Philip Morris International
2017 Annual Report
C H A N G
2017 Philip Morris Annual Report_FEB 28, 2018 Designing a Smoke-Free Future
The greatest contribution PMI can make to society is to replace cigarettes with less-harmful alternatives, which is why we are
transforming from a cigarette maker to a smoke-free technology leader. Thanks to groundbreaking research, we have developed
and are commercializing smoke-free products that are enjoyable for adult smokers and are a much better choice than cigarette
smoking. The first of these is our flagship heat-not-burn product, IQOS.
Korea
The impressive
performance of
IQOS in 2017
was further driven
by its launch in
Korea in May.
IQOS Highlights in 2017
High Conversion Rates(a)
n Converted/Predominant n Situational
n Abandoned
Greece
89%
Italy
77%
Korea
80%
Romania
86%
Nearly
IQOS Available in
Key Cities in
38
Markets
5 Million
Estimated Adult Consumers Around the
World Have Already Stopped Smoking
and Made the Change to IQOS(b)
+36 Billion
Heated Tobacco
Units Shipped
PMI National Heated Tobacco Unit Market Shares - Fourth Quarter 2017 vs. Fourth Quarter 2016
2.8%
1.2%
13.9%
5.5%
1.5%
1.9%
1.2%
0.3%
4.9%
0.2%
2016
2017
2016
2017
2016
2017
0.2%
0.2%
0.0%
2016
2017
2016
2017
2016
2017
Greece
Italy
Japan
Korea
Portugal
Romania
0.7%
2016
2017
Switzerland
(a)Estimated number of legal age IQOS users that used our heated tobacco units for the following percentages of their daily tobacco consumption over the past seven
days: Converted/Predominant: 70% or more. Situational: Between 5% and less than 70%. Abandoned: Less than 5%.
(b)Status at the end of January 2018. For markets where IQOS is the only heated tobacco product, daily individual consumption of PMI heated tobacco units
represents the totality of their daily tobacco consumption. For markets where IQOS is one among other heated tobacco products, daily individual consumption of
heated tobacco units represents the totality of their daily tobacco consumption, of which at least 70% are PMI heated tobacco units.
Note: Product visuals in this report are for illustrative purposes only.
2017 Philip Morris Annual Report_FEB 28, 2018 Dear Shareholder,
Our robust performance in 2017, a landmark year in our transformation to
a smoke-free future, underscored the enormous promise of reduced-risk
products (RRPs), the strength of our combustible product portfolio and the
commitment of our employees to lead the transformation of our industry.
Our strong currency-neutral financial results were
underpinned by the excellent performance of our
flagship smoke-free product, IQOS, which exceeded our
expectations and helped offset the adverse impact of
essentially no net pricing in Russia and a severe cigarette
volume contraction in Saudi Arabia.
2017 vs. 2016 Results
Our total cigarette and heated tobacco unit shipment
volume of 798.2 billion units declined by 2.7%, primarily
reflecting lower cigarette industry volume in the Asia
and Eastern Europe, Middle East & Africa (EEMA)
Regions, partly offset by higher heated tobacco unit
volume, driven principally by Japan.
Our total international market share, excluding
China and the U.S., declined by 0.1 percentage point
to 28.0%, mainly due to mid- and low price segments
cigarette brands in the Asia and EEMA Regions. Market
share of our premium brands increased, driven by the
strong performance of our heated tobacco portfolio. We
recorded growing or stable total market share in 16 of
our top 30 operating companies income (OCI)(1) markets.
Marlboro’s international cigarette share increased
slightly to 9.7%,(2) a notable achievement given the
impact of out-switching to our heated tobacco products
in IQOS launch markets and the volume contraction in
Saudi Arabia. The brand’s cigarette share increased in
the Asia and EEMA Regions, reflecting robust growth in
the Philippines and across markets in North Africa.
Our other key international cigarette brands also
André Calantzopoulos
Chief Executive Officer
Louis C. Camilleri
Chairman of the Board
performed well. Chesterfield and Philip Morris grew
their cigarette share. While share of L&M, the third-
largest international cigarette brand, declined slightly,
Parliament, our above-premium brand, recorded stable
share – noteworthy given the challenging economic
conditions and related consumer down-trading in some
of its key Eastern European markets.
Net revenues, excluding excise taxes, of $28.7
billion increased by 7.7%, driven by strong RRP growth
(principally heated tobacco units and IQOS devices)
coupled with favorable pricing for our cigarette portfolio.
This reflected a favorable volume/mix variance of $1.1
billion, our best-ever full-year performance on this
measure. On a currency-neutral basis, net revenues,
excluding excise taxes, grew by 9.4%.
Adjusted OCI of $11.8 billion increased by 6.0%,
or by 7.4% excluding currency, driven by the strong
growth in net revenues, partly offset by investment
behind the commercialization of IQOS, as well as the
unfavorable profitability impact of higher IQOS device
sales, which yielded a negative margin due to introduc-
tory discounts offered in the initial commercialization
phase to accelerate adult smoker switching. Adjusted
OCI margin declined by 0.7 points to 41.1%, or by 0.8
points, excluding currency.
Our reported diluted EPS were unfavorably impacted
by tax items totaling $0.84 primarily related to the
enactment of the Tax Cuts and Jobs Act in the United
States, reflecting the requirement to pay a one-time
transition tax on accumulated foreign earnings.
Excluding these tax items, our adjusted diluted EPS
of $4.72 increased by 5.4%, despite a currency head-
wind of $0.21 per share. Excluding currency and
the aforementioned tax items, adjusted diluted EPS
increased by 10.0%.
(1)Operating companies income, or OCI, is defined as operating income, excluding general corporate expenses and the amortization
of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net.
(2)Marlboro international cigarette share is defined as PMI total sales volume for Marlboro cigarettes as a percentage of the total
industry estimated sales volume for cigarettes, excluding China and the U.S.
Note: Reduced-risk products (RRPs) is the term we use to refer to products that present, are likely to present, or have the potential
to present less risk of harm to smokers who switch to these products versus continued smoking. We have a range of RRPs in various
stages of development, scientific assessment and commercialization. Because our RRPs do not burn tobacco, they produce an
aerosol that contains far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.
1
2017 Philip Morris Annual Report_FEB 28, 2018 Robust EPS Growth
+10.0%
in 2017 vs. 2016,
Adjusted Diluted,
Excluding Currency
$4.93(3)
$4.48(2)
2016
2017
Since its Spin-Off in
March 2008,(4) PMI has
Increased its Regular
Quarterly Dividend by
132.6%
$4.28
$1.84
2008
2017
Representing a
Compound Annual
Growth Rate of
9.8%
Operating cash flow(1) of $8.9 billion increased by
$0.8 billion or 10.3%. Excluding currency, operating
cash flow increased by $0.4 billion, or 5.5%. Capital
expenditures of $1.5 billion increased by $0.4 billion,
primarily reflecting investment behind heated tobacco
production capacity expansion.
In September, the Board of Directors approved an
increase in our quarterly dividend to an annualized rate
of $4.28 per share. This was the tenth consecutive year
in which we increased our dividend, representing a total
increase of 132.6%, or a compound annual growth rate
of 9.8%, since we became a public company.
We continued to access the capital markets at
favorable rates in 2017, raising $6.9 billion and reducing
the weighted-average all-in financing cost of our total
debt by 20 basis points to 2.6%. The weighted-average
time to maturity of our total long-term debt stood at
9.4 years at the end of 2017 compared to 10.6 years at
the end of 2016.
U.S. Tax Reform
As a U.S. company that operates exclusively in markets
outside of the U.S., the impact of the Tax Cuts and Jobs
Act on our business is unique. Based on our current
interpretation of the law, we expect an effective tax
rate of approximately 28% for 2018. The difference
between this rate and the 21% statutory tax rate
under the new law reflects three main factors: foreign
tax rate differences, the non-deductibility of interest
expense, and the partial disallowance of foreign tax
credits related to the application of the rules for global
intangible low-taxed income. A more detailed discussion
on the impact of U.S. tax reform on our business is
included in our Form 10-K.
Fiscal, Regulatory and Illicit Trade Environment
Our favorable pricing in 2017 was supported by a fiscal
environment for combustible tobacco products that
remained largely rational with either no, or moderate,
excise tax increases in most of our major markets. The
clear exception was Saudi Arabia, where the intro-
duction of the country’s first-ever excise tax system
resulted in a doubling of cigarette retail prices.
Depending on national legislation, heated tobacco
units generally continue to be taxed under a dedicated
excise category or as OTP (Other Tobacco Products).
Last year, the governments of Japan and Korea re-
viewed their fiscal structures for heated tobacco and
maintained the excise tax differentiation to cigarettes,
albeit at reduced levels.
In implementing traditional restrictive regulatory
measures, including plain packaging, governments
aim to foster smoking prevention and cessation. We
believe these objectives can be met more rapidly and
sustainably by fully incorporating the opportunities
represented by reduced-risk products into existing
tobacco control policies. The establishment of regula-
tory frameworks that differentiate between cigarettes
and smoke-free products is a critical component in the
switching of smokers to better alternatives compared to
continued smoking.
The regulatory environment for RRPs continued to
evolve in 2017, though the underlying process remains
undeniably complex, as RRPs are uncharted territory
for the vast majority of regulators. This complexity
is exacerbated by the divide in the public health
community on the topic of tobacco harm reduction.
We hope that the interests of the men and women
who smoke will ultimately prevail over ideology in this
debate.
We were encouraged by a number of policy an-
nouncements and findings related to RRPs by govern-
mental agencies and advisory committees, such as the
U.S. Food & Drug Administration (FDA), the U.K. Com-
mittee on Toxicity, Public Health England and others.
We hope that they will soon act as a catalyst for other
governments to adopt similar sensible policies.
Despite continued progress on combatting illicit
trade, notably in the EU Region, it remains a sizable
challenge, particularly in markets such as Brazil and
Pakistan. To help confront tobacco smuggling and
related crimes, we launched PMI IMPACT in 2016,
and last year the program’s council of independent
experts, in the fields of law, anti-corruption and law
enforcement, allocated approximately $28 million in
grants across 32 projects as part of its first funding
round. The projects come from public, private and
academic organizations in 18 countries.
Reduced-Risk Product Commercialization
In 2017, PMI’s journey to replace cigarettes with
RRPs took a meaningful step forward, led by
significant momentum in the product development,
commercialization and scientific substantiation of our
product platforms.
The most notable achievement was our ongoing
progress in commercializing IQOS. As of year-end, IQOS
was available in key cities in 38 markets. We estimate
that nearly 5 million adult consumers around the world
have already stopped smoking and made the change to
IQOS. The impressive performance of IQOS was led by
Japan and Korea, where national market shares in the
fourth quarter reached 13.9% and 5.5%, respectively,
despite capacity-driven constraints, first on the heated
tobacco consumables and then on device sales.
Outside Asia, we recorded sequential quarterly
volume growth for our heated tobacco products in
essentially all launch markets. Favorable performances
in the Czech Republic, Greece, Portugal and Romania
stood out in particular.
For the time being, the momentum of IQOS outside
Asia remains below the very high bar set by Japan
and Korea. We are actively enhancing sustainable
adult consumer adoption against a backdrop of lower
(1)Net cash provided by operating activities.
(2)Reported diluted EPS. (3)Reported diluted EPS of $3.88, excluding the unfavorable impact of tax items and currency of $0.84 and $0.21 per share, respectively.
(4)Dividends for 2008 and 2017 are annualized rates. The 2008 annualized rate is based on a quarterly dividend of $0.46 per common share, declared June 18,
2008. The 2017 annualized rate is based on a quarterly dividend of $1.07 per common share, declared September 13, 2017.
2
2017 Philip Morris Annual Report_FEB 28, 2018
initial awareness and greater limitations on consumer
engagement. To address this, we are working to build
adult consumer understanding of the heated tobacco
category, raise adult consumers’ commitment to
the exclusive use of IQOS and enhance consumer
conversion support. This approach entails a greater
deployment of specialized field forces to conduct IQOS
guided trials.
We remain focused on our aspiration to see IQOS
launched in the United States. Following the submission
of our Modified Risk Tobacco Product (MRTP) appli-
cation to the FDA in December 2016, we submitted
our Premarket Tobacco Application in March 2017.
Both applications have been accepted by the FDA for
substantive review. As part of this process, the FDA
concluded a series of pre-approval inspections of our
manufacturing facilities and quality control systems,
as well as research and select suppliers’ facilities. In
addition, in January 2018 the FDA’s Tobacco Product
Scientific Advisory Committee (TPSAC) held a two-
day meeting on our MRTP application for IQOS. We
appreciate the open, positive dialogue and the serious
consideration that TPSAC showed in discussing the
complex science presented in our MRTP application and
are encouraged by the recognition of the risk-reduction
potential of IQOS compared to continued smoking –
including a significant decrease in exposure to harmful
chemicals – that clearly emerged from the statements
of the Committee members.
With respect to our other RRP platforms, we made
further progress in terms of product development and
commercialization. We began a small-scale city test
of our Platform 2 product, marketed under the brand
name TEEPS, in the Dominican Republic in December
2017, and while still early, we are very excited by the
potential for this platform. The city test in the U.K. of
our Platform 4 product with MESH technology has been
well received by adult consumers and has provided
important insights and uncovered opportunities for
product improvement. We plan to commercialize a
next-generation version of the product this year. Finally,
we also advanced the development of our Platform 3
product, for which we plan a consumer test in 2018.
Scientific Assessment, Engagement
and Research & Development
Our scientific assessment program, outlined in our
dedicated website at www.pmiscience.com, continued
to make substantial progress last year. The program is
built on best practices and guidelines. We adhere to
the internationally recognized Good Clinical Practices
and Good Laboratory Practices. We actively share
our methods and data, making them available to the
public for verification of our approaches and results.
We post our clinical study protocols and subsequent
results on www.ClinicalTrials.gov. We invite scientists
from around the world to verify our systems biology
methods through a crowd-sourcing platform called
Reduced-Risk Products – Our Four Product Platforms
Heated Tobacco Products
Products Without Tobacco
Platform 1
IQOS, using the consumables
HeatSticks or HEETS, features
an electronic holder that
heats tobacco rather than
burning it, thereby creating a
nicotine-containing vapor with
significantly fewer harmful
toxicants compared
to cigarette smoke.
Platform 2
TEEPS uses a pressed carbon
heat source that, once ignited,
heats the tobacco without
burning it, to generate a
nicotine-containing vapor
with a reduction in harmful
toxicants similar to IQOS.
A small-scale city
test of the product
was initiated in 2017.
Platform 3
Platform 3 is based on acquired
technology that uses a chemical
process to create a nicotine-
containing vapor. We are
exploring two routes for this
platform: one with electronics
and one without.
Platform 4
Products under this platform
are e-vapor products: battery-
powered devices that produce
an aerosol by vaporizing a
nicotine solution. One of
these – MESH – uses new
proprietary
vaporization
technology.
3
2017 Philip Morris Annual Report_FEB 28, 2018 www.sbvIMPROVER.com. We are going a step further
by gradually making the data and results from our non-
clinical and clinical programs around IQOS available
to the public this year, in part through a database and
associated web portal called INTERVALS (see
http://intervals.science).
In 2017, we published 46 peer-reviewed papers
in leading scientific journals and shared our science
and smoke-free vision in over 150 presentations at
76 scientific conferences.
With regard to our research and development
program, we continued to build our RRP-related
intellectual property portfolio in 2017, with over 170
new patent applications filed, and we expect, once
again, to have been among the top 100 filers at the
European Patent Office. We currently have more than
2,900 RRP-related patents granted worldwide and over
4,600 such patent applications pending.
Manufacturing & Supply Chain
The accelerated expansion of our heated tobacco unit
and IQOS device capacity was the major undertaking
of 2017. The increase of our annualized production
capacity of heated tobacco units was mainly driven by
the installation of additional machines at our Greenfield
facility in Bologna, Italy, and also greater production
efficiency.
To support the growth of our heated tobacco unit
production capacity over the near to mid-term, we
began the second phase of our facility expansion
in Bologna and the partial or full conversion of our
cigarette factories in Greece, Korea, Romania and
Russia. Additionally, we announced plans for a new
Greenfield facility in Dresden, Germany.
Last year, we qualified additional manufacturers for
the IQOS device and its critical components such as the
heating blade, allowing us to diversify our supply base
and increase capacity. Indeed, since February of this
year, we have been able to fully supply devices to our
markets. Importantly, we also reduced the unit cost of
devices, a key – and ongoing – component of improving
their economics.
The Organization
To deliver on the substantial promise of RRPs, we
initiated fundamental changes to our operating
model, organizational structure and culture in 2017
to accelerate our evolution into a consumer-centric,
technology and science-driven company.
We grouped the smoke-free products and
related ecosystem development, as well as scientific
substantiation, under a new Science & Innovation
function. We focused the commercial deployment of
both our smoke-free and combustible products, as well
as global strategy execution, under a newly created
Chief Operating Officer position. And we realigned our
operating segments from four to six geographic Regions
to provide greater speed and efficiency and recognize
their differing levels of maturity with respect to our
smoke-free vision.
Further to enhancing organizational effectiveness,
employee engagement remains a top priority – even
more so as we transform into an RRP-focused company.
In 2017, the Top Employer Institute recognized PMI for
its excellence in professional development programs,
workplace environment and opportunities for career
advancement in a total of 34 countries, compared to
24 and 15 in 2016 and 2015, respectively.
We are committed to leveraging the full potential
of women in the workplace, and we recognize we
have more work to do. Nevertheless, by year-end
2017, women made up over 34% of our employees
at managerial levels, reflecting continued steady
progress towards our goal of reaching 40% by 2022.
To support this goal, we aim for a 50:50 gender ratio
in our recruitment pipeline. In 2017, 43% of new hires
at managerial levels and 47% of new hires at more
junior levels were women. Women’s career support and
advancement are also critical for achieving this goal.
In 2017, women accounted for 38% of promotions at
managerial levels.
Overall, our organization is fully energized by our
smoke-free vision that will benefit the hundreds of
millions of men and women who smoke, our company
and ultimately society at large. Finally, we continue to
benefit from the tremendous experience of our Board
of Directors, whose relationship with management
continues to be based on transparency and candor.
The Year Ahead
Against the backdrop of a broadly rational regulatory
and excise tax environment, the fundamentals of our
business remain robust, supported by our leading brand
portfolio in the combustible product category. For the
first time since 2011, we entered the year with annual
EPS guidance that, at exchange rates prevailing at the
time it was announced, reflects favorable currency.
Our RRP portfolio continues to provide us with the
single-largest opportunity to accelerate our business
growth and generously reward our shareholders, and
we will make further significant investments in 2018 to
drive this growth potential over the coming years.
Momentum behind the harm-reduction principle
is accelerating, helped by our vision for a smoke-free
future. While the task is enormous, our resolve is
steadfast, and we are confident that the outstanding
people of PMI will rise to the challenge.
André Calantzopoulos, Chief Executive Officer
Louis C. Camilleri, Chairman of the Board
March 2, 2018
4
2017 Philip Morris Annual Report_FEB 28, 2018
Our Approach to Sustainability
Our sustainability work is focused on creating long-term value while continuously improving our understanding, management,
and performance of the social, economic, and environmental impacts of our operations and our wider value chain. Through our
sustainability efforts we remain committed to the UN Sustainable Development Goals (SDGs) and take decisive actions where
we can have the greatest impact.
+2 Million
people living or working
on farms that supply
tobacco for PMI
+350,000
farmers contracted by
PMI and our suppliers
in 28 countries
Approximately
81,000
employees worldwide
40%
female representation
in management
by 2022
At least
30%
of our total shipment volume
to come from smoke-free
products by 2025
-60%
greenhouse gas
emissions by 2040
The greatest contribution PMI can make to society is to replace cigarettes with less-
harmful alternatives. In 2017, smoke-free products represented approximately 5% of
our combined cigarette and heated tobacco unit shipment volume. But they already
accounted for approximately 13% of our net revenues, excluding excise taxes, 39% of
our global commercial expenditure and 74% of our global R&D expenditure. We estimate that more
than 4.7 million adult smokers around the world have already stopped smoking and made the change
to IQOS, and approximately 10,000 are switching every day. Our aspiration is that, by 2025, at least
40 million people who would have otherwise continued smoking will have switched to our smoke-
free products. Last September we announced our support for the establishment of the Foundation
for a Smoke-Free World by contributing $80 million per year over the next 12 years. The Foundation
is an independent body that will fund research and encourage innovative measures to reduce the
harm caused by smoking and help accelerate the pace at which a smoke-free world is achieved.
Through our
Good Agricultural
Practices program,
we support over
350,000 contracted tobacco
farmers by increasing productiv-
ity, implementing safe and fair
labor practices, and minimizing
environmental impacts. The pro-
gram includes efforts to promote
crop diversification to generate
additional sources of income and
improve food security.
We provide a
professional, safe
and inclusive
workplace for our
approximately 81,000 employees
and continue to implement
programs to uphold respect
for labor and human rights
internally and across our supply
chain, including electronics
manufacturing. Our Responsible
Sourcing Principles set processes
and performance requirements
for all suppliers so as to identify,
manage, and address risks in
the areas of human rights, labor
rights, the environment and
business integrity.
Our main contri-
bution to SDG
12 relates to the
improvements in the
life cycle impacts of our products.
We have adopted science-based
targets for greenhouse gas emis-
sions, which we aim to reduce
by 60% by 2040 (using 2010 as
the base) across both our own
operations and value chain. In
2017, PMI made the CDP Climate
A list for the fourth year in a row
and achieved CDP A list status for
both Water and Supplier Engage-
ment for the first time.
Illicit trade fuels
criminal activity
and corruption,
making our efforts
to tackle illicit tobacco trade of
particular relevance for SDG 16.
We continue to invest time, effort
and resources in maintaining
the integrity of our supply chain.
Through PMI IMPACT, a global
initiative supporting organizations
in developing and implementing
projects to fight illegal trade and
related crimes, 32 projects were
selected in 2017 for the first
funding round of approximately
$28 million. A further 157 expres-
sions of interest were received for
the second funding round.
We continue to align our practices with all SDGs. Our Sustainability Report (available at https://www.pmi.com/sustainability) provides a
comprehensive overview of our performance.
Note: Unless otherwise stated, all data as at end December 2017.
5
2017 Philip Morris Annual Report_FEB 28, 2018 Board of Directors
H. Brown
A. Calantzopoulos
L. C. Camilleri
M. Ferragamo
W. Geissler
J. Li
J. Makihara
S. Marchionne
K. Morparia
L. A. Noto
F. Paulsen
R. B. Polet
S. M. Wolf
Committees
Presiding Director, Lucio A. Noto
1 Member of Audit Committee, Jennifer Li, Chair
2 Member of Compensation and Leadership
Development Committee, Werner Geissler, Chair
3 Member of Finance Committee, Jun Makihara, Chair
4 Member of Nominating and Corporate Governance
Committee, Kalpana Morparia, Chair
5 Member of Product Innovation and Regulatory Affairs
Committee, Harold Brown, Chair
Company Management
Harold Brown 2,3,5
Counselor, Center
for Strategic and
International Studies
Director since 2008
André Calantzopoulos
Chief Executive Officer
Director since 2013
Louis C. Camilleri
Chairman of the Board
Director since 2008
Massimo Ferragamo 3,5
Chairman,
Ferragamo USA Inc.
Director since 2016
Werner Geissler 1,2,3,5
Operating Partner,
Advent International
Director since 2015
Sergio Marchionne 3,5
Chief Executive Officer,
Fiat Chrysler
Automobiles N.V.
Chairman, Ferrari N.V.
Chairman, CNH
Industrial N.V.
Director since 2008
Kalpana Morparia 3,4,5
Chief Executive Officer,
South and South East Asia,
J.P. Morgan Chase
Director since 2011
Lucio A. Noto 1,2,3,4
Managing Partner,
Midstream Partners, LLC
Director since 2008
Frederik Paulsen 3,5
Chairman, Ferring Group
Director since 2014
Jennifer Li 1,3,4
Chief Executive Officer and
General Managing Director,
Baidu Capital
Director since 2010
Jun Makihara 1,3,5
Retired Businessman
Director since 2014
Robert B. Polet 2,3,4,5
Chairman, Rituals Cosmetics
Enterprise B.V.
Director since 2011
Stephen M. Wolf 1,2,3,4,5
Managing Partner,
Alpilles, LLC
Director since 2008
A. Calantzopoulos
M. Andolina
D. Azinovic
W. Barth
C. Bendotti
P. Brunel
F. de Rooij
F. de Wilde
M. S. Firestone
P. Janelle
S. Kennedy
M. G. King
A. Kurali
M. Mariotti
J. Olczak
J. Pollès
P. Riley
J. Suarez
J. Whitson
M. Zielinski
André Calantzopoulos
Chief Executive Officer
Charles Bendotti
Senior Vice President,
People & Culture
Marc S. Firestone
President, External Affairs
& General Counsel
Andreas Kurali
Vice President and Controller
Massimo Andolina
Senior Vice President,
Operations
Drago Azinovic
President, Middle East
& Africa Region and
PMI Duty Free
Werner Barth
Senior Vice President,
Commercial
Patrick Brunel
Chief Information Officer
Frank de Rooij
Vice President,
Treasury &
Corporate Finance
Frederic de Wilde
President, European
Union Region
Paul Janelle
Vice President,
Corporate Planning &
Business Development
Stacey Kennedy
President, South &
Southeast Asia Region
Martin G. King
Chief Financial Officer
Marco Mariotti
President, Eastern
Europe Region
Jacek Olczak
Chief Operating Officer
Jeanne Pollès
President, Latin America
& Canada Region
Paul Riley
President, East Asia
& Australia Region
Jaime Suarez
Chief Digital Officer
Jerry Whitson
Deputy General Counsel
and Corporate Secretary
Miroslaw Zielinski
President, Science
& Innovation
6
2017 Philip Morris Annual Report_FEB 28, 2018 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33708
PHILIP MORRIS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
120 Park Avenue, New York, New York
(Address of principal executive offices)
13-3435103
(I.R.S. Employer
Identification No.)
10017
(Zip Code)
917-663-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on which registered
New York Stock Exchange
5.650% Notes due 2018
1.875% Notes due 2019
1.625% Notes due 2019
1.375% Notes due 2019
1.875% Notes due 2019
2.125% Notes due 2019
2.000% Notes due 2020
Floating Notes due 2020
1.750% Notes due 2020
4.500% Notes due 2020
1.875% Notes due 2021
1.875% Notes due 2021
4.125% Notes due 2021
2.900% Notes due 2021
2.625% Notes due 2022
2.375% Notes due 2022
2.500% Notes due 2022
2.500% Notes due 2022
2.625% Notes due 2023
2.125% Notes due 2023
3.600% Notes due 2023
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Title of each class
2.875% Notes due 2024
0.625% Notes due 2024
3.250% Notes due 2024
2.750% Notes due 2025
3.375% Notes due 2025
2.750% Notes due 2026
2.875% Notes due 2026
3.125% Notes due 2027
3.125% Notes due 2028
2.875% Notes due 2029
3.125% Notes due 2033
2.000% Notes due 2036
1.875% Notes due 2037
6.375% Notes due 2038
4.375% Notes due 2041
4.500% Notes due 2042
3.875% Notes due 2042
4.125% Notes due 2043
4.875% Notes due 2043
4.250% Notes due 2044
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$182 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class
Outstanding at January 31, 2018
Common Stock,
no par value
1,553,229,898 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for use in connection with its annual
meeting of shareholders to be held on May 9, 2018, to be filed with the Securities and
Exchange Commission (“SEC”) on or about March 29, 2018.
Document
Parts Into Which Incorporated
Part III
TABLE OF CONTENTS
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.
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Item 1.
Business.
(a) General Development of Business
PART I
General
Philip Morris International Inc. is a Virginia holding company incorporated in 1987. Our subsidiaries and affiliates and their licensees
are engaged in the manufacture and sale of cigarettes and other nicotine-containing products in markets outside of the United States of
America. We are building our future on smoke-free products that are a much better consumer choice than continuing to smoke cigarettes.
Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure
that our smoke-free products meet adult consumer preferences and rigorous regulatory requirements. Our vision is that these products
ultimately replace cigarettes to the benefit of adult smokers, society, our company and our shareholders.
Our cigarettes are sold in more than 180 markets, and in many of these markets they hold the number one or number two market share
position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands
and is led by Marlboro, the world’s best-selling international cigarette, which accounted for approximately 35% of our total 2017 cigarette
shipment volume. Marlboro is complemented in the premium-price category by Parliament. Our other leading international cigarette
brands are Bond Street, Chesterfield, L&M, Lark and Philip Morris. These seven international cigarette brands contributed approximately
75% of our cigarette shipment volume in 2017. We also own a number of important local cigarette brands, such as Dji Sam Soe, Sampoerna
A and Sampoerna U in Indonesia; Fortune and Jackpot in the Philippines; Belmont and Canadian Classics in Canada; and Delicados in
Mexico. While there are a number of markets where local brands remain important, international brands are expanding their share in
numerous markets.
In addition to our leading cigarette brand portfolio, we are engaged in the development and commercialization of smoke-free alternatives
to cigarettes. Reduced-risk products ("RRPs") is the term we use to refer to products that present, are likely to present, or have the
potential to present less risk of harm to smokers who switch to these products versus continued smoking. We have a range of RRPs in
various stages of development, scientific assessment and commercialization. Because our RRPs do not burn tobacco, they produce an
aerosol that contains far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.
Our leading RRP brand, IQOS, is a precisely controlled device into which a specially designed heated tobacco unit is inserted and heated
to generate an aerosol. We market our heated tobacco units under the brand names HEETS, HEETS Marlboro and HEETS FROM
MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks. IQOS was first introduced in
Nagoya, Japan in 2014. To date, IQOS is available for sale in key cities in 37 markets and nationwide in Japan.
Source of Funds — Dividends
We are a legal entity separate and distinct from our direct and indirect subsidiaries. Accordingly, our right, and thus the right of our
creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of
creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company,
our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of dividends and repayment
of debt from our subsidiaries. Our principal wholly-owned and majority-owned subsidiaries currently are not limited by long-term debt
or other agreements in their ability to pay cash dividends or to make other distributions with respect to their common stock.
(b) Financial Information About Segments
For all periods presented in this report, we divided our markets into four geographic regions, which constitute our segments for financial
reporting purposes:
• The European Union (“EU”) Region is headquartered in Lausanne, Switzerland, and covers all the EU countries and also comprises
Switzerland, Norway and Iceland, which are linked to the EU through trade agreements;
• The Eastern Europe, Middle East & Africa (“EEMA”) Region is also headquartered in Lausanne and includes Eastern Europe,
certain Balkan countries, Turkey, the Middle East and Africa and our international duty free business;
• The Asia Region is headquartered in Hong Kong and covers all other Asian markets as well as Australia, New Zealand and the
Pacific Islands; and
1
• The Latin America & Canada Region is headquartered in New York and covers the South American continent, Central America,
Mexico, the Caribbean and Canada.
Net revenues and operating companies income* (together with a reconciliation to operating income) attributable to each segment for
each of the last three years are set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K
("Item 8") in Note 12. Segment Reporting to the consolidated financial statements. See Item 7 of this Annual Report on Form 10-K for
a discussion of our operating results by business segment.
The relative percentages of operating companies income attributable to each reportable segment were as follows:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
2017
2016
2015
32.0%
24.4
35.1
8.5
100.0%
35.8%
27.1
28.7
8.4
100.0%
32.6%
31.2
26.3
9.9
100.0%
______________________________
*
For all periods presented in this report, our management evaluated segment performance and allocated resources based on
operating companies income, which we define as operating income, excluding general corporate expenses and amortization of
intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. The accounting policies of the segments are the same
as those described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8.
We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives. Our
net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products,
changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-
price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume
in more profitable markets versus shipment volume in less profitable markets (geographic mix). We often collect excise taxes from our
customers and then remit them to local governments, and, in those circumstances, we include excise taxes in our net revenues and excise
taxes on products. Our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs, as
well as the cost of the IQOS devices produced by third-party electronics manufacturing service providers.
Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related
to the manufacture of our products (including general corporate expenses), and costs incurred to develop new products. The most significant
components of our marketing, administration and research costs are marketing and sales expenses and general and administrative expenses.
To provide a greater focus on both parts of our business -- combustible and reduced-risk products -- and to support our transformation
toward a smoke-free future, effective January 1, 2018, we began managing our business in six reportable segments as follows:
• The European Union Region is headquartered in Lausanne, Switzerland and covers all the European Union countries and also
Switzerland, Norway and Iceland, which are linked to the European Union through trade agreements;
• The Eastern Europe Region is also headquartered in Lausanne and includes Southeast Europe, Central Asia, Ukraine, Israel and
Russia;
• The Middle East & Africa Region is also headquartered in Lausanne and covers the African continent, the Middle East, Turkey
and our international duty free business;
• The South & Southeast Asia Region is headquartered in Hong Kong and includes Indonesia, the Philippines and other markets
in this region;
• The East Asia & Australia Region is also headquartered in Hong Kong and includes Australia, Japan, South Korea, the People's
Republic of China and other markets in this region, as well as Malaysia and Singapore; and
• The Latin America & Canada Region is headquartered in New York and covers the South American continent, Central America,
Mexico, the Caribbean and Canada.
2
(c) Narrative Description of Business
Our total shipments, including cigarettes and heated tobacco units, decreased by 2.7% in 2017 to 798.2 billion units. We estimate that
international industry volumes, including cigarettes and heated tobacco units, were approximately 5.2 trillion units in 2017, a 1.3%
decrease over 2016. Excluding the People’s Republic of China (“PRC”), we estimate that the international cigarette and heated tobacco
unit volume was 2.8 trillion units in 2017, a 2.8% decrease over 2016. We estimate that our reported share of the international market
(which is defined as worldwide cigarette and heated tobacco unit volume, excluding the United States of America) was approximately
15.2% in 2017, 15.5% in 2016 and 15.6% in 2015. Excluding the PRC, we estimate that our reported share of the international market
was approximately 28.0%, 28.1%, and 28.6% in 2017, 2016 and 2015, respectively.
Shipments of our principal cigarette brand, Marlboro, decreased by 4.0% in 2017 and represented approximately 9.7% of the international
cigarette market, excluding the PRC, in 2017, 9.6% in 2016 and 9.6% in 2015.
We have a market share of at least 15% and, in a number of instances, substantially more than 15%, in approximately 100 markets,
including Algeria, Argentina, Australia, Austria, Belgium, Brazil, Canada, the Czech Republic, Egypt, France, Germany, Hong Kong,
Indonesia, Israel, Italy, Japan, Korea, Kuwait, Mexico, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia,
Spain, Singapore, Switzerland, Turkey and Ukraine.
Heated tobacco units is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Marlboro and HEETS
FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks. Total shipment volume
of heated tobacco units reached 36.2 billion units in 2017, up from 7.4 billion units in 2016.
References to total international market, defined as worldwide cigarette and heated tobacco unit volume excluding the United States,
total industry, total market and market shares in this Form 10-K are our estimates for tax-paid products based on the latest available data
from a number of internal and external sources.
Distribution & Sales
Our main types of distribution are tailored to the characteristics of each market and are often used simultaneously:
• Direct sales and distribution, where we have set up our own distribution selling directly to the retailers (including gas
stations and other key accounts);
• Distribution through independent distributors that often distribute other fast-moving consumer goods and are responsible
for distribution in a particular market;
• Exclusive zonified distribution, where the distributors are dedicated to us in tobacco products distribution and assigned
to exclusive territories within a market;
• Distribution through national or regional wholesalers that then supply the retail trade; and
• Our own brand retail and e-commerce infrastructures for our RRP products and accessories.
Competition
We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality,
brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and,
increasingly, adult smoker willingness to convert to our RRPs. Our competitors include three large international tobacco companies and
several regional and local tobacco companies and, in some instances, state-owned tobacco enterprises, principally in Algeria, Egypt, the
PRC, Taiwan, Thailand and Vietnam. Industry consolidation and privatizations of state-owned enterprises have led to an overall increase
in competitive pressures. Some competitors have different profit and volume objectives, and some international competitors are susceptible
to changes in currency exchange rates. In the combustible product category, we predominantly sell American blend cigarette brands, such
as Marlboro, L&M, Parliament, Philip Morris and Chesterfield, which are the most popular across many of our markets. In the RRP
product category, we predominantly sell IQOS devices and heated tobacco units. We seek to compete in all profitable retail price categories,
although our brand portfolio is weighted towards the premium-price category.
3
Procurement and Raw Materials
We purchase tobacco leaf of various types, grades and styles throughout the world, mostly through independent tobacco suppliers. We
also contract directly with farmers in several countries, including Argentina, Brazil, Colombia, Ecuador, Italy, Kazakhstan, Pakistan, the
Philippines and Poland. In 2017, direct sourcing from farmers represented approximately 22% of PMI’s global leaf requirements. The
largest supplies of tobacco leaf are sourced from Argentina, Brazil, China, India, Indonesia (mostly for domestic use in kretek products),
Malawi, Mozambique, Philippines, Turkey and the United States.
We believe that there is an adequate supply of tobacco leaf in the world markets to satisfy our current and anticipated production
requirements.
In addition to tobacco leaf, we purchase a wide variety of direct materials from a total of approximately 450 suppliers. In 2017, our top
ten suppliers of direct materials combined represented approximately 50% of our total direct materials purchases. The three most significant
direct materials that we purchase are printed paper board used in packaging, acetate tow used in filter making and fine paper used in the
manufacturing of cigarettes and heated tobacco units. In addition, the adequate supply and procurement of cloves are of particular
importance to our Indonesian business.
The adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business. We work with
two electronics manufacturing service providers for the supply of our IQOS devices and a small number of other providers for other
products in our RRP portfolio and related accessories. Although we work closely with these service providers on monitoring their
production capability and financial health, the commercialization of our RRPs could be adversely affected if they are unable to meet their
commitments. The production of our RRP portfolio requires various metals, and we believe that there is an adequate supply of such
metals in the world markets to satisfy our current and anticipated production requirements. However, some components and materials
necessary for the production of our RRPs are obtained from single or limited sources, and can be subject to industry-wide shortages and
price fluctuations. Our inability to secure an adequate supply of such components and materials could negatively impact the
commercialization of our RRPs.
Our IQOS devices are subject to product warranties, which are described in more detail in Item 8. Note 5. Product Warranty to our
consolidated financial statements. We discuss our RRP products in more detail in Item 7. Business Environment—Reduced Risk Products.
Business Environment
Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Business Environment.
Customers
Other Matters
None of our business segments is dependent upon a single customer or a few customers, the loss of which would have a material adverse
effect on our consolidated results of operations.
Employees
At December 31, 2017, we employed approximately 80,600 people worldwide, including full time, temporary and part-time staff. Our
businesses are subject to a number of laws and regulations relating to our relationship with our employees. Generally, these laws and
regulations are specific to the location of each business. In addition, in accordance with European Union requirements, we have established
a European Works Council composed of management and elected members of our workforce. We believe that our relations with our
employees and their representative organizations are excellent.
Executive Officers of the Registrant
The disclosure regarding executive officers is set forth under the heading “Executive Officers as of February 9, 2018” in Item 10. Directors,
Executive Officers and Corporate Governance of this Annual Report on Form 10-K ("Item 10").
4
Research and Development
Our product development is based on the elimination of combustion via tobacco heating and other innovative systems for aerosol
generation, which we believe is the most promising path to providing a better consumer choice for those who would otherwise continue
to smoke. We recognize that no single product will appeal to all adult smokers. Therefore, we are developing a portfolio of products
intended to appeal to a variety of distinct preferences. Four RRP platforms are in various stages of development and commercialization
readiness. We describe each of them in more detail in Item 7, Business Environment—Reduced-Risk Products.
The research and development expense for our RRP portfolio accounted for 74%, 72% and 70% of our total research and development
expense for the years ended December 31, 2017, 2016 and 2015, respectively.
The research and development expense for the years ended December 31, 2017, 2016 and 2015, is set forth in Item 8, Note 14. Additional
Information to the consolidated financial statements.
Intellectual Property
Our trademarks are valuable assets, and their protection and reputation are essential to us. We own the trademark rights to all of our
principal brands, including Marlboro, or have the right to use them in all countries where we use them.
In addition, we have more than 7,800 granted patents worldwide and approximately 7,700 pending patent applications. Our patent portfolio,
as a whole, is material to our business. However, no one patent, or group of related patents, is material to us. We also have registered
industrial designs, as well as unregistered proprietary trade secrets, technology, know-how, processes and other unregistered intellectual
property rights.
Effective January 1, 2008, PMI entered into an Intellectual Property Agreement with Philip Morris USA Inc. (“PM USA”). The Intellectual
Property Agreement governs the ownership of intellectual property between PMI and PM USA. Ownership of the jointly funded intellectual
property has been allocated as follows:
•
•
PMI owns all rights to the jointly funded intellectual property outside the United States, its territories and possessions; and
PM USA owns all rights to the jointly funded intellectual property in the United States, its territories and possessions.
