TOGETHER. FORWARD.
P H I L I P M O R R I S I N T E R N A T I O N A L
2 0 2 0 A N N U A L R E P O R T
2020 Philip Morris Annual Report_Feb 26, 2021 2020 Financial Highlights
Net
Revenues
-1.6%
vs. 20191
Adjusted
Diluted
EPS
+7.0%
vs. 20191
Adjusted
Operating
Income
+4.6%
vs. 20191
Operating
Cash Flow
$9.8
Billion
Adjusted
Operating
Income Margin
+2.4pp
vs. 20191
Annualized
Dividend
$4.80
Per Share2
Smoke-Free Portfolio
IQOS 2.4+
IQOS 3 DUO
IQOS 3 MULTI
IQOS VEEV
2020 Highlights
Total
IQOS
Users3
17.6
Million
Market Share
of PMI HTUs3
in IQOS
Markets4
6.1%
PMI HTUs
#3
Tobacco “Brand”
in IQOS
Markets4
HTU
Shipment
Volume
76.1
Billion Units
Smoke-Free
Product
Net Revenues
23.8%
of Total5
Note: See page G-1 for glossary of select terms. Reconciliations to the most
directly comparable U.S. GAAP measures are provided on pages R-1 to R-2.
(1) On an organic basis. See page G-1 for definition.
(2) Annualized rate based on a quarterly dividend of $1.20 per common share,
declared September 9, 2020.
(3) See page G-1 for definition.
(4) Excluding the U.S.
(5) Reflects PMI reduced-risk product net revenues of $6.8 billion as a
percentage of PMI total net revenues of $28.7 billion.
Cover photo: “TOGETHER. FORWARD.” is a new, integrated
campaign that aims to address the motivations and desires
of millions of diverse adult smokers across the globe who
would otherwise continue to smoke. As a consumer-centric
organization, we carefully listened to what our consumers
had to say, then co-created the new IQOS campaign.
2020 Philip Morris Annual Report_Feb 26, 2021 Dear Shareholder,
In 2020, PMI delivered a robust business performance given the
unprecedented headwinds of the COVID-19 pandemic. This
reflected the consistent, broad-based and increasingly profitable
growth of IQOS, solid pricing for combustible tobacco products
outside Indonesia, and significant cost efficiencies. We also
achieved several important milestones, notably the U.S. Food
and Drug Administration’s authorization of a version of IQOS as a
Modified Risk Tobacco Product (MRTP).
As we look back on the year, we must first and foremost salute
the enormous efforts of the entire PMI organization to keep our
employees and their families safe, ensure business continuity,
rapidly adapt our ways of working and help our local communities.
2020 vs. 2019 Results
The industry backdrop was very challenging, as pandemic-linked
confinements and other restrictions led to reduced adult smoker
daily tobacco consumption, temporary disruptions of both our
supply chain and the retail trade in certain markets, a severe
decline in our duty-free business, and the exacerbation of market
headwinds in Indonesia.
Nonetheless, our 2020 results represent an outstanding
delivery by the organization under severe constraints, including
the management of the business through remote working for the
majority of the year.
Total cigarette and heated tobacco unit (HTU) shipment
volume of 704.6 billion units decreased by 8.1%, or by 7.9% on a
like-for-like1 basis, reflecting lower cigarette volume, mainly due to
industry-wide COVID-related disruption, particularly in the second
quarter. HTU shipment volume increased by 27.6%, to 76.1 billion
units, driven by the strong growth of IQOS.
Total cigarette and HTU market share declined by 0.7
percentage points, to 27.7% of the international market, excluding
China and the U.S., reflecting a lower share for cigarettes –
mainly due to Indonesia and PMI Duty Free, which accounted
for a 0.8-percentage-point decline – partly offset by the strong
performance of our HTU brands, whose international share
increased by 0.8 percentage points to reach 3.0%.
Net revenues of $28.7 billion decreased by 3.7%. On an organic
basis, net revenues declined by 1.6%, due primarily to unfavorable
combustible tobacco volume/mix – which was exacerbated by
pandemic-related headwinds – partly offset by higher HTU
shipment volume and favorable combustible tobacco pricing.
