff, and cigars increased effective April 1, 2009, which may further impact sales volume.
  • IRS Challenges: The IRS has disallowed tax benefits for certain leveraged lease transactions (PMCC) from 1996-1999, potentially requiring significant tax payments if litigation is not resolved favorably.

Investor Verification Checklist

• Verify the integration progress and synergy realization of the UST Inc. acquisition, specifically the $300 million in annual synergies targeted by 2011.
• Monitor the outcome of pending "Lights/Ultra Lights" class action litigation following the Supreme Court's decision in Good, which lifted preemption barriers.
• Assess the impact of the April 1, 2009 federal excise tax increase on cigarette and smokeless product volumes in Q2 2009.
• Review the status of the IRS challenge regarding PMCC leveraged leases and the potential for accelerated tax payments.
• Track the company's ability to maintain its investment-grade credit rating amidst increased debt levels and economic uncertainty.