Ownership of intellectual property related to patent applications and resulting patents based solely on the jointly funded intellectual
property, regardless of when filed or issued, will be exclusive to PM USA in the United States, its territories and possessions and exclusive
to PMI everywhere else.
The Intellectual Property Agreement contains provisions concerning intellectual property that is independently developed by us or PM
USA following March 28, 2008, the date of the spin-off from Altria Group, Inc. For ten years following that date, independently developed
intellectual property may be subject to rights under certain circumstances that would allow either us or PM USA a priority position to
obtain the rights to the new intellectual property from the other party, with the price and other commercial terms to be negotiated.
In the event of a dispute between us and PM USA under the Intellectual Property Agreement, we have agreed with PM USA to submit
the dispute first to negotiation between our and PM USA’s senior executives and then to binding arbitration.
Seasonality
Our business segments are not significantly affected by seasonality, although in certain markets cigarette consumption trends rise during
the summer months due to longer daylight time and tourism.
5
Environmental Regulation
We are subject to international, national and local environmental laws and regulations in the countries in which we do business. We have
specific programs across our business units designed to meet applicable environmental compliance requirements and reduce our carbon
footprint and wastage as well as water and energy consumption. We report externally about our climate change mitigation strategy,
together with associated targets and results in reducing our carbon footprint, through CDP (formerly, the Carbon Disclosure Project), the
leading international non-governmental organization assessing the work of thousands of companies worldwide in the area of climate
change. We have developed and implemented a consistent environmental and occupational health, safety and security management system
("EHSS"), which involves policies, standard practices and procedures at all our manufacturing centers. We also conduct regular safety
assessments at our offices, warehouses and car fleet organizations. Furthermore, we have engaged an external certification body to validate
the effectiveness of our EHSS management system at our manufacturing centers around the world, in accordance with internationally
recognized standards for safety and environmental management. The environmental performance data we report externally is also verified
by a qualified third party. Our subsidiaries expect to continue to make investments in order to drive improved performance and maintain
compliance with environmental laws and regulations. We assess and report the compliance status of all our legal entities on a regular
basis. Based on the management and controls we have in place and our review of climate change risks (both physical and regulatory),
environmental expenditures have not had, and are not expected to have, a material adverse effect on our consolidated results of operations,
capital expenditures, financial position, earnings or competitive position.
(d) Financial Information About Geographic Areas
The amounts of net revenues and long-lived assets attributable to each of our geographic segments for each of the last three fiscal years
are set forth in Item 8, Note 12. Segment Reporting to the consolidated financial statements.
(e) Available Information
We are required to file with the SEC annual, quarterly and current reports, proxy statements and other information required by the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors may read and copy any document that we file, including
this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC, from which investors can electronically access our SEC filings.
We make available free of charge on, or through, our website at www.pmi.com our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Investors can
access our filings with the SEC by visiting www.pmi.com.
The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make
with the SEC.
Item 1A.
Risk Factors.
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements
contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating
results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report
on Form 10-K.
Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including statements contained in this Annual Report on
Form 10-K and other filings with the SEC, in reports to stockholders and in 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," "intends," "projects," "goals," "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.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and
assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks
or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated,
6
estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain
invested in our 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 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 document, particularly in Item 7, Business Environment. 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 in the normal course of our public disclosure obligations.
Risks Related to Our Business and Industry
• Consumption of tax-paid cigarettes continues to decline in many of our markets.
This decline is due to multiple factors, including increased taxes and pricing, governmental actions, the diminishing social acceptance
of smoking, continuing economic and geopolitical uncertainty, and the continuing prevalence of illicit products. These factors and their
potential consequences are discussed more fully below and in Item 7, Business Environment.
• Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and
are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may disproportionately affect
our profitability and make us less competitive versus certain of our competitors.
Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of cigarettes versus other
combustible tobacco products, or disproportionately affect the relative retail price of our cigarette brands versus cigarette brands
manufactured by certain of our competitors. Because our portfolio is weighted toward the premium-price cigarette category, tax regimes
based on sales price can place us at a competitive disadvantage in certain markets. As a result, our volume and profitability may be
adversely affected in these markets.
Increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption
levels, a shift in sales from manufactured cigarettes to other combustible tobacco products and from the premium-price to the mid-price
or low-price cigarette categories, where we may be under-represented, from local sales to legal cross-border purchases of lower price
products, or to illicit products such as contraband, counterfeit and "illicit whites."
• Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of reducing
or preventing the use of tobacco products.
Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted
in reduced industry volume in many of our markets, and we expect that such factors will continue to reduce consumption levels and will
increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases. Significant regulatory
developments will take place over the next few years in most of our markets, driven principally by the World Health Organization's
Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective
is to establish a global agenda for tobacco regulation. The FCTC has led to increased efforts by tobacco control advocates and public
health organizations to promote increasingly restrictive regulatory measures on the marketing and sale of tobacco products to adult
smokers. Regulatory initiatives that have been proposed, introduced or enacted include:
•
•
•
•
•
•
•
•
•
•
restrictions on or licensing of outlets permitted to sell cigarettes;
the levying of substantial and increasing tax and duty charges;
restrictions or bans on advertising, marketing and sponsorship;
the display of larger health warnings, graphic health warnings and other labeling requirements;
restrictions on packaging design, including the use of colors, and plain packaging;
restrictions on packaging and cigarette formats and dimensions;
restrictions or bans on the display of tobacco product packaging at the point of sale and restrictions or bans on cigarette vending
machines;
requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke
constituents;
disclosure, restrictions, or bans of tobacco product ingredients;
increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
7
•
•
•
restrictions on the sale of novel tobacco or nicotine-containing products;
elimination of duty free sales and duty free allowances for travelers; and
encouraging litigation against tobacco companies.
Our operating income could be significantly affected by regulatory initiatives resulting in a significant decrease in demand for our brands,
in particular requirements that lead to a commoditization of tobacco products, as well as any significant increase in the cost of complying
with new regulatory requirements.
• Litigation related to tobacco use and exposure to environmental tobacco smoke could substantially reduce our profitability
and could severely impair our liquidity.
There is litigation related to tobacco products pending in certain jurisdictions. Damages claimed in some tobacco-related litigation are
significant and, in certain cases in Brazil, Canada and Nigeria, range into the billions of U.S. dollars. We anticipate that new cases will
continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. It is possible that our consolidated results
of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable
outcome or settlement of certain pending litigation. See Item 8, Note 18. Contingencies (“Note 18. Contingencies”) for a discussion of
pending litigation.
• We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability
and results of operations.
We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer
service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our RRPs. We are subject to
highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly
influenced by weak economic conditions, erosion of consumer confidence, competitors' introduction of lower-price products or innovative
products, higher tobacco product taxes, higher absolute prices and larger gaps between retail price categories, and product regulation that
diminishes the ability to differentiate tobacco products. Competitors include three large international tobacco companies and several
regional and local tobacco companies and, in some instances, state-owned tobacco enterprises, principally in Algeria, Egypt, the PRC,
Taiwan, Thailand and Vietnam. Industry consolidation and privatizations of state-owned enterprises have led to an overall increase in
competitive pressures. Some competitors have different profit and volume objectives, and some international competitors are susceptible
to changes in different currency exchange rates.
• Because we have operations in numerous countries, our results may be influenced by economic, regulatory and political
developments, natural disasters or conflicts.
Some of the countries in which we operate face the threat of civil unrest and can be subject to regime changes. In others, nationalization,
terrorism, conflict and the threat of war may have a significant impact on the business environment. Economic, political, regulatory or
other developments or natural disasters could disrupt our supply chain, manufacturing capabilities or distribution capabilities. In addition,
such developments could lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing
and managing our operations, which could reduce our volumes, revenues and net earnings.
In certain markets, we are dependent on governmental approvals of various actions such as price changes, and failure to obtain such
approvals could impair growth of our profitability.
In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful
conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful
conduct by our employees and partners.
8
• We may be unable to anticipate changes in consumer preferences or to respond to consumer behavior influenced by economic
downturns.
Our business is subject to changes in adult consumer preferences, which may be influenced by local economic conditions. To be successful,
we must:
•
•
•
•
•
•
•
promote brand equity successfully;
anticipate and respond to new adult consumer trends;
develop new products and markets and broaden brand portfolios;
improve productivity;
convince adult smokers to convert to our RRPs;
ensure adequate production capacity to meet demand for our products; and
be able to protect or enhance margins through price increases.
In periods of economic uncertainty, adult consumers may tend to purchase lower-price brands, and the volume of our premium-price and
mid-price brands and our profitability could suffer accordingly. Such down-trading trends may be reinforced by regulation that limits
branding, communication and product differentiation.
• We lose revenues as a result of counterfeiting, contraband, cross-border purchases, “illicit whites” and non-tax-paid volume
produced by local manufacturers.
Large quantities of counterfeit cigarettes are sold in the international market. We believe that Marlboro is the most heavily counterfeited
international cigarette brand, although we cannot quantify the revenues we lose as a result of this activity. In addition, our revenues are
reduced by contraband, legal cross-border purchases, “illicit whites” and non-tax-paid volume produced by local manufacturers.
• From time to time, we are subject to governmental investigations on a range of matters.
Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets,
allegations of underpayment of customs duties and/or excise taxes, allegations of false and misleading usage of descriptors and allegations
of unlawful advertising. We cannot predict the outcome of those investigations or whether additional investigations may be commenced,
and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations. See Note
18. Contingencies—Other Litigation and Item 7, Business Environment-Governmental Investigations for a description of certain
governmental investigations to which we are subject.
• We may be unsuccessful in our attempts to introduce reduced-risk products, and regulators may not permit the
commercialization of these products or the communication of scientifically substantiated risk-reduction claims.
Our key strategic priorities are: to develop and commercialize products that present less risk of harm to adult smokers who switch to
those products versus continued smoking; and to convince current adult smokers who would otherwise continue to smoke to switch to
those RRPs. For our efforts to be successful, we must: develop RRPs that such adult smokers find acceptable alternatives to smoking;
conduct rigorous scientific studies to substantiate that they reduce exposure to harmful and potentially harmful constituents in smoke
and, ultimately, that these products present, are likely to present, or have the potential to present less risk of harm to adult smokers who
switch to them versus continued smoking; and effectively advocate for the development of science-based regulatory frameworks for
the development and commercialization of RRPs, including communication of scientifically substantiated information to enable adult
smokers to make better consumer choices. We might not succeed in our efforts. If we do not succeed, but others do, we may be at a
competitive disadvantage. Furthermore, we cannot predict whether regulators will permit the sale and/or marketing of RRPs with
scientifically substantiated risk-reduction claims. Such restrictions could limit the success of our RRPs.
• We may be unsuccessful in our efforts to differentiate reduced-risk products and cigarettes with respect to taxation.
To date, we have been largely successful in demonstrating to regulators that our RRPs are not cigarettes, and as such they are generally
taxed either as a separate category or as other tobacco products, which typically yields more favorable tax rates than cigarettes. If we
cease to be successful in these efforts, RRP unit margins may be adversely affected.
9
• Our reported results could be adversely affected by unfavorable currency exchange rates, and currency devaluations could
impair our competitiveness.
We conduct our business primarily in local currency and, for purposes of financial reporting, the local currency results are translated into
U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, our reported
net revenues and operating income will be reduced because the local currency translates into fewer U.S. dollars. During periods of local
economic crises, foreign currencies may be devalued significantly against the U.S. dollar, reducing our margins. Actions to recover
margins may result in lower volume and a weaker competitive position.
• Changes in the earnings mix and changes in tax laws may result in significant variability in our effective tax rates. Our ability
to receive payments from foreign subsidiaries or to repatriate royalties and dividends could be restricted by local country
currency exchange controls.
The Tax Cuts and Jobs Act that was signed into law in December 2017 constitutes a major change to the U.S. tax system. Our estimated
impact of the Tax Cuts and Jobs Act is based on management’s current interpretations, and our analysis is ongoing. Our final tax liability
may be materially different from current estimates due to developments such as implementing regulations and clarifications. In future
periods, our effective tax rate and our ability to recover deferred tax assets could be subject to additional uncertainty as a result of such
developments. Furthermore, changes in the earnings mix or applicable foreign tax laws may result in significant variability in our effective
tax rates. Because we are a U.S. holding company, our most significant source of funds is distributions from our non-U.S. subsidiaries.
Certain countries in which we operate have adopted or could institute currency exchange controls that limit or prohibit our local subsidiaries'
ability to convert local currency into U.S. dollars or to make payments outside the country. This could subject us to the risks of local
currency devaluation and business disruption.
• Our ability to grow profitability may be limited by our inability to introduce new products, enter new markets or improve
our margins through higher pricing and improvements in our brand and geographic mix.
Our profit growth may suffer if we are unable to introduce new products or enter new markets successfully, to raise prices or to improve
the proportion of our sales of higher margin products and in higher margin geographies.
• We may be unable to expand our brand portfolio through successful acquisitions or the development of strategic business
relationships.
One element of our growth strategy is to strengthen our brand portfolio and market positions through selective acquisitions and the
development of strategic business relationships. Acquisition and strategic business development opportunities are limited and present
risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings.
There is no assurance that we will be able to acquire attractive businesses on favorable terms, or that future acquisitions or strategic
business developments will be accretive to earnings.
• Government mandated prices, production control programs, shifts in crops driven by economic conditions and the impact
of climate change may increase the cost or reduce the quality of the tobacco and other agricultural products used to
manufacture our products.
As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand, and
crop quality can be influenced by variations in weather patterns, including those caused by climate change. 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 could cause farmers to produce less tobacco or cloves. Any significant change in tobacco
leaf and clove prices, quality and quantity could affect our profitability and our business.
• Our ability to implement our strategy of attracting and retaining the best global talent may be impaired by the decreasing
social acceptance of cigarette smoking.
The tobacco industry competes for talent with consumer products and other companies that enjoy greater societal acceptance. As a result,
we may be unable to attract and retain the best global talent.
10
• The failure of our information systems to function as intended or their penetration by outside parties with the intent to corrupt
them or our failure to comply with privacy laws and regulations could result in business disruption, litigation and regulatory
action, and loss of revenue, assets or personal or other confidential data.
We use information systems to help manage business processes, collect and interpret business data and communicate internally and
externally with employees, suppliers, customers and others. Some of these information systems are managed by third-party service
providers. We have backup systems and business continuity plans in place, and we take care to protect our systems and data from
unauthorized access. Nevertheless, failure of our systems to function as intended, or penetration of our systems by outside parties intent
on extracting or corrupting information or otherwise disrupting business processes, could place us at a competitive disadvantage, result
in a loss of revenue, assets or personal or other sensitive data, litigation and regulatory action, cause damage to our reputation and that
of our brands and result in significant remediation and other costs. Failure to protect personal data and respect the rights of data subjects
could subject us to substantial fines under regulations such as the EU General Data Protection Regulation.
• We may be required to replace third-party contract manufacturers or service providers with our own resources.
In certain instances, we contract with third parties to manufacture some of our products or product parts or to provide other services. We
may be unable to renew these agreements on satisfactory terms for numerous reasons, including government regulations. Accordingly,
our costs may increase significantly if we must replace such third parties with our own resources.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2017, we operated and owned 46 manufacturing facilities and maintained contract manufacturing relationships with
25 third-party manufacturers across 23 markets. In addition, we work with 38 third-party operators in Indonesia who manufacture our
hand-rolled cigarettes.
PMI-Owned Manufacturing Facilities
Fully integrated
Make-pack
Other
Total
(1)
EU
EEMA
Asia
7
3
3
13
8
—
1
9
9
1
3
13
Latin
America
&
Canada
TOTAL
7
2
2
11
31
6
9
46
(1) Includes facilities that produced heated tobacco units in 2017.
In 2017, 23 of our facilities each manufactured over 10 billion cigarettes, of which eight facilities each produced over 30 billion units.
Our largest factories are in Karawang and Sukorejo (Indonesia), Izmir (Turkey), Krakow (Poland), St. Petersburg and Krasnodar (Russia),
Batangas and Marikina (Philippines), Berlin (Germany), Kharkiv (Ukraine), and Kutna Hora (Czech Republic). Our smallest factories
are mostly in Latin America and Asia, where due to tariff and other constraints we have established small manufacturing units in individual
markets. We will continue to optimize our manufacturing base, taking into consideration the evolution of trade blocks.
The plants and properties owned or leased and operated by our subsidiaries are maintained in good condition and are believed to be
suitable and adequate for our present needs.
We are integrating the production of heated tobacco units into a number of our existing manufacturing facilities and progressing with our
plans to build manufacturing capacity for our other RRP platforms.
11
Item 3.
Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. Note 18. Contingencies.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The principal stock exchange on which our common stock (no par value) is listed is the New York Stock Exchange. At January 31, 2018,
there were approximately 57,300 holders of record of our common stock.
12
Performance Graph
The graph below compares the cumulative total shareholder return on PMI's common stock with the cumulative total return for the same
period of PMI's Peer Group and the S&P 500 Index. The graph assumes the investment of $100 as of December 31, 2012, in PMI common
stock (at prices quoted on the New York Stock Exchange) and each of the indices as of the market close and reinvestment of dividends
on a quarterly basis.
Date
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
PMI
$100.00
$108.50
$106.20
$120.40
$130.80
$156.80
PMI Peer Group (1)
$100.00
$122.80
$132.50
$143.50
$145.60
$172.70
S&P 500 Index
$100.00
$132.40
$150.50
$152.60
$170.80
$208.10
(1) The PMI Peer Group presented in this graph is the same as that used in the prior year, except Reynolds American Inc. was removed following the
completion of its acquisition by British American Tobacco p.l.c. on July 25, 2017. The PMI Peer Group was established based on a review of four
characteristics: global presence; a focus on consumer products; and net revenues and a market capitalization of a similar size to those of PMI. The
review also considered the primary international tobacco companies. As a result of this review, the following companies constitute the PMI Peer Group:
Altria Group, Inc., Anheuser-Busch InBev SA/NV, British American Tobacco p.l.c., The Coca-Cola Company, Colgate-Palmolive Co., Diageo plc,
Heineken N.V., Imperial Brands PLC, Japan Tobacco Inc., Johnson & Johnson, Kimberly-Clark Corporation, The Kraft-Heinz Company, McDonald's
Corp., Mondel z International, Inc., Nestlé S.A., PepsiCo, Inc., The Procter & Gamble Company, Roche Holding AG, and Unilever NV and PLC.
Note: Figures are rounded to the nearest $0.10.
13
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2017
Our share repurchase activity for each of the three months in the quarter ended December 31, 2017, was as follows:
Period
October 1, 2017 –
October 31, 2017 (1)
November 1, 2017 –
November 30, 2017 (1)
December 1, 2017 –
December 31, 2017 (1)
Pursuant to Publicly Announced
Plans or Programs
October 1, 2017 –
October 31, 2017 (2)
November 1, 2017 –
November 30, 2017 (2)
December 1, 2017 –
December 31, 2017 (2)
For the Quarter Ended
December 31, 2017
Total
Number of
Shares
Repurchased
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
— $
— $
— $
—
—
—
— $
— $
— $
— $
672
271
497
1,440
$
$
$
$
—
—
—
—
112.68
104.73
102.99
107.84
(1) During this reporting period, we did not have an authorized share repurchase program.
(2) Shares repurchased represent shares tendered to us by employees who vested in restricted share unit awards and used shares to
pay all, or a portion of, the related taxes.
The other information called for by this Item is included in Item 8, Note 22. Quarterly Financial Data (Unaudited) to the consolidated
financial statements.
14
Item 6. Selected Financial Data
(in millions of dollars, except per share data)
Summary of Operations:
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Operating income
Interest expense, net
Earnings before income taxes
Pre-tax profit margin
Provision for income taxes
Net earnings
Net earnings attributable to noncontrolling
interests
Net earnings attributable to PMI
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Capital expenditures
Depreciation and amortization
Property, plant and equipment, net
Inventories
Total assets
Long-term debt
Total debt
Stockholders' deficit
2017
2016
2015
2014
2013
$
78,098
10,432
49,350
18,316
11,503
914
10,589
$
74,953
$
73,908
$
9,391
48,268
17,294
10,815
891
9,924
9,365
47,114
17,429
10,623
1,008
9,615
80,106
10,436
50,339
19,331
11,702
1,052
10,650
$
80,029
10,410
48,812
20,807
13,515
973
12,542
13.6%
13.2%
13.0%
13.3%
15.7%
4,307
6,341
306
6,035
3.88
3.88
4.22
1,548
875
7,271
8,806
2,768
7,250
283
6,967
4.48
4.48
4.12
1,172
743
6,064
9,017
42,968
31,334
34,339
(10,230)
36,851
25,851
29,067
(10,900)
2,688
7,032
159
6,873
4.42
4.42
4.04
960
754
5,721
8,473
33,956
25,250
28,480
(11,476)
3,097
7,658
165
7,493
4.76
4.76
3.88
1,153
889
6,071
8,592
35,187
26,929
29,455
(11,203)
3,670
8,850
274
8,576
5.26
5.26
3.58
1,200
882
6,755
9,846
38,168
24,023
27,678
(6,274)
Common dividends declared as a % of
Diluted EPS
108.8%
92.0%
91.4%
81.5%
68.1%
Market price per common share — high/low 123.55-89.97
104.20-84.46
90.27-75.27
91.63-75.28
96.73-82.86
Closing price of common share at year end
Price/earnings ratio at year end — Diluted
Number of common shares outstanding at
year end (millions)
Number of employees
105.65
27
1,553
80,600
91.49
20
1,551
79,500
87.91
20
1,549
80,200
81.45
17
1,547
82,500
87.13
17
1,589
91,100
This Selected Financial Data should be read in conjunction with Item 7 and Item 8.
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the
consolidated financial statements and related notes contained in Item 8, and the discussion of risks and cautionary factors that may affect
future results in Item 1A. Risk Factors.
Description of Our Company
We are a leading international tobacco company engaged in the manufacture and sale of cigarettes and other nicotine-containing products
in markets outside the United States of America. We are building our future on smoke-free products that are a much better consumer
choice than continuing to smoke cigarettes. Through multidisciplinary capabilities in product development, state-of-the-art facilities
and scientific substantiation, we aim to ensure that our smoke-free products meet adult consumer preferences and rigorous regulatory
requirements. Our vision is that these products ultimately replace cigarettes to the benefit of adult smokers, society, our company and
our shareholders.
Our cigarettes are sold in more than 180 markets, and in many of these markets they hold the number one or number two market share
position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local
brands. In addition to the manufacture and sale of cigarettes, we are engaged in the development and commercialization of reduced-risk
products ("RRPs"). RRPs is the term we use to refer to products that present, are likely to present, or have the potential to present less
risk of harm to smokers who switch to these products versus continued smoking. We have a range of RRPs in various stages of
development, scientific assessment and commercialization. Because our RRPs do not burn tobacco, they produce an aerosol that contains
far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.
For all periods presented in this report, we managed our business in four segments:
• European Union;
• Eastern Europe, Middle East & Africa (“EEMA”);
• Asia; and
• Latin America & Canada.
To provide a greater focus on both parts of our business -- combustible and reduced-risk products -- and to support our transformation
toward a smoke-free future, effective January 1, 2018, we are managing our business in six reportable segments as follows:
• European Union - Covers all the European Union countries and also Switzerland, Norway and Iceland, which are linked to the
European Union through trade agreements;
• Eastern Europe - Includes Southeast Europe, Central Asia, Ukraine, Israel and Russia;
• Middle East & Africa - Covers the African continent, the Middle East, Turkey and PMI Duty Free;
•
South & Southeast Asia - Includes Indonesia, the Philippines and other markets in this region;
• East Asia & Australia - Includes Australia, Japan, South Korea, the People's Republic of China and other markets in this region,
as well as Malaysia and Singapore; and
• Latin America & Canada - Covers the South American continent, Central America, Mexico, the Caribbean and Canada.
We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives.
Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products,
changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-
price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume
in more profitable markets versus shipment volume in less profitable markets (geographic mix). We often collect excise taxes from our
customers and then remit them to governments, and, in those circumstances, we include the excise taxes in our net revenues and in excise
taxes on products. Our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs, as
well as the cost of the IQOS devices produced by third-party electronics manufacturing service providers.
Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related
to the manufacture of our products (including general corporate expenses), and costs incurred to develop new products. The most
16
significant components of our marketing, administration and research costs are marketing and sales expenses and general and
administrative expenses.
Philip Morris International Inc. is a legal entity separate and distinct from its direct and indirect subsidiaries. Accordingly, our right,
and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject
to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized.
As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of
dividends and repayment of debt from our subsidiaries. Our principal wholly-owned and majority-owned subsidiaries currently are not
limited by long-term debt or other agreements in their ability to pay cash dividends or to make other distributions with respect to their
common stock.
Executive Summary
The following executive summary provides significant highlights from the Discussion and Analysis that follows.
Consolidated Operating Results
• Net Revenues and Net Revenues, Excluding Excise Taxes on Products – The changes in our net revenues, and net revenues,
excluding excise taxes, for the year ended December 31, 2017, from the comparable 2016 amounts, were as follows:
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise
taxes on products
For the Years Ended
December 31,
Variance
Variance due to
$
2017
78,098 $
(49,350)
2016
74,953
$
(48,268)
$
3,145
(1,082)
%
Currency
Volume/
Mix
Pricing
4.2 % $
(2.2)%
(2,355) $
1,918
(439) $
1,553
5,939
(4,553)
$
28,748 $
26,685
$
2,063
7.7 % $
(437) $
1,114 $
1,386
Net revenues include $3.8 billion in 2017 and $739 million in 2016 related to the sale of RRPs, mainly driven by Japan. These net
revenue amounts include excise taxes billed to customers, where we collect and remit the excise tax. Excluding excise taxes, net
revenues for RRPs were $3.6 billion in 2017 and $733 million in 2016. In some jurisdictions, including Japan, we are not responsible
for collecting excise taxes.
• Diluted Earnings Per Share – The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended December 31,
2017, from the comparable 2016 amounts, were as follows:
For the year ended December 31, 2016
$
4.48
Diluted EPS % Growth
2016 Asset impairment and exit costs
2016 Tax items
Subtotal of 2016 items
2017 Asset impairment and exit costs
2017 Tax items
Subtotal of 2017 items
Currency
Interest
Change in tax rate
Operations
For the year ended December 31, 2017
$
17
—
—
—
—
(0.84)
(0.84)
(0.21)
0.01
(0.03)
0.47
3.88
(13.4)%
Income Taxes – Our effective income tax rate for 2017 increased by 12.8 percentage points to 40.7%. The 2017 tax items that
decreased our diluted EPS by $0.84 per share in the table above were primarily due to the impact of the Tax Cuts and Jobs Act,
which was signed into law in December 2017.
The principal elements of the Tax Cuts and Jobs Act relevant to our consolidated financial statements for the year ended December
31, 2017, were:
• A reduction of the U.S. federal corporate tax rate from 35% to 21%; and
• The requirement to pay a one-time transition tax on accumulated foreign earnings, including 2017 earnings ("transition tax").
In connection with these elements of the Tax Cuts and Jobs Act, we recognized a provisional expense of $1.6 billion, which was
included as a component of income tax expense as follows:
• A provisional charge of $1.4 billion, which represents the transition tax of $2.2 billion, net of a reversal of $0.7 billion of
previously recorded deferred tax liabilities on part of the accumulated foreign earnings, and other items of $0.1 billion.
• Re-measurement of U.S. deferred tax assets and liabilities using a rate of 21%, which, under the Tax Cuts and Jobs Act, is
expected to be in place when such deferred assets and liabilities reverse in the future. In connection with this re-measurement,
we recorded a provisional charge of $0.2 billion.
While the impacts of the Tax Cuts and Jobs Act reduced net earnings by $1.6 billion, there was no net impact on operating cash flows
for the year, as the changes in deferred taxes and income taxes payable offset the net earnings impact. At December 31, 2017, we
recorded an income tax payable of $1.7 billion representing the transition tax of $2.2 billion, partially offset by foreign tax credits
related to foreign withholding taxes previously paid of $0.5 billion. The income tax payable is due over an 8-year period beginning
in 2018. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.
The change in the effective tax rate that decreased our diluted EPS by $0.03 per share in the table above was primarily due to
earnings mix by taxing jurisdiction.
Currency – The unfavorable currency impact during 2017 results from the fluctuations of the U.S. dollar, especially against the
Brazilian real, Egyptian pound, Euro, Japanese yen and Turkish lira, partially offset by the Russian ruble. This unfavorable currency
movement has impacted our profitability across our primary revenue markets and local currency cost bases.
Interest – The favorable impact of interest was due primarily to higher interest income, partly offset by higher average debt levels.
Operations – The increase in diluted EPS of $0.47 from our operations in the table above was due primarily to the following segments:
• Asia: Favorable volume/mix, higher pricing and lower manufacturing costs, partially offset by higher marketing, administration
and research costs; and
• Latin America & Canada: Higher pricing, partially offset by unfavorable volume/mix;
partially offset by
• EEMA: Unfavorable volume/mix and higher marketing, administration and research costs, partially offset by higher pricing;
and
• European Union: Unfavorable volume/mix and higher marketing, administration and research costs, partially offset by higher
pricing.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following
Discussion and Analysis.
2018 Forecasted Results – On February 8, 2018, we announced our forecast for 2018 full-year reported diluted EPS to be in a range of
$5.20 to $5.35, representing a projected increase of approximately 34% to 38% at prevailing exchange rates, versus $3.88 in 2017.
Excluding a favorable currency impact, at then-prevailing exchange rates, of approximately $0.16 per share for the full-year 2018, the
forecast range represents a projected increase of approximately 7% to 10% versus adjusted diluted earnings per share of $4.72 in 2017.
18
This forecast assumes:
• Net revenue growth, excluding excise taxes, of over 8.0%, excluding currency;
• Operating cash flow of over $9.0 billion;
• Capital expenditures of approximately $1.7 billion; and
• No share repurchases.
Following the enactment of the Tax Cuts and Jobs Act, our 2018 full-year diluted earnings per share forecast -- based on the current
interpretation of the legislation -- assumes a full-year effective tax rate of approximately 28%, subject to future regulatory developments
and earnings mix by taxing jurisdiction. The difference between the 21% statutory rate under the new law and our effective rate reflects
the fact that we operate in markets outside the United States and is driven by three main factors: foreign tax rate differences, non-
deductibility of interest expense and a partial disallowance of foreign tax credits related to the application of the rules for global intangible
low-taxed income.
We calculated 2017 adjusted diluted EPS as reported diluted EPS of $3.88, plus the $0.84 per share charge related to tax items.
During 2017, we did not have an EPS impact related to asset impairment and exit costs.
Adjusted diluted EPS is not a measure under accounting principles generally accepted in the United States of America ("U.S. GAAP").
We define adjusted diluted EPS as reported diluted EPS adjusted for asset impairment and exit costs, tax items and unusual items. We
believe it is appropriate to disclose this measure as it represents core earnings, improves comparability and helps investors analyze
business performance and trends. Adjusted diluted EPS should be considered neither in isolation nor as a substitute for reported diluted
EPS prepared in accordance with U.S. GAAP.
This 2018 guidance excludes the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future changes
in currency exchange rates, further developments related to the Tax Cuts and Jobs Act, and any unusual events. The factors described in
Item 1A. Risk Factors represent continuing risks to these projections.
Discussion and Analysis
Critical Accounting Estimates
Item 8, Note 2. Summary of Significant Accounting Policies to our consolidated financial statements includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated financial statements. In most instances, we must use a
particular accounting policy or method because it is the only one that is permitted under U.S. GAAP.
The preparation of financial statements requires that we use estimates and assumptions that affect the reported amounts of our assets,
liabilities, net revenues and expenses, as well as our disclosure of contingencies. If actual amounts differ from previous estimates, we
include the revisions in our consolidated results of operations in the period during which we know the actual amounts. Historically,
aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated
financial statements.
The selection and disclosure of our critical accounting estimates have been discussed with our Audit Committee. The following is a
discussion of the more significant assumptions, estimates, accounting policies and methods used in the preparation of our consolidated
financial statements:
Revenue Recognition - We recognize revenue when persuasive evidence of an arrangement exists, delivery of product has occurred,
the sales price is fixed or determinable and collectability is reasonably assured. For our company, this means that revenue is recognized
when title and risk of loss is transferred to our customers. Title transfers to our customers upon shipment or upon receipt at the customer's
location as determined by the sales terms for each transaction. The company estimates the cost of sales returns based on historical
experience, and these estimates are immaterial. Estimated costs associated with warranty programs for IQOS devices are generally
provided for in cost of sales in the period the related revenues are recognized, based on a number of factors including historical experience,
product failure rates and warranty policies.
Goodwill and Non-Amortizable Intangible Assets Valuation - We test goodwill and non-amortizable intangible assets for impairment
annually or more frequently if events occur that would warrant such review. During the second quarter of 2016, we changed the date of
19
our annual goodwill impairment test from the first quarter to the second quarter. The change was made to more closely align the
impairment testing date with our long-range planning and forecasting process. We had determined that this change in accounting principle
was preferable under the circumstances and believe that the change in the annual impairment testing date did not delay, accelerate, or
avoid an impairment charge. While the company has the option to perform a qualitative assessment for both goodwill and non-amortizable
intangible assets to determine if it is more likely than not that an impairment exists, the company elects to perform the quantitative
assessment for our annual impairment analysis. The impairment analysis involves comparing the fair value of each reporting unit or
non-amortizable intangible asset to the carrying value. If the carrying value exceeds the fair value, goodwill or a non-amortizable intangible
asset is considered impaired. To determine the fair value of goodwill, we primarily use a discounted cash flow model, supported by the
market approach using earnings multiples of comparable global and local companies within the tobacco industry. At December 31, 2017,
the carrying value of our goodwill was $7.7 billion, which is related to ten reporting units, each of which consists of a group of markets
with similar economic characteristics. The estimated fair value of each of our ten reporting units exceeded the carrying value as of
December 31, 2017. To determine the fair value of non-amortizable intangible assets, we primarily use a discounted cash flow model
applying the relief-from-royalty method. We concluded that the fair value of our non-amortizable intangible assets exceeded the carrying
value. These discounted cash flow models include management assumptions relevant for forecasting operating cash flows, which are
subject to changes in business conditions, such as volumes and prices, costs to produce, discount rates and estimated capital
needs. Management considers historical experience and all available information at the time the fair values are estimated, and we believe
these assumptions are consistent with the assumptions a hypothetical marketplace participant would use. Since the March 28, 2008,
spin-off from Altria Group, Inc., we have not recorded a charge to earnings for an impairment of goodwill or non-amortizable intangible
assets.
Marketing and Advertising Costs - We incur certain costs to support our products through programs that include advertising, marketing,
consumer engagement and trade promotions. The costs of our advertising and marketing programs are expensed in accordance with
U.S. GAAP. Recognition of the cost related to our consumer engagement and trade promotion programs contain uncertainties due to
the judgment required in estimating the potential performance and compliance for each program. For volume-based incentives provided
to customers, management continually assesses and estimates, by customer, the likelihood of the customer's achieving the specified
targets, and records the reduction of revenue as the sales are made. For other trade promotions, management relies on estimated utilization
rates that have been developed from historical experience. Changes in the assumptions used in estimating the cost of any individual
marketing program would not result in a material change in our financial position, results of operations or operating cash flows.
Employee Benefit Plans - As discussed in Item 8, Note 13. Benefit Plans to our consolidated financial statements, we provide a range
of benefits to our employees and retired employees, including pensions, postretirement health care and postemployment benefits
(primarily severance). We record annual amounts relating to these plans based on calculations specified by U.S. GAAP. These calculations
include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, mortality,
turnover rates and health care cost trend rates. We review actuarial assumptions on an annual basis and make modifications to the
assumptions based on current rates and trends when it is deemed appropriate to do so. As permitted by U.S. GAAP, any effect of the
modifications is generally amortized over future periods. We believe that the assumptions utilized in calculating our obligations under
these plans are reasonable based upon our historical experience and advice from our actuaries.
Weighted-average discount rate assumptions for pensions and postretirement plans are as follows:
Pension plans
Postretirement plans
2017
1.51%
3.79%
2016
1.52%
3.68%
We anticipate that assumption changes will decrease 2018 pre-tax pension and postretirement expense to approximately $164 million
as compared with approximately $199 million in 2017, excluding amounts related to early retirement programs. The anticipated decrease
is primarily due to higher expected return on assets of $21 million, coupled with lower amortization out of other comprehensive earnings
for prior service cost of $12 million and unrecognized actuarial gains/losses of $10 million, partially offset by other movements of $8
million.
Weighted-average expected rate of return and discount rate assumptions have a significant effect on the amount of expense reported for
the employee benefit plans. A fifty-basis-point decrease in our discount rate would increase our 2018 pension and postretirement expense
by approximately $38 million, and a fifty-basis-point increase in our discount rate would decrease our 2018 pension and postretirement
expense by approximately $54 million. Similarly, a fifty-basis-point decrease (increase) in the expected return on plan assets would
increase (decrease) our 2018 pension expense by approximately $45 million. See Item 8, Note 13. Benefit Plans to our consolidated
financial statements for a sensitivity discussion of the assumed health care cost trend rates.
20
Income Taxes - Income tax provisions for jurisdictions outside the United States, as well as state and local income tax provisions, are
determined on a separate company basis, and the related assets and liabilities are recorded in our consolidated balance sheets.
The extent of our operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude
of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions
and resolution of disputes arising from federal, state, and international tax audits. In accordance with the authoritative guidance for
income taxes, we evaluate potential tax exposures and record tax liabilities for anticipated tax audit issues based on our estimate of
whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances;
however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different
from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional
charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the
liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
The effective tax rates used for interim reporting are based on our full-year geographic earnings mix projections. Changes in currency
exchange rates or earnings mix by taxing jurisdiction could have an impact on the effective tax rates. Significant judgment is required
in determining income tax provisions and in evaluating tax positions.
For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.
Hedging - As discussed below in “Market Risk,” we use derivative financial instruments principally to reduce exposures to market risks
resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. For derivatives to which we
have elected to apply hedge accounting, gains and losses on these derivatives are initially deferred in accumulated other comprehensive
losses on the consolidated balance sheet and recognized in the consolidated statement of earnings in the periods when the related hedged
transactions are also recognized in operating results. If we had elected not to use the hedge accounting provisions, gains (losses) deferred
in stockholders’ (deficit) equity would have been recorded in our net earnings for these derivatives.
Contingencies - As discussed in Item 8, Note 18. Contingencies to our consolidated financial statements, legal proceedings covering a
wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. We
and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable
outcome is probable and the amount of the loss can be reasonably estimated. 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. Much of the pending tobacco-related litigation is in its early stages, and litigation is subject
to uncertainty. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the
information available to it: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending
tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related
cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in
these cases, if any. Legal defense costs are expensed as incurred.
21
Consolidated Operating Results
Our net revenues, excise taxes on products and operating companies income by segment were as follows:
(in millions)
Net Revenues
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Net Revenues
(in millions)
Excise Taxes on Products
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Excise Taxes on Products
(in millions)
Operating Income
Operating companies income:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Amortization of intangibles
General corporate expenses
Less:
Equity (income)/loss in unconsolidated subsidiaries, net
Operating Income
2017
2016
2015
27,580 $
27,129 $
18,045
22,635
9,838
18,286
20,531
9,007
78,098 $
74,953 $
26,563
18,328
19,469
9,548
73,908
2017
2016
2015
19,262 $
18,967 $
11,346
11,845
6,897
11,286
11,850
6,165
49,350 $
48,268 $
18,495
10,964
11,266
6,389
47,114
2017
2016
2015
3,775 $
2,888
4,149
1,002
(88)
(164)
3,994 $
3,016
3,196
938
(74)
(161)
3,576
3,425
2,886
1,085
(82)
(162)
(59)
11,503 $
(94)
10,815 $
(105)
10,623
$
$
$
$
$
$
As discussed in Item 8, Note 12. Segment Reporting to our consolidated financial statements, we evaluate segment performance and
allocate resources based on operating companies income, which we define as operating income, excluding general corporate expenses
and amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. We believe it is appropriate to disclose
this measure to help investors analyze the business performance and trends of our various business segments.
22
Our shipment volume by segment for cigarettes and heated tobacco units was as follows:
PMI Shipment Volume (Million Units)
Cigarettes
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total Cigarettes
Heated Tobacco Units
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total Heated Tobacco Units
Cigarettes and Heated Tobacco Units
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total Cigarettes and Heated Tobacco Units
2017
2016
2015
187,293
256,157
234,253
84,223
761,926
1,889
1,581
32,729
27
36,226
189,182
257,738
266,982
84,250
798,152
193,586
271,393
260,029
87,938
812,946
224
100
7,070
—
7,394
193,810
271,493
267,099
87,938
820,340
194,589
279,411
281,350
91,920
847,270
24
2
370
—
396
194,613
279,413
281,720
91,920
847,666
Heated tobacco units is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Marlboro and HEETS
FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks.
