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, 2006, from the year ended December 31, 2005, 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. Amounts shown above that relate to Kraft are reported net of the related minority interest impact.

• Asset Impairment, Exit and Implementation Costs—In January 2004, Kraft announced a three-year restructuring program. In January 2006, Kraft announced plans to expand its restructuring efforts through 2008. The entire restructuring program is expected to result in $3.0 billion in pre-tax charges, the closure of up to 40 facilities and the elimination of approximately 14,000 positions. During the years ended December 31, 2006 and 2005, Kraft recorded pre-tax charges of $673 million ($397 million after taxes and minority interest) and $297 million ($178 million after taxes and minority interest), respectively, for the restructuring plan, including pre-tax implementation costs of $95 million and $87 million, respectively.
  
  During 2006, Kraft incurred pre-tax asset impairment charges of $424 million ($250 million after taxes and minority interest), relating primarily to the impairment of its Tassimo hot beverage business, the sale of its pet snacks brand and assets and the announced sale of its hot cereal assets and trademarks. During 2006, PMI, PM USA and Altria Group, Inc. recorded pre-tax asset impairment and exit costs totaling $178 million ($118 million after taxes). During 2005, Kraft incurred pre-tax asset impairment charges of $269 million ($151 million after taxes and minority interest), relating to the sale of its fruit snacks assets and the pending sales of certain assets in Canada and a small biscuit brand in the United States. In addition, during 2005, PMI and Altria Group, Inc. recorded pre-tax asset impairment and exit costs of $139 million ($97 million after taxes). For further details on the restructuring program or asset impairment, exit and implementation costs, see Note 3 to the Consolidated Financial Statements and the Food Business Environment section of the following Discussion and Analysis.
• International Tobacco Italian Antitrust Charge—During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action.
• Domestic Tobacco Loss on U.S. Tobacco Pool—As further discussed in Note 19. Contingencies ("Note 19"), in October 2004, the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA") was signed into law. Under the provisions of FETRA, PM USA was obligated to cover its share of potential losses that the government may incur on the disposition of pool tobacco stock accumulated under the previous tobacco price support program. In 2005, PM USA recorded a $138 million pre-tax expense ($87 million after taxes) for its share of the loss.
• Domestic Tobacco Quota Buy-Out—The provisions of FETRA require PM USA, along with other manufacturers and importers of tobacco products, to make quarterly payments that will be used to compensate tobacco growers and quota holders affected by the legislation. Payments made by PM USA under FETRA offset amounts due under the provisions of the National Tobacco Grower Settlement Trust ("NTGST"), a trust formerly established to compensate tobacco growers and quota holders. Disputes arose as to the applicability of FETRA to 2004 NTGST payments. During the third quarter of 2005, a North Carolina Supreme Court ruling determined that FETRA enactment had not triggered the offset provisions during 2004 and that tobacco companies were required to make full payment to the NTGST for the full year of 2004. The ruling, along with FETRA billings from the United States Department of Agriculture ("USDA"), established that FETRA was effective beginning in 2005. PM USA had accrued for 2004 FETRA charges and after the clarification of the court ruling, PM USA reversed a 2004 pre-tax accrual for FETRA payments in the amount of $115 million ($72 million after taxes).
• Gain on Redemption of United Biscuits Investment—During the third quarter of 2006, Kraft realized a pre-tax gain of $251 million (benefiting Altria Group, Inc. by $131 million after taxes and minority interest or $0.06 per diluted share) from the redemption of its outstanding investment in United Biscuits. For further details, see Note 5 to the Consolidated Financial Statements.
• Gains on Sales of Businesses, net—The 2006 gains on sales of businesses, net, were due primarily to a $488 million gain on the exchange of PMI's interest in a beer business in the Dominican Republic in return for cash proceeds of $427 million and 100% ownership of the cigarette business. The 2006 gains also included Kraft's sale of its rice brand and assets, partially offset by the loss on the sale of Kraft's U.S. coffee plant and tax expense of $57 million related to the sale of Kraft's pet snacks brand and assets. The 2005 gains on sales of businesses, net, were due primarily to the gain on sale of Kraft's U.K. desserts assets.
• Provision for Airline Industry Exposure—As discussed in Note 8. Finance Assets, net, ("Note 8") during 2006, PMCC increased its allowance for losses by $103 million ($66 million after taxes), due to continuing issues within the airline industry. During 2005, PMCC increased its allowance for losses by $200 million ($129 million after taxes), reflecting its exposure to the airline industry, particularly Delta Air Lines, Inc. ("Delta") and Northwest Airlines, Inc. ("Northwest"), both of which filed for bankruptcy protection during 2005.
• Currency—The unfavorable currency impact is due primarily to the strength of the U.S. dollar versus the Japanese yen and the Turkish lira.
• Income taxes—Altria Group, Inc.'s effective tax rate decreased by 3.6 percentage points to 26.3%. The 2006 effective tax rate includes $1.0 billion 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 tax accruals of $52 million no longer required at Kraft and the reversal of foreign tax accruals no longer required at PMI of $105 million. The 2005 effective tax rate includes a $372 million benefit related to dividend repatriation under the American Jobs Creation Act in 2005, the reversal of $82 million of tax accruals no longer required at Kraft, as well as other benefits, including lower repatriation costs.
• Shares Outstanding—Higher shares outstanding during 2006 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 international tobacco income, reflecting higher pricing and the impact of acquisitions, partially offset by unfavorable volume/mix(including a $70 million benefit in 2005 related to the inventory sale to a new distributor in Italy) and higher marketing, administration and research costs.
  • Higher domestic tobacco income, reflecting lower wholesale promotional allowance rates, partially offset by lower volume and higher marketing, administration and research costs (including higher marketing expenses and spending in 2006 for various excise tax ballot initiatives, partially offset by a pre-tax provision in 2005 of $56 million for the Boeken individual smoking case).
  • Higher North American food income, reflecting higher pricing and lower marketing, administration and research costs, partially offset by increased promotional spending, lower volume/mix (including the impact of the extra week of shipments in 2005) and unfavorable commodity costs.
  • Higher international food income, reflecting higher volume/mix (including the impact of the extra week of shipments in 2005), higher pricing and the impact of the acquisitions, partially offset by higher marketing, administration and research costs, unfavorable product costs and increased promotional spending.
  • Higher financial services income, reflecting higher gains from asset sales.

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

• 2007 Forecasted Results—In January 2007, Altria Group, Inc. announced that it expects to generate 2007 full-year diluted earnings per share from continuing operations in a range of $4.15 to $4.20 at current exchange rates and excluding Kraft, which will be accounted for as a discontinued operation for the full-year 2007, following the distribution of Kraft shares. The forecast includes a higher tax rate in 2007 versus 2006, and charges of approximately $0.08 per share. Diluted earnings per share from continuing operations are forecast to grow in the mid-single-digit range for the full-year 2007, versus $4.05 per share for 2006, including certain items shown below.

The forecast excludes the impact of any potential future acquisitions or divestitures (other than the Kraft spin-off). 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.