Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Continued)

Executive Summary

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

• Consolidated Operating Results—The changes in Altria Group, Inc.’s earnings from continuing operations and diluted earnings per share (“EPS”) from continuing operations for the year ended December 31, 2007, from the year ended December 31, 2006, were due primarily to the following:
  
  

                                                           

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

• Asset Impairment, Exit and Implementation Costs— In June 2007, Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving U.S.-based cigarette production for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. From 2007 through 2011, PM USA expects to incur total pre-tax asset impairment, exit and implementation charges of approximately $670 million for the program, including $371 million ($234 million after taxes) incurred during 2007. During 2006, PM USA recorded pre-tax asset impairment and exit costs of $10 million ($6 million after taxes). During 2007 and 2006, PMI recorded pre-tax asset impairment and exit costs of $195 million ($143 million after taxes) and $126 million ($86 million after taxes), respectively. In addition, during 2007 and 2006, pre-tax asset impairment and exit costs of $111 million ($75 million after taxes) and $42 million ($26 million after taxes) were recorded in general corporate expense. For further details on asset impairment, exit and implementation costs, see Note 3 to the Consolidated Financial Statements.
• Recoveries/Provision from/for Airline Industry Exposure— As discussed in Note 8. Finance Assets, net, (“Note 8”) PMCC recorded a pre-tax gain of $214 million ($137 million after taxes) on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down. During 2006, PMCC increased its allowance for losses by $103 million ($66 million after taxes), due to issues within the airline industry.
• Interest on Tax Reserve Transfers to Kraft—As further discussed in Note 1. Background and Basis of Presentation and Note 14. Income Taxes, the interest on tax reserves transferred to Kraft is related to the Kraft spin-off, the adoption of FIN 48 in 2007 and the conclusion of an IRS audit in 2006.
• Italian Antitrust Charge— During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action.
• Gain on Sale of Business— The 2006 gain on sale of a business was due to a $488 million pre-tax gain ($317 million after taxes) on the exchange of PMI’s interest in a beer business in return for cash proceeds of $427 million and 100% ownership of a cigarette business in the Dominican Republic.
• Currency— The favorable currency impact is due primarily to the weakness of the U.S. dollar versus the euro, Russian ruble and Turkish lira, partially offset by the strength of the U.S. dollar versus the Japanese yen.
• Income Taxes— Altria Group, Inc.’s effective tax rate increased 4.3 percentage points to 31.5%. The 2007 effective tax rate includes net tax benefits of $111 million related to the reversal of tax reserves and associated interest resulting from the expiration of statutes of limitations ($55 million in the third quarter and $56 million in the fourth quarter) and $42 million related to the reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany in the third quarter. The tax rate in 2007 also includes the reversal of tax accruals of $98 million no longer required in the fourth quarter. The 2006 effective tax rate includes $631 million of non-cash tax benefits principally representing the reversal of tax reserves after the U.S. Internal Revenue Service (“IRS”) concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999 in the first quarter of 2006. The 2006 rate also includes the reversal of foreign tax reserves no longer required at PMI of $105 million.
• Shares Outstanding— Higher shares outstanding during 2007 primarily reflects exercises of employee stock options (which become outstanding when exercised) and the incremental share impact of stock options outstanding.
• Continuing Operations— The increase in earnings from continuing operations was due primarily to the following:
  • Higher Eastern Europe, Middle East and Africa income, reflecting higher pricing and higher volume/mix, partially offset by higher marketing, administration and research costs;
  • Higher European Union income, reflecting higher pricing, and lower marketing, administration and research costs, partially offset by lower volume/mix;
  • Higher U.S. tobacco income, reflecting lower wholesale promotional allowance rates and lower marketing, administration and research costs, partially offset by lower volume and higher ongoing resolution costs; and
  • Higher Latin America income, reflecting higher pricing, partially offset by higher marketing, administration and research costs;

    partially offset by:

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

• 2008 Forecasted Results— In January 2008, Altria Group, Inc. announced that it forecasts 2008 full-year diluted earnings per share from continuing operations, excluding PMI, which will be accounted for as a discontinued operation for the full-year 2008, following the PMI spin-off, to be in the range of $1.63 to $1.67, representing a growth rate of approximately 9% to 11% for the full-year 2008, from a base of $1.50 per share in 2007. This forecast reflects a higher effective tax rate, the contribution of income from recently acquired John Middleton, Inc. and the impact of share repurchases. Earnings per share growth is expected to be stronger in the second half of 2008.
  
  Reconciliation of 2007 Reported Diluted EPS from Continuing Operations to 2007 Adjusted Diluted EPS from Continuing Operations
  
  
                                                           
  The forecast excludes the impact of any potential future acquisitions or divestitures (other than the PMI spin-off), Altria Group, Inc.’s gain on the sale of its headquarters in New York City, charges related to the tender offer for Altria Group, Inc.’s notes and a number of other factors including the items shown in the table above. 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.