Our net revenues by product category, which include excise taxes billed to customers, were as follows:
PMI Net Revenues by Product Category
(in millions)
Combustible Products
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total Combustible Products
Reduced-Risk Products
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total Reduced-Risk Products
Total PMI Net Revenues
Note: Sum of product categories or Regions might not foot to total PMI due to rounding.
23
2017
2016
2015
$
$
$
$
$
27,261 $
17,886
19,325
9,833
74,305 $
320 $
158
3,310
5
3,793 $
27,067 $
18,276
19,865
9,006
74,214 $
62 $
9
666
2
739 $
26,533
18,328
19,434
9,547
73,842
30
—
35
1
66
78,098 $
74,953 $
73,908
Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, net of sales and
promotion incentives. These net revenue amounts consist of the sale of our cigarettes and other tobacco products combined. Other tobacco
products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include reduced-
risk products.
Net revenues related to reduced-risk products refer to the operating revenues generated from the sale of these products, net of sales and
promotion incentives. These net revenue amounts consist of the sale of our heated tobacco units, IQOS devices and related accessories,
and other nicotine-containing products, which primarily include our e-vapor products.
References to total international market, defined as worldwide cigarette and heated tobacco unit volume excluding the United States,
total industry, total market and market shares throughout this "Discussion and Analysis" are our estimates for tax-paid products based on
the latest available data from a number of internal and external sources.
2017 compared with 2016
The following discussion compares our consolidated operating results for the year ended December 31, 2017, with the year ended
December 31, 2016.
Estimated international cigarette and heated tobacco unit volume, excluding China and the United States, of 2.8 trillion was down by
2.8%.
Our total shipment volume decreased by 2.7%, principally due to:
• European Union, notably reflecting lower cigarette shipment volume in Greece, Italy and Spain, partly offset by higher heated
tobacco unit shipment volume;
• EEMA, notably reflecting lower cigarette shipment volume in Russia, Saudi Arabia - where our cigarette shipment volume
declined by 35.8%, impacted by the new excise tax implemented in June 2017 that resulted in the doubling of retail prices -
and Ukraine; partly offset by higher cigarette shipment volume in North Africa, notably Algeria, and higher heated tobacco unit
shipment volume;
• Asia, notably reflecting lower cigarette shipment volume in Indonesia, Japan, Korea, Pakistan - impacted by excise tax-driven
price increases and an increase in the prevalence of illicit trade - and the Philippines; fully offset by higher heated tobacco unit
shipment volume, mainly in Japan and Korea; and
• Latin America & Canada, notably reflecting lower cigarette shipment volume in Argentina, Brazil, Canada, Colombia and
Mexico.
Excluding the favorable net impact of estimated cigarette and heated tobacco unit inventory movements of approximately 3.3 billion
units, our total shipment volume decreased by 3.1%. The favorable inventory movements were driven primarily by approximately 8.5
billion units net in Japan reflecting: the increasing demand for HeatSticks, anticipated to further increase in the first quarter of 2018
following a planned lifting of the restriction on IQOS device sales; the establishment of appropriate distributor inventory levels of heated
tobacco units, given the current high dependence on a single manufacturing center; and the transition from air freight to sea freight of
heated tobacco units, largely completed in the fourth quarter of 2017. These favorable inventory movements were partly offset by a
reduction of combustible product inventory levels, mainly in: the European Union, notably Italy and Spain; EEMA, notably North Africa,
Russia and Saudi Arabia.
24
Our cigarette shipment volume by brand and heated tobacco unit shipment volume are shown in the table below:
PMI Shipment Volume by Brand (Million Units)
Cigarettes
Marlboro
L&M
Chesterfield
Philip Morris
Parliament
Bond Street
Lark
Others
Total Cigarettes
Heated Tobacco Units
Total Cigarettes and Heated Tobacco Units
Full-Year
2017
2016
Change
270,366
281,720
90,817
55,075
48,522
43,965
37,987
24,373
190,821
761,926
36,226
798,152
96,770
46,291
35,914
45,671
44,567
27,571
234,442
812,946
7,394
820,340
(4.0)%
(6.2)%
19.0 %
35.1 %
(3.7)%
(14.8)%
(11.6)%
(18.6)%
(6.3)%
+100.0%
(2.7)%
Cigarette shipment volume of Marlboro decreased in: the European Union, mainly due to Greece, Italy and Spain; EEMA, predominantly
due to Saudi Arabia, reflecting the impact of the new excise tax implemented in June 2017 that resulted in the doubling of the retail price
of Marlboro from SAR 12 to SAR 24 per pack, partly offset by North Africa, notably Algeria and Egypt, and Turkey; Asia, mainly due
to Japan and Korea, principally reflecting out-switching to heated tobacco products, partly offset by Indonesia and the Philippines; and
Latin America & Canada, mainly due to Argentina and Brazil.
Cigarette shipment volume of the following brands decreased: L&M, mainly due to Russia, Saudi Arabia and Turkey, partly offset by
Algeria, Argentina, Colombia and Kazakhstan; Parliament, mainly due to Japan, Russia and Saudi Arabia, partly offset by Kazakhstan;
Bond Street, mainly due to Kazakhstan, Russia and Ukraine; Lark, principally due to Japan; and "Others," mainly due to low-price brands
in Indonesia, Pakistan, the Philippines, Russia and Ukraine.
Cigarette shipment volume of the following brands increased: Chesterfield, notably driven by Argentina, Brazil, Colombia, Saudi Arabia,
Turkey and Venezuela, partly offset by Italy and Russia; and Philip Morris, mainly driven by Russia and Ukraine, notably reflecting
successful portfolio consolidation of local, low-price brands in "Others," partly offset by Argentina and Italy.
Our net revenues and excise taxes on products were as follows:
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
For the Years Ended
December 31,
2017
2016
Variance
$
%
$
$
78,098
49,350
28,748
$
$
74,953
48,268
26,685
$
$
3,145
1,082
2,063
4.2%
2.2%
7.7%
Net revenues, which include excise taxes billed to customers, increased by $3.1 billion. Excluding excise taxes, net revenues increased
by $2.1 billion, due to:
•
•
•
price increases ($1.4 billion) and
favorable volume/mix ($1.1 billion), partly offset by
unfavorable currency ($437 million).
The unfavorable currency was due primarily to the Argentine peso, Egyptian pound, Japanese yen, Philippine peso and Turkish lira,
partially offset by the Russian ruble.
25
Net revenues include $3.8 billion in 2017 and $739 million in 2016 related to the sale of RRPs, mainly driven by Japan. These net revenue
amounts include excise taxes billed to customers. Excluding excise taxes, net revenues for RRPs were $3.6 billion in 2017 and $733
million in 2016. In some jurisdictions, including Japan, we are not responsible for collecting excise taxes. In 2017, approximately $0.9
billion of our $3.6 billion in RRP net revenues, excluding excise taxes, were from IQOS devices and accessories.
Excise taxes on products increased by $1.1 billion, due to:
•
•
•
higher excise taxes resulting from changes in retail prices and tax rates ($4.6 billion), partially offset by
favorable currency ($1.9 billion) and
lower excise taxes resulting from volume/mix ($1.6 billion).
Our cost of sales; marketing, administration and research costs; and operating income were as follows:
(in millions)
Cost of sales
Marketing, administration and research costs
Operating income
Cost of sales increased by $1.0 billion, due to:
For the Years Ended
December 31,
2017
2016
Variance
$
%
$
10,432
$
9,391
$
1,041
6,725
11,503
6,405
10,815
320
688
11.1%
5.0%
6.4%
•
•
•
higher cost of sales resulting from volume/mix ($1.1 billion), partly offset by
lower manufacturing costs ($36 million) and
favorable currency ($30 million).
Marketing, administration and research costs increased by $320 million, due to:
•
•
higher expenses ($570 million, largely reflecting increased investment behind reduced-risk products, predominately in the
European Union and Asia), partly offset by
favorable currency ($250 million).
Operating income increased by $688 million, due primarily to:
•
•
•
price increases ($1.4 billion), partly offset by
higher marketing, administration and research costs ($570 million) and
unfavorable currency ($157 million).
Interest expense, net, of $914 million increased by $23 million, due primarily to unfavorably currency and higher average debt levels,
partly offset by higher interest income.
Our effective tax rate increased by 12.8 percentage points to 40.7%. The 2017 effective tax rate was unfavorably impacted by $1.6 billion
due to the Tax Cuts and Jobs Act. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements. We
are continuing to evaluate the impact that the Tax Cuts and Jobs Act will have on our tax liability. Based upon our current interpretation
of the Tax Cuts and Jobs Act, we estimate that our 2018 effective tax rate will be approximately 28%, subject to future regulatory
developments and earnings mix by taxing jurisdiction.
We are regularly examined by tax authorities around the world, and we are currently under examination in a number of jurisdictions. It
is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized
tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time.
Net earnings attributable to PMI of $6.0 billion decreased by $932 million (13.4%). This decrease was due primarily to a higher effective
tax rate as discussed above, partly offset by higher operating income. Diluted and basic EPS of $3.88 decreased by 13.4%. Excluding
26
an unfavorable tax impact of $0.84 primarily related to the implementation of the Tax Cuts and Jobs Act and an unfavorable currency
impact of $0.21, diluted EPS increased by 10.0%.
2016 compared with 2015
The following discussion compares our consolidated operating results for the year ended December 31, 2016, with the year ended
December 31, 2015.
Our cigarette shipment volume decreased by 4.1%, or by 4.7% excluding net estimated inventory movements, due to:
• European Union, principally Italy, Germany and Greece, partly offset by Poland and Spain;
• EEMA, mainly North Africa, primarily Algeria, and Russia, partly offset by Saudi Arabia and Ukraine;
• Asia, principally Indonesia, Pakistan, the Philippines and Thailand, partly offset by Korea; and
• Latin America & Canada, predominantly Argentina, partly offset by Mexico.
Our cigarette market share increased in a number of markets, including Brazil, Canada, Colombia, the Czech Republic, France, Mexico,
the Netherlands, Norway, Poland, Saudi Arabia, Spain, Switzerland, Turkey and the United Arab Emirates.
Our cigarette shipment volume by brand is shown in the table below:
PMI Cigarette Shipment Volume by Brand (Million Units)
Marlboro
L&M
Chesterfield
Parliament
Bond Street
Philip Morris
Lark
Others
Total PMI
2016
281,720
96,770
46,291
45,671
44,567
35,914
27,571
234,442
812,946
Full-Year
2015
285,583
97,884
41,397
44,879
43,608
35,815
28,828
269,276
847,270
Change
(1.4)%
(1.1)%
11.8 %
1.8 %
2.2 %
0.3 %
(4.4)%
(12.9)%
(4.1)%
Cigarette shipment volume of Marlboro decreased, driven by Algeria, Argentina, Egypt and Vietnam, as well as in-switching to heated
tobacco units, partly offset by Korea, Mexico, the Philippines, Saudi Arabia and Spain.
Cigarette shipment volume of L&M decreased, notably in Russia, Thailand and Turkey, partly offset by Algeria, Kazakhstan and Ukraine.
Cigarette shipment volume of Chesterfield increased, mainly driven by Argentina, the Czech Republic, reflecting the morphing of Red
& White, Turkey and the United Kingdom, partly offset by Russia. Cigarette shipment volume of Parliament increased, mainly driven
by Korea, Turkey and Ukraine, partly offset by Japan and Russia. Cigarette shipment volume of Bond Street increased, mainly driven
by Ukraine, partly offset by Kazakhstan. Cigarette shipment volume of Philip Morris increased, driven mainly by Italy and Russia, partly
offset by Argentina. Cigarette shipment volume of Lark decreased, principally due to Japan and Turkey. Cigarette shipment volume of
"Others" decreased, mainly due to local, largely low-margin brands in Pakistan, the Philippines, Russia and Ukraine.
Total shipment volume of heated tobacco units reached 7.4 billion units, up from 396 million units in 2015.
27
Our net revenues and excise taxes on products were as follows:
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
For the Years Ended
December 31,
Variance
2016
2015
$
%
$
$
74,953
48,268
26,685
$
$
73,908
47,114
26,794
$
$
1,045
1,154
(109)
1.4 %
2.4 %
(0.4)%
Net revenues, which include excise taxes billed to customers, increased by $1.0 billion. Excluding excise taxes, net revenues decreased
by $109 million, due to:
•
•
•
unfavorable currency ($1.3 billion) and
unfavorable volume/mix ($450 million), partly offset by
price increases ($1.6 billion).
The unfavorable currency was due primarily to the Argentine peso, Canadian dollar, Egyptian pound, Euro, Kazakh tenge, Mexican peso,
Philippine peso, Russian ruble and Turkish lira, partially offset by the Japanese yen.
Net revenues include $739 million in 2016 related to sale of RRPs, mainly driven by Japan. This amount includes excise taxes billed to
customers. Excluding excise taxes, net revenues for RRPs were $733 million in 2016. In some jurisdictions, including Japan, we are
not responsible for collecting excise taxes. Approximately 22% of our $733 million in 2016 RRP net revenues, excluding excise taxes,
were from IQOS devices.
Excise taxes on products increased by $1.2 billion, due to:
•
•
•
higher excise taxes resulting from changes in retail prices and tax rates ($5.3 billion), partly offset by
favorable currency ($3.9 billion) and
lower excise taxes resulting from volume/mix ($236 million).
Our cost of sales; marketing, administration and research costs; and operating income were as follows:
(in millions)
Cost of sales
Marketing, administration and research costs
Operating income
Cost of sales increased by $26 million, due to:
For the Years Ended
December 31,
Variance
2016
2015
$
%
$
9,391
$
9,365
$
6,405
10,815
6,656
10,623
26
(251)
192
0.3 %
(3.8)%
1.8 %
•
•
higher cost of sales resulting from volume/mix ($242 million), partly offset by
favorable currency ($216 million).
28
Marketing, administration and research costs decreased by $251 million, due to:
•
•
lower expenses ($210 million, driven by a favorable comparison to 2015, notably related to cigarette brand building and business
optimization initiatives, partly offset by increased support behind Reduced-Risk Products) and
favorable currency ($41 million).
Operating income increased by $192 million, due primarily to:
•
•
•
•
•
price increases ($1.6 billion),
lower marketing, administration and research costs ($210 million) and
the non-recurrence of the 2015 pre-tax charges for asset impairment and exit costs ($68 million), partly offset by
unfavorable currency ($1.0 billion) and
unfavorable volume/mix ($692 million).
Interest expense, net, of $891 million decreased by $117 million, due primarily to lower effective interest rates on debt and higher interest
income.
Our effective tax rate decreased by 0.1 percentage point to 27.9%. The 2015 effective tax rate was unfavorably impacted by changes to
repatriation assertions on certain foreign subsidiary historical earnings ($58 million), partially offset by a reduction in unrecognized tax
benefits of $41 million following the conclusion of the IRS examinations of Altria Group, Inc.'s consolidated tax returns for the years
2007 and 2008 and PMI's consolidated tax returns for the years 2009 through 2011. Prior to March 28, 2008, PMI was a wholly-owned
subsidiary of Altria Group, Inc.
Net earnings attributable to PMI of $7.0 billion increased by $94 million (1.4%). This increase was due primarily to higher operating
income as discussed above, and lower interest expense, net. Diluted and basic EPS of $4.48 increased by 1.4%. Excluding an unfavorable
currency impact of $0.46, diluted EPS increased by 11.8%.
Operating Results by Business Segment
Business Environment
Taxes, Legislation, Regulation and Other Matters Regarding the Manufacture, Marketing, Sale and Use of Tobacco Products
The tobacco industry and our business face a number of challenges that may adversely affect our business, volume, results of operations,
cash flows and financial position. These challenges, which are discussed below and in “Cautionary Factors That May Affect Future
Results,” include:
•
•
•
•
•
•
regulatory restrictions on our products, including restrictions on the packaging, marketing, and sale of tobacco or other nicotine-
containing products that could reduce our competitiveness, eliminate our ability to communicate with adult consumers, or even
ban certain of our products;
fiscal challenges, such as excessive excise tax increases and discriminatory tax structures;
illicit trade in cigarettes and other tobacco products, including counterfeit, contraband and so-called “illicit whites”;
intense competition, including from non-tax paid volume by certain local manufacturers;
pending and threatened litigation as discussed in Item 8, Note 18. Contingencies; and
governmental investigations.
Regulatory Restrictions: The tobacco industry operates in a highly regulated environment. The well-known risks of smoking have led
regulators to impose significant restrictions and high excise taxes on cigarettes.
We support a comprehensive regulatory framework for tobacco products based on the principle of harm reduction, including mandated
health warnings, minimum age laws, restrictions on advertising, and public place smoking restrictions. We also support regulatory
measures that help reduce illicit trade.
29
Much of the regulation that shapes the business environment in which we operate is driven by the World Health Organization's (“WHO”)
Framework Convention on Tobacco Control (“FCTC”), which entered into force in 2005. The FCTC is the first international public
health treaty and has as its main objective to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use.
To date, 180 countries and the European Union are Parties to the FCTC. The treaty requires Parties to have in place various tobacco
control measures and recommends others. The FCTC governing body, the Conference of the Parties (“CoP”), has also adopted non-
binding guidelines and policy recommendations related to certain articles of the FCTC that go beyond the text of the treaty.
We have opposed certain measures and continue to engage in a dialogue with regulators with respect to those measures that we do not
believe would protect public health and, if implemented, could disrupt competition, severely limit our ability to market and sell our
products to adult smokers, or increase illicit trade. Certain measures are discussed in more detail below. It is not possible to predict
whether or to what extent measures recommended in the FCTC guidelines will be implemented.
Fiscal Challenges: Excessive and disruptive excise, sales and other tax increases and discriminatory tax structures are expected to continue
to have an adverse impact on our profitability, due to lower consumption and consumer down-trading to non-premium, discount, other
low-price or low-taxed combustible tobacco products such as fine cut tobacco and illicit cigarettes. In addition, in certain jurisdictions,
some of our combustible products are subject to tax structures that discriminate against premium-price products and manufactured
cigarettes. We believe that such tax policies undermine public health by encouraging consumers to turn to illicit trade, and ultimately
undercut government revenue objectives, disrupt the competitive environment, and encourage criminal activity. Other jurisdictions have
imposed, or are seeking to impose, levies or other taxes specifically on tobacco companies, such as taxes on revenues and/or profits.
EU Tobacco Products Directive: In April 2014, the EU adopted the text of a significantly revised EU Tobacco Products Directive (TPD),
which entered into force in May 2016. All 28 Member States and Norway have adopted laws transposing the TPD. The TPD sets forth
a comprehensive set of regulatory requirements for tobacco products, including:
•
•
•
•
health warnings covering 65% of the front and back panels of cigarette packs, with an option for Member States to further
standardize tobacco packaging, including the introduction of plain packaging;
a ban on characterizing flavors in some tobacco products, with a transition period for menthol expiring in May 2020;
security features and tracking and tracing measures that will become effective on May 20, 2019, and will increase operational
expenses; and
a framework for the regulation of novel tobacco products and e-cigarettes, including requirements for health warnings and
information leaflets, a prohibition on product packaging text related to reduced risk, and the introduction of notification
requirements or authorization procedures in advance of commercialization.
Plain Packaging and Other Packaging Restrictions: Plain packaging legislation bans the use of branding, logos and colors on packaging
other than the brand name and variant that may be printed only in specified locations and in a uniform font. To date, Australia, France,
Georgia, Hungary, Ireland, New Zealand, Norway, Slovenia and the U.K. have adopted plain packaging laws, which are in various degrees
of implementation.
Several countries have initiated World Trade Organization (“WTO”) dispute settlement proceedings against Australia related to Australia's
plain packaging legislation. The matter is still pending before the WTO panel.
Other countries are also considering adopting plain packaging legislation, including, but not limited to, Canada, Singapore, South Africa
and Turkey.
Some countries have adopted, or are considering adopting, packaging restrictions that could have an impact similar to plain packaging.
Examples of such restrictions include standardizing the shape and size of packages, prohibiting certain colors or the use of certain
descriptive phrases on packaging, and requiring very large graphic health warnings that leave little space for branding.
Restrictions and Bans on the Use of Ingredients: The WHO and others in the public health community have recommended restrictions
or total bans on the use of some or all ingredients in tobacco products, including menthol. Broad restrictions and ingredient bans would
require us to reformulate our American blend tobacco products and could reduce our ability to differentiate these products in the market
in the long term. Menthol bans would eliminate the entire category of mentholated tobacco products. The European Union has banned
flavored tobacco products, subject to an exemption until May 2020 for menthol. Other countries may follow the EU’s approach. For
instance, Turkey has banned menthol as of May 2020. Broader ingredient bans have been adopted by Canada and Brazil. While the
Canadian ingredient ban initially exempted menthol, amendments to the federal Tobacco Act banned menthol in cigarettes as of October
2017. In addition, the Canadian parliament is considering further amendments to the Act that would extend the menthol ban to all tobacco
products. The majority of Canadian provinces have also adopted or are in the process of adopting menthol bans. The Brazil ingredients
30
ban, which would prohibit the use of virtually all ingredients with flavoring or aromatic properties, is not in force due to a legal challenge
by a tobacco industry union, of which our Brazilian subsidiary is a member. Other lawsuits are also pending against the Brazil ingredients
ban. It is not possible to predict the outcome of these legal proceedings.
Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia, Canada, Norway,
Russia, and Singapore, governments have banned the display of tobacco products at the point of sale. Other countries are also considering
similar bans.
Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships: For many years, the FCTC has called for, and countries
have imposed, partial or total bans on tobacco advertising, marketing, promotions and sponsorships, including bans and restrictions on
advertising on radio and television, in print and on the Internet. The FCTC's non-binding guidelines recommend that governments
prohibit all forms of communication with adult smokers.
Restrictions on Product Design: Some members of the public health community are calling for the further standardization of tobacco
products by requiring, for example, that cigarettes have a certain minimum diameter, which would amount to a ban on slim cigarettes,
or requiring the use of standardized filter and cigarette paper designs. In addition, at its meeting in November 2016, the CoP adopted
non-binding guidelines recommending that countries regulate product design features that increase the attractiveness of tobacco products,
such as the diameter of cigarettes and the use of flavor capsules.
Restrictions on Public Smoking: The pace and scope of public smoking restrictions have increased significantly in most of our markets.
Many countries around the world have adopted, or are likely to adopt, regulations that restrict or ban smoking in public and/or work
places, restaurants, bars and nightclubs. Some public health groups have called for, and some countries, regional governments and
municipalities have adopted or proposed, bans on smoking in outdoor places, as well as bans on smoking in cars (typically, when minors
are present) and private homes.
Other Regulatory Issues: Some regulators are considering, or in some cases have adopted, regulatory measures designed to reduce the
supply of tobacco products. These include regulations intended to reduce the number of retailers selling tobacco products by, for example,
reducing the overall number of tobacco retail licenses available or banning the sale of tobacco products within arbitrary distances of
certain public facilities.
In a limited number of markets, most notably Japan, we are dependent on governmental approvals that may limit our pricing flexibility.
Illicit Trade: The illicit tobacco trade creates a cheap and unregulated supply of tobacco products, undermines efforts to reduce smoking
prevalence, especially among youth, damages legitimate businesses, stimulates organized crime, increases corruption and reduces
government tax revenue. Illicit trade may account for as much as 10% of global cigarette consumption; this includes counterfeit,
contraband and the growing problem of “illicit whites,” which are cigarettes legally produced in one jurisdiction for the sole purpose of
being exported and illegally sold in another jurisdiction where they have no legitimate market. We estimate that illicit trade in the European
Union accounted for slightly less than 10% of total cigarette consumption in 2016.
A number of jurisdictions are considering actions to prevent illicit trade. In November 2012, the FCTC adopted the Protocol to Eliminate
Illicit Trade in Tobacco Products (the “Protocol”), which includes supply chain control measures, such as licensing of manufacturers
and distributors, enforcement in free trade zones, controls on duty free and Internet sales and the implementation of tracking and tracing
technologies. To date, 54 Parties have signed the Protocol, and 35 Parties, including the European Union, have ratified it. The Protocol
will come into force once the fortieth Party ratifies it, after which countries must implement its measures via national legislation. We
expect, and welcome, that other Parties will ratify the Protocol.
As discussed in the EU Tobacco Products Directive section above, the EU regulations that mandate tracking and tracing of cigarettes
and roll-your-own products manufactured or destined for the EU will become effective on May 20, 2019. The effective date for other
tobacco-containing products, including some of our RRPs such as the heated tobacco units used with IQOS, is May 20, 2024.
In 2009, our Colombian subsidiaries entered into an Investment and Cooperation Agreement with the national and regional governments
of Colombia to promote investment in, and cooperation on, anti-contraband and anti-counterfeit efforts. The agreement provides $200
million in funding over a 20-year period to address issues such as combating the illegal cigarette trade and increasing the quality and
quantity of locally-grown tobacco.
In May 2016, PMI launched PMI IMPACT, a global initiative that supports third-party projects dedicated to fighting illegal trade and
related crimes such as corruption, organized criminal networks and money laundering. The centerpiece of PMI IMPACT is a council of
external independent experts with impeccable credentials in the fields of law, anti-corruption and law enforcement. The experts are
31
responsible for evaluating and approving funding proposals for PMI IMPACT grants. PMI has pledged $100 million to fund projects
within PMI IMPACT over three funding rounds. Substantially all grants under the first funding round were awarded in 2017. The second
funding round began in September 2017.
In November 2016, PMI signed a joint Declaration of Intent to Prevent the Maritime Transportation of Counterfeit Goods together with
eight other global brand owners and five of the world’s largest shipping companies. This commitment was a result of a dialogue with the
International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy. The signatories aim to tackle the infiltration
of shipping services by criminal networks that exploit vessels to transport counterfeit goods, including “illicit whites,” across the oceans.
Reduced-Risk Products (RRPs)
Our Approach to RRPs: We recognize that smoking cigarettes causes serious diseases and that the best way to avoid the harms of smoking
is never to start or to quit. Nevertheless, it is predicted that over the next decade the number of smokers will remain largely unchanged
from the current estimate of 1.1 billion, despite the considerable efforts to discourage smoking.
Cigarettes burn tobacco, which produces smoke. As a result of the combustion process, the smoker inhales various toxic substances. In
contrast, RRPs do not burn tobacco and produce an aerosol that contains significantly lower levels of harmful and potentially harmful
constituents ("HPHCs") than found in cigarette smoke.
For smokers who would otherwise continue to smoke, we believe that RRPs offer a much better consumer choice. Accordingly, our key
strategic priorities are: to develop and commercialize products that present less risk of harm to adult smokers who switch to those products
versus continued smoking; and to convince current adult smokers who would otherwise continue to smoke to switch to those products.
We recognize that this transformation from cigarettes to RRPs will take time and that the speed of transformation will depend in part
upon factors beyond our control, such as the willingness of governments, regulators and other policy groups to embrace RRPs as a desired
alternative to continued cigarette smoking. We also recognize that our part in this transformation must be funded from our existing
cigarette business. For as long as a significant number of adult smokers continues to smoke, it is critical that the industry be led by
responsible and ethical manufacturers. Therefore, during the transformation, we intend to remain a leading international cigarette
manufacturer.
We have a range of RRPs in various stages of development, scientific assessment and commercialization. We conduct rigorous scientific
assessments of our RRP platforms to substantiate that they reduce exposure to HPHCs and, ultimately, that these products present, are
likely to present, or have the potential to present less risk of harm to adult smokers who switch to them versus continued smoking. We
draw upon a team of expert scientists and engineers from a broad spectrum of scientific disciplines and our extensive learnings of adult
consumer preferences to develop and assess our RRPs. Our efforts are guided by the following key objectives:
•
•
•
•
to develop RRPs that adult smokers who would otherwise continue to smoke find to be satisfying alternatives to smoking;
for those adult smokers, our goal is to offer RRPs with a scientifically substantiated risk-reduction profile that approaches as
closely as possible that associated with smoking cessation;
to substantiate the reduction of risk for the individual adult smoker and the reduction of harm to the population as a whole, based
on scientific evidence of the highest standard that is made available for scrutiny and review by external independent scientists
and relevant regulatory bodies; and
to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs,
including the communication of scientifically substantiated information to enable adult smokers to make better consumer choices.
Our RRP Platforms: Our product development is based on the elimination of combustion via tobacco heating and other innovative systems
for aerosol generation, which we believe is the most promising path to providing a better consumer choice for those who would otherwise
continue to smoke. We recognize that no single product will appeal to all adult smokers. Therefore, we are developing a portfolio of
products intended to appeal to a variety of distinct adult consumer preferences.
Four RRP platforms are in various stages of development and commercialization readiness:
Platform 1 uses a precisely controlled heating device that we are commercializing under the IQOS brand name, into which a
specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol. We have conducted a series of clinical
studies for this platform, the results of which were included in our submission to the U.S. Food and Drug Administration (“FDA”)
described below. As anticipated, the results of the first six-month term of the 6+6 month exposure response study were received at the
32
end of 2017, and the related report is under preparation. We expect to submit the final report for these results to the FDA in May of 2018.
We expect to receive the results of the second six-month term of the study for analysis in the second quarter of 2018.
Platform 2 uses a pressed carbon heat source which, when ignited, generates an aerosol by heating tobacco. The results of our
pharmacokinetic study (that measured the nicotine pharmacokinetic profile and subjective effects) and of our five-day reduced exposure
study with Platform 2 indicate that this platform could be an acceptable substitute for adult smokers who seek an alternative to cigarettes.
Furthermore, the reduced exposure study showed a substantial reduction in relevant biomarkers of exposure to HPHCs in those who
switched to Platform 2 compared to those who continued to smoke cigarettes over a five-day period. The sustainability of this reduction
as well as changes in clinical risk markers were assessed in a 3-month reduced exposure study. As anticipated, the results of this study
were received at the end of 2017, and the related report is under preparation. We expect the report to be finalized in the second quarter
of 2018. Subsequently, in accordance with standard scientific practices, we intend to share the conclusions in scientific forums and to
submit them for inclusion in peer-reviewed publications.
Platform 3 provides an aerosol of nicotine salt formed by the chemical reaction of nicotine with a weak organic acid. We have
explored two routes for this platform, one with electronics and one without, and have initiated a new nicotine pharmacokinetic study.
We expect to receive the results for analysis in the second quarter of 2018.
Platform 4 covers e-vapor products, which are battery-powered devices that produce an aerosol by vaporizing a nicotine-
containing liquid solution. Our e-vapor products comprise devices using current generation technology, and we are well advanced in the
development and commercialization of our new e-vapor mesh technology that addresses certain challenges presented by some e-vapor
products currently on the market. Our MESH products are designed to ensure the consistency and quality of the generated aerosol. We
have initiated a nicotine pharmacokinetic study for which we expect to receive the results for analysis in the second quarter of 2018; the
results of this study are expected to contribute to further developments of Platform 4 products.
Commercialization of RRPs: We are building a new product category and tailor our commercialization strategy to the characteristics of
each specific market. We focus our commercialization efforts on retail experience, guided consumer trials and customer care, as well as
digital communication programs. In order to accelerate switching to IQOS, our initial market introductions typically entail one-on-one
consumer engagement and introductory device discounts. These initial commercialization efforts require substantial investment.
In 2014, we introduced the IQOS system in pilot city launches in Nagoya, Japan, and in Milan, Italy. Since then, we have expanded our
commercialization activities to include all of Japan, as well as multiple cities in Italy. To date, IQOS is available for sale in key cities in
37 markets and nationwide in Japan.
On the basis of our experience in Japan and Italy, we estimate that only a very small percentage of adult smokers who convert to IQOS
switch back to cigarettes.
In the first quarter of 2016, we started the large scale commercial production of heated tobacco units. During 2017, we experienced supply
shortages resulting from stronger-than-anticipated demand, primarily in Japan. Currently, we are no longer experiencing capacity
limitations. We are integrating the production of our heated tobacco units into a number of our existing manufacturing facilities and
progressing with our plans to build manufacturing capacity for our other RRP platforms.
In 2017, we secured a second supplier of IQOS devices. We are no longer experiencing supply constraints on the IQOS devices and,
based on demand forecasts, we expect to be able to fully supply our current and planned launch markets with such devices.
The adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business. We work with
two electronics manufacturing service providers for the supply of our IQOS devices and a small number of other providers for other
products in our RRP portfolio and related accessories. Although we work closely with these service providers on monitoring their
production capability and financial health, the commercialization of our RRPs could be adversely affected if they are unable to meet their
commitments. The production of our RRP portfolio requires various metals, and we believe that there is an adequate supply of such
metals in the world markets to satisfy our current and anticipated production requirements. However, some components and materials
necessary for the production of our RRPs, including those for the electronic devices, are obtained from single or limited sources, and can
be subject to industry-wide shortages and price fluctuations. Our inability to secure an adequate supply of such components and materials
could negatively impact the commercialization of our RRPs.
Our IQOS devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other
periods as required by law. We discuss product warranties in more detail in Note 5. Product Warranty. The significance of warranty
claims is dependent on a number of factors including warranty policies and product failure rates and may increase with the number of
devices sold.
33
To further improve the consumer experience, we introduced a new version of the IQOS device in the first quarter of 2017 and continue
to develop product improvements.
We are also progressing with our commercialization efforts for the other platforms:
• We currently market our e-vapor products in several markets, including Ireland, Israel, Spain and the U.K. A city test of MESH,
one of our Platform 4 products, is ongoing in Birmingham, U.K., and we expect to initiate a pilot launch of a next-generation
version of this product in 2018.
•
In December 2017, we initiated a small-scale city test of TEEPS, our Platform 2 product, in Santo Domingo, the Dominican
Republic.
•
In 2018, we plan to conduct a consumer test of our Platform 3 product.
RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. We therefore support science-based regulation and taxation
of RRPs. Regulation and taxation should differentiate between cigarettes and products that present, are likely to present, or have the
potential to present less risk of harm to adult smokers who switch to these products versus continued smoking. Regulation should provide
minimum standards for RRPs and specific rules for product assessment methodologies, ingredients, labelling and consumer
communication, and should ensure that the public is informed about the health risks of all combustible and non-combustible tobacco and
nicotine-containing products. Regulation, as well as tobacco industry activities, should reflect the fact that youth should not consume
nicotine in any form.
Some governments have banned or are seeking to ban or severely restrict emerging tobacco and nicotine-containing products such as our
RRPs. These regulations might foreclose or unreasonably restrict adult consumer access even to products that might be shown to be a
better consumer choice than continuing to smoke. We oppose such blanket bans and unreasonable restrictions of products that have the
potential to present less risk of harm compared to continued smoking. By contrast, we support regulation that sets clear standards and
propels innovation to benefit adult smokers who would otherwise continue to smoke.
In the United States, an established regulatory framework for assessing “Modified Risk Tobacco Products” and “New Tobacco Products”
exists under the jurisdiction of the FDA. We submitted to the FDA a Modified Risk Tobacco Product Application (“MRTPA”) for IQOS
in December 2016, and a Premarket Tobacco Product Application (“PMTA”) for IQOS in March 2017. In May 2017, the FDA formally
accepted and filed our MRTPA for substantive scientific review and, in June 2017, the FDA opened the period for the public to provide
comments on our application. In August 2017, the FDA completed a preliminary review of our PMTA and accepted our application for
substantive review. The FDA referred our MRTPA to the Tobacco Product Scientific Advisory Committee (“TPSAC”). TPSAC held a
meeting on January 24 and January 25, 2018 on our MRTPA. The recommendations and votes of TPSAC are not binding on the FDA.
By regulation, the FDA’s decision on our MRTPA will take into account, in addition to the views of TPSAC, scientific evidence as well
as comments, data and information submitted by interested persons.
Separately, on July 28, 2017, the FDA issued a policy announcement aiming to explore the potential of nicotine reduction in cigarettes
in conjunction with less harmful products that deliver nicotine for adults who choose to use such products.
Future FDA actions may influence the regulatory approach of other governments.
In the EU, all EU Member States and Norway have transposed the EU Tobacco Products Directive, including the provisions on novel
tobacco products, such as heated tobacco units, and e-cigarettes. Most of the EU Member States require a notification submitted six
months before the intended placing on the market of a novel tobacco product, while some require pre-market authorizations for the
introduction of such products. To date, we have filed a comprehensive dossier summarizing our scientific assessment of IQOS in 22
Member States.
On December 12, 2017, at the request of the U.K. Department of Health and Public Health England, the U.K. Committee on Toxicity
published its assessment of the risk of heated tobacco products relative to cigarette smoking. This assessment included analysis of
scientific data for two heated tobacco products, one of which was IQOS. The assessment concluded that, while still harmful to health,
compared with the known risks from cigarettes, heated tobacco products are probably less harmful. Subsequently, on February 6, 2018,
Public Health England published a report stating that the available evidence suggests that heated tobacco products may be considerably
less harmful than cigarettes and more harmful than e-cigarettes.
34
We make our scientific findings publicly available for scrutiny and peer review through several channels, including our websites. From
time to time, adult consumers, competitors, members of the scientific community, and others inquire into our scientific methodologies,
challenge our scientific conclusions or request further study of certain aspects of our RRPs and their health effects. We are committed to
a robust and open scientific debate but believe that such debate should be based on accurate and reliable scientific information. We seek
to provide accurate and reliable scientific information about our RRPs; nonetheless, we may not be able to prevent third-party dissemination
of false, misleading or unsubstantiated information about these products.
To date, we have been largely successful in demonstrating to regulators that our RRPs are not cigarettes, and as such they are generally
taxed either as a separate category or as other tobacco products, which typically yields more favorable tax rates than cigarettes. Although
we believe that this is sensible from the public health perspective, we cannot guarantee that regulators will continue this approach.
There can be no assurance that we will succeed in our efforts to replace cigarettes with RRPs or that regulation will allow us to commercialize
RRPs in all markets, to communicate scientifically substantiated risk-reduction claims, or to treat RRPs differently from cigarettes.
Our RRP Business Development Initiatives: In December 2013, we established a strategic framework with Altria Group, Inc. (“Altria”)
under which Altria will make available its e-vapor products exclusively to us for commercialization outside the United States, and we
will make available two of our RRPs exclusively to Altria for commercialization in the United States. In March 2015, we launched
Solaris, a Platform 4 e-vapor product licensed from Altria, in Spain. In December 2015, we introduced Solaris in Israel.
In July 2015, we extended the strategic framework with Altria to include a Joint Research, Development and Technology Sharing
Agreement. The additional agreement provides the framework under which PMI and Altria will collaborate to develop the next generation
of e-vapor products for commercialization in the United States by Altria and in markets outside the United States by PMI. The collaboration
between PMI and Altria in this endeavor is enabled by exclusive technology cross licenses and technical information sharing. The
agreements also provide for cooperation on the scientific assessment of, and for the sharing of improvements to, the existing generation
of licensed products.
Other Developments: On September 12, 2017, we announced our support of the Foundation for a Smoke-Free World. We agreed to
contribute $80 million per year over the next 12 years, as specified in the agreement. We made an initial contribution of $4.5 million in
2017 and the first annual contribution of $80 million in the beginning of 2018. The Foundation is an independent body and is governed
by its independent Board of Directors. The Foundation’s role, as set out in its corporate charter, includes funding research in the field of
tobacco harm reduction, encouraging measures that reduce the harm caused by smoking, and assessing the effect of reduced cigarette
consumption on the industry value chain.
Governmental Investigations
From time to time, we are subject to governmental investigations on a range of matters. We describe certain matters pending in Thailand
and South Korea in Item 8, Note 18. Contingencies.
In November 2010, a WTO panel issued its decision in a dispute relating to facts that arose from August 2006 between the Philippines
and Thailand concerning a series of Thai customs and tax measures affecting cigarettes imported by PM Thailand into Thailand (see Item
8, Note 18. Contingencies for additional information). The WTO panel decision, which was upheld by the WTO Appellate Body, concluded
that Thailand had no basis to find that PM Thailand's declared customs values and taxes paid were too low, as alleged by the DSI in 2009.
The decision also created obligations for Thailand to revise its laws, regulations, or practices affecting the customs valuation and tax
treatment of future cigarette imports. Thailand agreed in September 2011 to fully comply with the decision by October 2012. The
Philippines asserts that to date Thailand has not fully complied with the WTO panel decision. The Philippines has repeatedly expressed
concerns with ongoing investigations by Thailand of PM Thailand, including those that led to the criminal charges described in Item 8,
Note 18. Contingencies, and has commenced two formal proceedings at the WTO to challenge criminal charges against PM Thailand
arguing that the criminal charges appear to be based on grounds not supported by WTO customs valuation rules and inconsistent with
several decisions already taken by Thai Customs and other Thai governmental agencies.
Acquisitions and Other Business Arrangements
We discuss our acquisitions and other business arrangements in Item 8, Note 6. Acquisitions and Other Business Arrangements to our
consolidated financial statements.
35
Investments in Unconsolidated Subsidiaries
We discuss our investments in unconsolidated subsidiaries in Item 8, Note 4. Investments in Unconsolidated Subsidiaries to our
consolidated financial statements.
Trade Policy
We are subject to various trade restrictions imposed by the United States of America and countries in which we do business (“Trade
Sanctions”), including the trade and economic sanctions administered by the U.S. Department of the Treasury's Office of Foreign Assets
Control and the U.S. Department of State. It is our policy to comply fully with these Trade Sanctions.
Tobacco products are agricultural products under U.S. law and are not technological or strategic in nature. From time to time we make
sales in countries subject to Trade Sanctions, either where such sanctions do not apply to our business or pursuant to exemptions or
licenses.
To our knowledge, none of our commercial arrangements results in the governments of any country identified by the U.S. government
as a state sponsor of terrorism, nor entities controlled by those governments, receiving cash or acting as intermediaries in violation of
U.S. laws.
We do not sell products in Iran, Sudan, North Korea and Syria. From time to time, we explore opportunities to sell our products in one
or more of these countries, as permitted by law.
In January 2018, we commenced sales of cigarettes in Cuba, as permitted by law.
Certain states within the U.S. have enacted legislation permitting state pension funds to divest or abstain from future investment in stocks
of companies that do business with certain countries that are sanctioned by the U.S. We do not believe such legislation has had a material
effect on the price of our shares.
2017 compared with 2016
The following discussion compares operating results within each of our reportable segments for 2017 with 2016.
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes
and heated tobacco units.
European Union:
European Union
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2017
2016
$
27,580
$
27,129
$
19,262
8,318
3,775
18,967
8,162
3,994
Variance
$
%
451
295
156
(219)
1.7 %
1.6 %
1.9 %
(5.5)%
Net revenues increased by $451 million. Excluding excise taxes, net revenues increased by $156 million, due to:
•
•
•
price increases ($156 million) and
favorable currency ($45 million), partially offset by
unfavorable volume/mix ($45 million).
The net revenues of the European Union segment include $320 million in 2017 and $62 million in 2016 related to the sale of RRPs.
Excluding excise taxes, net revenues for RRPs were $269 million in 2017 and $57 million in 2016.
Operating companies income decreased by $219 million during 2017. This decrease was due primarily to:
36
•
•
•
•
•
higher marketing, administration and research costs ($223 million, primarily related to increased investment behind reduced-
risked products),
unfavorable volume/mix ($119 million) and
unfavorable currency ($43 million), partly offset by
price increases ($156 million) and
lower manufacturing costs ($14 million).
European Union - Total Market, PMI Shipment & Market Share Commentaries
The estimated total market in the European Union decreased by 1.9% to 492.1 billion units. Our Regional market share was flat at 38.3%,
with gains in France, Germany and Poland offset by declines in Italy and Spain.
Shipment volume and market share performance by brand for cigarettes and heated tobacco units are shown in the tables below:
European Union Shipment Volume by Brand (Million Units)
Full-Year
2017
2016
Change
Cigarettes
Marlboro
L&M
Chesterfield
Philip Morris
Others
Total Cigarettes
Heated Tobacco Units
Total European Union
Marlboro
L&M
Chesterfield
Philip Morris
HEETS
Others
Total European Union
93,088
34,261
29,087
15,158
15,699
187,293
1,889
189,182
96,245
34,691
30,140
16,290
16,220
193,586
224
193,810
European Union Market Shares by Brand
Full-Year
2017
18.8%
6.9%
6.0%
3.1%
0.3%
3.2%
2016
19.0%
6.9%
5.9%
3.2%
—%
3.3%
38.3%
38.3%
(3.3)%
(1.2)%
(3.5)%
(6.9)%
(3.2)%
(3.3)%
+100.0%
(2.4)%
Change
p.p.
(0.2)
—
0.1
(0.1)
0.3
(0.1)
—
Our total shipment volume decreased by 2.4% to 189.2 billion units, or by 1.9% excluding estimated net inventory movements, notably
in Italy and Spain. The decrease in cigarette shipment volume of Marlboro was mainly due to Greece, Italy and Spain. The decrease in
cigarette shipment volume of L&M was mainly due to Germany, Romania and Spain, partly offset by France. The decrease in cigarette
shipment volume of Chesterfield was mainly due to Italy, Portugal and Spain, partly offset by Poland. The decrease in cigarette shipment
volume of Philip Morris was mainly due to Italy. The decrease in cigarette shipment volume of "Others" was due notably to Muratti in
Italy.
37
European Union - Key Market Commentaries
In France, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and
our heated tobacco units.
Total Market (billion units)
France Key Market Data
Full-Year
2017
44.4
2016
44.9
Change
% / p.p.
(1.2)%
PMI Shipments (million units)
19,264
19,247
0.1 %
PMI Market Share
Marlboro
Philip Morris
Chesterfield
Others*
Total
*Includes heated tobacco units.
27.1%
10.3%
3.0%
2.8%
43.2%
26.4%
10.2%
3.1%
2.7%
42.4%
0.7
0.1
(0.1)
0.1
0.8
The estimated total market decreased by 1.2%. The increase in our shipment volume was driven by higher market share, notably of
Marlboro, reflecting the growth of both Marlboro Red and Gold in 30s packs launched in March 2017.
In Germany, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes
and our heated tobacco units.
Total Market (billion units)
Germany Key Market Data
Full-Year
2017
76.9
2016
78.1
Change
% / p.p.
(1.6)%
PMI Shipments (million units)
28,575
28,958
(1.3)%
PMI Market Share
Marlboro
L&M
Chesterfield
Others*
Total
*Includes heated tobacco units.
22.7%
11.5%
1.5%
1.5%
37.2%
22.5%
11.6%
1.6%
1.4%
37.1%
0.2
(0.1)
(0.1)
0.1
0.1
The estimated total market decreased by 1.6%, or by 2.7% excluding the net impact of estimated trade inventory movements, mainly
reflecting the impact of price increases in March 2017. The decrease in our shipment volume was mainly due to the lower total market,
partly offset by higher market share.
38
In Italy, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and
our heated tobacco units.
Total Market (billion units)
Italy Key Market Data
Full-Year
2017
69.8
2016
72.1
Change
% / p.p.
(3.2)%
PMI Shipments (million units)
36,767
38,744
(5.1)%
PMI Market Share
Marlboro
Chesterfield
Philip Morris
HEETS
Others
Total
23.9%
11.3%
7.7%
0.7%
8.6%
52.2%
24.3%
11.5%
8.5%
0.1%
8.1%
52.5%
(0.4)
(0.2)
(0.8)
0.6
0.5
(0.3)
The estimated total market decreased by 3.2%, partly reflecting the implementation of the Tobacco Product Directive's ban on pack sizes
of ten cigarettes at the end of 2016. The decline of our shipments, down by 3.6% excluding the net impact of distributor inventory
movements, mainly reflected the lower total market, as well as lower cigarette market share, principally due to Marlboro, partly reflecting
the ban on pack sizes of ten cigarettes, and low-price Philip Morris, impacted by the growth of the super-low price segment, partly offset
by HEETS and Merit in "Others."
In Poland, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and
our heated tobacco units.
Total Market (billion units)
Poland Key Market Data
Full-Year
2017
41.7
2016
41.3
PMI Shipments (million units)
17,784
17,485
PMI Market Share
Marlboro
L&M
Chesterfield
HEETS
Others
Total
10.7%
18.4%
10.4%
0.2%
3.0%
42.7%
11.6%
18.5%
9.1%
—%
3.1%
42.3%
Change
% / p.p.
0.9%
1.7%
(0.9)
(0.1)
1.3
0.2
(0.1)
0.4
The estimated total market increased by 0.9%. The increase in our shipment volume was primarily driven by the higher total market and
higher market share, driven by Chesterfield, benefiting from brand support, partly offset by Marlboro, reflecting pressure from competitive
brands in the below premium segment.
39
In Spain, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and
our heated tobacco units.
Total Market (billion units)
Spain Key Market Data
Full-Year
2017
45.0
2016
46.7
Change
% / p.p.
(3.5)%
PMI Shipments (million units)
14,456
16,374
(11.7)%
PMI Market Share
Marlboro
L&M
Chesterfield
Others*
Total
*Includes heated tobacco units.
16.5%
5.3%
8.6%
1.9%
32.3%
18.0%
5.4%
8.6%
1.9%
33.9%
(1.5)
(0.1)
—
—
(1.6)
The estimated total market decreased by 3.5%, or by 2.5% excluding the net impact of estimated trade inventory movements. The decline
of our shipment volume, down by 8.0% excluding the net impact of distributor inventory movements, mainly reflected the lower total
market, and lower market share, due to Marlboro, reflecting the impact of price increases, particularly above the round €5.00 per pack
price point in the vending channel, as well as a challenging comparison with 2016 in which the market share of Marlboro grew by 1.0
point.
Eastern Europe, Middle East & Africa:
Eastern Europe, Middle East & Africa
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2017
2016
$
18,045
$
18,286
$
11,346
6,699
2,888
11,286
7,000
3,016
Variance
$
%
(241)
60
(301)
(128)
(1.3)%
0.5 %
(4.3)%
(4.2)%
Net revenues decreased by $241 million. Excluding excise taxes, net revenues decreased by $301 million, due to:
•
•
•
unfavorable volume/mix ($374 million) and
unfavorable currency ($291 million), partly offset by
price increases ($364 million).
The net revenues of the Eastern Europe, Middle East & Africa segment include $158 million in 2017 and $9 million in 2016 related to
the sale of RRPs. Excluding excise taxes, net revenues for RRPs were $149 million in 2017 and $9 million in 2016.
40
Operating companies income decreased by $128 million during 2017. This decrease was due primarily to:
•
•
•
•
unfavorable volume/mix ($344 million) and
higher marketing, administration and research costs ($201 million), partly offset by
price increases ($364 million) and
favorable currency ($81 million).
Eastern Europe, Middle East & Africa - Total Market, PMI Shipment & Market Share Commentaries
EEMA PMI Shipment Volume by Brand (Million Units)
Cigarettes
Marlboro
L&M
Bond Street
Parliament
Philip Morris
Others
Total Cigarettes
Heated Tobacco Units
Total EEMA
Full-Year
2017
2016
Change
70,122
46,923
36,336
33,299
19,086
50,391
256,157
1,581
257,738
73,818
52,183
42,553
33,940
2,058
66,841
271,393
100
271,493
(5.0)%
(10.1)%
(14.6)%
(1.9)%
+100.0%
(24.6)%
(5.6)%
+100.0%
(5.1)%
The estimated total market in EEMA decreased by 2.8% to 1.0 trillion units. Our Regional market share decreased by 0.3 points to 24.9%.
Our total shipment volume decreased by 5.1% to 257.7 billion units, mainly reflecting: lower cigarette shipment volume in Russia, Saudi
Arabia - where our cigarette shipment volume declined by 35.8%, impacted by the new excise tax implemented in June 2017 that resulted
in the doubling of retail prices - and Ukraine; partly offset by higher cigarette shipment volume in North Africa, notably Algeria, and
higher heated tobacco unit shipment volume. The decrease in cigarette shipment volume of Marlboro was predominantly due to Saudi
Arabia, reflecting the impact of the excise tax that resulted in the doubling of the brand's retail price from SAR 12 to SAR 24 per pack,
partly offset by North Africa, mainly Algeria and Egypt, and Turkey. The decrease in cigarette shipment volume of L&M was mainly
due to Russia, Saudi Arabia and Turkey, partly offset by Algeria and Kazakhstan. The decrease in cigarette shipment volume of Bond
Street was mainly due to Kazakhstan, Russia and Ukraine. The decrease in cigarette shipment volume of Parliament was mainly due to
Russia and Saudi Arabia, partly offset by Kazakhstan. The increase in cigarette shipment volume of Philip Morris was driven mainly
by Russia and Ukraine, largely reflecting successful portfolio consolidation of local, low-price brands in "Others."
41
Eastern Europe, Middle East & Africa - Key Market Commentaries
In North Africa (defined as Algeria, Egypt, Libya, Morocco and Tunisia), estimated cigarette industry size, our cigarette shipment
volume and cigarette market share performance are shown in the table below.
Total Cigarette Market (billion units)
North Africa Key Market Data
Full-Year
2017
144.9
2016
142.3
PMI Cigarette Shipments (million units)
35,085
34,035
PMI Cigarette Market Share
Marlboro
L&M
Others
Total
9.3%
11.8%
2.9%
24.0%
8.3%
12.2%
2.7%
23.2%
Change
% / p.p.
1.9%
3.1%
1.0
(0.4)
0.2
0.8
The estimated total cigarette market increased by 1.9%, mainly driven by Egypt, partially offset by Tunisia. The increase in our cigarette
shipment volume was mainly driven by the higher cigarette market, as well as higher cigarette market share, notably of Marlboro in
Algeria, partly offset by L&M in Egypt.
In Russia, estimated industry size and our shipment volume, shown in the table below, include cigarettes and our heated tobacco units.
Our market share performance, as measured by Nielsen and shown in the table below, reflects that of cigarettes.
Total Market (billion units)
Russia Key Market Data
Full-Year
2017
260.0
2016
280.0
Change
% / p.p.
(7.2)%
PMI Shipments (million units)
72,417
79,706
(9.1)%
PMI Cigarette Market Share
Marlboro
Parliament
Bond Street
Philip Morris
Others
Total
1.5%
3.5%
8.6%
4.3%
9.2%
27.1%
1.4%
3.8%
8.4%
0.2%
13.4%
27.2%
0.1
(0.3)
0.2
4.1
(4.2)
(0.1)
The estimated total market decreased by 7.2%, reflecting the impact of excise tax-driven price increases and an increase in the prevalence
of illicit trade. The decline of our shipment volume was mainly due to the lower total market. Our market share decreased by 0.1 point.
The decline of "Others" largely reflected the successful portfolio consolidation of local, low-price brands into Philip Morris.
42
In Turkey, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance, as measured by
Nielsen, are shown in the table below.
Total Cigarette Market (billion units)
Turkey Key Market Data
Full-Year
2017
106.2
2016
105.5
PMI Cigarette Shipments (million units)
49,649
49,624
PMI Cigarette Market Share
Marlboro
Parliament
Lark
Others
Total
10.2%
11.5%
6.9%
14.7%
43.3%
10.2%
11.7%
7.4%
15.0%
44.3%
Change
% / p.p.
0.7%
0.1%
—
(0.2)
(0.5)
(0.3)
(1.0)
The estimated total cigarette market increased by 0.7%. Excluding the net impact of estimated trade inventory movements, the estimated
total cigarette market declined by 1.6%. The decrease in our cigarette market share, as measured by Nielsen, was mainly due to Lark,
and L&M and Muratti in "Others," partly offset by Chesterfield, principally reflecting competitive pressure from super-low price
alternatives.
In Ukraine, estimated industry size and our shipment volume, shown in the table below, include cigarettes and our heated tobacco units.
Our market share performance, as measured by Nielsen and shown in the table below, reflects that of cigarettes.
Total Market (billion units)
Ukraine Key Market Data
Full-Year
2017
67.1
2016
73.1
Change
% / p.p.
(8.2)%
PMI Shipments (million units)
19,356
22,022
(12.1)%
PMI Cigarette Market Share
Marlboro
Parliament
Bond Street
Philip Morris
Others
Total
3.0%
3.2%
8.4%
3.1%
9.6%
27.3%
3.1%
2.9%
10.0%
—%
13.2%
29.2%
(0.1)
0.3
(1.6)
3.1
(3.6)
(1.9)
The estimated total market decreased by 8.2%, mainly due to the impact of price increases and an increase in the prevalence of illicit
trade. The decrease in our shipment volume was primarily due to the lower total market, as well as lower cigarette market share, as
measured by Nielsen, notably of low-price Bond Street, reflecting competitive pressure from lower-priced alternatives, partly offset by
Parliament and Philip Morris, following the successful portfolio consolidation of a local, low-price brand in "Others."
43
Asia:
Asia
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2017
2016
$
22,635
$
20,531
$
11,845
10,790
4,149
11,850
8,681
3,196
Variance
$
%
2,104
(5)
2,109
953
10.2 %
— %
24.3 %
29.8 %
Net revenues increased by $2.1 billion. Excluding excise taxes, net revenues increased by $2.1 billion, due to:
•
•
•
favorable volume/mix ($1.7 billion) and
price increases ($559 million), partly offset by
unfavorable currency ($137 million).
The net revenues of the Asia segment include $3.3 billion in 2017 and $666 million in 2016 related to the sale of RRPs, mainly driven
by Japan and Korea in 2017 and Japan in 2016. Excluding excise taxes, net revenues for RRPs were $3.2 billion in 2017 and $666 million
in 2016. In some jurisdictions, including Japan, we are not responsible for collecting excise taxes.
Operating companies income increased by $953 million during 2017. This increase was due primarily to:
•
•
•
•
•
favorable volume/mix ($622 million),
price increases ($559 million) and
lower manufacturing costs ($40 million), partly offset by
higher marketing, administration and research costs ($141 million, principally related to increased investment behind reduced-
risk products) and
unfavorable currency ($123 million).
Asia - Total Market, PMI Shipment & Market Share Commentaries
Asia PMI Shipment Volume by Brand (Million Units)
Cigarettes
Marlboro
Lark
Parliament
Others
Total Cigarettes
Heated Tobacco Units
Total Asia
Full-Year
2017
2016
Change
73,446
14,474
9,224
137,109
234,253
32,729
266,982
76,463
17,600
10,142
155,824
260,029
7,070
267,099
(3.9)%
(17.8)%
(9.1)%
(12.0)%
(9.9)%
+100.0%
— %
The estimated total market in Asia, excluding China, decreased by 3.1% to 1.1 trillion units. Our Regional market share, excluding China,
was flat at 23.8%.
Our total shipment volume of 267.0 billion units was flat, mainly reflecting: lower cigarette shipment volume in Indonesia, Japan, Korea,
Pakistan - impacted by excise tax-driven price increases in 2017 and an increase in the prevalence of illicit trade - and the Philippines,
fully offset by higher heated tobacco unit shipment volume, mainly in Japan and Korea. The decrease in cigarette shipment volume of
Marlboro was mainly due to Japan and Korea, primarily reflecting out-switching to heated tobacco products, partly offset by Indonesia
and the Philippines. The decrease in cigarette shipment volume of Lark was principally due to Japan. The decrease in cigarette shipment
44
volume of Parliament was mainly due to Japan and Korea. The decrease in cigarette shipment volume of "Others" was mainly due to
local, low-price brands in Indonesia, Pakistan and the Philippines.
Our total shipment volume benefited from the favorable net impact of estimated combustible and heated tobacco unit inventory movements,
which were driven by approximately 8.5 billion units net in Japan, reflecting: the increasing demand for HeatSticks, anticipated to further
increase in the first quarter of 2018 following a planned lifting of the restriction on IQOS device sales; the establishment of appropriate
distributor inventory levels of heated tobacco units, given the current high dependence on a single manufacturing center; and the transition
from air freight to sea freight of heated tobacco units, largely completed in the fourth quarter of 2017. Excluding the impact of total
estimated net inventory movements, our total shipment volume decreased by 3.1%.
Asia - Key Market Commentaries
In Indonesia, estimated cigarette industry size, our cigarette shipment volume, cigarette market share and segmentation performance are
shown in the tables below.
Total Cigarette Market (billion units)
Indonesia Key Market Data
Full-Year
2017
307.4
2016
315.6
Change
% / p.p.
(2.6)%
PMI Cigarette Shipments (million units)
101,324
105,524
(4.0)%
PMI Cigarette Market Share
Sampoerna A
Dji Sam Soe
Sampoerna U
Others
Total
Segment % of Total Market
Hand-Rolled Kretek (SKT)
Machine-Made Kretek (SKM)
Whites (SPM)
Total
PMI % Share of Segment
Hand-Rolled Kretek (SKT)
Machine-Made Kretek (SKM)
Whites (SPM)
13.8%
7.4%
4.1%
7.7%
33.0%
14.0%
6.5%
5.2%
7.7%
33.4%
(0.2)
0.9
(1.1)
—
(0.4)
Indonesia Segmentation Data
Full-Year
2017
2016
Change
p.p.
17.6%
77.2%
5.2%
100.0%
37.5%
29.4%
70.2%
18.2 %
75.8 %
6.0 %
100.0%
37.3 %
28.9 %
79.5 %
(0.6)
1.4
(0.8)
—
0.2
0.5
(9.3)
The estimated total cigarette market decreased by 2.6%, reflecting a soft economic environment and the impact of above-inflation excise
tax-driven price increases. The decrease in our shipments was mainly due to the lower total market and lower cigarette market share,
notably due to a decline of Sampoerna U, reflecting the impact of price increases, partly offset by a growth of Dji Sam Soe, driven by
the variant Magnum Mild.
45
In Japan, our shipments reflect cigarette and heated tobacco unit volume. The estimated total market and our market share reflect total
industry cigarette and heated tobacco unit volume.
Total Market (billion units)
PMI Shipments (million units)
Cigarettes
Heated Tobacco Units
Total
PMI Market Share
Marlboro
HeatSticks
Parliament
Lark
Others
Total
Japan Key Market Data
Full-Year
2017
171.5
2016
179.0
34,853
31,291
66,144
43,915
7,069
50,985
9.3%
10.8%
2.1%
8.6%
1.3%
32.1%
10.6%
2.9%
2.3%
9.6%
1.7%
27.1%
Change
% / p.p.
(4.2)%
(20.6)%
+100%
29.7 %
(1.3)
7.9
(0.2)
(1.0)
(0.4)
5.0
The estimated total market decreased by 4.2%. Our shipment volume increased by 13.1%, excluding the net impact of estimated cigarette
and heated tobacco unit distributor inventory movements, driven by higher market share of HeatSticks.
In Korea, our shipments reflect cigarette and heated tobacco unit volume. The estimated total market and our market share reflect total
industry cigarette and heated tobacco unit volume.
Total Market (billion units)
PMI Shipments (million units)
Cigarettes
Heated Tobacco Units
Total
PMI Market Share
Marlboro
Parliament
HEETS
Virginia S.
Others
Total
Korea Key Market Data
Full-Year
2017
70.6
2016
73.6
13,499
1,438
14,937
15,490
—
15,490
8.7%
8.0%
2.0%
2.0%
0.5%
9.6%
7.9%
—%
3.0%
0.5%
21.2%
21.0%
Change
% / p.p.
(4.1)%
(12.9)%
— %
(3.6)%
(0.9)
0.1
2.0
(1.0)
—
0.2
The estimated total market decreased by 4.1%, or by 3.3% excluding the net impact of estimated cigarette trade inventory movements.
The decrease in our shipment volume was due to the lower total market, partly offset by higher market share driven by the May 2017
launch of HEETS.
46
In the Philippines, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown
in the table below.
Total Cigarette Market (billion units)
Philippines Key Market Data
Full-Year
2017
74.9
2016
79.3
Change
% / p.p.
(5.6)%
PMI Cigarette Shipments (million units)
50,618
56,611
(10.6)%
PMI Cigarette Market Share
Marlboro
Fortune
Jackpot
Others
Total
33.0%
18.0%
6.1%
10.5%
67.6%
28.4%
23.4%
7.9%
11.6%
71.3%
4.6
(5.4)
(1.8)
(1.1)
(3.7)
The decline of the estimated total cigarette market of 6.7% excluding the net impact of estimated trade inventory movements, was mainly
due to the impact of excise tax-driven price increases. The decline in our cigarette shipment volume was due to the lower total cigarette
market, as well as lower cigarette market share, particularly of our low and super-low price brands as a result of the timing of competitors'
price increases, which initially widened the price gaps to our principal competitor's discounted brands, partly offset by Marlboro, which
benefited from in-switching from lower-priced brands.
Latin America & Canada:
Latin America & Canada
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2017
2016
$
9,838
$
9,007
$
6,897
2,941
1,002
6,165
2,842
938
Variance
$
%
831
732
99
64
9.2%
11.9%
3.5%
6.8%
Net revenues increased by $831 million. Excluding excise taxes, net revenues increased by $99 million, due to:
•
•
•
price increases ($307 million), partly offset by
unfavorable volume/mix ($154 million) and
unfavorable currency ($54 million).
The net revenues of the Latin America & Canada segment include $5 million in 2017 related to the sale of RRPs. Excluding excise taxes,
net revenues for RRPs were $4 million in 2017.
47
Operating companies income increased by $64 million during 2017. This increase was due primarily to:
•
•
•
•
price increases ($307 million), partly offset by
unfavorable volume/mix ($152 million),
unfavorable currency ($70 million) and
higher manufacturing costs ($17 million).
Latin America & Canada - Total Market, PMI Shipment & Market Share Commentaries
Latin America & Canada PMI Shipment Volume by Brand (Million Units)
Cigarettes
Marlboro
Philip Morris
Chesterfield
Others
Total Cigarettes
Heated Tobacco Units
Total Latin America & Canada
Full-Year
2017
2016
Change
33,711
13,320
9,852
27,340
84,223
27
84,250
35,194
16,463
2,626
33,655
87,938
—
87,938
(4.2)%
(19.1)%
+100.0%
(18.8)%
(4.2)%
— %
(4.2)%
The estimated total market in Latin America & Canada decreased by 3.8% to 213.0 billion units. Our Regional market share decreased
by 0.1 point to 39.6%.
Our total shipment volume decreased by 4.2% to 84.3 billion units, mainly due to lower cigarette shipment volume in Argentina, Brazil,
Canada, Colombia and Mexico. The decrease in cigarette shipment volume of Marlboro was mainly due to Argentina and Brazil. The
decrease in cigarette shipment volume of Philip Morris was mainly due to Argentina. The increase in cigarette shipment volume of
Chesterfield was driven by Argentina, Brazil, Colombia and Venezuela, partly offset by Mexico. The decrease in cigarette shipment
volume of "Others" was principally due to mainly local brands in Argentina, Brazil, Colombia and Venezuela, largely reflecting successful
brand portfolio consolidation, Canada and Mexico.
48
Latin America & Canada - Key Market Commentaries
In Argentina, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown in
the table below.
Total Cigarette Market (billion units)
Argentina Key Market Data
Full-Year
2017
36.2
2016
36.1
Change
% / p.p.
0.2 %
PMI Cigarette Shipments (million units)
27,002
27,512
(1.9)%
PMI Cigarette Market Share
Marlboro
Chesterfield
Philip Morris
Others
Total
20.0%
15.9%
33.0%
5.8%
74.7%
22.4%
5.5%
41.6%
6.8%
76.3%
(2.4)
10.4
(8.6)
(1.0)
(1.6)
The estimated total cigarette market increased by 0.2%, reflecting higher tax declarations by local manufacturers, as well as a favorable
comparison to the full year 2016, which declined by 11.6% mainly due to the impact of tax-driven price increases. The decrease in our
cigarette shipment volume was mainly due to lower cigarette market share, reflecting the growth of the low price segment, where local
manufacturers are exempt from paying minimum excise tax, resulting in widened price gaps with premium Marlboro and mid-price
Philip Morris, partly offset by low-price Chesterfield that benefited from successful brand portfolio consolidation of a low-price brand
in "Others."
In Canada, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes
and our heated tobacco units.
Total Market (billion units)
Canada Key Market Data
Full-Year
2017
24.6
2016
26.3
Change
% / p.p.
(6.3)%
PMI Shipments (million units)
9,259
10,049
(7.9)%
PMI Market Share
Belmont
Canadian Classics
Next
Others*
Total
*Includes heated tobacco units
4.1%
9.5%
11.5%
12.2%
37.3%
3.7%
10.2%
11.3%
13.2%
38.4%
0.4
(0.7)
0.2
(1.0)
(1.1)
The estimated total market decreased by 6.3%, mainly due to the impact of price increases. The decrease in our shipment volume mainly
reflected the lower total market, as well as lower cigarette market share, unfavorably impacted by estimated net trade inventory movements.
49
In Mexico, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown in the
table below.
Total Cigarette Market (billion units)
Mexico Key Market Data
Full-Year
2017
35.8
2016
36.2
Change
% / p.p.
(1.1)%
PMI Cigarette Shipments (million units)
24,351
25,080
(2.9)%
PMI Cigarette Market Share
Marlboro
Delicados
Benson & Hedges
Others
Total
49.4%
8.3%
5.0%
5.4%
68.1%
49.0%
9.7%
4.7%
5.9%
69.3%
0.4
(1.4)
0.3
(0.5)
(1.2)
The estimated total cigarette market decreased by 1.1%, or increased by 1.2% excluding the net impact of estimated trade inventory
movements. The decrease in our cigarette shipment volume mainly reflected the lower total cigarette market, as well as lower cigarette
market share. The decrease of our cigarette market share largely reflected the net impact of the estimated trade inventory movements,
as well as lower share of Delicados, impacted by competitive pressure in the low price segment.
2016 compared with 2015
The following discussion compares operating results within each of our reportable segments for 2016 with 2015.
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance in the following
discussion reflect cigarettes only.
European Union:
European Union
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2016
2015
$
27,129
$
26,563
$
18,967
8,162
3,994
18,495
8,068
3,576
Variance
$
%
566
472
94
418
2.1%
2.6%
1.2%
11.7%
Net revenues increased by $566 million. Excluding excise taxes, net revenues increased by $94 million, due to:
•
•
•
price increases ($390 million), partly offset by
unfavorable volume/mix ($149 million) and
unfavorable currency ($147 million).
Operating companies income increased by $418 million during 2016. This increase was due primarily to:
•
•
•
price increases ($390 million),
the non-recurrence of the 2015 pre-tax charges for asset impairment and exit costs ($68 million),
lower manufacturing costs ($49 million),
50
•
•
•
lower marketing, administration and research costs ($47 million) and
favorable currency ($34 million), partly offset by
unfavorable volume/mix ($168 million).
European Union - Industry Volume
The estimated total cigarette market decreased by 1.4% to 501.6 billion units. The moderate decline of the estimated total cigarette market
reflected improved macroeconomics, a lower prevalence of illicit trade and, in certain geographies, the estimated positive impact of
immigration, which was concentrated in the first half of 2016.
European Union - PMI Shipment Volume and Market Share Commentaries
Cigarette shipment volume and market share performance by brand are shown in the tables below:
European Union Cigarette Shipment Volume by Brand (Million Units)
Marlboro
L&M
Chesterfield
Philip Morris
Others
Total European Union
Marlboro
L&M
Chesterfield
Philip Morris
Others
Total European Union
2016
96,245
34,691
30,140
16,290
16,220
Full-Year
2015
95,588
35,010
28,278
14,205
21,508
193,586
194,589
European Union Cigarette Market Shares by Brand
Full-Year
2016
19.0%
6.9%
5.9%
3.2%
3.3%
38.3%
2015
18.8%
6.9%
5.6%
3.2%
3.8%
38.3%
Change
0.7 %
(0.9)%
6.6 %
14.7 %
(24.6)%
(0.5)%
Change
p.p.
0.2
—
0.3
—
(0.5)
—
Our cigarette shipment volume decreased by 0.5% to 193.6 billion units, mainly due to Italy, Germany and Greece, partly offset by Poland
and Spain. Cigarette shipment volume of Marlboro increased by 0.7%, mainly driven by Spain, partly offset by Greece. Our total cigarette
market share was flat at 38.3%, with gains, notably in the Czech Republic, France, Poland and Spain, offset by declines, mainly in Greece
and Italy. Cigarette shipment volume of "Others" decreased, mainly due the morphing of various trademarks in the Czech Republic and
Italy into international brands.
51
European Union - Key Market Commentaries
In France, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
France Key Market Data
Full-Year
2016
44.9
2015
45.5
Change
% / p.p.
(1.2)%
PMI Cigarette Shipments (million units)
19,243
18,943
1.6 %
PMI Cigarette Market Share
Marlboro
Philip Morris
Chesterfield
Others
Total
26.4%
10.2%
3.1%
2.7%
42.4%
25.9%
9.5%
3.3%
2.9%
41.6%
0.5
0.7
(0.2)
(0.2)
0.8
The estimated total cigarette market decreased moderately by 1.2%, partly reflecting a lower prevalence of illicit trade and e-vapor
products. The increase in our cigarette shipment volume mainly reflected market share growth, driven by Marlboro, as well as the launch
of certain Philip Morris variants in January 2016.
In Germany, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Germany Key Market Data
Full-Year
2016
78.1
2015
80.0
Change
% / p.p.
(2.4)%
PMI Cigarette Shipments (million units)
28,950
29,778
(2.8)%
PMI Cigarette Market Share
Marlboro
L&M
Chesterfield
Others
Total
22.5%
11.6%
1.6%
1.4%
37.1%
22.1%
11.9%
1.5%
1.7%
37.2%
0.4
(0.3)
0.1
(0.3)
(0.1)
The estimated total cigarette market decreased by 2.4%, primarily reflecting the impact of price increases. The decrease in our cigarette
shipment volume primarily reflected the lower total market.
52
In Italy, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Italy Key Market Data
Full-Year
2016
72.1
2015
73.8
Change
% / p.p.
(2.4)%
PMI Cigarette Shipments (million units)
38,624
39,717
(2.8)%
PMI Cigarette Market Share
Marlboro
Chesterfield
Philip Morris
Others
Total
24.3%
11.5%
8.5%
8.1%
52.4%
24.7%
11.0%
9.2%
8.8%
53.7%
(0.4)
0.5
(0.7)
(0.7)
(1.3)
The estimated total cigarette market decreased by 2.4%, primarily reflecting the impact of price increases. The decline of our cigarette
shipments, down by 4.8% excluding the net impact of distributor inventory movements, reflected the lower total market, and lower
cigarette market share, notably due to Marlboro as a result of its price increase in the second quarter of 2016, and low-price Philip Morris,
impacted by the growth of the super-low price segment, partly offset by super-low price Chesterfield.
In Poland, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Poland Key Market Data
Full-Year
2016
41.3
2015
41.1
PMI Cigarette Shipments (million units)
17,485
16,763
PMI Cigarette Market Share
Marlboro
L&M
Chesterfield
Others
Total
11.6%
18.5%
9.1%
3.1%
42.3%
11.4%
18.1%
8.6%
2.7%
40.8%
Change
% / p.p.
0.5%
4.3%
0.2
0.4
0.5
0.4
1.5
The estimated total cigarette market increased by 0.5%, primarily reflecting a lower prevalence of non-duty paid products. The increase
in our cigarette shipment volume was mainly driven by higher cigarette market share, principally L&M, reflecting the positive impact of
brand support, Chesterfield, benefiting from its 100s and super-slims variants, and RGD in "Others," up by 0.4 points to 2.6%.
53
In Spain, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Spain Key Market Data
Full-Year
2016
46.7
2015
46.7
Change
% / p.p.
(0.1)%
PMI Cigarette Shipments (million units)
16,365
15,435
6.0 %
PMI Cigarette Market Share
Marlboro
Chesterfield
L&M
Others
Total
18.0%
8.6%
5.4%
1.9%
33.9%
17.0%
9.1%
5.8%
1.5%
33.4%
1.0
(0.5)
(0.4)
0.4
0.5
The estimated total cigarette market decreased by 0.1%, reflecting an improved economy and the favorable estimated impact of in-
switching from other tobacco products. Excluding the net impact of distributor inventory movements, our cigarette shipment volume
increased by 1.6%, driven by higher market share reflecting the strong performance of Marlboro, benefiting from its round price point
in the vending channel and the new Architecture 2.0.
Eastern Europe, Middle East & Africa:
Eastern Europe, Middle East & Africa
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2016
2015
$
18,286
$
18,328
$
11,286
7,000
3,016
10,964
7,364
3,425
Variance
$
(42)
322
(364)
(409)
%
(0.2)%
2.9 %
(4.9)%
(11.9)%
Net revenues decreased by $42 million. Excluding excise taxes, net revenues decreased by $364 million, due to:
•
•
•
unfavorable currency ($600 million) and
unfavorable volume/mix ($348 million), partly offset by
price increases ($584 million).
Operating companies income decreased by $409 million during 2016. This decrease was due primarily to:
•
•
•
•
unfavorable currency ($839 million) and
unfavorable volume/mix ($333 million), partly offset by
price increases ($584 million) and
lower marketing, administration and research costs ($170 million).
Eastern Europe, Middle East & Africa - PMI Cigarette Shipment Volume Commentaries
Our cigarette shipment volume decreased by 2.9% to 271.4 billion units, mainly due to North Africa, primarily Algeria, and Russia,
partially offset by Saudi Arabia and Ukraine. Cigarette shipment volume of Marlboro decreased by 8.5% to 73.8 billion units, principally
due to Algeria and Egypt, partly offset by Saudi Arabia. Cigarette shipment volume of Parliament increased by 1.0% to 33.9 billion
54
units, driven by Saudi Arabia, Turkey and Ukraine, partly offset by Russia. Cigarette shipment volume of L&M increased by 1.9% to
52.2 billion units, driven notably by Algeria, Kazakhstan and Ukraine, partly offset by Russia and Turkey.
Eastern Europe, Middle East & Africa - Key Market Commentaries
In North Africa, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
North Africa Key Market Data
Full-Year
2016
142.3
2015
139.7
Change
% / p.p.
1.9 %
PMI Cigarette Shipments (million units)
34,035
38,111
(10.7)%
PMI Cigarette Market Share
Marlboro
L&M
Others
Total
8.3%
12.2%
2.7%
23.2%
13.6%
11.8%
2.2%
27.6%
(5.3)
0.4
0.5
(4.4)
The estimated total cigarette market increased by 1.9%, driven by Egypt, Morocco and Tunisia, partly offset by Algeria. The decrease
in our cigarette shipment volume reflected lower market share, mainly due to Marlboro in Algeria, principally resulting from the impact
of excise tax-driven price increases, as well as lower-than-anticipated acceptance of Architecture 2.0 for Marlboro Round Taste.
In Russia, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown in
the table below.
Total Cigarette Market (billion units)
Russia Key Market Data
Full-Year
2016
280.0
2015
294.1
Change
% / p.p.
(4.8)%
PMI Cigarette Shipments (million units)
79,651
84,422
(5.7)%
PMI Cigarette Market Share
Marlboro
Parliament
Bond Street
Others
Total
1.4%
3.8%
8.4%
13.6%
27.2%
1.4%
3.9%
8.4%
14.7%
28.4%
—
(0.1)
—
(1.1)
(1.2)
The estimated total cigarette market decreased by 4.8%, mainly due to the impact of excise tax-driven price increases. The decrease in
our cigarette shipment volume, down by 8.3% excluding the impact of estimated distributor inventory movements, mainly reflected the
lower total market, and lower cigarette market share primarily due to a decline in "Others" of mid-price L&M and Chesterfield and super-
low Optima, resulting from the timing of retail price increases compared to competition.
55
In Turkey, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown in
the table below.
Total Cigarette Market (billion units)
Turkey Key Market Data
Full-Year
2016
105.5
2015
103.2
PMI Cigarette Shipments (million units)
49,624
49,014
PMI Cigarette Market Share
Marlboro
Parliament
Lark
Others
Total
10.2%
11.7%
7.4%
15.0%
44.3%
9.5%
11.6%
7.6%
15.1%
43.8%
Change
% / p.p.
2.2%
1.2%
0.7
0.1
(0.2)
(0.1)
0.5
The estimated total cigarette market increased by 2.2%, primarily reflecting a lower prevalence of illicit trade. The increase in our
cigarette shipment volume was mainly driven by the higher total market. Our higher market share, led by Marlboro, primarily reflecting
the growth of its slimmer Touch variant, and Chesterfield, partly offset by L&M in "Others."
In Ukraine, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown
in the table below.
Total Cigarette Market (billion units)
Ukraine Key Market Data
Full-Year
2016
73.1
2015
70.6
Change
% / p.p.
3.5%
PMI Cigarette Shipments (million units)
22,014
19,195
14.7%
PMI Cigarette Market Share
Marlboro
Parliament
Bond Street
Others
Total
3.1%
2.9%
10.0%
13.2%
29.2%
3.8%
2.8%
8.2%
14.9%
29.7%
(0.7)
0.1
1.8
(1.7)
(0.5)
The estimated total cigarette market increased by 3.5%, mainly driven by a lower prevalence of illicit trade. The increase in our cigarette
shipment volume reflected the higher total cigarette market. The decrease in our market share was primarily due to Marlboro, reflecting
the impact of widened price gaps, and mid-price Chesterfield and super-low President in "Others," mainly resulting from competitive
price pressure in the low price segment, partly offset by Bond Street and L&M in "Others."
56
Asia:
Asia
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2016
2015
Variance
$
%
$
20,531
$
19,469
$
1,062
11,850
8,681
3,196
11,266
8,203
2,886
584
478
310
5.5%
5.2%
5.8%
10.7%
Net revenues increased by $1.1 billion. Excluding excise taxes, net revenues increased by $478 million, due primarily to:
•
•
price increases ($335 million) and
favorable volume/mix ($151 million).
Net revenues include $666 million in 2016 related to sale of RRPs, mainly driven by Japan. Excluding excise taxes, net revenues for
RRPs were $666 million in 2016. In some jurisdictions, including Japan, we are not responsible for collecting excise taxes.
Operating companies income increased by $310 million during 2016. This increase was due primarily to:
•
•
•
•
price increases ($335 million),
favorable currency ($52 million) and
lower marketing, administration and research costs ($28 million), partly offset by
unfavorable volume/mix ($106 million).
Asia - PMI Cigarette Shipment Volume Commentaries
Our cigarette shipment volume decreased by 7.6% to 260.0 billion units, mainly due to: Indonesia; Pakistan, reflecting a lower total
estimated cigarette market resulting from excise tax-driven price increases and the growth of illicit trade; the Philippines; and Thailand,
primarily reflecting the impact of excise tax-driven price increases in the first quarter of 2016, as well as lower market share; and in-
switching from our cigarette brands to heated tobacco units; partly offset by Korea, reflecting a normalization of the total estimated
cigarette market following the disruptive excise tax increase in January 2015.
Cigarette shipment volume of Marlboro increased by 4.0% to 76.5 billion units, mainly driven by Korea and the Philippines, partly offset
by Vietnam, as well as in-switching from that brand to heated tobacco units. Cigarette shipment volume of Parliament increased by 7.5%
to 10.1 billion units, driven by Korea. Cigarette shipment volume of Lark decreased by 3.8% to 17.6 billion units, principally due to
Japan.
57
Asia - Key Market Commentaries
In Indonesia, estimated industry size, our cigarette shipment volume, market share and segmentation performance are shown in the tables
below.
Total Cigarette Market (billion units)
Indonesia Key Market Data
Full-Year
2016
315.6
2015
320.0
Change
% / p.p.
(1.4)%
PMI Cigarette Shipments (million units)
105,524
109,840
(3.9)%
PMI Cigarette Market Share
Sampoerna A
Dji Sam Soe
U Mild
Others
Total
Segment % of Total Market
Hand-Rolled Kretek (SKT)
Machine-Made Kretek (SKM)
Whites (SPM)
Total
PMI % Share of Segment
Hand-Rolled Kretek (SKT)
Machine-Made Kretek (SKM)
Whites (SPM)
14.0%
6.5%
4.2%
8.7%
33.4%
14.6%
6.9%
4.7%
8.1%
34.3%
(0.6)
(0.4)
(0.5)
0.6
(0.9)
Indonesia Segmentation Data
Full-Year
2016
2015
Change
p.p.
18.2%
75.8%
6.0%
100.0%
37.3%
28.9%
79.5%
19.1%
74.7%
6.2%
100.0%
37.7%
29.7%
80.3%
(0.9)
1.1
(0.2)
—
(0.4)
(0.8)
(0.8)
The estimated total cigarette market decreased by 1.4%, mainly reflecting a soft economic environment and the impact of excise tax-
driven price increases. The decrease in our cigarette shipments was mainly due to lower market share, reflecting the soft performance
of our SKM portfolio, due to competitors' discounted product offerings, and our SKT portfolio, broadly in line with industry trends, as
well as a lower estimated total market.
58
In Japan, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Japan Key Market Data
Full-Year
2016
173.8
2015
182.3
Change
% / p.p.
(4.6)%
PMI Cigarette Shipments (million units)
43,915
45,690
(3.9)%
PMI Cigarette Market Share
Marlboro
Parliament
Lark
Others
Total
10.9%
2.4%
9.9%
1.7%
24.9%
11.3%
2.3%
9.9%
1.8%
25.3%
(0.4)
0.1
—
(0.1)
(0.4)
The estimated total cigarette market decreased by 4.6%, reflecting the continued underlying cigarette consumption decline, the growth
of reduced-risk products, and the impact of the April price increases of certain brands of our key competitor. Excluding the net impact
of distributor inventory movements, our cigarette shipment volume decreased by 6.5%. The decline was mainly due to a lower total
cigarette market, as well as lower cigarette market share, reflecting the impact of competitors' retail pricing, competitors' differentiated
menthol taste product offerings and in-switching from our cigarette brands to heated tobacco units.
The estimated national market share of heated tobacco units was 2.9%, bringing our total combined national market share to 27.1%, up
by 1.7 points. We calculate national market share for heated tobacco units in Japan as the total sales volume for heated tobacco units as
a percentage of the total estimated sales volume for cigarettes and heated tobacco units.
In Korea, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Korea Key Market Data
Full-Year
2016
73.6
2015
67.3
PMI Cigarette Shipments (million units)
15,490
14,201
PMI Cigarette Market Share
Marlboro
Parliament
Virginia S.
Others
Total
9.6%
7.9%
3.0%
0.5%
21.0%
9.6%
7.2%
3.8%
0.6%
21.2%
Change
% / p.p.
9.4%
9.1%
—
0.7
(0.8)
(0.1)
(0.2)
Excluding a favorable comparison with the prior year driven by estimated trade inventory movements, the estimated total cigarette market
increased by 4.3%, reflecting the normalization of the market following the disruptive excise tax increase of 120% in January 2015. The
growth in our cigarette shipment volume primarily reflected the higher estimated total market.
59
In the Philippines, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Philippines Key Market Data
Full-Year
2016
79.3
2015
90.2
Change
% / p.p.
(12.0)%
PMI Cigarette Shipments (million units)
56,611
66,236
(14.5)%
PMI Cigarette Market Share
Marlboro
Fortune
Jackpot
Others
Total
28.4%
23.4%
7.9%
11.6%
71.3%
20.0%
29.2%
12.4%
11.8%
73.4%
8.4
(5.8)
(4.5)
(0.2)
(2.1)
The estimated total cigarette market decreased by 12.0%, mainly due to the impact of excise tax-driven price increases. The decline in
our cigarette shipment volume reflected the lower total market, as well as the impact of these price increases on market share, particularly
on our low and super-low price brands, Fortune and Jackpot, partly offset by an increase in market share of Marlboro, benefiting from
its narrowed price gap with lower-priced brands as a result of the price increases.
Latin America & Canada:
Latin America & Canada
(in millions)
Net revenues
Excise taxes on products
Net revenues, excluding excise taxes on products
Operating companies income
For the Years Ended
December 31,
2016
2015
$
9,007
$
9,548
$
6,165
2,842
938
6,389
3,159
1,085
Variance
$
(541)
(224)
(317)
(147)
%
(5.7)%
(3.5)%
(10.0)%
(13.5)%
Net revenues decreased by $541 million. Excluding excise taxes, net revenues decreased by $317 million, due to:
•
•
•
unfavorable currency ($525 million) and
unfavorable volume/mix ($104 million), partly offset by
price increases ($312 million).
Operating companies income decreased by $147 million during 2016. This decrease was due to:
•
•
•
•
•
unfavorable currency ($282 million),
unfavorable volume/mix ($85 million),
higher manufacturing costs ($57 million) and
higher marketing, administration and research costs ($35 million), partly offset by
price increases ($312 million).
Latin America & Canada - PMI Cigarette Shipment Volume Commentaries
Our cigarette shipment volume decreased by 4.3% to 87.9 billion units, mainly due to Argentina, partly offset by Mexico. While cigarette
shipment volume of Marlboro decreased by 1.8% to 35.2 billion units, its market share increased by 0.6 points to an estimated 15.8%,
60
primarily driven by Brazil, up by 0.6 points to 10.3%, Colombia, up by 0.3 points to 9.3%, and Mexico, up by 1.2 points to 49.0%, partly
offset by Argentina, down by 1.9 points to 22.4%. Cigarette shipment volume of Philip Morris decreased by 15.3% to 16.5 billion units,
mainly due to Argentina.
Latin America & Canada - Key Market Commentaries
In Argentina, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Argentina Key Market Data
Full-Year
2016
36.1
2015
40.8
Change
% / p.p.
(11.6)%
PMI Cigarette Shipments (million units)
27,512
31,910
(13.8)%
PMI Cigarette Market Share
Marlboro
Parliament
Philip Morris
Others
Total
22.4%
1.9%
41.6%
10.4%
76.3%
24.3%
2.1%
44.7%
7.1%
78.2%
(1.9)
(0.2)
(3.1)
3.3
(1.9)
The decline of the estimated total cigarette market of 11.6% mainly reflected a soft economic environment and the impact of the May
2016 excise tax increase that drove a more than 50% increase in average industry retail prices. The decrease in our cigarette shipment
volume was principally due to the lower total market. Our lower cigarette market share primarily reflected growth in competitors' super-
low priced products benefiting from down-trading, partly offset by low-price Chesterfield in "Others." The capsule segment was up by
1.0 point to 17.4% of the total market; our share of the segment increased by 0.4 points to 73.9%.
In Canada, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Canada Key Market Data
Full-Year
2016
26.3
2015
26.7
Change
% / p.p.
(1.6)%
PMI Cigarette Shipments (million units)
10,049
9,926
1.2 %
PMI Cigarette Market Share
Belmont
Canadian Classics
Next
Others
Total
3.7%
10.2%
11.3%
13.2%
38.4%
3.3%
10.3%
10.6%
13.1%
37.3%
0.4
(0.1)
0.7
0.1
1.1
The estimated total cigarette market decreased by 1.6%. The increase in our cigarette shipment volume was principally driven by higher
cigarette market share, favorably impacted by estimated trade inventory movements, partly offset by a lower total market.
61
In Mexico, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
Total Cigarette Market (billion units)
Mexico Key Market Data
Full-Year
2016
36.2
2015
33.8
PMI Cigarette Shipments (million units)
25,080
23,246
PMI Cigarette Market Share
Marlboro
Delicados
Benson & Hedges
Others
Total
49.0%
9.7%
4.7%
5.9%
69.3%
47.8%
10.7%
4.5%
5.8%
68.8%
Change
% / p.p.
7.0%
7.9%
1.2
(1.0)
0.2
0.1
0.5
The estimated total cigarette market increased by 7.0%, or by 2.2% excluding the net impact of estimated trade inventory movements,
primarily reflecting improved market conditions and a lower prevalence of illicit trade. The increase in our cigarette shipment volume
reflected the higher total market. Our cigarette market share, benefiting from the impact of estimated inventory movements, was up by
0.5 points, with growth of Marlboro and Benson & Hedges, reflecting the impact of new product launches, partly offset by low-price
Delicados. Our share of the premium segment, representing 56.9% of the total market, increased by 1.0 point to 93.5%.
Financial Review
Net Cash Provided by Operating Activities
Net cash provided by operating activities of $8.9 billion for the year ended December 31, 2017, increased by $0.8 billion from the
comparable 2016 period. While the impacts of the Tax Cuts and Jobs Act reduced net earnings by $1.6 billion, there was no net impact
on operating cash flows for the year, as the changes in deferred taxes and income taxes payable offset the net earnings impact. Excluding
the impact of the Tax Cuts and Jobs Act as well as favorable currency movements of $0.4 billion, the increase in cash flows provided by
operating activities can be attributed to higher net earnings offset by working capital and other movements.
At December 31, 2017, PMI recorded an income tax payable of $1.7 billion representing the transition tax of $2.2 billion, partially offset
by foreign tax credits related to foreign withholding taxes previously paid of $0.5 billion. The income tax payable is due over an 8-year
period beginning in 2018. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.
Net cash provided by operating activities of $8.1 billion for the year ended December 31, 2016, increased by $212 million from the
comparable 2015 period. Excluding unfavorable currency movements of $409 million, the change was due primarily to net earnings
growth and lower cash payments related to exit costs, partly offset by higher working capital requirements and 2016 installment payments
of security into a court trust pertaining to the Létourneau and Blais cases as well as a 2016 payment to the South Korean tax authorities
(see Item 8, Note 18. Contingencies for additional information).
Excluding currency, the unfavorable variance in working capital was due primarily to the following:
• more cash used for accounts receivable, primarily due to the timing of sales and cash collections (including unfavorable
comparisons to the cash flows provided for accounts receivable in 2015 following the expansion of arrangements to sell accounts
receivable to unaffiliated financial institutions as disclosed in Item 8, Note 20. Sale of Accounts Receivable), partly offset by
• more cash provided by accrued liabilities and other current assets, primarily due to the timing of payments for excise taxes.
62
Net Cash Used in Investing Activities
Net cash used in investing activities of $3.0 billion for the year ended December 31, 2017, increased by $2.0 billion from the comparable
2016 period. This increase in net cash used of $2.0 billion was due principally to cash collateral posted to secure derivatives designated
as net investment hedges of Euro assets following the strengthening of the Euro versus the U.S. dollar, and higher capital expenditures.
For further details on our derivatives designated as net investment hedges, see Item 8, Note 15. Financial Instruments.
Net cash used in investing activities of $968 million for the year ended December 31, 2016, increased by $260 million from the comparable
2015 period, due primarily to higher capital expenditures.
Our capital expenditures were $1.5 billion in 2017, $1.2 billion in 2016 and $1.0 billion in 2015. The 2017 expenditures were primarily
related to our ongoing investments in RRPs to support capacity expansion (notably for heated tobacco units). We expect total capital
expenditures in 2018 of approximately $1.7 billion (including additional capital expenditures related to our ongoing investment in RRPs
to support capacity expansion), to be funded by operating cash flows.
Net Cash Used in Financing Activities
During 2017, net cash used in financing activities was $2.8 billion, compared with net cash used in financing activities of $5.4 billion
during 2016 and $4.7 billion in 2015.
The 2017 change was due primarily to higher proceeds from long-term debt issuances (primarily the $6.9 billion proceeds in 2017 from
our U.S. dollar and Euro debt issuances versus the $3.5 billion proceeds in 2016 from our U.S. dollar and Euro debt issuances).
The 2016 change was due primarily to lower net proceeds received from the sale of subsidiary shares to noncontrolling interests, partially
offset by higher proceeds from long-term debt issuances. For further details on the proceeds from the sale of subsidiary shares in 2015,
see Item 8, Note 6. Acquisitions and Other Business Arrangements to our consolidated financial statements.
Dividends paid in 2017, 2016 and 2015 were $6.5 billion, $6.4 billion and $6.3 billion, respectively.
Debt and Liquidity
We define cash and cash equivalents as short-term, highly liquid investments, readily convertible to known amounts of cash that mature
within a maximum of three months and have an insignificant risk of change in value due to interest rate or credit risk changes. As a policy,
we do not hold any investments in structured or equity-linked products. Our cash and cash equivalents are predominantly held in demand
deposits with institutions that have investment-grade long-term credit rating. As part of our cash management strategy and in order to
manage counterparty exposure, we also enter into reverse repurchase agreements. Such agreements are collateralized with government
or corporate securities held by a custodial bank and, at maturity, cash is paid back to PMI and the collateral is returned to the bank. While
we entered into these agreements during the periods and had an average balance during 2017 and 2016 of $0.9 billion and $0.2 billion,
respectively, we had a zero balance both at December 31, 2017 and December 31, 2016.
We utilize long-term and short-term debt financing, including a commercial paper program that is regularly used to finance ongoing
liquidity requirements, as part of our overall cash management strategy. Our ability to access the capital and credit markets as well as
overall dynamics of these markets may impact borrowing costs. We expect that the combination of our long-term and short-term debt
financing, the commercial paper program and the committed credit facilities, coupled with our operating cash flows, will enable us to
meet our liquidity requirements.
Credit Ratings – The cost and terms of our financing arrangements as well as our access to commercial paper markets may be affected
by applicable credit ratings. At February 9, 2018, our credit ratings and outlook by major credit rating agencies were as follows:
Moody’s
Standard & Poor’s
Fitch
Short-term
P-1
Long-term
A2
A-1
F1
A
A
Outlook
Stable
Negative
Negative
Credit Facilities – On January 29, 2018, we entered into an agreement to extend the term of our $2.0 billion 364-day revolving credit
facility from February 6, 2018, to February 5, 2019. On August 29, 2017, we entered into an agreement, effective October 1, 2017, to
63
extend the term of our $3.5 billion multi-year revolving credit facility, for an additional year covering the period October 1, 2021 to
October 1, 2022.
At February 9, 2018, our committed credit facilities were as follows:
(in billions)
Type
364-day revolving credit, expiring February 5, 2019
Multi-year revolving credit, expiring February 28, 2021
Multi-year revolving credit, expiring October 1, 2022
Total facilities
Committed
Credit
Facilities
$
$
2.0
2.5
3.5
8.0
At February 9, 2018, there were no borrowings under the committed credit facilities, and the entire committed amounts were available
for borrowing.
All banks participating in our committed credit facilities have an investment-grade long-term credit rating from the credit rating agencies.
We continuously monitor the credit quality of our banking group, and at this time we are not aware of any potential non-performing credit
provider.
Each of these facilities requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization
(“consolidated EBITDA”) to consolidated interest expense of not less than 3.5 to 1.0 on a rolling four-quarter basis. At December 31,
2017, our ratio calculated in accordance with the agreements was 10.6 to 1.0. These facilities do not include any credit rating triggers,
material adverse change clauses or any provisions that could require us to post collateral. We expect to continue to meet our covenants.
The terms “consolidated EBITDA” and “consolidated interest expense,” both of which include certain adjustments, are defined in the
facility agreements previously filed with the U.S. Securities and Exchange Commission.
In addition to the committed credit facilities discussed above, certain of our subsidiaries maintain short-term credit arrangements to meet
their respective working capital needs. These credit arrangements, which amounted to approximately $2.8 billion at December 31, 2017
and $2.9 billion at December 31, 2016, are for the sole use of our subsidiaries. Borrowings under these arrangements amounted to $499
million at December 31, 2017, and $643 million at December 31, 2016.
Commercial Paper Program – We continue to have access to liquidity in the commercial paper market through programs in place in the
U.S. and in Europe having an aggregate issuance capacity of $8.0 billion. At December 31, 2017 and December 31, 2016, we had no
commercial paper outstanding. The average commercial paper balance outstanding during 2017 and 2016 was $5.2 billion and $4.2
billion, respectively.
Sale of Accounts Receivable – To mitigate credit risk and enhance cash and liquidity management we sell trade receivables to unaffiliated
financial institutions. These arrangements allow us to sell, on an ongoing basis, certain trade receivables without recourse. The trade
receivables sold are generally short-term in nature and are removed from the consolidated balance sheets. We sell trade receivables under
two types of arrangements, servicing and nonservicing.
Our operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the consolidated
balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained
outstanding under these arrangements as of December 31, 2017, 2016 and 2015 were $1,092 million, $729 million and $888 million,
respectively. The net proceeds received are included in cash provided by operating activities in the consolidated statements of cash flows.
For further details, see Item 8, Note 20. Sale of Accounts Receivable to our consolidated financial statements.
Debt – Our total debt was $34.3 billion at December 31, 2017, and $29.1 billion at December 31, 2016. Our total debt is primarily fixed
rate in nature. For further details, see Item 8, Note 7. Indebtedness. The weighted-average all-in financing cost of our total debt was
2.6% in 2017, compared to 2.8% in 2016. See Item 8, Note 16. Fair Value Measurements to our consolidated financial statements for
a discussion of our disclosures related to the fair value of debt. The amount of debt that we can issue is subject to approval by our Board
of Directors.
64
On February 14, 2017, we filed a shelf registration statement with the U.S. Securities and Exchange Commission, under which we may
from time to time sell debt securities and/or warrants to purchase debt securities over a three-year period.
Our debt issuances in 2017 were as follows:
(in millions)
Type
Face Value
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
EURO notes
EURO notes
(a)
(b)
(a)
(a)
(c)
(c)
(d)
(d)
(e)
(f)
(f)
$700
$300
$1,000
$500
$750
$500
$750
$750
$500
€500 (approximately $582)
€500 (approximately $582)
Interest
Rate
1.625%
Floating
2.000%
2.625%
2.375%
3.125%
1.875%
2.500%
3.125%
0.625%
1.875%
Issuance
Maturity
February 2017
February 2017
February 2017
February 2017
August 2017
August 2017
February 2019
February 2020
February 2020
February 2022
August 2022
August 2027
November 2017
November 2019
November 2017
November 2022
November 2017
March 2028
November 2017
November 2024
November 2017
November 2037
(a) Interest on these notes is payable semi-annually in arrears beginning in August 2017.
(b) Interest on these notes is payable quarterly in arrears beginning in May 2017.
(c) Interest on these notes is payable semi-annually in arrears beginning in February 2018.
(d) Interest on these notes is payable semi-annually in arrears beginning May 2018.
(e) Interest on these notes is payable semi-annually in arrears beginning March 2018.
(f) Interest on these notes is payable annually in arrears beginning November 2018.
The net proceeds from the sale of the securities listed in the table above were used for general corporate purposes.
The weighted-average time to maturity of our long-term debt was 9.4 years at the end of 2017 and 10.6 years at the end of 2016.
• Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations discussed
below.
Guarantees – At December 31, 2017, we were contingently liable for $0.9 billion of guarantees of our own performance, which were
primarily related to excise taxes on the shipment of our products. There is no liability in the consolidated financial statements associated
with these guarantees. At December 31, 2017, our third-party guarantees were insignificant.
65
Aggregate Contractual Obligations – The following table summarizes our contractual obligations at December 31, 2017:
(in millions)
Long-term debt (1)
Interest on borrowings (2)
Operating leases (3)
Purchase obligations (4):
Inventory and production costs
Other
Other long-term liabilities (5)
Payments Due
Total
2018
2019-2020 2021-2022
$34,120
$2,506
$8,221
11,131
849
5,040
2,230
7,270
468
981
179
2,696
1,437
4,133
58
1,656
219
1,255
588
1,843
60
$5,811
1,372
95
687
194
881
42
2023 and
Thereafter
$17,582
7,122
356
402
11
413
308
$53,838
$7,857
$11,999
$8,201
$25,781
(1) Amounts represent the expected cash payments of our long-term debt and capital lease obligations.
(2) Amounts represent the expected cash payments of our interest expense on our long-term debt, including the current portion of long-term debt. Interest on our fixed-
rate debt is presented using the stated interest rate. Interest on our variable debt is estimated using the rate in effect at December 31, 2017. Amounts exclude the
amortization of debt discounts, the amortization of loan fees and fees for lines of credit that would be included in interest expense in the consolidated statements of
earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage
and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing,
advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all
significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Amounts represent the minimum
commitments under non-cancelable contracts. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from
the table above.
(5) Other long-term liabilities consist primarily of postretirement health care costs and accruals established for employment costs. The following long-term liabilities
included on the consolidated balance sheet are excluded from the table above: accrued pension and postemployment costs, tax contingencies, insurance accruals and
other accruals. We are unable to estimate the timing of payments (or contributions in the case of accrued pension costs) for these items. Currently, we anticipate making
pension contributions of approximately $53 million in 2018, based on current tax and benefit laws (as discussed in Item 8, Note 13. Benefit Plans to our consolidated
financial statements).
Equity and Dividends
We discuss our stock awards as of December 31, 2017, in Item 8, Note 9. Stock Plans to our consolidated financial statements.
During 2017, 2016 and 2015, we did not repurchase any shares under a share repurchase program and we do not presently intend to
repurchase shares of our common stock in 2018.
Dividends paid in 2017 were $6.5 billion. During the third quarter of 2017, our Board of Directors approved a 2.9% increase in the
quarterly dividend to $1.07 per common share. As a result, the present annualized dividend rate is $4.28 per common share.
Market Risk
Counterparty Risk - We predominantly work with financial institutions with strong short- and long-term credit ratings as assigned
by Standard & Poor’s and Moody’s. These banks are also part of a defined group of relationship banks. Non-investment grade institutions
are only used in certain emerging markets to the extent required by local business needs. We have a conservative approach when it comes
to choosing financial counterparties and financial instruments. As such we do not invest or hold investments in any structured or equity-
linked products. The majority of our cash and cash equivalents is currently invested in demand deposits maturing within less than 30
days.
We continuously monitor and assess the credit worthiness of all our counterparties.
Derivative Financial Instruments - We operate in markets outside of the U.S., with manufacturing and sales facilities in various
locations throughout the world. Consequently, we use certain financial instruments to manage our foreign currency and interest rate
exposure. We use derivative financial instruments principally to reduce our exposure to market risks resulting from fluctuations in foreign
66
exchange rates by creating offsetting exposures. We are not a party to leveraged derivatives and, by policy, do not use derivative financial
instruments for speculative purposes.
See Item 8, Note 15. Financial Instruments, Item 8, Note 16. Fair Value Measurements and Item 8, Note 19. Balance Sheet Offsetting
to our consolidated financial statements for further details on our derivative financial instruments and the related collateral arrangements.
Value at Risk - We use a value at risk computation to estimate the potential one-day loss in the fair value of our interest-rate-sensitive
financial instruments and to estimate the potential one-day loss in pre-tax earnings of our foreign currency price-sensitive derivative
financial instruments. This computation includes our debt, short-term investments, and foreign currency forwards, swaps and options.
Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign subsidiaries, which the foregoing
instruments are intended to hedge, were excluded from the computation.
The computation estimates were made assuming normal market conditions, using a 95% confidence interval. We use a “variance/co-
variance” model to determine the observed interrelationships between movements in interest rates and various currencies. These
interrelationships were determined by observing interest rate and forward currency rate movements over the preceding quarter for
determining value at risk at December 31, 2017 and 2016, and over each of the four preceding quarters for the calculation of average
value at risk amounts during each year. The values of foreign currency options do not change on a one-to-one basis with the underlying
currency and were valued accordingly in the computation.
The estimated potential one-day loss in fair value of our interest-rate-sensitive instruments, primarily debt, under normal market conditions
and the estimated potential one-day loss in pre-tax earnings from foreign currency instruments under normal market conditions, as
calculated in the value at risk model, were as follows:
(in millions)
Instruments sensitive to:
Pre-Tax Earnings Impact
At
12/31/17
Average
High
Low
Foreign currency rates
$27
$49
$58
$27
(in millions)
Instruments sensitive to:
Interest rates
(in millions)
Instruments sensitive to:
Fair Value Impact
At
12/31/17
Average
High
Low
$118
$150
$173
$118
Pre-Tax Earnings Impact
At
12/31/16
Average
High
Low
Foreign currency rates
$63
$58
$87
$34
(in millions)
Instruments sensitive to:
Interest rates
Fair Value Impact
At
12/31/16
Average
High
Low
$143
$147
$217
$112
The value at risk computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse
movements in interest and foreign currency rates under normal market conditions. The computation does not purport to represent actual
losses in fair value or earnings to be incurred by us, nor does it consider the effect of favorable changes in market rates. We cannot predict
actual future movements in such market rates and do not present these results to be indicative of future movements in market rates or to
be representative of any actual impact that future changes in market rates may have on our future results of operations or financial
position.
67
Contingencies
See Item 3 and Item 8, Note 18. Contingencies to our consolidated financial statements for a discussion of contingencies.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including statements contained in filings with the SEC, in
reports to stockholders and in 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," "intends," "projects," "goals," "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.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and
assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks
or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated,
estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain
invested in our 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 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 document, particularly in Item 1A. Risk Factors and Business
Environment of this section. 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 in the normal course of our public disclosure obligations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this Item is included in Item 7, Market Risk.
68
Item 8.
Financial Statements and Supplementary Data.
Consolidated Balance Sheets
(in millions of dollars, except share data)
at December 31,
Assets
Cash and cash equivalents
2017
2016
$
8,447
$
4,239
Receivables (less allowances of $30 in 2017 and $42 in 2016)
3,738
3,499
Inventories:
Leaf tobacco
Other raw materials
Finished product
Other current assets
Total current assets
Property, plant and equipment, at cost:
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress
Less: accumulated depreciation
Goodwill (Note 3)
Other intangible assets, net (Note 3)
Investments in unconsolidated subsidiaries (Note 4)
Deferred income taxes
Other assets
Total Assets
2,606
1,563
4,637
8,806
603
2,498
1,569
4,950
9,017
853
21,594
17,608
639
3,989
8,976
962
14,566
7,295
7,271
7,666
2,432
1,074
1,007
1,924
590
3,474
7,366
930
12,360
6,296
6,064
7,324
2,470
1,011
859
1,515
$
42,968
$
36,851
See notes to consolidated financial statements.
69
at December 31,
Liabilities
Short-term borrowings (Note 7)
Current portion of long-term debt (Note 7)
Accounts payable
Accrued liabilities:
Marketing and selling
Taxes, except income taxes
Employment costs
Dividends payable
Other
Income taxes (Note 11)
Total current liabilities
Long-term debt (Note 7)
Deferred income taxes
Employment costs
Income taxes and other liabilities (Note 11)
Total liabilities
Contingencies (Note 18)
Stockholders’ (Deficit) Equity
Common stock, no par value (2,109,316,331 shares issued in 2017 and 2016)
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses
Less: cost of repurchased stock (556,098,569 and 557,930,784 shares in 2017 and
2016, respectively)
Total PMI stockholders’ deficit
Noncontrolling interests
Total stockholders’ deficit
2017
2016
$
499
$
643
2,506
2,242
708
5,324
856
1,669
1,346
812
15,962
31,334
799
2,271
2,832
2,573
1,666
575
6,204
800
1,621
1,553
832
16,467
25,851
1,897
2,800
736
53,198
47,751
—
—
1,972
1,964
29,859
30,397
(8,535)
(9,559)
23,296
22,802
35,382
35,490
(12,086)
(12,688)
1,856
1,788
(10,230)
(10,900)
Total Liabilities and Stockholders’ (Deficit) Equity
$ 42,968
$ 36,851
See notes to consolidated financial statements.
70
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
for the years ended December 31,
Net revenues
Cost of sales
Excise taxes on products
Gross profit
Marketing, administration and research costs
Asset impairment and exit costs
Amortization of intangibles
Operating income
Interest expense, net (Note 14)
Earnings before income taxes
Provision for income taxes (Note 11)
Equity (income)/loss in unconsolidated subsidiaries, net
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to PMI
Per share data (Note 10):
Basic earnings per share
Diluted earnings per share
2017
2016
2015
$
78,098
$
74,953
$
73,908
10,432
9,391
9,365
49,350
48,268
47,114
18,316
17,294
17,429
6,725
6,405
6,656
—
88
—
74
68
82
11,503
10,815
10,623
914
10,589
4,307
891
9,924
2,768
1,008
9,615
2,688
(59)
(94)
(105)
6,341
306
7,250
283
7,032
159
6,035
$
6,967
$
6,873
3.88
3.88
$
$
4.48
4.48
$
$
4.42
4.42
$
$
$
See notes to consolidated financial statements.
71
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
for the years ended December 31,
2017
2016
2015
Net earnings
$
6,341
$
7,250
$
7,032
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustments:
Unrealized gains (losses), net of income taxes of $620 in 2017,
($101) in 2016 and ($143) in 2015
330
(14)
(2,248)
(Gains)/losses transferred to earnings, net of income taxes of $- in
2017, 2016 and 2015
(2)
5
(1)
Change in net loss and prior service cost:
Net gains (losses) and prior service costs, net of income taxes of
($17) in 2017, $78 in 2016 and $17 in 2015
523
(460)
(536)
Amortization of net losses, prior service costs and net transition
costs, net of income taxes of ($31) in 2017, ($43) in 2016 and
($48) in 2015
228
224
227
Change in fair value of derivatives accounted for as hedges:
Gains (losses) recognized, net of income taxes of $8 in 2017, ($4)
in 2016 and ($5) in 2015
(Gains) losses transferred to earnings, net of income taxes of $2 in
2017, ($3) in 2016 and $14 in 2015
(44)
(11)
8
30
38
(102)
Total other comprehensive earnings (losses)
1,024
(207)
(2,622)
Total comprehensive earnings
7,365
7,043
4,410
Less comprehensive earnings attributable to:
Noncontrolling interests
306
233
113
Comprehensive earnings attributable to PMI
$
7,059
$
6,810
$
4,297
See notes to consolidated financial statements.
72
Consolidated Statements of Stockholders' (Deficit) Equity
(in millions of dollars, except per share data)
PMI Stockholders’ (Deficit) Equity
Common
Stock
Additional
Paid-in
Capital
Earnings
Reinvested
in the
Business
Accumulated
Other
Comprehensive
Losses
Cost of
Repurchased
Stock
Noncontrolling
Interests
Total
Balances, January 1, 2015
$
— $
710
$
29,249
$
(6,826) $
(35,762) $
1,426
$
(11,203)
Net earnings
Other comprehensive earnings
(losses), net of income taxes
Issuance of stock awards
Dividends declared ($4.04 per share)
Payments to noncontrolling interests
Sale (purchase) of subsidiary shares
to/(from) noncontrolling interests
(Note 6)
Balances, December 31, 2015
—
Net earnings
Other comprehensive earnings
(losses), net of income taxes
Issuance of stock awards
Dividends declared ($4.12 per share)
Payments to noncontrolling interests
Other
Balances, December 31, 2016
—
Net earnings
Other comprehensive earnings
(losses), net of income taxes
Issuance of stock awards
Dividends declared ($4.22 per share)
Payments to noncontrolling interests
Other
6,873
(6,280)
29,842
6,967
(6,412)
30,397
6,035
(6,573)
(3)
1,222
1,929
37
(2)
1,964
20
(12)
(2,576)
149
(9,402)
(35,613)
(157)
123
(9,559)
(35,490)
1,024
108
159
7,032
(46)
(2,622)
146
(6,280)
(171)
1,622
(11,476)
7,250
(207)
160
(6,412)
(219)
4
(10,900)
6,341
1,024
128
(6,573)
(255)
5
(171)
400
1,768
283
(50)
(219)
6
1,788
306
—
(255)
17
Balances, December 31, 2017
$
— $
1,972
$
29,859
$
(8,535) $
(35,382) $
1,856
$
(10,230)
See notes to consolidated financial statements.
73
Consolidated Statements of Cash Flows
(in millions of dollars)
for the years ended December 31,
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
2017
2016
2015
Net earnings
$
6,341
$
7,250
$
7,032
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization
Deferred income tax (benefit) provision
Asset impairment and exit costs, net of cash paid
Cash effects of changes in:
Receivables, net
Inventories
Accounts payable
Accrued liabilities and other current assets
Income taxes
Pension plan contributions
Other
875
(501)
(10)
743
182
(31)
(92)
(1,009)
730
425
(695)
373
(554)
1,477
1,370
(66)
394
(209)
(191)
187
754
(18)
(164)
647
(841)
310
(8)
(42)
(154)
349
Net cash provided by operating activities
8,912
8,077
7,865
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures
Investments in unconsolidated subsidiaries
Net investment hedges
Other
Net cash used in investing activities
(1,548)
(1,172)
(111)
(1,527)
172
(41)
295
(50)
(960)
(55)
239
68
(3,014)
(968)
(708)
See notes to consolidated financial statements.
74
for the years ended December 31,
2017
2016
2015
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Short-term borrowing activity by original maturity:
Net repayments - maturities of 90 days or less
$
(127) $
(12) $
(266)
Issuances - maturities longer than 90 days
Repayments - maturities longer than 90 days
Long-term debt proceeds
Long-term debt repaid
Repurchases of common stock
Dividends paid
Sale (purchase) of subsidiary shares to/(from) noncontrolling
interests (Note 6)
Other
1,634
(1,634)
6,850
—
—
3,536
(2,551)
(2,393)
—
—
—
—
1,539
(1,229)
(48)
(6,520)
(6,378)
(6,250)
5
(426)
7
(173)
1,622
(104)
Net cash used in financing activities
(2,769)
(5,413)
(4,736)
Effect of exchange rate changes on cash and cash equivalents
1,079
(874)
(686)
Cash and cash equivalents:
Increase
Balance at beginning of year
Balance at end of year
Cash Paid:
Interest
Income taxes
4,208
4,239
8,447
$
822
3,417
4,239
1,050
3,403
$
$
1,052
2,829
1,735
1,682
3,417
1,045
2,771
$
$
$
$
$
$
See notes to consolidated financial statements.
75
Notes to Consolidated Financial Statements
Note 1.
Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees
are engaged in the manufacture and sale of cigarettes and other nicotine-containing products, including reduced-risk products, in markets
outside of the United States of America. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc.
and its subsidiaries.
Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present
less risk of harm to smokers who switch to these products versus continued smoking. PMI has a range of RRPs in various stages of
development, scientific assessment and commercialization.
Basis of presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during
the reporting periods. Significant estimates and assumptions include, among other things: pension and benefit plan assumptions; useful
lives and valuation assumptions of goodwill and other intangible assets; marketing programs, and income taxes. Actual results could
differ from those estimates.
The consolidated financial statements include PMI, as well as its wholly-owned and majority-owned subsidiaries. Investments in which
PMI exercises significant influence (generally 20%-50% ownership interest) are accounted for under the equity method of accounting.
Investments in which PMI has an ownership interest of less than 20%, or does not exercise significant influence, are accounted for under
the cost method of accounting. All intercompany transactions and balances have been eliminated.
Certain prior years' amounts have been reclassified to conform with the current year's presentation, due primarily to the aggregation of
the U.S. and non-U.S. pension plans in Note 13. Benefit Plans.
Note 2.
Summary of Significant Accounting Policies:
Cash and cash equivalents
Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less.
Depreciation
Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of
the assets. Machinery and equipment are depreciated over periods ranging from 3 to 15 years, and buildings and building improvements
over periods up to 40 years.
76
Employee benefit plans
PMI provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and
postemployment benefits (primarily severance). PMI records annual amounts relating to these plans based on calculations specified
under U.S. GAAP. PMI recognizes the funded status of its defined pension and postretirement plans on the consolidated balance sheets.
The funded status is measured as the difference between the fair value of the plans assets and the benefit obligation. PMI measures the
plan assets and liabilities at the end of the fiscal year. For defined benefit pension plans, the benefit obligation is the projected benefit
obligation. For the postretirement health care plans, the benefit obligation is the accumulated postretirement benefit obligation. Any
plan with an overfunded status is recognized as an asset, and any plan with an underfunded status is recognized as a liability. Any gains
or losses and prior service costs or credits that have not been recognized as a component of net periodic benefit costs are recorded as a
component of other comprehensive earnings (losses), net of deferred taxes. PMI elects to recognize actuarial gains/(losses) using the
corridor approach.
Foreign currency translation
PMI translates the results of operations of its subsidiaries and affiliates using average exchange rates during each period, whereas balance
sheet accounts are translated using exchange rates at the end of each period. Currency translation adjustments are recorded as a component
of stockholders’ (deficit) equity. In addition, some of PMI’s subsidiaries have assets and liabilities denominated in currencies other than
their functional currencies, and to the extent those are not designated as net investment hedges, these assets and liabilities generate
transaction gains and losses when translated into their respective functional currencies.
Goodwill and non-amortizable intangible assets valuation
PMI tests goodwill and non-amortizable intangible assets for impairment annually or more frequently if events occur that would warrant
such review. PMI performs its annual impairment analysis in the second quarter of each year. The impairment analysis involves comparing
the fair value of each reporting unit or non-amortizable intangible asset to the carrying value. If the carrying value exceeds the fair value,
goodwill or a non-amortizable intangible asset is considered impaired.
Hedging instruments
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Changes in
the fair value of derivatives are recorded each period either in accumulated other comprehensive losses on the consolidated balance sheet,
or in earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are reclassified to the
consolidated statements of earnings in the periods in which operating results are affected by the hedged item. Cash flows from hedging
instruments are classified in the same manner as the affected hedged item in the consolidated statements of cash flows.
Impairment of long-lived assets
PMI reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. PMI performs undiscounted operating cash
flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for
use, PMI groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined
to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based
on the estimated proceeds to be received, less costs of disposal.
Impairment of investments in unconsolidated subsidiaries
Investments in unconsolidated subsidiaries are evaluated for impairment whenever events or changes in circumstances indicate that the
carrying amount of the investments may not be recoverable. An impairment loss would be recorded whenever a decline in value of an
equity investment below its carrying amount is determined to be other than temporary. PMI determines whether a loss is other than
temporary by considering the length of time and extent to which the fair value of the equity investment has been less than the carrying
amount, the financial condition of the equity investment, and the intent to retain the investment for a period of time is sufficient to allow
for any anticipated recovery in market value.
Income taxes
Income taxes are provided on all earnings for jurisdictions outside the United States. These provisions, as well as state and local income
tax provisions, are determined on a separate company basis, and the related assets and liabilities are recorded in PMI’s consolidated
balance sheets. Significant judgment is required in determining income tax provisions and in evaluating tax positions. PMI recognizes
77
accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on the consolidated
statements of earnings.
Inventories
Inventories are stated at the lower of cost or market. The first-in, first-out and average cost methods are used to cost substantially all
inventories. It is a generally recognized industry practice to classify leaf tobacco inventory as a current asset, although part of such
inventory, because of the duration of the aging process, ordinarily would not be utilized within one year.
Marketing costs
PMI supports its products with advertising, adult consumer engagement and trade promotions. Such programs include, but are not limited
to, discounts, rebates, in-store display incentives, e-commerce, mobile and other digital platforms, adult consumer activation and promotion
activities, as well as costs associated with adult consumer experience outlets and other adult consumer touchpoints and volume-based
incentives. Advertising, as well as certain consumer engagement and trade activities costs, are expensed as incurred. Trade promotions
are recorded as a reduction of revenues based on amounts estimated as being due to customers at the end of a period, based principally
on historical utilization. For interim reporting purposes, advertising and certain consumer engagement expenses are charged to earnings
based on estimated sales and related expenses for the full year.
Revenue recognition
PMI recognizes revenues, net of sales incentives and including shipping and handling charges billed to customers, either upon shipment
or delivery of goods when title and risk of loss pass to customers. Excise taxes billed by PMI to customers are reported in net revenues.
Shipping and handling costs are classified as part of cost of sales. Estimated costs associated with warranty programs are generally
provided for in cost of sales in the period the related revenues are recognized.
On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU 2014-09, "Revenue from Contracts
with Customers." For further details, see Note 21. New Accounting Standards.
Stock-based compensation
PMI measures compensation cost for all stock-based awards at fair value on date of grant and recognizes the compensation costs over
the service periods for awards expected to vest. PMI’s accounting policy is to estimate the number of awards expected to be forfeited
and adjust the expense when it is no longer probable that the employee will fulfill the service condition. For further details, see Note 9.
Stock Plans.
Note 3.
Goodwill and Other Intangible Assets, net:
Goodwill and other intangible assets, net, by segment were as follows:
(in millions)
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total
Goodwill
December 31,
2017
December 31,
2016
Other Intangible Assets, net
December 31,
December 31,
2016
2017
$
1,419
$
1,238
$
458
$
423
3,577
2,247
372
3,596
2,118
194
1,048
732
$
7,666
$
7,324
$
2,432
$
479
200
1,074
717
2,470
78
Goodwill primarily reflects PMI’s acquisitions in Canada, Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the
business combination in the Philippines.
The movements in goodwill were as follows:
(in millions)
Eastern
Europe,
Middle East
&
Africa
European
Union
Latin
America
&
Canada
Total
Asia
Balance at January 1, 2016
$
1,310
$
374
$ 3,581
$
2,150
$ 7,415
Changes due to:
Currency
Balance at December 31, 2016
Changes due to:
Currency
(72)
1,238
181
Balance at December 31, 2017
$
1,419
$
(2)
372
15
3,596
(32)
2,118
(91)
7,324
51
423
(19)
$ 3,577
129
342
$
2,247
$ 7,666
Additional details of other intangible assets were as follows:
(in millions)
Non-amortizable intangible assets
Amortizable intangible assets
Total other intangible assets
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
$
$
1,323
1,798
3,121
$
$
$
1,455
689
1,598
689
$
3,053
$
$
583
583
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007.
Amortizable intangible assets primarily consist of certain trademarks and distribution networks associated with business combinations.
During the first quarter of 2017, PMI reclassified three trademarks with a gross carrying amount of $153 million from non-amortizable
intangible assets to amortizable intangible assets. The gross carrying amount, the range of useful lives as well as the weighted-average
remaining useful life of amortizable intangible assets at December 31, 2017, were as follows:
Description
(dollars in millions)
Trademarks
Distribution networks
Other (including farmer contracts and intellectual
property rights)
Gross
Carrying
Amount
Initial
Estimated
Useful Lives
Weighted-Average
Remaining Useful Life
$
$
1,559
2 - 40 years
5 - 30 years
4 - 17 years
152
87
1,798
19 years
9 years
9 years
Pre-tax amortization expense for intangible assets during the years ended December 31, 2017, 2016 and 2015, was $88 million, $74
million and $82 million, respectively. Amortization expense for each of the next five years is estimated to be $84 million or less, assuming
no additional transactions occur that require the amortization of intangible assets.
The increase in the gross carrying amount of other intangible assets from December 31, 2016, was primarily due to currency movements.
During the second quarter of 2017, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential
impairment, and no impairment charges were required as a result of this review. Additionally, PMI elected to early adopt Accounting
79
Standards Update ASU 2017-04 “Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment,” which
had no impact on PMI's impairment review or conclusion.
Note 4.
Investments in Unconsolidated Subsidiaries:
At December 31, 2017 and 2016, PMI had total investments in unconsolidated subsidiaries of $1,074 million and $1,011 million,
respectively, which were accounted for under the equity method of accounting. Equity method investments are initially recorded at cost.
Under the equity method of accounting, the investment is adjusted for PMI's proportionate share of earnings or losses and movements
in currency translation adjustments. The carrying value of our equity method investments at December 31, 2017 and 2016 exceeded our
share of the unconsolidated subsidiaries' book value by $927 million and $867 million, respectively. The difference between the investment
carrying value and the amount of underlying equity in net assets, excluding $873 million and $810 million attributable to goodwill as of
December 31, 2017 and 2016, respectively, is being amortized on a straight-line basis over the underlying assets' estimated useful lives
of 10 to 20 years. At December 31, 2017 and 2016, PMI received year-to-date dividends from unconsolidated subsidiaries of $120 million
and $117 million, respectively.
PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25%
economic interest in Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by
the Algerian state-owned enterprise Société Nationale des Tabacs et Allumettes SpA. STAEM manufactures and distributes under license
some of PMI’s brands.
PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in Russia.
The initial investments in EITA and Megapolis Distribution BV were recorded at cost and are included in investments in unconsolidated
subsidiaries on the consolidated balance sheets.
PMI’s earnings activity from unconsolidated subsidiaries was as follows:
(in millions)
Net revenues
For the Years Ended December 31,
2017
2016
$
4,425 $
3,985
PMI’s balance sheet activity related to unconsolidated subsidiaries was as follows:
(in millions)
Receivables
At December 31,
2017
2016
$
293 $
289
The activity primarily related to agreements with PMI’s unconsolidated subsidiaries within the Eastern Europe, Middle East & Africa
segment. These agreements, which are in the ordinary course of business, are primarily for distribution, contract manufacturing and
licenses. PMI eliminated its respective share of all significant intercompany transactions with the equity method investees.
Note 5.
Product Warranty:
PMI's IQOS devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such
other periods as required by law. Estimated costs associated with warranty programs are generally provided for in cost of sales in the
period the related revenue is recognized, and during 2017, PMI recorded $168 million associated with these product warranty programs.
PMI assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes
in future estimates. Factors that affect warranty obligations may vary across markets but typically include product failure rates, logistics
and service delivery costs, and warranty policies. At December 31, 2017, $71 million was accrued related to these warranty obligations
within other accrued liabilities.
80
Note 6.
Acquisitions and Other Business Arrangements:
As announced in June 2015, PMI’s subsidiary PT HM Sampoerna Tbk. (“Sampoerna”), of which PMI held a 98.18% interest, was required
to comply with the January 30, 2014, Indonesian Stock Exchange (“IDX”) regulation requiring all listed public companies to have at
least a 7.5% public shareholding by January 30, 2016. In order to comply with this requirement, Sampoerna conducted a rights issue
(the “Rights Issue”). The exercise price for the rights was set at Rp. 77,000 per share, a 1.349% premium to the closing price on the IDX
as of September 30, 2015. In connection with the Rights Issue, PT Philip Morris Indonesia (“PMID”), a fully consolidated subsidiary
of PMI, sold 264,209,711 of the rights to third-party investors. Delivery of the rights sold took place on October 26, 2015. The total net
proceeds from the Rights Issue were $1.5 billion at prevailing exchange rates on the closing date. The sale of the rights resulted in an
increase to PMI's additional paid-in capital of $1.1 billion.
Note 7.
Indebtedness:
Short-Term Borrowings
At December 31, 2017 and 2016, PMI’s short-term borrowings and related average interest rates consisted of the following:
December 31, 2017
December 31, 2016
(in millions)
Commercial paper
Bank loans
Amount
Outstanding
Average Year-
End Rate
Amount
Outstanding
Average Year-
End Rate
$
$
—
499
499
—% $
5.7
$
—
643
643
—%
5.0
Given the mix of subsidiaries and their respective local economic environments, the average interest rate for bank loans above can vary
significantly from day to day and country to country.
The fair values of PMI’s short-term borrowings at December 31, 2017 and 2016, based upon current market interest rates, approximate
the amounts disclosed above.
Long-Term Debt
At December 31, 2017 and 2016, PMI’s long-term debt consisted of the following:
(in millions)
U.S. dollar notes, 1.375% to 6.375% (average interest rate 3.560%), due through 2044
Foreign currency obligations:
Euro notes, 0.625% to 3.125% (average interest rate 2.250%), due through 2037
Swiss franc notes, 0.750% to 2.000% (average interest rate 1.269%), due through 2024
Other (average interest rate 3.421%), due through 2024
Less current portion of long-term debt
December 31,
2017
2016
$
23,291
$
19,857
8,997
1,376
176
33,840
2,506
6,828
1,312
427
28,424
2,573
$
31,334
$
25,851
81
Other debt:
Other foreign currency debt above includes mortgage debt in Switzerland and capital lease obligations at December 31, 2017 and
December 31, 2016. Other foreign currency debt above also includes a bank loan in the Philippines at December 31, 2016.
Debt Issuances Outstanding:
PMI’s debt issuances outstanding at December 31, 2017, were as follows:
Face Value
$2,500
$750
$700
$500
$750
$300
$1,000
$1,000
$750
$350
$750
$500
$750
$750
$750
$600
$500
$500
$750
$750
$750
$500
$500
$1,500
$750
$700
$750
$850
$750
$750
$500
(in millions)
Type
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
(a)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
Issuance
Interest
Rate
5.650%
1.875% November 2013
1.625%
February 2017
May 2008
1.375%
February 2016
1.875% November 2017
Floating
February 2017
Maturity
May 2018
January 2019
February 2019
February 2019
November 2019
February 2020
2.000%
4.500%
1.875%
February 2017
February 2020
March 2010
March 2020
February 2016
February 2021
May 2011
4.125%
2.900% November 2011
2.625%
February 2017
2.375%
August 2017
August 2012
2.500%
2.500% November 2017
2.625%
March 2013
May 2016
2.125%
3.600% November 2013
3.250% November 2014
3.375%
August 2015
May 2021
November 2021
February 2022
August 2022
August 2022
November 2022
March 2023
May 2023
November 2023
November 2024
August 2025
2.750%
February 2016
February 2026
August 2017
3.125%
3.125% November 2017
6.375%
4.375% November 2011
4.500%
March 2012
May 2008
3.875%
August 2012
March 2013
4.125%
4.875% November 2013
4.250% November 2014
4.250%
May 2016
August 2027
March 2028
May 2038
November 2041
March 2042
August 2042
March 2043
November 2043
November 2044
November 2044
May 2019
March 2020
March 2021
May 2024
November 2024
March 2025
March 2026
May 2029
€750 (approximately $951)
€1,250 (approximately $1,621)
€750 (approximately $1,029)
2.125%
1.750%
1.875%
May 2012
March 2013
March 2014
€600 (approximately $761)
€500 (approximately $582)
€750 (approximately $972)
May 2012
2.875%
0.625% November 2017
2.750%
March 2013
€1,000 (approximately $1,372)
€500 (approximately $697)
2.875%
2.875%
March 2014
May 2014
82
(in millions)
Type
EURO notes
EURO notes
EURO notes
Swiss franc notes
Swiss franc notes
Swiss franc notes
Swiss franc notes
Swiss franc notes
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
Face Value
€500 (approximately $648)
€500 (approximately $578)
€500 (approximately $582)
CHF200 (approximately $217)
CHF275 (approximately $311)
CHF325 (approximately $334)
CHF300 (approximately $335)
CHF250 (approximately $283)
Interest
Rate
3.125%
Issuance
June 2013
May 2016
2.000%
1.875% November 2017
0.875%
March 2013
May 2014
0.750%
1.000% September 2012
2.000% December 2011
1.625%
May 2014
Maturity
June 2033
May 2036
November 2037
March 2019
December 2019
September 2020
December 2021
May 2024
(a) These notes are a further issuance of the 4.250% notes issued by PMI in November 2014.
(b) USD equivalents for foreign currency notes were calculated based on exchange rates on the date of issuance.
The net proceeds from the sale of the securities listed in the table above were used for general corporate purposes, including working
capital requirements and repurchase of PMI's common stock until 2015.
Aggregate maturities:
Aggregate maturities of long-term debt are as follows:
(in millions)
2018
2019
2020
2021
2022
2023-2027
2028-2032
Thereafter
Debt discounts
Total long-term debt
$
2,506
4,091
4,130
3,056
2,755
8,144
1,097
8,341
34,120
(280)
$
33,840
See Note 16. Fair Value Measurements for additional disclosures related to the fair value of PMI’s debt.
Credit Facilities
On January 27, 2017, PMI entered into an agreement to extend the term of its $2.0 billion 364-day revolving credit facility from February
7, 2017 to February 6, 2018. On August 29, 2017, PMI entered into an agreement, effective October 1, 2017, to extend the term of its
$3.5 billion multi-year revolving credit facility, for an additional year covering the period October 1, 2021 to October 1, 2022.
83
At December 31, 2017, PMI’s total committed credit facilities and commercial paper outstanding were as follows:
Type
(in billions of dollars)
364-day revolving credit, expiring February 6, 2018
Multi-year revolving credit, expiring February 28, 2021
Multi-year revolving credit, expiring October 1, 2022
Total facilities
Commercial paper outstanding
Committed
Credit
Facilities
Commercial
Paper
$
$
2.0
2.5
3.5
8.0
$
—
At December 31, 2017, there were no borrowings under these committed credit facilities, and the entire committed amounts were available
for borrowing.
On January 29, 2018, PMI entered into an agreement to extend the term of its $2.0 billion 364-day revolving credit facility from February
6, 2018, to February 5, 2019.
Each of these facilities requires PMI to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization
(“consolidated EBITDA”) to consolidated interest expense of not less than 3.5 to 1.0 on a rolling four-quarter basis. At December 31,
2017, PMI’s ratio calculated in accordance with the agreements was 10.6 to 1.0. These facilities do not include any credit rating triggers,
material adverse change clauses or any provisions that could require PMI to post collateral. The terms “consolidated EBITDA” and
“consolidated interest expense,” both of which include certain adjustments, are defined in the facility agreements previously filed with
the Securities and Exchange Commission.
In addition to the committed credit facilities discussed above, certain subsidiaries maintain short-term credit arrangements to meet their
respective working capital needs. These credit arrangements, which amounted to approximately $2.8 billion at December 31, 2017 and
$2.9 billion at December 31, 2016, are for the sole use of the subsidiaries. Borrowings under these arrangements amounted to $499
million at December 31, 2017, and $643 million at December 31, 2016.
Note 8.
Capital Stock:
Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares were as follows:
Balances, January 1, 2015
Issuance of stock awards
Balances, December 31, 2015
Issuance of stock awards
Balances, December 31, 2016
Issuance of stock awards
Shares Issued
Shares
Repurchased
Shares
Outstanding
2,109,316,331
(562,416,635)
1,546,899,696
2,444,373
2,444,373
2,109,316,331
(559,972,262)
1,549,344,069
2,041,478
2,041,478
2,109,316,331
(557,930,784)
1,551,385,547
1,832,215
1,832,215
Balances, December 31, 2017
2,109,316,331
(556,098,569)
1,553,217,762
At December 31, 2017, 31,246,310 shares of common stock were reserved for stock awards under PMI’s stock plans, and 250 million
shares of preferred stock, without par value, were authorized but unissued. PMI currently has no plans to issue any shares of preferred
stock.
84
Note 9.
Stock Plans:
In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). The
2017 Plan replaced the 2012 Performance Incentive Plan, and there will be no additional grants under the replaced plan. Under the 2017
Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and
performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2017 Plan. At December 31,
2017, shares available for grant under the 2017 Plan were 24,991,850.
In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee
Directors (the “2017 Non-Employee Directors Plan”). The 2017 Non-Employee Directors Plan replaced the 2008 Stock Compensation
Plan for Non-Employee Directors, and there will be no additional grants under the replaced plan. A non-employee director is defined as
a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or
indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of
directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors
Plan. As of December 31, 2017, shares available for grant under the plan were 1,000,000.
Restricted share unit (RSU) awards
PMI may grant RSU awards to eligible employees; recipients may not sell, assign, pledge or otherwise encumber such awards. Such
awards are subject to forfeiture if certain employment conditions are not met. RSU awards generally vest on the third anniversary of the
grant date. RSU awards do not carry voting rights, although they do earn dividend equivalents.
During 2017, the activity for RSU awards was as follows:
Balance at January 1, 2017
Granted
Vested
Forfeited
Balance at December 31, 2017
Number of
Shares
Weighted-
Average Grant
Date Fair Value
Per Share
4,500,990 $
1,210,210
(2,022,856)
(75,944)
3,612,400 $
82.08
98.59
78.19
88.82
89.65
During the years ended December 31, 2017, 2016 and 2015, the weighted-average grant date fair value of the RSU awards granted to
PMI employees and the recorded compensation expense related to RSU awards were as follows:
(in millions, except per RSU
award granted)
2017
2016
2015
Total Weighted-
Average Grant
Date Fair Value of
RSU Awards
Granted
Weighted-
Average Grant
Date Fair Value
Per RSU Award
Granted
Compensation
Expense related
to RSU Awards
$
$
$
119
108
126
$
$
$
98.59 $
89.03 $
82.28 $
111
126
166
The fair value of the RSU awards at the date of grant is amortized to expense over the restriction period, typically three years after the
date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2017, PMI had $108 million of total unrecognized
compensation costs related to non-vested RSU awards. These costs are expected to be recognized over a weighted-average period of two
years, or upon death, disability or reaching the age of 58.
85
During the years ended December 31, 2017, 2016 and 2015, share and fair value information for PMI RSU awards that vested were as
follows:
(dollars in millions)
Shares of RSU
Awards that Vested
Grant Date Fair
Value of Vested
Shares of RSU
Awards
Total Fair Value
of RSU Awards
that Vested
2017
2016
2015
2,022,856
2,302,525
2,711,974
$
$
$
158 $
202 $
217 $
208
210
224
Performance share unit (PSU) awards
PMI may grant PSU awards to certain executives; recipients may not sell, assign, pledge or otherwise encumber such awards. The PSU
awards require the achievement of certain performance factors, which are predetermined at the time of grant, over a three-year performance
cycle. PMI’s performance metrics consist of PMI’s Total Shareholder Return (TSR) relative to a predetermined peer group and on an
absolute basis, PMI’s currency-neutral compound annual adjusted operating companies income growth rate, excluding acquisitions, and
PMI’s performance against specific measures of PMI's innovation and transformation. The aggregate of the weighted performance factors
for the three metrics determines the percentage of PSUs that will vest at the end of the three-year performance cycle. The minimum
percentage of PSUs that can vest is zero, with a target percentage of 100 and a maximum percentage of 200. Each vested PSU entitles
the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 will result in the targeted number
of PSUs being vested. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends
paid on common stock during the performance cycle for the number of shares earned. PSU awards do not carry voting rights.
During 2017, the activity for PSU awards was as follows:
Balance at January 1, 2017
Granted
Vested
Forfeited
Balance at December 31, 2017
Grant Date
Fair Value
Subject to TSR
Performance
Factor
Per Share(a)
Grant Date
Fair Value
Subject to Other
Performance
Factors
Per Share(b)
Number of
Shares
427,570
$
393,460
—
—
104.60 $
128.72
—
—
821,030
$
116.16 $
89.02
98.29
—
—
93.46
(a) The grant date fair value of the PSU market based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation
model.
(b) The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market
price of PMI’s stock at the date of grant.
During the years ended December 31, 2017 and 2016, the grant date fair value of the PSU awards granted to PMI employees and the
recorded compensation expense related to PSU awards were as follows:
(in millions, except per PSU award
granted)
2017
2016
PSU Grant Date Fair Value
Subject to TSR
Performance Factor(a)
Per PSU
Award
Total
PSU Grant Date Fair Value
Subject to Other
Performance Factors(b)
Per PSU
Award
Total
Compensation
Expense related
to PSU Awards
Total
$
$
25 $
22 $
128.72
104.60
$
$
19 $
19 $
98.29
89.02
$
$
37
27
(a) The grant date fair value of the PSU market based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation
model.
(b) The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market
price of PMI’s stock at the date of grant.
86
The fair value of the PSU award at the date of grant is amortized to expense over the performance period, which is typically three years
after the date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2017, PMI had $34 million of total
unrecognized compensation cost related to non-vested PSU awards. This cost is recognized over a weighted-average performance cycle
period of two years, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2017, and 2016, there were no PSU awards that vested. PMI did not grant any PSU awards during
2015.
Note 10.
Earnings per Share:
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities
and therefore are included in PMI’s earnings per share calculation pursuant to the two-class method.
Basic and diluted earnings per share (“EPS”) were calculated using the following:
(in millions)
Net earnings attributable to PMI
Less distributed and undistributed earnings attributable to share-based payment awards
Net earnings for basic and diluted EPS
Weighted-average shares for basic EPS
Plus contingently issuable performance stock units (PSUs)
Weighted-average shares for diluted EPS
For the 2017, 2016 and 2015 computations, there were no antidilutive stock options.
For the Years Ended December 31,
2017
2016
2015
$
$
6,035
$
6,967
$
6,873
14
19
24
6,021
$
6,948
$
6,849
1,552
1
1,553
1,551
—
1,551
1,549
—
1,549
87
Note 11.
Income Taxes:
Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2017, 2016
and 2015:
(in millions)
Earnings before income taxes
Provision for income taxes:
United States federal and state:
Current
Deferred
Total United States
Outside United States:
Current
Deferred
Total outside United States
Total provision for income taxes
$
$
2017
2016
2015
10,589
$
9,924
$
9,615
$
1,662
(384)
1,278
3,146
(117)
3,029
(39) $
293
254
2,625
(111)
2,514
(56)
117
61
2,762
(135)
2,627
$
4,307
$
2,768
$
2,688
United States income tax is primarily attributable to repatriation costs.
In December 2017, the Tax Cuts and Jobs Act was signed into law. The principal elements of the Tax Cuts and Jobs Act relevant to PMI’s
consolidated financial statements for the year ended December 31, 2017, were:
• A reduction of the U.S. federal corporate tax rate from 35% to 21%; and
• The requirement to pay a one-time transition tax on accumulated foreign earnings, including 2017 earnings ("transition tax").
In connection with these elements of the Tax Cuts and Jobs Act, PMI recognized a provisional expense of $1.6 billion, which was included
as a component of income tax expense as follows:
• A provisional charge of $1.4 billion, which represents the transition tax of $2.2 billion, net of a reversal of $0.7 billion of
previously recorded deferred tax liabilities on part of the accumulated foreign earnings, and other items of $0.1 billion.
• Re-measurement of U.S. deferred tax assets and liabilities using a rate of 21%, which, under the Tax Cuts and Jobs Act, is
expected to be in place when such deferred assets and liabilities reverse in the future. In connection with this re-measurement,
PMI recorded a provisional charge of $0.2 billion.
Other provisions of the Tax Cuts and Jobs Act did not have a significant impact on PMI’s consolidated financial statements for the year
ended December 31, 2017, but may impact the effective tax rate in subsequent periods.
The Tax Cuts and Jobs Act has significant complexity and our final tax liability may materially differ from these estimates, due to, among
other things, changes in PMI's assumptions, guidance that may be issued by the U.S. Treasury Department and the Internal Revenue
Service and related interpretations and clarifications of tax law. For the transition tax, further information is required to finalize the
estimated amount of accumulated foreign earnings as well as to validate the amount of earnings represented by the aggregate foreign
cash position as defined in the Tax Cuts and Jobs Act. For the re-measurement of the deferred tax assets and liabilities, further analysis
will be required to refine PMI's calculations and related account balances.
PMI will complete the remaining elements of its analysis during 2018, and any adjustments to the provisional charges will be included
in income tax expense or benefit in the appropriate period, in accordance with guidance provided by Staff Accounting Bulletin No. 118
(SAB 118).
At December 31, 2017, U.S. federal and foreign deferred income taxes have been provisionally provided on all accumulated earnings of
PMI's foreign subsidiaries.
88
At December 31, 2017, PMI recorded an income tax payable of $1.7 billion attributable to the Tax Cuts and Jobs Act, of which $1.6
billion was recorded in "income taxes and other liabilities" on PMI's consolidated balance sheet. The income tax payable of $1.7 billion
represented the transition tax of $2.2 billion, partially offset by foreign tax credits related to foreign withholding taxes previously paid
of $0.5 billion. The income tax payable is due over an 8-year period beginning in 2018.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
(in millions)
Balance at January 1,
Additions based on tax positions related to the current year
Additions for tax positions of previous years
Reductions for tax positions of prior years
Reductions due to lapse of statute of limitations
Settlements
Other
Balance at December 31,
2017
2016
2015
$
$
79
71
5
—
(7)
(4)
1
$
145
$
88
13
1
(7)
(14)
(2)
—
79
$
$
123
17
6
(42)
(7)
(1)
(8)
88
Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:
(in millions)
Unrecognized tax benefits
Accrued interest and penalties
Tax credits and other indirect benefits
Liability for tax contingencies
December 31, 2017 December 31, 2016 December 31, 2015
$
$
145
$
23
(35)
133
$
79
15
(31)
63
$
$
88
28
(40)
76
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $110 million at December 31, 2017.
The remainder, if recognized, would principally affect deferred taxes.
For the years ended December 31, 2017, 2016 and 2015, PMI recognized income (expense) in its consolidated statements of earnings of
$(11) million, $13 million and $3 million, respectively, related to interest and penalties.
PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S.
federal statute of limitations remains open for the years 2013 and onward. Foreign and U.S. state jurisdictions have statutes of limitations
generally ranging from three to five years. Years still open to examination by foreign tax authorities in major jurisdictions include
Germany (2015 onward), Indonesia (2014 onward), Russia (2015 onward) and Switzerland (2017 onward).
It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized
tax benefits, along with related interest and penalties. An estimate of any possible change cannot be made at this time.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years
ended December 31, 2017, 2016 and 2015:
U.S. federal statutory rate
Increase (decrease) resulting from:
Foreign rate differences
Dividend repatriation cost
Other
Effective tax rate
2017
2016
2015
35.0%
35.0%
35.0%
(12.2)
16.4
1.5
40.7%
(12.6)
5.8
(0.3)
27.9%
(12.3)
5.7
(0.4)
28.0%
89
The 2017 effective tax rate increased 12.8 percentage points to 40.7%. The change in the effective tax rate for 2017, as compared to
2016, was primarily due to the Tax Cuts and Jobs Act. In addition to the transition tax, which resulted in a net tax charge of $1.4 billion,
the Tax Cuts and Jobs Act also included a reduction in the U.S. income tax rate from 35% to 21%, as of January 1, 2018. This change
in income tax rate required a re-measurement of PMI's U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax
charge of $0.2 billion.
The 2016 effective tax rate decreased 0.1 percentage point to 27.9%. The change in the effective tax rate for 2016, as compared to 2015,
was primarily due to earnings mix by taxing jurisdiction and repatriation cost differences.
The 2015 effective tax rate decreased 1.1 percentage points to 28.0%. The effective tax rate for 2015 was unfavorably impacted by
changes to repatriation assertions on certain foreign subsidiary historical earnings ($58 million), partially offset by the recognition of tax
benefits of $41 million following the conclusion of the IRS examinations of Altria's consolidated tax returns for the years 2007 and 2008
and PMI's consolidated tax returns for the years 2009 through 2011. Prior to March 28, 2008, PMI was a wholly-owned subsidiary of
Altria. Excluding the effect of these items, the change in the effective tax rate for 2015, as compared to 2014, was primarily due to
earnings mix by taxing jurisdiction and repatriation cost differences.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment benefits
Accrued pension costs
Inventory
Accrued liabilities
Foreign exchange
Other
Total deferred income tax assets
Deferred income tax liabilities:
Trade names
Property, plant and equipment
Unremitted earnings
Foreign exchange
Total deferred income tax liabilities
Net deferred income tax assets (liabilities)
At December 31,
2017
2016
$
$
$
239
334
131
117
91
114
287
256
241
137
—
173
1,026
1,094
(546)
(223)
(49)
—
(818)
208
$
(554)
(217)
(636)
(725)
(2,132)
(1,038)
Note 12.
Segment Reporting:
PMI’s subsidiaries and affiliates are engaged in the manufacture and sale of cigarettes and other nicotine-containing products, including
RRPs, in markets outside of the United States of America. Reportable segments for PMI are organized by geographic region and managed
by segment managers who are responsible for the operating and financial results of the regions inclusive of all product categories sold
in the region. PMI’s reportable segments are the European Union; Eastern Europe, Middle East & Africa; Asia; and Latin America &
Canada for all periods presented in these financial statements. PMI records net revenues and operating companies income to its segments
based upon the geographic area in which the customer resides.
PMI’s chief operating decision maker evaluates segment performance and allocates resources based on regional operating companies
income, which includes results from all product categories sold in each region. PMI defines operating companies income as operating
income, excluding general corporate expenses and amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries,
net. General corporate expenses include amounts relating to central functions that provide strategic direction and support for activities
including new product and market launches across the product portfolio. Interest expense, net, and provision for income taxes are centrally
managed and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability
90
reviewed by management. Information about total assets by segment is not disclosed because such information is not reported to or used
by PMI’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 3. Goodwill and Other
Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant
Accounting Policies.
Segment data were as follows:
(in millions)
Net revenues:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Net revenues(1)
For the Years Ended December 31,
2017
2016
2015
$
27,580
$
27,129
$
18,045
22,635
9,838
18,286
20,531
9,007
$
78,098
$
74,953
$
26,563
18,328
19,469
9,548
73,908
(1) Total net revenues attributable to customers located in Indonesia, PMI’s largest market in terms of net revenues, were $8.0 billion, $7.7 billion
and $7.1 billion for the years ended December 31, 2017, 2016 and 2015, respectively. Total net revenues attributable to customers located in
Germany were $7.2 billion, $7.1 billion and $7.2 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
(in millions)
Earnings before income taxes:
Operating companies income:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Amortization of intangibles
General corporate expenses
Less:
Equity (income)/loss in unconsolidated subsidiaries, net
Operating income
Interest expense, net
Earnings before income taxes
(in millions)
Depreciation expense:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Other
Total depreciation expense
For the Years Ended December 31,
2017
2016
2015
$
3,775
$
3,994
$
2,888
4,149
1,002
(88)
(164)
3,016
3,196
938
(74)
(161)
(59)
11,503
(914)
10,589
$
(94)
10,815
(891)
9,924
$
3,576
3,425
2,886
1,085
(82)
(162)
(105)
10,623
(1,008)
9,615
For the Years Ended December 31,
2017
2016
2015
$
213
164
313
85
775
12
$
184
150
247
79
660
9
184
163
230
85
662
10
672
$
$
$
787
$
669
$
91
(in millions)
Capital expenditures:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Other
Total capital expenditures
(in millions)
Long-lived assets:
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total long-lived assets
Other
For the Years Ended December 31,
2017
2016
2015
$
$
956
182
227
175
1,540
8
$
665
223
180
103
1,171
1
$
1,548
$
1,172
$
497
147
185
130
959
1
960
At December 31,
2017
2016
2015
$
4,130
$
3,282
$
976
2,078
885
8,069
1,126
866
1,916
765
6,829
750
3,129
743
1,743
605
6,220
644
6,864
Total property, plant and equipment, net and Other assets
$
9,195
$
7,579
$
Long-lived assets consist of non-current assets other than goodwill; other intangible assets, net; deferred tax assets, investments in
unconsolidated subsidiaries, and financial instruments. PMI's largest markets in terms of long-lived assets are Italy, Switzerland and
Indonesia. Total long-lived assets located in Italy, which is reflected in the European Union segment above, were $1.2 billion, $0.7 billion
and $0.4 billion at December 31, 2017, 2016 and 2015, respectively. Total long-lived assets located in Switzerland, which is reflected
in the European Union segment above, were $0.9 billion, $0.9 billion and $0.9 billion at December 31, 2017, 2016 and 2015, respectively.
Total long-lived assets located in Indonesia, which is reflected in the Asia segment above, were $0.8 billion, $0.8 billion and $0.7 billion
at December 31, 2017, 2016 and 2015, respectively.
Note 13.
Benefit Plans:
Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of
which are plans outside of the U.S., which are governed by local statutory requirements, and to a lesser extent U.S. plans that are closed
to new participants. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-
U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.
92
Pension and Postretirement Benefit Plans
Obligations and Funded Status
The postretirement health care plans are not funded. The projected benefit obligations, plan assets and funded status of PMI’s pension
plans, and the accumulated benefit obligation and net amount accrued for PMI's postretirement health care plans, at December 31, 2017
and 2016, were as follows:
(in millions)
Benefit obligation at January 1,
Service cost
Interest cost
Benefits paid
Settlement and curtailment
Actuarial losses (gains)
Currency
Other
Benefit obligation at December 31,
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Settlement and curtailment
Currency
Fair value of plan assets at December 31,
Net pension and postretirement liability recognized at
December 31,
(1) Primarily non-U.S. based defined benefit retirement plans.
Pension(1)
Postretirement
2017
2016
2017
2016
211
3
9
(10)
—
15
(2)
1
227
$
8,387
$
8,086
$
227
$
4
8
(10)
—
12
7
—
248
208
108
(226)
—
(93)
621
23
9,028
6,457
742
66
40
(226)
—
519
7,598
207
146
(240)
(1)
427
(329)
91
8,387
6,404
322
191
39
(240)
—
(259)
6,457
$
(1,430) $
(1,930) $
(248) $
(227)
At December 31, 2017 and 2016, the Swiss pension plan represented 57% and 57% of the benefit obligation, respectively, and
approximately 57% of the fair value of plan assets for each of the years. At December 31, 2017 and 2016, the U.S. pension plan represented
5% and 5% of the benefit obligation, respectively, and approximately 4% and 5% of the fair value of plan assets at December 31, 2017
and 2016, respectively.
At December 31, 2017 and 2016, the amounts recognized on PMI's consolidated balance sheets for the pension and postretirement plans
were as follows:
(in millions)
Other assets
Accrued liabilities — employment costs
Long-term employment costs
Pension
Postretirement
2017
2016
2017
2016
$
$
$
47
(26)
33
(23) $
(10) $
(10)
(1,451)
(1,430) $
(1,940)
(1,930) $
(238)
(248) $
(217)
(227)
The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8,496 million and $7,931 million
at December 31, 2017 and 2016, respectively.
93
For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit
obligation and fair value of plan assets were $7,287 million, $6,953 million and $5,835 million, respectively, as of December 31, 2017.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $6,934 million, $6,622 million and
$5,009 million, respectively, as of December 31, 2016.
The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at
December 31:
Discount rate
Rate of compensation increase
Health care cost trend rate assumed for next year
Ultimate trend rate
Year that rate reaches the ultimate trend rate
Pension
Postretirement
2017
2016
2017
2016
1.51%
1.52%
3.79%
3.68%
1.65
1.68
6.17
4.62
2029
7.15
5.08
2029
The discount rate for the largest pension plans is based on a yield curve constructed from a portfolio of high quality corporate bonds that
produces a cash flow pattern equivalent to each plan’s expected benefit payments. The discount rate for the remaining plans is developed
from local bond indices that match local benefit obligations as closely as possible.
Components of Net Periodic Benefit Cost
Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2017, 2016 and
2015:
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization:
Net losses
Prior service cost
Settlement and curtailment
Pension
Postretirement
2017
2016
2015
2017
2016
2015
$
208
$
207
$
205
$
108
146
156
(326)
(346)
(340)
186
186
194
6
6
4
4
4
3
$
4
8
—
5
—
—
$
3
9
—
2
—
—
Net periodic pension and postretirement costs
$
188
$
201
$
222
$
17
$
14
$
4
9
—
4
—
—
17
As of December 31, 2016, PMI elected to change the method used to calculate the service and interest cost components of the net periodic
pension benefit costs. Historically, these costs were determined utilizing a single weighted-average discount rate based on a yield curve
used to measure the benefit obligation at the beginning of the period. As of January 1, 2017, PMI utilized a full yield curve approach in
the estimation of the service and interest costs by applying the specific spot rates along the yield curve to the relevant projected cash
flows. Specifically, service costs were determined based on duration-specific spot rates applied to service cost cash flows, and interest
costs were determined by applying duration-specific spot rates to the year-by-year projected benefit payments. PMI changed to the new
method to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit
cash flows to the corresponding spot rates along the yield curve. PMI accounted for this change as a change in accounting estimate on
a prospective basis. This change did not affect the measurement of PMI’s pension plan obligations and did not have a material impact
on PMI’s consolidated results of operations, financial position or cash flows.
Settlement and curtailment charges were due primarily to early retirement programs.
94
For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive
earnings into net periodic benefit cost during 2018 are $171 million and $2 million, respectively.
The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:
2017
Pension
2016
2015
2017
Postretirement
2016
2015
Discount rate - service cost
1.68%
1.81%
2.04%
3.68%
4.45%
4.20%
Discount rate - interest cost
Expected rate of return on plan assets
Rate of compensation increase
Health care cost trend rate
1.27
4.80
1.68
1.81
5.36
2.03
2.04
5.38
2.12
3.68
4.45
4.20
7.15
6.23
6.62
PMI’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current
asset allocation and estimates of future long-term returns by asset class.
PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled
$58 million, $56 million and $52 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Plan Assets
PMI’s investment strategy for pension plans is based on an expectation that equity securities will outperform debt securities over the long
term. Accordingly, the target allocation of PMI’s plan assets is broadly characterized as approximately a 60%/40% split between equity
and debt securities. The strategy primarily utilizes indexed U.S. equity securities, international equity securities and investment-grade
debt securities. PMI’s plans have no investments in hedge funds, private equity or derivatives. PMI attempts to mitigate investment risk
by rebalancing between equity and debt asset classes once a year or as PMI’s contributions and benefit payments are made.
The fair value of PMI’s pension plan assets at December 31, 2017 and 2016, by asset category was as follows:
Asset Category
(in millions)
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At
December 31,
2017
Cash and cash equivalents
$
17
$
Equity securities:
U.S. securities
International securities
Investment funds(a)
International government bonds
Corporate bonds
Other
Total assets in the fair value hierarchy
Investment funds measured at net
asset value(b)
Total assets
$
$
146
518
6,219
119
247
22
17
146
518
4,191
$
2,028
119
247
22
7,288
$
5,260
$
2,028
$
—
310
7,598
(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe,
Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds),
primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60% are invested in U.S. and international equities;
20% are invested in U.S. and international government bonds; 10% are invested in real estate and other money markets, and 10% are invested in
corporate bonds.
95
(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient
have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair
value hierarchy to the amounts presented in the statement of financial position.
Asset Category
(in millions)
Cash and cash equivalents
Equity securities:
U.S. securities
International securities
Investment funds(a)
International government bonds
Other
Total assets in the fair value hierarchy
Investment funds measured at net
asset value(b)
Total assets
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At
December 31,
2016
$
$
$
8
$
131
432
5,270
309
10
8
131
432
3,530
$
1,740
309
10
6,160
$
4,420
$
1,740
$
—
297
6,457
(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe,
Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds),
primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60% were invested in U.S. and international equities;
19% were invested in U.S. and international government bonds; 11% were invested in real estate and other money markets, and 10% were invested
in corporate bonds.
(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient
have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair
value hierarchy to the amounts presented in the statement of financial position.
See Note 16. Fair Value Measurements for a discussion of the fair value of pension plan assets.
PMI makes, and plans to make, contributions to the extent that they are tax deductible and to meet specific funding requirements of its
funded pension plans. Currently, PMI anticipates making contributions of approximately $53 million in 2018 to its pension plans, based
on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well
as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and
currency rates.
The estimated future benefit payments from PMI pension plans at December 31, 2017, are as follows:
(in millions)
2018
2019
2020
2021
2022
2023 - 2027
$
295
290
309
318
330
1,879
PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2027.
96
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point
change in assumed health care trend rates would have the following effects as of December 31, 2017:
Effect on total service and interest cost
Effect on postretirement benefit obligation
Postemployment Benefit Plans
One-Percentage-Point Increase
One-Percentage-Point Decrease
21.7%
16.3
(16.7)%
(13.0)
PMI and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees.
The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs were $144
million, $166 million and $187 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The estimated net loss for the postemployment benefit plans that will be amortized from accumulated other comprehensive losses into
net postemployment costs during 2018 is approximately $60 million.
The amounts recognized in accrued postemployment costs on PMI's consolidated balance sheets at December 31, 2017 and 2016, were
$671 million and $727 million, respectively.
The accrued postemployment costs were determined using a weighted-average discount rate of 3.0% and 2.8% in 2017 and 2016,
respectively; an assumed ultimate annual weighted-average turnover rate of 2.6% and 2.8% in 2017 and 2016, respectively; assumed
compensation cost increases of 2.3% in 2017 and 2.6% in 2016, and assumed benefits as defined in the respective plans. In accordance
with local regulations, certain postemployment plans are funded. As a result, the accrued postemployment costs disclosed above are
presented net of the related assets of $33 million and $25 million at December 31, 2017 and 2016, respectively. Postemployment costs
arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Comprehensive Earnings (Losses)
The amounts recorded in accumulated other comprehensive losses at December 31, 2017, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
$
(2,624) $
(35)
(5)
327
$
(2,337) $
Post-
retirement
Post-
employment
Total
(80) $
4
—
28
(48) $
(617) $
—
—
186
(431) $
(3,321)
(31)
(5)
541
(2,816)
The amounts recorded in accumulated other comprehensive losses at December 31, 2016, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
$
(3,314) $
(53)
(5)
350
$
(3,022) $
Post-
retirement
Post-
employment
Total
(73) $
4
—
24
(45) $
(713) $
—
—
215
(498) $
(4,100)
(49)
(5)
589
(3,565)
97
The amounts recorded in accumulated other comprehensive losses at December 31, 2015, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
$
(3,074) $
(40)
(5)
320
$
(2,799) $
Post-
retirement
Post-
employment
Total
(61) $
5
—
20
(36) $
(710) $
—
—
213
(497) $
(3,845)
(35)
(5)
553
(3,332)
The movements in other comprehensive earnings (losses) during the year ended December 31, 2017, were as follows:
(in millions)
Amounts transferred to earnings as components of net periodic
Pension
Post-
retirement
Post-
employment
Total
benefit cost:
Amortization:
Net losses
Prior service cost
Other income/expense:
Net losses
Prior service cost
Deferred income taxes
Other movements during the year:
Net losses
Prior service cost
Deferred income taxes
$
175
$
5
6
—
(10)
176
509
13
(13)
509
$
5
—
—
—
(1)
4
(12)
—
5
(7)
68
—
—
—
(20)
48
28
—
(9)
19
$
248
5
6
—
(31)
228
525
13
(17)
521
Total movements in other comprehensive earnings (losses)
$
685
$
(3) $
67
$
749
98
The movements in other comprehensive earnings (losses) during the year ended December 31, 2016, were as follows:
(in millions)
Amounts transferred to earnings as components of net periodic
Pension
Post-
retirement
Post-
employment
Total
benefit cost:
Amortization:
Net losses
Prior service cost
Other income/expense:
Net losses
Prior service cost
Deferred income taxes
Other movements during the year:
Net losses
Prior service cost
Deferred income taxes
$
193
$
6
4
—
(26)
177
(437)
(18)
55
(400)
$
2
—
—
—
—
2
(15)
—
4
(11)
62
—
—
—
(17)
45
(65)
—
19
(46)
$
257
6
4
—
(43)
224
(517)
(18)
78
(457)
Total movements in other comprehensive earnings (losses)
$
(223) $
(9) $
(1) $
(233)
The movements in other comprehensive earnings (losses) during the year ended December 31, 2015, were as follows:
(in millions)
Amounts transferred to earnings as components of net periodic
Pension
Post-
retirement
Post-
employment
Total
benefit cost:
Amortization:
Net losses
Prior service cost
Other income/expense:
Net losses
Prior service cost
Deferred income taxes
Other movements during the year:
Net losses
Deferred income taxes
$
194
$
4
3
1
(26)
176
(510)
4
(506)
$
4
—
—
—
(2)
2
12
(4)
8
69
—
—
—
(20)
49
(58)
17
(41)
$
267
4
3
1
(48)
227
(556)
17
(539)
Total movements in other comprehensive earnings (losses)
$
(330) $
10
$
8
$ (312)
99
Note 14.
Additional Information:
(in millions)
Research and development expense
Advertising expense
Foreign currency net transaction losses
Interest expense
Interest income
Interest expense, net
Rent expense
For the Years Ended December 31,
2017
2016
2015
$
$
$
$
$
$
453
830
49
1,096
(182)
914
313
$
$
$
$
$
$
429
405
272
1,069
(178)
891
284
$
$
$
$
$
$
423
448
102
1,132
(124)
1,008
286
Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2017, were as follows:
(in millions)
2018
2019
2020
2021
2022
Thereafter
Note 15.
Financial Instruments:
Overview
$
$
179
125
94
58
37
356
849
PMI operates in markets outside of the United States of America, with manufacturing and sales facilities in various locations around the
world. PMI utilizes certain financial instruments to manage foreign currency and interest rate exposure. Derivative financial instruments
are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest
rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial
instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of
effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI
formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management
objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically
identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction
would not occur, the gain or loss would be recognized in earnings. PMI reports its net transaction gains or losses in marketing, administration
and research costs on the consolidated statements of earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options,
collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure
to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. The primary currencies
100
to which PMI is exposed include the Australian dollar, Canadian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine
peso, Russian ruble, Swiss franc and Turkish lira. At December 31, 2017 and 2016, PMI had contracts with aggregate notional amounts
of $26.1 billion and $29.2 billion, respectively. Of the $26.1 billion aggregate notional amount at December 31, 2017, $3.4 billion related
to cash flow hedges, $11.3 billion related to hedges of net investments in foreign operations and $11.4 billion related to other derivatives
that primarily offset currency exposures on intercompany financing. Of the $29.2 billion aggregate notional amount at December 31,
2016, $5.0 billion related to cash flow hedges, $10.6 billion related to hedges of net investments in foreign operations and $13.6 billion
related to other derivatives that primarily offset currency exposures on intercompany financing.
The fair value of PMI’s foreign exchange contracts included in the consolidated balance sheet as of December 31, 2017 and 2016, were
as follows:
Asset Derivatives
Liability Derivatives
(in millions)
Foreign exchange contracts
designated as hedging instruments
Foreign exchange contracts not
designated as hedging instruments
$
Balance Sheet
Classification
Other current
assets
Other assets
Other current
assets
Other assets
Fair Value
2017
2016
Balance Sheet
Classification
Fair Value
2017
2016
$
207
Other accrued
liabilities
$
436 Other liabilities
Other accrued
liabilities
161
9 Other liabilities
84
34
22
—
$
197
880
37
14
66
36
61
—
163
Total derivatives
$
140
$
813
$
1,128
$
For the years ended December 31, 2017, 2016 and 2015, PMI's cash flow and net investment hedging instruments impacted the
consolidated statements of earnings and comprehensive earnings as follows:
(pre-tax, millions)
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/
(Losses) on Derivatives
2016
2017
2015
For the Year Ended December 31,
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive
Earnings/(Losses) into
Earnings
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/
(Losses) into Earnings
2016
2015
2017
Derivatives in Cash Flow
Hedging Relationship
Foreign exchange contracts $
(52) $
12
$
43
Net revenues
Cost of sales
$
$
60
1
(38) $
46
Marketing, administration and
research costs
Interest expense, net
(7)
(41)
(11)
(30)
149
(3)
1
(31)
Derivatives in Net
Investment Hedging
Relationship
Foreign exchange contracts
Total
(1,644)
$ (1,696) $
296
308
$
253
296
$
13
$
(33) $
116
Cash Flow Hedges
PMI has entered into foreign exchange contracts to hedge the foreign currency exchange and interest rate risks related to certain forecasted
transactions. The effective portion of gains and losses associated with qualifying cash flow hedge contracts is deferred as a component
of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s consolidated statements of
earnings. During the years ended December 31, 2017, 2016 and 2015, ineffectiveness related to cash flow hedges was not material. As
101
of December 31, 2017, PMI has hedged forecasted transactions for periods not exceeding the next twelve months, with the exception of
one foreign exchange contract that expires in May 2024. The impact of these hedges is primarily included in operating cash flows on
PMI’s consolidated statements of cash flows.
Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and foreign exchange contracts as net investment hedges, primarily of its Euro
net assets. For the years ended December 31, 2017, 2016 and 2015, these hedges of net investments resulted in gains/(losses), net of
income taxes, of $(1,725) million, $430 million and $761 million, respectively, principally related to changes in the exchange rates
between the Euro and U.S. dollar. These gains/(losses) were reported as a component of accumulated other comprehensive losses within
currency translation adjustments, and were substantially offset by the losses and gains generated on the underlying assets. For the years
ended December 31, 2017, 2016 and 2015, ineffectiveness related to net investment hedges was not material. The premiums paid for,
and settlements of, net investment hedges are included in investing cash flows on PMI’s consolidated statements of cash flows.
Other Derivatives
PMI has entered into foreign exchange contracts to hedge the foreign currency exchange and interest rate risks related to intercompany
loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these
contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s consolidated statements of earnings.
For the years ended December 31, 2017, 2016 and 2015, the gains/(losses) from contracts for which PMI did not apply hedge accounting
were $382 million, $(85) million and $(587) million, respectively. The gains/(losses) from these contracts substantially offset the losses
and gains generated by the underlying intercompany and third-party loans being hedged.
As a result, for the years ended December 31, 2017, 2016 and 2015, these items impacted the consolidated statement of earnings as
follows:
(pre-tax, in millions)
Derivatives not Designated as
Hedging Instruments
Foreign exchange contracts
Total
Statement of Earnings
Classification of Gain/(Loss)
Amount of Gain/(Loss)
Recognized in Earnings
2017
2016
2015
Interest expense, net
$
$
(60)
(60)
$
$
(24)
(24)
$
$
(1)
(1)
Qualifying Hedging Activities Reported in Accumulated Other Comprehensive Losses
Derivative gains or losses reported in accumulated other comprehensive losses are a result of qualifying hedging activity. Transfers of
these gains or losses to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected
accumulated other comprehensive losses, net of income taxes, as follows:
(in millions)
Gain as of January 1,
Derivative (gains)/losses transferred to earnings
Change in fair value
Gain as of December 31,
For the Years Ended December 31,
2017
2016
2015
$
$
97
(11)
(44)
42
$
$
59
30
8
97
$
$
123
(102)
38
59
At December 31, 2017, PMI expects $36 million of derivative gains that are included in accumulated other comprehensive losses to be
reclassified to the consolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by
the statement of earnings impact of the respective hedged transactions.
102
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Credit Exposure and Credit Risk
PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its
risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure
to credit risk through the use of credit approvals and credit limits and by selecting and continuously monitoring a diverse group of major
international banks and financial institutions as counterparties.
Fair Value
See Note 16. Fair Value Measurements and Note 19. Balance Sheet Offsetting for additional discussion of derivative financial instruments.
Note 16.
Fair Value Measurements:
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of input that may
be used to measure fair value, which are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
PMI's policy is to reflect transfers between hierarchy levels at the end of the reporting period.
Derivative Financial Instruments
PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their
basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing
foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s
currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials,
currency volatilities and maturity dates. PMI’s derivative financial instruments have been classified within Level 2 at December 31,
2017 and 2016. See Note 15. Financial Instruments for additional discussion of derivative financial instruments.
Pension Plan Assets
The fair value of pension plan assets determined by using readily available quoted market prices in active markets has been classified
within Level 1 of the fair value hierarchy at December 31, 2017 and 2016. The fair value of pension plan assets determined by using
quoted prices in markets that are not active has been classified within Level 2 at December 31, 2017 and 2016. See Note 13. Benefit
Plans for additional discussion of pension plan assets.
Debt
The fair value of PMI’s outstanding debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest
rates currently available to PMI for issuances of debt with similar terms and remaining maturities. The aggregate carrying value of PMI’s
debt, excluding short-term borrowings and $28 million of capital lease obligations, was $33,812 million at December 31, 2017. The
aggregate carrying value of PMI’s debt, excluding short-term borrowings and $13 million of capital lease obligations, was $28,411 million
103
at December 31, 2016. The fair value of PMI's outstanding debt, excluding the aforementioned short-term borrowings and capital lease
obligations, was classified within Level 1 and Level 2 at December 31, 2017 and 2016.
The aggregate fair values of PMI’s derivative financial instruments, pension plan assets and debt as of December 31, 2017 and 2016,
were as follows:
(in millions)
Assets:
Foreign exchange contracts
Pension plan assets
Total assets in fair value
hierarchy
Pension plan assets
measured at net asset
value(a)
Total assets
Liabilities:
Debt
Foreign exchange contracts
Total liabilities
(in millions)
Assets:
Foreign exchange contracts
Pension plan assets
Total assets in fair value
hierarchy
Pension plan assets
measured at net asset
value(a)
Total assets
Liabilities:
Debt
Foreign exchange contracts
Total liabilities
Fair Value At
December 31, 2017
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
140
$
7,288
— $
5,260
140
$
2,028
7,428
$
5,260
$
2,168
$
310
7,738
35,856
$
35,685
$
1,128
—
36,984
$
35,685
$
171
$
1,128
1,299
$
—
—
—
—
—
—
Fair Value At
December 31, 2016
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
813
$
6,160
— $
4,420
813
$
1,740
6,973
$
4,420
$
2,553
$
297
7,270
30,192
$
29,756
$
163
—
30,355
$
29,756
$
436
$
163
599
$
—
—
—
—
—
—
(a) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient
have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the
fair value hierarchy to the amounts presented in the statement of financial position.
104
Note 17.
Accumulated Other Comprehensive Losses:
PMI's accumulated other comprehensive losses, net of taxes, consisted of the following:
(Losses) Earnings
(in millions)
Currency translation adjustments
Pension and other benefits
Derivatives accounted for as hedges
At December 31,
2017
2016
2015
$
(5,761) $
(6,091) $
(6,129)
(2,816)
(3,565)
(3,332)
42
97
59
Total accumulated other comprehensive losses
$
(8,535) $
(9,559) $
(9,402)
Reclassifications from Other Comprehensive Earnings
The movements in accumulated other comprehensive losses and the related tax impact, for each of the components above, that are due
to current period activity and reclassifications to the income statement are shown on the consolidated statements of comprehensive
earnings for the years ended December 31, 2017, 2016, and 2015. For the years ended December 31, 2017, 2016, and 2015, $2 million,
$(5) million and $1 million of net currency translation adjustment gains/(losses) were transferred from other comprehensive earnings to
marketing, administration and research costs in the consolidated statements of earnings, respectively, upon liquidation of subsidiaries.
For additional information, see Note 13. Benefit Plans and Note 15. Financial Instruments for disclosures related to PMI's pension and
other benefits and derivative financial instruments.
Note 18.
Contingencies:
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees
in various jurisdictions. Our indemnitees include distributors, licensees and others that have been named as parties in certain cases and
that we have agreed to defend, as well as to pay costs and some or all of judgments, if any, that may be entered against them. Pursuant
to the terms of the Distribution Agreement between Altria Group, Inc. ("Altria") and PMI, PMI will indemnify Altria and Philip Morris
USA Inc. ("PM USA"), a U.S. tobacco subsidiary of Altria, for tobacco product claims based in substantial part on products manufactured
by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for tobacco product claims based in substantial
part on products manufactured by PM USA, excluding tobacco products contract manufactured for PMI.
It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or
settlement of pending tobacco-related litigation could encourage the commencement of additional litigation.
Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Canada and Nigeria, range into
the billions of U.S. 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.
Much of the tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. However, as discussed below, we have
to date been largely successful in defending tobacco-related litigation.
We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an
unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably
possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded
that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the
possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in
the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.
105
It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal
quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject
to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the
respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts.
All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions
in particular cases if we believe it is in our best interests to do so.
To date, no tobacco-related case has been finally resolved in favor of a plaintiff against us, our subsidiaries or indemnitees.
The table below lists the number of tobacco-related cases pending against us and/or our subsidiaries or indemnitees as of February 9,
2018, December 31, 2016 and December 31, 2015:
Type of Case
Individual Smoking and Health Cases
Smoking and Health Class Actions
Health Care Cost Recovery Actions
Label-Related Class Actions
Individual Label-Related Cases
Public Civil Actions
Number of Cases
Pending as of
February 9, 2018
Number of Cases
Pending as of
December 31, 2016
Number of Cases
Pending as of
December 31, 2015
57
11
16
1
1
2
64
11
16
—
3
2
68
11
16
—
3
3
Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 476 Smoking and Health, Label-Related, Health Care
Cost Recovery, and Public Civil Actions in which we and/or one of our subsidiaries and/or indemnitees were a defendant have been
terminated in our favor. Thirteen cases have had decisions in favor of plaintiffs. Nine of these cases have subsequently reached final
resolution in our favor and four remain on appeal.
106
The table below lists the verdict and significant post-trial developments in the four pending cases where a verdict was returned in favor
of the plaintiff:
Date
February 2004
Location of
Court/Name of
Plaintiff
Brazil/The Smoker Health
Defense Association
Type of
Case
Class Action
Date
May 27, 2015
Location of
Court/Name of
Plaintiff
Canada/Cecilia
Létourneau
Type of
Case
Class Action
Verdict
The Civil Court of São
Paulo found defendants
liable without hearing
evidence. In April 2004,
the court awarded “moral
damages” of R$1,000
(approximately $305) per
smoker per full year of
smoking plus interest at
the rate of 1% per month,
as of the date of the
ruling. The court did not
assess actual damages,
which were to be assessed
in a second phase of the
case. The size of the class
was not defined in the
ruling.
Verdict
On May 27, 2015, the
Superior Court of the
District of Montreal,
Province of Quebec ruled
in favor of the
Létourneau class on
liability and awarded a
total of CAD 131 million
(approximately $104
million) in punitive
damages, allocating CAD
46 million (approximately
$37 million) to our
subsidiary. The trial court
ordered defendants to pay
the full punitive damage
award into a trust within
60 days. The court did
not order the payment of
compensatory damages.
Post-Trial
Developments
Defendants appealed to the São
Paulo Court of Appeals, which
annulled the ruling in November
2008, finding that the trial court
had inappropriately ruled without
hearing evidence and returned the
case to the trial court for further
proceedings. In May 2011, the
trial court dismissed the claim.
Plaintiff appealed the decision. In
February 2015, the appellate
court unanimously dismissed
plaintiff's appeal. In September
2015, plaintiff appealed to the
Superior Court of Justice. In
addition, the defendants filed a
constitutional appeal to the
Federal Supreme Tribunal on the
basis that plaintiff did not have
standing to bring the lawsuit.
This appeal is still pending.
Post-Trial
Developments
In June 2015, our subsidiary
commenced the appellate process
with the Court of Appeal of
Quebec. Our subsidiary also
filed a motion to cancel the trial
court’s order for payment into a
trust notwithstanding appeal. In
July 2015, the Court of Appeal
granted the motion to cancel and
overturned the trial court’s ruling
that our subsidiary make the
payment into a trust. In August
2015, plaintiffs filed a motion for
security with the Court of Appeal
covering both the Létourneau
case and the Blais case described
below. In October 2015, the
Court of Appeal granted the
motion and ordered our
subsidiary to furnish security
totaling CAD 226 million
(approximately $180 million) to
cover both the Létourneau and
Blais cases. The hearing for the
merits appeal took place in
November 2016. (See below for
further detail.)
107
Date
May 27, 2015
Location of
Court/Name of
Plaintiff
Canada/Conseil
Québécois Sur Le Tabac
Et La Santé and Jean-
Yves Blais
Type of
Case
Class Action
Date
Location of
Court/Name of
Plaintiff
August 5, 2016 Argentina/Hugo Lespada
Type of
Case
Individual
Action
Post-Trial
Developments
In June 2015, our subsidiary
commenced the appellate process
with the Court of Appeal of
Quebec. Our subsidiary also
filed a motion to cancel the trial
court’s order for payment into a
trust notwithstanding appeal. In
July 2015, the Court of Appeal
granted the motion to cancel and
overturned the trial court’s ruling
that our subsidiary make the
payment into a trust. In August
2015, plaintiffs filed a motion for
security with the Court of
Appeal. In October 2015, the
Court of Appeal granted the
motion and ordered our
subsidiary to furnish security
totaling, together with the
Létourneau case, CAD 226
million (approximately $180
million). The hearing for the
merits appeal took place in
November 2016. (See below for
further detail.)
Post-Trial
Developments
On August 23, 2016, our
subsidiary filed its notice of
appeal. On October 31, 2017, the
Civil and Commercial Court of
Appeals of Mar del Plata ruled
that plaintiff's claim was barred
by the statute of limitations and it
reversed the trial court's decision.
On November 28, 2017, plaintiff
filed an extraordinary appeal of
the reversal of the trial court's
decision to the Supreme Court of
the Province of Buenos Aires.
Verdict
On May 27, 2015, the
Superior Court of the
District of Montreal,
Province of Quebec ruled
in favor of the Blais class
on liability and found the
class members’
compensatory damages
totaled approximately
CAD 15.5 billion
(approximately $12.3
billion), including pre-
judgment interest. The
trial court awarded
compensatory damages
on a joint and several
liability basis, allocating
20% to our subsidiary
(approximately CAD 3.1
billion including pre-
judgment interest
(approximately $2.5
billion)). The trial court
awarded CAD 90,000
(approximately $71,500)
in punitive damages,
allocating CAD 30,000
(approximately $23,900)
to our subsidiary. The
trial court ordered
defendants to pay CAD 1
billion (approximately
$795 million) of the
compensatory damage
award, CAD 200 million
(approximately $159
million) of which is our
subsidiary’s portion, into
a trust within 60 days.
Verdict
On August 5, 2016, the
Civil Court No. 14 - Mar
del Plata, issued a verdict
in favor of plaintiff, an
individual smoker, and
awarded him ARS
110,000 (approximately
$5,558), plus interest, in
compensatory and moral
damages.
The trial court found that
our subsidiary failed to
warn plaintiff of the risk
of becoming addicted to
cigarettes.
108
Pending claims related to tobacco products generally fall within the following categories:
Smoking and Health Litigation: These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a
class or purported class of individual plaintiffs. Plaintiffs' allegations of liability in these cases are based on various theories of recovery,
including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and
implied warranties, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various
forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include
licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute
of limitations.
As of February 9, 2018, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:
•
•
57 cases brought by individual plaintiffs in Argentina (30), Brazil (10), Canada (4), Chile (5), Costa Rica (1), Italy (3), the
Philippines (1), Russia (1), Turkey (1) and Scotland (1), compared with 64 such cases on December 31, 2016, and 68 cases on
December 31, 2015; and
11 cases brought on behalf of classes of individual plaintiffs in Brazil (2) and Canada (9), compared with 11 such cases on
December 31, 2016, and 11 such cases on December 31, 2015.
In the first class action pending in Brazil, The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris
Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995,
our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for all
addicted smokers and former smokers, and injunctive relief. In 2004, the trial court found defendants liable without hearing evidence
and awarded “moral damages” of R$1,000 (approximately $305) per smoker per full year of smoking plus interest at the rate of 1% per
month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case.
The size of the class was not estimated. Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November
2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further
proceedings. In May 2011, the trial court dismissed the claim. In February 2015, the appellate court unanimously dismissed plaintiff's
appeal. In September 2015, plaintiff appealed to the Superior Court of Justice. In February 2017, the Chief Justice of the Supreme Court
of Justice denied plaintiff's appeal. In March 2017, plaintiff filed an en banc appeal to the Supreme Court of Justice. In addition, the
defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the
lawsuit. Both appeals are still pending.
In the second class action pending in Brazil, Public Prosecutor of São Paulo v. Philip Morris Brasil Industria e Comercio Ltda., Civil
Court of the City of São Paulo, Brazil, filed August 6, 2007, our subsidiary is a defendant. The plaintiff, the Public Prosecutor of the State
of São Paulo, is seeking (i) damages on behalf of all smokers nationwide, former smokers, and their relatives; (ii) damages on behalf of
people exposed to environmental tobacco smoke nationwide, and their relatives; and (iii) reimbursement of the health care costs allegedly
incurred for the treatment of tobacco-related diseases by all Brazilian States and Municipalities, and the Federal District. In an interim
ruling issued in December 2007, the trial court limited the scope of this claim to the State of São Paulo only. In December 2008, the
Seventh Civil Court of São Paulo issued a decision declaring that it lacked jurisdiction because the case involved issues similar to the
ADESF case discussed above and should be transferred to the Nineteenth Lower Civil Court in São Paulo where the ADESF case is
pending. The court further stated that these cases should be consolidated for the purposes of judgment. In April 2010, the São Paulo Court
of Appeals reversed the Seventh Civil Court's decision that consolidated the cases, finding that they are based on different legal claims
and are progressing at different stages of proceedings. This case was returned to the Seventh Civil Court of São Paulo, and our subsidiary
filed its closing arguments in December 2010. In March 2012, the trial court dismissed the case on the merits. In January 2014, the São
Paulo Court of Appeals rejected plaintiff’s appeal and affirmed the trial court decision. In July 2014, plaintiff appealed to the Superior
Court of Justice.
In the first class action pending in Canada, Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI
Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, our subsidiary and other Canadian manufacturers (Imperial
Tobacco Canada Ltd. and JTI-MacDonald Corp.) are defendants. The plaintiff, an individual smoker, sought compensatory and punitive
damages for each member of the class who is deemed addicted to smoking. The class was certified in 2005. Trial began in March 2012
and concluded in December 2014. The trial court issued its judgment on May 27, 2015. The trial court found our subsidiary and two
other Canadian manufacturers liable and awarded a total of CAD 131 million (approximately $104 million) in punitive damages, allocating
CAD 46 million (approximately $37 million) to our subsidiary. The trial court found that defendants violated the Civil Code of Quebec,
the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the
dangers of smoking. The trial court also found that defendants conspired to prevent consumers from learning the dangers of smoking.
The trial court further held that these civil faults were a cause of the class members’ addiction. The trial court rejected other grounds of
109
fault advanced by the class, holding that: (i) the evidence was insufficient to show that defendants marketed to youth, (ii) defendants’
advertising did not convey false information about the characteristics of cigarettes, and (iii) defendants did not commit a fault by using
the descriptors light or mild for cigarettes with a lower tar delivery. The trial court estimated the size of the addiction class at 918,000
members but declined to award compensatory damages to the addiction class because the evidence did not establish the claims with
sufficient accuracy. The trial court ordered defendants to pay the full punitive damage award into a trust within 60 days and found that
a claims process to allocate the awarded damages to individual class members would be too expensive and difficult to administer. The
trial court ordered a briefing on the proposed process for the distribution of sums remaining from the punitive damage award after payment
of attorneys’ fees and legal costs. In June 2015, our subsidiary commenced the appellate process by filing its inscription of appeal of the
trial court’s judgment with the Court of Appeal of Quebec. Our subsidiary also filed a motion to cancel the trial court’s order for payment
into a trust within 60 days notwithstanding appeal. In July 2015, the Court of Appeal granted the motion to cancel and overturned the
trial court’s ruling that our subsidiary make the payment into a trust within 60 days. In August 2015, plaintiffs filed a motion with the
Court of Appeal seeking security in both the Létourneau case and the Blais case described below. In October 2015, the Court of Appeal
granted the motion and ordered our subsidiary to furnish security totaling CAD 226 million (approximately $180 million), in the form
of cash into a court trust or letters of credit, in six equal consecutive quarterly installments of approximately CAD 37.6 million
(approximately $29.9 million) beginning in December 2015 through March 2017. See the Blais description for further detail concerning
the security order. The Court of Appeal heard oral arguments on the merits appeal in November 2016. Our subsidiary and PMI believe
that the findings of liability and damages were incorrect and should ultimately be set aside on any one of many grounds, including the
following: (i) holding that defendants violated Quebec law by failing to warn class members of the risks of smoking even after the court
found that class members knew, or should have known, of the risks, (ii) finding that plaintiffs were not required to prove that defendants’
alleged misconduct caused injury to each class member in direct contravention of binding precedent, (iii) creating a factual presumption,
without any evidence from class members or otherwise, that defendants’ alleged misconduct caused all smoking by all class members,
(iv) holding that the addiction class members’ claims for punitive damages were not time-barred even though the case was filed more
than three years after a prominent addiction warning appeared on all packages, and (v) awarding punitive damages to punish defendants
without proper consideration as to whether punitive damages were necessary to deter future misconduct.
In the second class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd.,
Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, our subsidiary
and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-MacDonald Corp.) are defendants. The plaintiffs, an anti-
smoking organization and an individual smoker, sought compensatory and punitive damages for each member of the class who allegedly
suffers from certain smoking-related diseases. The class was certified in 2005. Trial began in March 2012 and concluded in December
2014. The trial court issued its judgment on May 27, 2015. The trial court found our subsidiary and two other Canadian manufacturers
liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest
(approximately $12.3 billion). The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our
subsidiary (approximately CAD 3.1 billion, including pre-judgment interest (approximately $2.5 billion)). In addition, the trial court
awarded CAD 90,000 (approximately $71,500) in punitive damages, allocating CAD 30,000 (approximately $23,900) to our subsidiary
and found that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec
Consumer Protection Act by failing to warn adequately of the dangers of smoking. The trial court also found that defendants conspired
to prevent consumers from learning the dangers of smoking. The trial court further held that these civil faults were a cause of the class
members’ diseases. The trial court rejected other grounds of fault advanced by the class, holding that: (i) the evidence was insufficient
to show that defendants marketed to youth, (ii) defendants’ advertising did not convey false information about the characteristics of
cigarettes, and (iii) defendants did not commit a fault by using the descriptors light or mild for cigarettes with a lower tar delivery. The
trial court estimated the disease class at 99,957 members. The trial court ordered defendants to pay CAD 1 billion (approximately $795
million) of the compensatory damage award into a trust within 60 days, CAD 200 million (approximately $159 million) of which is our
subsidiary’s portion and ordered briefing on a proposed claims process for the distribution of damages to individual class members and
for payment of attorneys’ fees and legal costs. In June 2015, our subsidiary commenced the appellate process by filing its inscription of
appeal of the trial court’s judgment with the Court of Appeal of Quebec. Our subsidiary also filed a motion to cancel the trial court’s
order for payment into a trust within 60 days notwithstanding appeal. In July 2015, the Court of Appeal granted the motion to cancel
and overturned the trial court’s ruling that our subsidiary make an initial payment within 60 days. In August 2015, plaintiffs filed a motion
with the Court of Appeal seeking an order that defendants place irrevocable letters of credit totaling CAD 5 billion (approximately $3.97
billion) into trust, to secure the judgments in both the Létourneau and Blais cases. Plaintiffs subsequently withdrew their motion for
security against JTI-MacDonald Corp. and proceeded only against our subsidiary and Imperial Tobacco Canada Ltd. In October 2015,
the Court of Appeal granted the motion and ordered our subsidiary to furnish security totaling CAD 226 million (approximately $180
million) to cover both the Létourneau and Blais cases. Such security may take the form of cash into a court trust or letters of credit, in
six equal consecutive quarterly installments of approximately CAD 37.6 million (approximately $29.9 million) beginning in December
2015 through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD 758 million
(approximately $603 million) in seven equal consecutive quarterly installments of approximately CAD 108 million (approximately $85.9
million) beginning in December 2015 through June 2017. In March 2017, our subsidiary made its sixth and final quarterly installment
of security for approximately CAD 37.6 million (approximately $29.9 million) into a court trust. This payment is included in other assets
on the consolidated balance sheets and in cash used in operating activities in the consolidated statements of cash flows. The Court of
Appeal ordered that the security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon
110
further order of the Court of Appeal. The Court of Appeal heard oral arguments on the merits appeal in November 2016. Our subsidiary
and PMI believe that the findings of liability and damages were incorrect and should ultimately be set aside on any one of many grounds,
including the following: (i) holding that defendants violated Quebec law by failing to warn class members of the risks of smoking even
after the court found that class members knew, or should have known, of the risks, (ii) finding that plaintiffs were not required to prove
that defendants’ alleged misconduct caused injury to each class member in direct contravention of binding precedent, (iii) creating a
factual presumption, without any evidence from class members or otherwise, that defendants’ alleged misconduct caused all smoking by
all class members, (iv) relying on epidemiological evidence that did not meet recognized scientific standards, and (v) awarding punitive
damages to punish defendants without proper consideration as to whether punitive damages were necessary to deter future misconduct.
In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg,
Canada, filed June 12, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease
(“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and
punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as
restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. In September 2009,
plaintiff's counsel informed defendants that he did not anticipate taking any action in this case while he pursues the class action filed in
Saskatchewan (see description of Adams, below).
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench,
Saskatchewan, Canada, filed July 10, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the
industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the
use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who
have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer,
as well as restitution of profits. Preliminary motions are pending.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al., The Supreme Court (trial court),
Nova Scotia, Canada, filed June 18, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the
industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the
use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their
estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly
caused by tobacco products. No activity in this case is anticipated while plaintiff's counsel pursues the class action filed in Saskatchewan
(see description of Adams, above).
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta,
Canada, filed June 15, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus
infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class
comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health
care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with
the complaint. No activity in this case is anticipated while plaintiff's counsel pursues the class action filed in Saskatchewan (see description
of Adams, above).
In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia,
Canada, filed June 25, 2010, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use
of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were
alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members,
plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.
In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia,
Canada, filed June 25, 2010, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from
emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class
comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by
smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954,
to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.
In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court
of Justice, filed June 20, 2012, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of
111
tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have
smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution
of profits. Plaintiff's counsel has indicated that he does not intend to take any action in this case in the near future.
Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of
health care cost expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on various
theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties,
violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product,
failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in
these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised
in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean
hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and
statute of limitations.
As of February 9, 2018, there were 16 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Canada (10),
Korea (1) and Nigeria (5), compared with 16 such cases on December 31, 2016 and 16 such cases on December 31, 2015.
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco
Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, our subsidiaries, our indemnitee
(PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British Columbia, brought
a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers
to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related wrong.” The Supreme Court of Canada
has held that the statute is constitutional. We and certain other non-Canadian defendants challenged the jurisdiction of the court. The
court rejected the jurisdictional challenge. Pre-trial discovery is ongoing.
In the second health care cost recovery case filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al.,
Court of Queen's Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, our subsidiaries,
our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the
province of New Brunswick based on legislation enacted in the province. This legislation is similar to the law introduced in British
Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has
incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing. In June 2017, the trial court set a trial
date for November 4, 2019.
In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario
Superior Court of Justice, Toronto, Canada, filed September 29, 2009, we, our subsidiaries, our indemnitees (PM USA and Altria), and
other members of the industry are defendants. The claim was filed by the government of the province of Ontario based on legislation
enacted in the province. This legislation is similar to the laws introduced in British Columbia and New Brunswick that authorize the
government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result
of a “tobacco related wrong.” Pre-trial discovery is ongoing.
In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al.,
Supreme Court of Newfoundland and Labrador, St. Johns, Canada, filed February 8, 2011, we, our subsidiaries, our indemnitees (PM
USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Newfoundland
and Labrador based on legislation enacted in the province that is similar to the laws introduced in British Columbia, New Brunswick and
Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs
it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.
In the fifth health care cost recovery case filed in Canada, Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court
of Quebec, Canada, filed June 8, 2012, we, our subsidiary, our indemnitee (PM USA), and other members of the industry are defendants.
The claim was filed by the government of the province of Quebec based on legislation enacted in the province that is similar to the laws
enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers
to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.
In the sixth health care cost recovery case filed in Canada, Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court
of Queen's Bench Alberta, Canada, filed June 8, 2012, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members
of the industry are defendants. The claim was filed by the government of the province of Alberta based on legislation enacted in the
province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct
action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related
wrong.” Pre-trial discovery is ongoing.
112
In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans,
Benson & Hedges, Inc., et al., The Queen's Bench, Winnipeg Judicial Centre, Canada, filed May 31, 2012, we, our subsidiaries, our
indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the
province of Manitoba based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces.
The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has
incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in September 2014. Pre-trial discovery
is ongoing.
In the eighth health care cost recovery case filed in Canada, The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et
al., Queen's Bench, Judicial Centre of Saskatchewan, Canada, filed June 8, 2012, we, our subsidiaries, our indemnitees (PM USA and
Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Saskatchewan based
on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes
the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a
result of a “tobacco related wrong.” Defendants filed their defenses in February 2015. While discovery initially was scheduled to begin
in 2017 by agreement of the parties, to date, the discovery process has not started.
In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v.
Rothmans, Benson & Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012,
we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by
the government of the province of Prince Edward Island based on legislation enacted in the province that is similar to the laws enacted
in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to
recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in
February 2015. While discovery initially was scheduled to begin in 2017 by agreement of the parties, to date, the discovery process has
not started.
In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans,
Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, our subsidiaries, our indemnitees (PM
USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova
Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation
authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will
incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in July 2015. While discovery initially was scheduled to
begin in 2017 by agreement of the parties, to date, the discovery process has not started.
In the first health care cost recovery case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited,
et al., High Court of Lagos State, Lagos, Nigeria, filed March 13, 2008, we and other members of the industry are defendants. Plaintiff
seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating
alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process
of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain
co-defendants relating to service objections.
In the second health care cost recovery case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited,
et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, we and other members of the industry are defendants. Plaintiff seeks
reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating
alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process
of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain
co-defendants relating to service objections.
In the third health care cost recovery case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited,
et al., High Court of Gombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff
seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating
alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2011, the
court ruled that the plaintiff had not complied with the procedural steps necessary to serve us. As a result of this ruling, plaintiff must re-
serve its claim. We have not yet been re-served.
In the fourth health care cost recovery case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria)
Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, we and other members of the industry are defendants.
Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs
of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We challenged
service as improper. In June 2010, the court ruled that plaintiffs did not have leave to serve the writ of summons on the defendants and
that they must re-serve the writ. We have not yet been re-served.
113
In the fifth health care cost recovery case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited,
et al., High Court of Ogun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants.
Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs
of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In May 2010,
the trial court rejected our service objections. We have appealed.
In the health care cost recovery case in Korea, the National Health Insurance Service v. KT&G, et. al., filed April 14, 2014, our subsidiary
and other Korean manufacturers are defendants. Plaintiff alleges that defendants concealed the health hazards of smoking, marketed to
youth, added ingredients to make their products more harmful and addictive, and misled consumers into believing that Lights cigarettes
are safer than regular cigarettes. The National Health Insurance Service seeks to recover approximately $53.7 million allegedly incurred
in treating 3,484 patients with small cell lung cancer, squamous cell lung cancer, and squamous cell laryngeal cancer from 2003 to 2012.
The case is now in the evidentiary phase.
Label-Related Cases: These cases, brought by individual plaintiffs, or on behalf of a class or purported class of individual plaintiffs,
allege that the use of the descriptor “Lights” or other alleged misrepresentations or omissions of labeling information constitute fraudulent
and misleading conduct. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including
misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution,
injunctive relief, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the
risk, and statute of limitations.
As of February 9, 2018, there was 1 case brought by an individual plaintiff in Italy (1) pending against our subsidiaries, compared with
3 such cases on December 31, 2016, and 3 such cases on December 31, 2015, and one purported class action in Israel (1).
An individual plaintiff filed the purported class action, Aharon Ringer v. Philip Morris Ltd. and Globrands Ltd., on July 18, 2017, in the
Central District Court of Israel. Our Israeli affiliate and an Israeli importer and distributor for other multinational tobacco companies are
defendants. Plaintiff seeks to represent a class of smokers in Israel who have purchased cigarettes imported by defendants since July 18,
2010. Plaintiff estimates the class size to be 7,000,000 smokers. Plaintiff alleges that defendants misled consumers by not disclosing
sufficient information about carbon monoxide, tar, and nicotine yields of, and tobacco contained in, the imported cigarettes. Plaintiff
seeks various forms of relief, including an order for defendants to label cigarette packs in accordance with plaintiff’s demands, and
damages for misleading consumers, breach of autonomy and unjust enrichment.
Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual
rights, such as the right to health, the right to information or the right to safety. Plaintiffs' allegations of liability in these cases are based
on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms
of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as
implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.
As of February 9, 2018, there were 2 public civil actions pending against our subsidiaries in Argentina (1) and Venezuela (1), compared
with 2 such cases on December 31, 2016, and 3 such cases on December 31, 2015.
In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of
Buenos Aires, Argentina, filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a
consumer association, seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly
caused by smoking. Our subsidiary filed its answer in September 2007. In March 2010, the case file was transferred to the Federal Court
on Administrative Matters after the Civil Court granted plaintiff's request to add the national government as a co-plaintiff in the case.
The case is currently in the evidentiary stage.
In the public civil action in Venezuela, Federation of Consumers and Users Associations (“FEVACU”), et al. v. National Assembly of
Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court, filed April 29, 2008, we
were not named as a defendant, but the plaintiffs published a notice pursuant to court order, notifying all interested parties to appear in
the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to
health of the citizens of Venezuela and claim that the government failed to protect adequately its citizens' right to health. The claim asks
the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs
ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund
to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file
the claim and that the claim meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and
BAT's subsidiary as interested third parties. In February 2013, our subsidiary answered the complaint.
114
Other Litigation
The Department of Special Investigations of the government of Thailand ("DSI") conducted an investigation into alleged underpayment
by our subsidiary, Philip Morris (Thailand) Limited ("PM Thailand"), of customs duties and excise taxes relating to imports from the
Philippines covering the period 2003-2007. On January 18, 2016, the Public Prosecutor filed charges against our subsidiary and seven
former and current employees in the Bangkok Criminal Court alleging that PM Thailand and the individual defendants jointly and with
the intention to defraud the Thai government, under-declared import prices of cigarettes to avoid full payment of taxes and duties in
connection with import entries of cigarettes from the Philippines during the period of July 2003 to June 2006. The government is seeking
a fine of approximately THB 80.8 billion (approximately $2.54 billion). In May 2017, the King of Thailand signed a new customs act.
The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings.
Trial in the case began in November 2017 and is presently expected to conclude in April 2018. PM Thailand believes that its declared
import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law and that the
allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and other Thai governmental
agencies.
The DSI also conducted an investigation into alleged underpayment by PM Thailand of customs duties and excise taxes relating to imports
from Indonesia covering the period 2000-2003. On January 26, 2017, the Public Prosecutor filed charges against PM Thailand and its
former Thai employee in the Bangkok Criminal Court alleging that PM Thailand and its former employee jointly and with the intention
to defraud the Thai government under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with
import entries during the period from January 2002 to July 2003. The government is seeking a fine of approximately THB 19.8 billion
(approximately $621 million). The case is in pre-trial proceedings. The trial is scheduled to begin in the last quarter of 2018. PM Thailand
believes that its declared import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and
Thai law, and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and a
Thai court. In May 2017, the King of Thailand signed a new customs act. The new act, which took effect in November 2017, substantially
limits the amount of fines that Thailand could seek in these proceedings. On November 29, 2017, PM Thailand received notices of
assessment in the aggregate amount of approximately THB 25.6 billion (approximately $803 million) from the Thai Customs Department
alleging that PM Thailand under-declared customs values for the imports from Indonesia covering the period 2001-2003. The notices
include the Indonesian import entries subject to the proceedings discussed above and are in addition to the fine sought by the government
in the criminal proceedings. PM Thailand filed its appeal against the notices in December 2017. We believe that all of the notices of
assessment are barred by the applicable statutes of limitations and are otherwise without merit.
The South Korean Board of Audit and Inspection (“BAI”) conducted an audit of certain Korean government agencies and the tobacco
industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies,
including Philip Morris Korea Inc. ("PM Korea"), our South Korean affiliate, were in compliance with South Korean tax laws. In
November 2016, the tax authorities completed their audit and assessed allegedly underpaid taxes and penalties. In order to avoid
nonpayment financial costs, PM Korea paid approximately KRW 272 billion (approximately $249 million), of which KRW 100 billion
(approximately $92 million) was paid in 2016 and KRW 172 billion (approximately $157 million) was paid in the first quarter of 2017.
These amounts are included in other assets in the consolidated balance sheets and in cash used in operating activities in the consolidated
statements of cash flows. PM Korea is appealing the assessments. The tax authorities have also referred the matter to the Public Prosecutor,
who will further investigate and decide whether to file criminal charges against PM Korea and/or other alleged co-offenders. If the Public
Prosecutor decides to prosecute, it may seek up to three times the underpaid tax for company criminal penalties and up to five times the
underpaid tax for individual criminal penalties. PM Korea believes that it has paid cigarette-related taxes in compliance with the South
Korean tax laws. In addition, the South Korean Ministry of Strategy and Finance (“MOSF”) filed a criminal complaint with the Public
Prosecutor against PM Korea and its managing director. In its criminal complaint, the MOSF alleged that PM Korea exceeded the monthly
product withdrawal limits that the MOSF had set in its notice. The Public Prosecutor will investigate the MOSF’s criminal complaint
and decide whether to prosecute. PM Korea disagrees with the MOSF’s allegations.
We are also involved in additional litigation arising in the ordinary course of our business. While the outcomes of these proceedings are
uncertain, management does not expect that the ultimate outcomes of other litigation, including any reasonably possible losses in excess
of current accruals, will have a material adverse effect on our consolidated results of operations, cash flows or financial position.
115
Note 19.
Balance Sheet Offsetting:
Derivative Financial Instruments
PMI uses foreign exchange contracts and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from
third-party and intercompany actual and forecasted transactions. Substantially all of PMI's derivative financial instruments are subject
to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts
contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the consolidated
balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. See Note 15. Financial Instruments
for disclosures related to PMI's derivative financial instruments.
The effects of these derivative financial instrument assets and liabilities on PMI's consolidated balance sheets were as follows:
Gross
Amounts
Recognized
Gross Amount
Offset in the
Consolidated
Balance Sheet
Net Amounts
Presented in the
Consolidated
Balance Sheet
Gross Amounts Not Offset in the
Consolidated
Balance Sheet
Financial
Instruments
Cash Collateral
Received/
Pledged
Net
Amount
$
$
$
$
140 $
— $
140 $
(50) $
(78) $
1,128 $
— $
1,128 $
(50) $
(1,004) $
813 $
163 $
— $
— $
813 $
(126) $
(607) $
163 $
(126) $
(31) $
12
74
80
6
(in millions)
At December 31, 2017
Assets
Foreign exchange contracts
Liabilities
Foreign exchange contracts
At December 31, 2016
Assets
Foreign exchange contracts
Liabilities
Foreign exchange contracts
Note 20.
Sale of Accounts Receivable:
To mitigate risk and enhance cash and liquidity management PMI sells trade receivables to unaffiliated financial institutions. These
arrangements allow PMI to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally
short-term in nature and are removed from the consolidated balance sheets. PMI sells trade receivables under two types of arrangements,
servicing and non-servicing. For servicing arrangements, PMI continues to service the sold trade receivables on an administrative basis
and does not act on behalf of the unaffiliated financial institutions. When applicable, a servicing liability is recorded for the estimated
fair value of the servicing. The amounts associated with the servicing liability were not material for the years ended December 31, 2017
and 2016. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables
have been sold to the unaffiliated financial institutions.
Cumulative trade receivables sold, including excise taxes, for the years ended December 31, 2017 and 2016, were $10,003 million and
$9,447 million, respectively. PMI’s operating cash flows were positively impacted by the amount of the trade receivables sold and
derecognized from the consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade
receivables sold that remained outstanding under these arrangements as of December 31, 2017, 2016 and 2015, were $1,092 million,
$729 million and $888 million, respectively. The net proceeds received are included in cash provided by operating activities in the
consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash
received is recorded as a loss on sale of trade receivables within marketing, administration and research costs in the consolidated statements
of earnings. For the years ended December 31, 2017, 2016 and 2015 the loss on sale of trade receivables was immaterial.
116
Note 21.
New Accounting Standards:
On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2016-02,
“Leases” (“ASU 2016-02”). ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU
2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. PMI
has identified its lease management system and is in the process of identifying and evaluating the applicable leases. PMI is currently
assessing the impact that the adoption of ASU 2016-02 will have on its financial position and results of operations.
On January 5, 2016, the FASB issued Accounting Standard Update ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 will require equity investments
(except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at
fair value with changes in fair value recognized in net income. Additionally, ASU 2016-01 also changes certain disclosure requirements
and other aspects of current U.S. GAAP. ASU 2016-01 is effective for interim and annual reporting periods beginning on or after January
1, 2018. PMI has identified certain cost investments which are applicable to ASU 2016-01. At January 1, 2018, the cumulative effect of
this change to PMI’s Earnings Reinvested in the Business is an increase of $238 million, which is net of $63 million in taxes.
On May 28, 2014, the FASB issued Accounting Standards Update ASU 2014-09, “Revenue from Contracts with Customers” (“ASU
2014-09”). ASU 2014-09 contains principles that an entity will need to apply to determine the measurement of revenue and timing of when
it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2014-09 is effective for interim and annual reporting periods beginning on or after January 1, 2017. In July 2015, the FASB approved
a proposal which allows for a deferral of the implementation until January 1, 2018, and permits early application, but not before the original
effective date of January 1, 2017. In addition to the guidance in ASU 2014-09, PMI has evaluated ASU 2016-12, which was issued in May
2016 and provides some practical expedients to the original standard. As a result of this evaluation, PMI made an accounting policy election
to exclude excise taxes collected from customers from the measurement of the transaction price, thereby presenting revenues, net of excise
taxes. PMI has adopted ASU 2014-09 on January 1, 2018 retrospectively to each prior period presented. PMI has elected this transition
method solely to reflect the change in excise tax presentation in all prior periods. Based on PMI’s assessment to date, the underlying
principles of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned with PMI’s current
business model and practices. As a result, other than excise tax presentation, the adoption of ASU 2014-09 will not have any other material
impact on the consolidated financial position or results of operations.
117
Note 22.
Quarterly Financial Data (Unaudited):
(in millions, except per share data)
Net revenues
Gross profit
Net earnings attributable to PMI
Per share data:
Basic EPS
Diluted EPS
Dividends declared
Market price:
— High
— Low
(in millions, except per share data)
Net revenues
Gross profit
Net earnings attributable to PMI
Per share data:
Basic EPS
Diluted EPS
Dividends declared
Market price:
— High
— Low
2017 Quarters
1st
2nd
3rd
4th
16,556
3,887
1,590
1.02
1.02
1.04
114.65
89.97
1st
16,788
3,987
1,530
0.98
0.98
1.02
99.53
84.46
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
19,319
4,398
1,781
1.14
1.14
1.04
123.55
108.56
$
$
$
$
$
$
$
$
20,638
4,738
1,970
1.27
1.27
1.07
121.69
109.31
2016 Quarters
2nd
3rd
19,041
4,285
1,788
1.15
1.15
1.02
102.55
95.91
$
$
$
$
$
$
$
$
19,935
4,550
1,938
1.25
1.25
1.04
104.20
96.95
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
21,585
5,293
694
0.44
0.44
1.07
115.28
101.58
4th
19,189
4,472
1,711
1.10
1.10
1.04
98.21
86.78
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts
may not agree to the total for the year.
118
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Philip Morris International Inc. and Subsidiaries:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Philip Morris International Inc. and its subsidiaries (PMI) as of
December 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ (deficit) equity
and of cash flows for each of the three years in the periods ended December 31, 2017, including the related notes (collectively referred
to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
PMI as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, PMI maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Basis for Opinions
PMI’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report
of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on PMI’s consolidated financial
statements and on PMI’s internal control over financial reporting based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
119
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers SA
/S/ BARRY J. MISTHAL
Barry J. Misthal
/S/ DR. MICHAEL ABRESCH
Dr. Michael Abresch
Lausanne, Switzerland
February 13, 2018
PricewaterhouseCoopers SA has served as the Company’s auditor since 2008.
120
Report of Management on Internal Control Over Financial Reporting
Management of Philip Morris International Inc. (“PMI”) is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. PMI’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over financial reporting includes those written policies and procedures that:
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of PMI;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America;
provide reasonable assurance that receipts and expenditures of PMI are being made only in accordance with the authorization
of management and directors of PMI; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets
that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken
to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of PMI’s internal control over financial reporting as of December 31, 2017. Management based
this assessment on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an
evaluation of the design of PMI’s internal control over financial reporting and testing of the operational effectiveness of its internal control
over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2017, PMI maintained effective internal control over financial
reporting.
PricewaterhouseCoopers SA, an independent registered public accounting firm, who audited and reported on the consolidated financial
statements of PMI included in this report, has audited the effectiveness of PMI’s internal control over financial reporting as of December 31,
2017, as stated in their report herein.
February 13, 2018
121
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
PMI carried out an evaluation, with the participation of PMI’s management, including PMI’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of PMI’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 report. Based upon that evaluation, PMI’s Chief Executive Officer
and Chief Financial Officer concluded that PMI’s disclosure controls and procedures are effective. There have been no changes in PMI’s
internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, PMI’s internal control over financial reporting.
The Report of Management on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting
Firm are included in Item 8.
Item 9B. Other Information.
None.
PART III
Except for the information relating to the executive officers set forth in Item 10 and the information relating to equity compensation plans
set forth in Item 12, the information called for by Items 10-14 is hereby incorporated by reference to PMI’s definitive proxy statement
for use in connection with its annual meeting of stockholders to be held on May 9, 2018, that will be filed with the SEC on or about
March 29, 2018 (the “proxy statement”), and, except as indicated therein, made a part hereof.
122
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers as of February 9, 2018:
Name
Office
Age
André Calantzopoulos
Chief Executive Officer
Massimo Andolina
Senior Vice President, Operations
Drago Azinovic
Werner Barth
Charles Bendotti
Patrick Brunel
Frank de Rooij
Frederic de Wilde
Marc S. Firestone
Paul Janelle
Stacey Kennedy
Martin G. King
Andreas Kurali
Marco Mariotti
Jacek Olczak
Jeanne Pollès
Paul Riley
Jaime Suarez
Jerry E. Whitson
Miroslaw Zielinski
President, Middle East & Africa Region and PMI Duty Free
Senior Vice President, Commercial
Senior Vice President, People and Culture
Chief Information Officer
Vice President, Treasury and Corporate Finance
President, European Union Region
President, External Affairs and General Counsel
Vice President, Corporate Planning and Business Development
President, South and Southeast Asia Region
Chief Financial Officer
Vice President and Controller
President, Eastern Europe Region
Chief Operating Officer
President, Latin America & Canada Region
President, East Asia and Australia Region
Chief Digital Officer
Deputy General Counsel and Corporate Secretary
President, Science and Innovation
60
49
55
53
45
52
52
50
58
52
45
53
52
53
53
52
52
44
62
56
All of the above-mentioned officers have been employed by us in various capacities during the past five years.
Codes of Conduct and Corporate Governance
We have adopted the Philip Morris International Code of Conduct, which complies with requirements set forth in Item 406 of Regulation S-
K. This Code of Conduct applies to all of our employees, including our principal executive officer, principal financial officer, principal
accounting officer or controller, and persons performing similar functions. We have also adopted a code of business conduct and ethics
that applies to the members of our Board of Directors. These documents are available free of charge on our website at www.pmi.com.
In addition, we have adopted corporate governance guidelines and charters for our Audit, Finance, Compensation and Leadership
Development, Product Innovation and Regulatory Affairs and Nominating and Corporate Governance committees of the Board of
Directors. All of these documents are available free of charge on our website at www.pmi.com. Any waiver granted by Philip Morris
International Inc. to its principal executive officer, principal financial officer or controller or any person performing similar functions
under the Code of Conduct, or certain amendments to the Code of Conduct, will be disclosed on our website at www.pmi.com.
The information on our website is not, and shall not be deemed to be, a part of this Report or incorporated into any other filings made
with the SEC.
Also refer to Board Operations and Governance - Committees of the Board, Election of Directors - Process for Nominating Directors
and Election of Directors - Director Nominees and Section 16(a) Beneficial Ownership Reporting Compliance sections of the proxy
statement.
Item 11. Executive Compensation.
Refer to Compensation Discussion and Analysis and Compensation of Directors sections of the proxy statement.
123
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under PMI’s
equity compensation plans at December 31, 2017, were as follows:
Number of Securities
to be Issued upon
Exercise of Outstanding
Options and Vesting of
RSUs and PSUs
(a)
Weighted Average
Exercise Price of
Outstanding Options
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding Securities
reflected in column (a))
(c)
Equity compensation plans
approved by stockholders
5,254,460(1)
$
—
25,991,850
(1) Represents 3,612,400 shares of common stock that may be issued upon vesting of the restricted share units and 1,642,060 shares
that may be issued upon vesting of the performance share units if maximum performance targets are achieved for each performance
cycle. PMI has not granted options since the spin-off from Altria on March 28, 2008.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Refer to Related Person Transactions and Code of Conduct and Election of Directors - Independence of Nominees sections of the
proxy statement.
Item 14. Principal Accounting Fees and Services.
Refer to Audit Committee Matters section of the proxy statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements and Schedules
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Earnings for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Earnings for the years ended December 31,
2017, 2016 and 2015
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016
and 2015
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting
Schedules have been omitted either because such schedules are not required or are not applicable.
Page
69 - 70
71
72
73
74 - 75
76 - 118
119 - 120
121
124
(b) The following exhibits are filed as part of this Report:
2.1
— Distribution Agreement between Altria Group, Inc. and Philip Morris International Inc. dated
January 30, 2008 (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form
10 filed February 7, 2008).
3.1
— Amended and Restated Articles of Incorporation of Philip Morris International Inc. (incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed February 7, 2008).
3.2
— Amended and Restated By-laws of Philip Morris International Inc., effective as of January 1, 2018
(incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed September 28,
2017).
4.1
4.2
— Specimen Stock Certificate of Philip Morris International Inc. (incorporated by reference to Exhibit
4.1 to the Registration Statement on Form 10 filed February 7, 2008).
— Indenture dated as of April 25, 2008, between Philip Morris International Inc. and HSBC Bank
USA, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-3, dated April 25, 2008).
4.6
— The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-
term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the
total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.
10.1
— Employee Matters Agreement between Altria Group, Inc. and Philip Morris International Inc.,
dated as of March 28, 2008 (incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed March 31, 2008).
10.2
— Intellectual Property Agreement between Philip Morris International Inc. and Philip Morris USA
Inc., dated as of January 1, 2008 (incorporated by reference to Exhibit 10.4 to the Registration
Statement on Form 10 filed March 5, 2008).
10.3
— Credit Agreement relating to a US$3,500,000,000 Revolving Credit Facility (including a US
$800,000,000 swingline option) dated as of October 25, 2011, among Philip Morris International
Inc. and the Initial Lenders named therein and Citibank International plc, as Facility Agent, and
Citibank, N.A., as Swingline Agent, and Citigroup Global Markets Limited, Barclays Capital, BNP
Paribas, Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Securities Inc., Goldman Sachs
International, HSBC Bank PLC, J.P. Morgan Limited, RBS Securities Inc. and Société Générale as
Mandated Lead Arrangers and Bookrunners (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed October 26, 2011).
10.4
__
10.5
__
10.6
__
10.7
__
Amendment No. 1, dated as of August 31, 2012, to the Credit Agreement, dated as of October 25,
2011, among Philip Morris International Inc., the lenders named therein and Citibank International
plc, as Facility Agent (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 2012).
Credit Agreement, dated as of February 12, 2013, among Philip Morris International Inc., the
lenders named therein and Citibank Europe PLC, UK Branch (formerly, The Royal Bank of
Scotland plc), as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed February 15, 2013).
Extension Agreement, effective February 7, 2017, to the Credit Agreement, dated as of February
12, 2013, among Philip Morris International Inc., the lenders party thereto, Citibank Europe PLC,
UK Branch (formerly, Citibank International Limited), as administrative agent (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 30, 2017).
Extension Agreement, effective January 31, 2014, to Credit Agreement, dated as of February 12,
2013, among Philip Morris International Inc., the lenders party thereto and Citibank Europe PLC,
UK Branch (formerly, The Royal Bank of Scotland plc), as Administrative Agent (incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended March 31,
2014).
125
10.8
__
Credit Agreement, dated as of February 28, 2014, among Philip Morris International Inc., the
lenders named therein, J.P. Morgan Europe Limited, as Facility Agent, and JPMorgan Chase Bank,
N.A., as Swingline Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed March 3, 2014).
10.9
__
Extension Agreement, effective as of February 10, 2015, to Credit Agreement dated as of February
12, 2013, among Philip Morris International Inc., the lenders named therein and Citibank Europe
PLC, UK Branch (formerly, The Royal Bank of Scotland plc), as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 29,
2015).
10.10
__
10.11
__
Extension Agreement, effective as of February 28, 2015, to the Credit Agreement, dated as of
February 28, 2014, among Philip Morris International Inc., the lenders named therein, J.P. Morgan
Europe Limited, as Facility Agent, and JPMorgan Chase Bank, N.A. as Swingline Agent
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed January 29,
2015).
Amendment No. 1, dated as of July 20, 2015, to the Credit Agreement, dated as of February 12,
2013, among Philip Morris International Inc., the lenders named therein, The Royal Bank of
Scotland plc, as resigning administrative agent, and Citibank Europe PLC, UK Branch (formerly,
Citibank International Limited), as successor administrative agent (incorporated by reference to
Exhibit 10.52 to the Annual Report on Form 10-K for the year ended December 31, 2015).
10.12
— Credit Agreement, dated as of October 1, 2015, among Philip Morris International Inc., the lenders
named therein, Citibank Europe PLC, UK Branch (formerly, Citibank International Limited), as
Facility Agent, and Citibank, N.A., as Swingline Agent (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed October 5, 2015).
10.13
10.14
10.15
10.16
— Amendment No. 2, effective as of February 9, 2016, to the Credit Agreement dated as of February
12, 2013, with the lenders named therein and Citibank Europe PLC, UK Branch (formerly,
Citibank International Limited), as administrative agent (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed January 28, 2016).
— Extension Agreement, effective February 28, 2016, to the Credit Agreement, dated as of February
28, 2014, among Philip Morris International Inc., each lender named therein, J.P. Morgan Europe
Limited, as facility agent, and JPMorgan Chase Bank, N.A., as swingline agent (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed January 28, 2016).
— Extension Agreement, effective as of October 1, 2016, to the Credit Agreement dated as of October
1, 2015, among Philip Morris International Inc., lenders named therein, Citibank Europe PLC, UK
Branch (formerly, Citibank International Limited), as facility agent, and Citibank, N.A., as
swingline agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
August 31, 2016).
— Extension Agreement, effective October 1, 2017, to the Credit Agreement, dated as of October 1,
2015, among Philip Morris International Inc., the lenders party thereto and Citibank Europe PLC,
UK Branch (formerly, Citibank International Limited), as facility agent, and Citibank N.A., as
swingline agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
August 29, 2017).
10.17
— Philip Morris International Inc. Automobile Policy (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form 10 filed February 7, 2008).*
10.18
— Philip Morris International Benefit Equalization Plan, as amended and in effect on August 6, 2012
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2012).*
10.19
— Philip Morris International Inc. 2012 Performance Incentive Plan, effective May 9, 2012
(incorporated by reference to Exhibit A to the Definitive Proxy Statement filed on March 30,
2012).*
10.20
— Philip Morris International Inc. 2017 Performance Incentive Plan, effective May 3, 2017
(incorporated by reference to Exhibit B to the Definitive Proxy Statement filed on March 23,
2017).*
126
10.21
— Pension Fund of Philip Morris in Switzerland (IC) (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).*
10.22
10.23
10.24
— Summary of Supplemental Pension Plan of Philip Morris in Switzerland (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).*
— Form of Restated Employee Grantor Trust Enrollment Agreement (Executive Trust Arrangement)
(incorporated by reference to Exhibit 10.18 to the Registration Statement on Form 10 filed
February 7, 2008).*
— Form of Restated Employee Grantor Trust Enrollment Agreement (Secular Trust Arrangement)
(incorporated by reference to Exhibit 10.19 to the Registration Statement on Form 10 filed
February 7, 2008).*
10.25
— Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors,
effective May 3, 2017 (incorporated by reference to Exhibit C to the Definitive Proxy Statement
filed on March 23, 2017).*
10.26
— Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (as
amended and restated as of January 1, 2018).*
10.27
— Philip Morris International Inc. 2008 Deferred Fee Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.21 to the Registration Statement on Form 10 filed February 7, 2008).*
10.28
— Supplemental Letter to the Employment Agreement (as amended) with André Calantzopoulos
(incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2017). The Employment Agreement was previously filed as Exhibit 10.22 to the
Registration Statement on Form 10 filed February 7, 2008 and is incorporated by reference to this
Exhibit 10.28. The Amendment to the Employment Agreement was previously filed as Exhibit 10.1
to the Current Report on Form 8-K/A filed June 13, 2013, and is incorporated by reference to this
Exhibit 10.28.*
10.29
— Supplemental Letter to Employment Agreement with Marc S. Firestone (incorporated by reference
to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). The
Employment Agreement was previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 2013 and is incorporated by reference to this Exhibit 10.29. The
Amendment to the Employment Agreement was previously filed as Exhibit 10.25 to the Annual
Report on Form 10-K for the year ended December 31, 2013, and is incorporated by reference to
this Exhibit 10.29.*
10.30
— Employment Agreement as of January 1, 2018 with Martin G. King. The previous Employment
Agreement was filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015, and is incorporated by reference to this Exhibit 10.30. The Amendments to the
previous Employment Agreement were filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 2015 and as Exhibit 10.6 to the Quarterly Report on Form 10-
Q for the quarter ended March 31, 2017 and are incorporated by reference to this Exhibit 10.30. *
10.31
— Supplemental Letter to the Employment Agreement (as amended) with Jacek Olczak (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K/A filed December 12, 2017). The
Employment Agreement was previously filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q
for the quarter ended June 30, 2012, and is incorporated by reference to this Exhibit 10.31. The
Amendments to the Employment Agreement were previously filed as Exhibit 10.33 to the Annual
Report on Form 10-K for the year ended December 31, 2013 and as Exhibit 10.7 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017 and are incorporated by reference to
this Exhibit 10.31.*
10.32
— Supplemental Letter to the Employment Agreement (as amended) with Miroslaw Zielinski
(incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2017). The Employment Agreement was previously filed as Exhibit 10.2 to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and is incorporated by
reference to this Exhibit 10.32. The Amendments to the Employment Agreement were previously
filed as Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2013
and as Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017,
and are incorporated by reference to this Exhibit 10.32.*
10.33
— Time Sharing Agreement between PMI Global Services Inc. and Louis C. Camilleri dated August
18, 2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed August
19, 2010).*
127
10.34
10.35
10.36
— Amendment No. 1 to the Time Sharing Agreement between PMI Global Services Inc. and Louis C.
Camilleri, dated August 22, 2012 (incorporated by reference to Exhibit 10.4 to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 2012).*
— Amendment No. 2 to the Time Sharing Agreement between PMI Global Services Inc. and Louis C.
Camilleri, dated October 23, 2012 (incorporated by reference to Exhibit 10.27 to the Annual Report
on Form 10-K for the year ended December 31, 2012).*
— Amendment No. 3 to the Time Sharing Agreement between PMI Global Services Inc. and Louis C.
Camilleri, dated December 31, 2014 (incorporated by reference to Exhibit 10.34 to the Annual
Report on Form 10-K for the year ended December 31, 2014).*
10.37
— Time Sharing Agreement between PMI Global Services Inc. and André Calantzopoulos, dated May
8, 2013 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2013).*
10.38
— Amendment No. 1 to the Time Sharing Agreement between PMI Global Services Inc. and André
Calantzopoulos, dated December 23, 2014 (incorporated by reference to Exhibit 10.36 to the
Annual Report on Form 10-K for the year ended December 31, 2014).*
10.39
— Agreement with Louis C. Camilleri (incorporated by reference to Exhibit 10.25 to the Registration
Statement on Form 10 filed February 7, 2008).*
10.40
— Amended and Restated Supplemental Management Employees’ Retirement Plan (incorporated by
reference to Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31,
2008).*
10.41
— Supplemental Equalization Plan, amended and restated as of June 29, 2015 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2015).*
10.42
— Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement (Secular
Trust) (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K for the year
ended December 31, 2008).*
10.43
— Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement
(Executive Trust) (incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K
for the year ended December 31, 2008).*
10.44
— Philip Morris International Inc. Form of Indemnification Agreement with Directors and Executive
Officers (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
September 18, 2009).*
10.45
— Form of Deferred Stock Agreement (2014 Grants) (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed February 7, 2014).*
10.46
— Form of Deferred Stock Agreement (2015 Grants) (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed February 10, 2015).*
10.47
— Philip Morris International Inc. Tax Return Preparation Services Policy (incorporated by reference
to Exhibit 10.51 to the Annual Report on Form 10-K for the year ended December 31, 2014).*
10.48
— Form of Restricted Stock Unit Agreement (2016 Grants) (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed February 9, 2016).*
10.49
— Form of Performance Share Unit Agreement (2016 Grants) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed February 9, 2016).*
10.50
— Form of Restricted Stock Unit Agreement (2017 Grants) (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed February 7, 2017).*
10.51
— Form of Performance Share Unit Agreement (2017 Grants) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed February 7, 2017).*
128
10.52
— Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors
(amended and restated as of January 1, 2015) (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed December 15, 2014).*
12
21
23
24
— Statement regarding computation of ratios of earnings to fixed charges.
— Subsidiaries of Philip Morris International Inc.
— Consent of independent registered public accounting firm.
— Powers of attorney.
31.1
— Certification of the Registrant’s 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 the Registrant’s 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
32.2
— Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
— Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
*
Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to
participate.
129
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
PHILIP MORRIS INTERNATIONAL INC.
By:
/s/ ANDRÉ CALANTZOPOULOS
(André Calantzopoulos
Chief Executive Officer)
Date: February 13, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated:
Signature
Title
Date
/s/ ANDRÉ CALANTZOPOULOS
Chief Executive Officer
February 13, 2018
Chief Financial Officer
February 13, 2018
Vice President and Controller
February 13, 2018
Directors
(André Calantzopoulos)
/s/ MARTIN G. KING
(Martin G. King)
/s/ ANDREAS KURALI
(Andreas Kurali)
*HAROLD BROWN,
LOUIS C. CAMILLERI,
MASSIMO FERRAGAMO,
WERNER GEISSLER,
JENNIFER LI,
JUN MAKIHARA,
SERGIO MARCHIONNE,
KALPANA MORPARIA,
LUCIO A. NOTO,
FREDERIK PAULSEN,
ROBERT B. POLET,
STEPHEN M. WOLF
*By:
/s/ ANDRÉ CALANTZOPOULOS
February 13, 2018
(André Calantzopoulos
Attorney-in-fact)
130
Reconciliation of Non-GAAP Measures
Adjustments for the Impact of Currency and Acquisitions
For the Years Ended December 31,
(in millions)
(Unaudited) 2017
2016
% Change in Net Revenues
excluding Excise Taxes
Net
Revenues
Less
Excise
Taxes
Net
Revenues
excluding
Excise
Taxes
Less
Currency
Net
Revenues
excluding
Excise
Taxes &
Currency
Net
Revenues
excluding
Excise Taxes,
Currency &
Acquisitions
Less
Acquisitions
Net
Revenues
Less
Excise
Taxes
Net
Revenues
excluding
Excise
Taxes
Total
Excluding
Currency
Excluding
Currency &
Acquisitions
$
27,580
$19,262
$ 8,318
$
45
$
8,273
$
— $
8,273
European Union
$ 27,129
$18,967
$
8,162
1.9 %
1.4 %
1.4 %
18,045
11,346
6,699
22,635
11,845
10,790
(291)
(137)
6,990
10,927
9,838
6,897
2,941
(54)
2,995
—
—
—
6,990
EEMA
18,286
11,286
7,000
(4.3)%
(0.1)%
(0.1)%
10,927
Asia
20,531
11,850
8,681
24.3 %
25.9 %
25.9 %
2,995
Latin America &
Canada
9,007
6,165
2,842
3.5 %
5.4 %
$
78,098
$49,350
$ 28,748
$
(437)
$
29,185
$
— $
29,185
PMI Total
$ 74,953
$48,268
$
26,685
7.7 %
9.4 %
5.4 %
9.4 %
Operating
Companies
Income
2017
Operating
Companies
Income
excluding
Currency
Less
Currency
Less
Acquisitions
Operating
Companies
Income
excluding
Currency &
Acquisitions
2016
% Change in
Operating Companies Income
Operating
Companies
Income
Total
Excluding
Currency
Excluding
Currency &
Acquisitions
$
3,775
$
(43)
$
3,818
$
— $
3,818
European Union
$
3,994
(5.5)%
(4.4)%
2,888
4,149
1,002
81
(123)
2,807
4,272
(70)
1,072
—
—
—
2,807
4,272
1,072
EEMA
Asia
Latin America &
Canada
3,016
3,196
(4.2)%
(6.9)%
29.8 %
33.7 %
(4.4)%
(6.9)%
33.7 %
938
6.8 %
14.3 %
14.3 %
$
11,814
$
(155)
$
11,969
$
— $
11,969
PMI Total
$
11,144
6.0 %
7.4 %
7.4 %
Reconciliation of Operating Companies Income to Adjusted Operating Companies Income, excluding Currency and Acquisitions
For the Years Ended December 31,
(in millions)
(Unaudited) 2017
2016
% Change in Adjusted
Operating Companies Income
Operating
Companies
Income
Less
Asset
Impairment
& Exit
Costs
Adjusted
Operating
Companies
Income
Less
Currency
Adjusted
Operating
Companies
Income
excluding
Currency
Less
Acquisitions
Adjusted
Operating
Companies
Income
excluding
Currency &
Acquisitions
Operating
Companies
Income
Less
Asset
Impairment
& Exit
Costs
Adjusted
Operating
Companies
Income
Adjusted
excluding
Currency
Adjusted
excluding
Currency &
Acquisitions
Adjusted
$
3,775
$
— $
3,775
$
(43)
$
3,818
$
— $
2,888
4,149
1,002
—
—
—
2,888
4,149
81
(123)
2,807
4,272
1,002
(70)
1,072
—
—
—
3,818
2,807
4,272
1,072
European
Union
EEMA
Asia
Latin
America &
Canada
$
3,994
$
— $
3,994
(5.5)%
(4.4)%
3,016
3,196
938
—
—
—
3,016
3,196
(4.2)%
(6.9)%
29.8 % 33.7 %
938
6.8 % 14.3 %
$
11,814
$
— $ 11,814
$
(155)
$
11,969
$
— $
11,969
PMI Total
$ 11,144
$
— $ 11,144
6.0 %
7.4 %
(4.4)%
(6.9)%
33.7 %
14.3 %
7.4 %
R-1
Adjusted Operating Companies Income Margin, excluding Currency and Acquisitions
For the Years Ended December 31,
(in millions)
(Unaudited) 2017
2016
% Points Change
Adjusted
Operating
Companies
Income
excluding
Currency
Net
Revenues
excluding
Excise
Taxes &
Currency
(1)
Adjusted
Operating
Companies
Income
Margin
excluding
Currency
$
3,818
$
8,273
2,807
4,272
6,990
10,927
1,072
2,995
$ 11,969
$ 29,185
46.2 %
40.2 %
39.1 %
35.8 %
41.0%
Adjusted
Operating
Companies
Income
excluding
Currency &
Acquisitions
Net
Revenues
excluding
Excise
Taxes,
Currency &
Acquisitions
(1)
Adjusted
Operating
Companies
Income
Margin
excluding
Currency &
Acquisitions
Adjusted
Operating
Companies
Income
Net
Revenues
excluding
Excise
Taxes(1)
Adjusted
Operating
Companies
Income
Margin (2)
$
3,818
$
2,807
4,272
8,273
6,990
10,927
46.2 %
40.2 %
39.1 %
1,072
2,995
35.8 %
European
Union
EEMA
Asia
Latin
America &
Canada
$
3,994
$ 8,162
3,016
3,196
7,000
8,681
938
2,842
$
11,969
$
29,185
41.0% PMI Total
$ 11,144
$ 26,685
48.9 %
43.1 %
36.8 %
33.0 %
41.8%
Adjusted
Operating
Companies
Income
Margin
excluding
Currency
Adjusted
Operating
Companies
Income
Margin
excluding
Currency &
Acquisitions
(2.7)
(2.9)
2.3
2.8
(0.8)
(2.7)
(2.9)
2.3
2.8
(0.8)
(1) For the calculation of net revenues excluding excise taxes, currency and acquisitions, refer to the "Adjustments for the Impact of Currency and Acquisitions" reconciliation in this section.
(2) 2017 Adjusted Operating Companies Income Margin for PMI Total was 41.1%, calculated as 2017 Adjusted Operating Companies Income of $11,814 divided by 2017 Net Revenues,
excluding Excise Taxes of 28,748. For the calculation of Net Revenues, excluding Excise Taxes and Adjusted Operating Companies Income, refer to the tables above.
Reconciliation of Reported Diluted EPS to Reported Diluted EPS, excluding Currency
For the Years Ended December 31, (Unaudited)
Reported Diluted EPS
Less:
Currency impact
Reported Diluted EPS, excluding Currency
2017
2016
% Change
3.88
$
4.48
(13.4)%
(0.21)
4.09
$
4.48
(8.7)%
$
$
Reconciliation of Reported Diluted EPS to Adjusted Diluted EPS and Adjusted Diluted EPS, excluding Currency
For the Years Ended December 31, (Unaudited)
Reported Diluted EPS
2017
2016
% Change
$
3.88
$
4.48
(13.4)%
Adjustments:
Asset impairment and exit costs
Tax items
Adjusted Diluted EPS
Less:
Currency impact
Adjusted Diluted EPS, excluding Currency
—
0.84
—
—
4.72
$
4.48
5.4 %
(0.21)
4.93
$
4.48
10.0 %
$
$
R-2
Reconciliation of Operating Income to Operating Companies Income
For the Years Ended December 31, (in millions) (Unaudited)
2017
2016
% Change
Operating Income
Excluding:
- Amortization of intangibles
- General corporate expenses (included in marketing, administration and research costs)
Plus: Equity (income)/loss in unconsolidated subsidiaries, net
Operating Companies Income
Reconciliation of Operating Cash Flow to Operating Cash Flow, excluding Currency
For the Years Ended December 31, (in millions) (Unaudited)
Net cash provided by operating activities (1)
Less:
Currency impact
Net cash provided by operating activities, excluding currency
(1) Operating cash flow.
$
$
$
$
11,503 $
10,815
6.4%
88
164
(59)
74
161
(94)
11,814 $
11,144
6.0%
2017
2016
% Change
8,912 $
8,077
10.3%
392
8,520 $
8,077
5.5%
R-3
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Shareholder Information
Mailing Addresses
Headquarters
Philip Morris International Inc.
120 Park Avenue
New York, NY 10017-5579
USA
www.pmi.com
Operations Center
Philip Morris International
Management SA
Avenue de Rhodanie 50
1007 Lausanne
Switzerland
www.pmi.com
Independent Auditors
PricewaterhouseCoopers SA
Avenue C.F. Ramuz 45
1001 Lausanne
Switzerland
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
USA
2018 Annual Meeting
The Philip Morris International Inc.
Annual Meeting of Shareholders will
be held at 9:00 a.m. on Wednesday,
May 9, 2018, in the Empire State
Ballroom at the Grand Hyatt New York
109 East 42nd Street
New York, NY 10017
USA
For further information, call toll-free:
1-866-713-8075
Shareholder Publications
Philip Morris International Inc. makes a
variety of publications and reports available.
These include the Annual Report, news
releases and other publications. For copies,
please visit: www.pmi.com/investors
Philip Morris International Inc. makes
available free of charge its filings (including
proxy statements and Reports on Forms
10-K, 10-Q and 8-K) with the U.S. Securities
and Exchange Commission. For copies,
please visit: www.pmi.com/SECfilings
If you do not have Internet access, you may
call our Shareholder Publications Center
toll-free: 1-866-713-8075
Shareholder Response Center
Computershare Trust Company, N.A., our
transfer agent, will answer questions about
your accounts, certificates, dividends or
the Direct Stock Purchase and Dividend
Reinvestment Plan. U.S. and Canadian
shareholders may call toll-free:
1-877-745-9350
From outside the U.S. or Canada,
shareholders may call:
1-781-575-4310
Postal address:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
USA
E-mail address:
pmi@computershare.com
Direct Stock Purchase and
Dividend Reinvestment Plan
Philip Morris International Inc. offers a Direct
Stock Purchase and Dividend Reinvestment
Plan, administered by Computershare. For more
information, or to purchase shares directly
through the Plan, please contact Computershare.
Trademarks
Trademarks and service marks in this report are
the registered property of, or licensed by, the
subsidiaries of Philip Morris International Inc.,
and are italicized or shown in their logo form.
Stock Exchange Listings
Philip Morris International Inc. is listed on
the New York Stock Exchange (ticker symbol
“PM”) and on the SIX Swiss Exchange (ticker
symbol “PMI”).
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As a convenience to shareholders and an
important cost-reduction measure, you
can register to receive future shareholder
materials (i.e., Annual Report and proxy
statement) via the Internet. Shareholders
also can vote their proxies via the Internet.
For complete instructions, please visit:
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To eliminate duplicate mailings, please contact
Computershare (if you are a registered share-
holder) or your broker (if you hold your stock
through a brokerage firm).
Additional Information
Information on our websites is not, and shall
not be deemed to be, a part of this report or
incorporated into any filings we make with
the SEC.
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Printer: Phoenix Lithographing, USA
© Copyright 2018 Philip Morris International Inc.
2017 Philip Morris Annual Report_FEB 28, 2018 Philip Morris International: Who We Are
We are a leading international tobacco company engaged in the manufacture
and sale of cigarettes and other nicotine-containing products in markets outside
the United States of America. We’re building our future on smoke-free products
that are a much better consumer choice than continuing to smoke cigarettes.
Through multidisciplinary capabilities in product development, state-of-the-art
facilities and scientific substantiation, we aim to ensure that our smoke-free
products meet adult consumer preferences and rigorous regulatory require-
ments. Our vision is that these products ultimately replace cigarettes to the
benefit of adult smokers, society, our company and our shareholders. For more
information, see www.pmi.com and www.pmiscience.com.
Philip Morris International Inc. | 120 Park Avenue, New York, NY 10017-5579 USA | www.pmi.com
2017 Philip Morris Annual Report_FEB 28, 2018