Adjusted operating income (OI) of $11.7 billion decreased
by 0.5%. On an organic basis, adjusted OI increased by 4.6%,
driven by: the growing weight of IQOS in our business; significant
efficiencies related to manufacturing and operating costs; and
the optimization, digitalization and greater utilization of our
smoke-free-product commercial infrastructure. Adjusted OI
margin increased by 240 basis points on an organic basis.
Adjusted diluted EPS of $5.17 decreased by 0.4%. On an organic
basis, adjusted diluted EPS increased by 7.0%.
Operating cash flow of $9.8 billion decreased by $0.3 billion,
or 2.8%. On a currency-neutral, like-for-like basis, operating cash
flow increased by 3.5%.
In September, the Board of Directors approved a 2.6% increase
in the quarterly dividend, to an annualized rate of $4.80 per share.
This represented the thirteenth consecutive year in which we
increased our dividend since becoming a public company in 2008.
Delivering a Smoke-Free Future
IQOS continued its strong performance in 2020. We closed the
year with an estimated 17.6 million total IQOS users,1 of which
(1) See page G-1 for definition.
approximately 12.7 million have switched to IQOS and stopped
smoking.1 Importantly, smoke-free products accounted for almost
one-quarter of our total net revenues for the year. This growing
weight provides a powerful tailwind to our top- and bottom-line
financial performance.
We added more IQOS users in 2020 than in the previous year,
with our accelerated shift to digital and remote engagement
helping to mitigate the pandemic-related impact on IQOS user
acquisition. This supported strong HTU volume growth in the
EU, Japan and Russia, only partly offset by Duty Free due to the
pandemic-related decline in international travel. By year-end,
IQOS was commercialized in 64 markets.
Complementing our IQOS heat-not-burn product offering,
we made important steps to expand our smoke-free portfolio
in 2020 to provide adult smokers with an ever-broader range of
taste, price and technology choices. This included the launch of lil
SOLID in Russia and Ukraine and lil HYBRID in Japan, leveraging
our global collaboration agreement with KT&G. We also began the
international launch of our IQOS VEEV e-vapor product (pictured
on the back cover of this report) in New Zealand in August,
followed by the Czech Republic in December.
In 2020, we maintained our relentless focus on consumer
centricity to enhance the experience along the entire consumer
journey associated with our smoke-free products – from aware-
ness and understanding to full switching and advocacy. This drives
our commercialization activities – covering channels and programs
– and development activities, from both a product and brand
perspective. A central element of this focus was our engagement
with consumers to collect timely, first-hand feedback to drive
improvements at each stage of consumer interaction.
The U.S. Food and Drug Administration’s issuance, in July,
of MRTP orders for the IQOS Tobacco Heating System (IQOS
2.4 device and three HTU variants) was a historic milestone for
PMI, permitting the marketing of these products with reduced
exposure claims in the U.S. and providing a strong reference for
science-based harm-reduction discussions in other jurisdictions.
Furthermore, the FDA’s authorization of IQOS 3 via the premarket
tobacco application (PMTA) pathway was another important step
for the tens of millions of men and women in the U.S. who smoke.
There were a number of important regulatory developments
internationally for smoke-free products in 2020. For example,
Greece adopted an amendment to its tobacco regulation that
sets forth a pre-approval regimen that allows the communication
of scientifically substantiated messages to adult smokers. In
addition, New Zealand included an amendment of its tobacco
regulation in which non-combusted alternatives are clearly
differentiated from smoking products.
In 2020, we extended our corporate “Unsmoke” campaign
to include “Unsmoke Your Mind,” which communicates the
importance of creating a regulatory environment in which
decision-making is transparent, science based, and people
centric. In this vein, we held our first Open Science events,
which showcased our latest scientific results and provided an
opportunity to discuss – in a virtual setting – relevant topics with
more than 1,600 participants from 80 countries.
Combustible Product Portfolio
Our combustible tobacco portfolio showed resilience in 2020.
While specific headwinds in Duty Free and Indonesia weighed on
the overall share of our cigarette brands, the share performance
elsewhere was essentially stable net of IQOS-related cannibal-
ization. This was achieved despite our premium positioning, which
1
2020 Philip Morris Annual Report_March 1, 2021
makes our portfolio more sensitive to reduced social consumption
opportunities for which brands like Marlboro are over indexed.
Our combustible tobacco pricing variance of nearly 4% was lower
than the historical annual average, mainly due to an approximate
two-percentage-point drag from Indonesia.
We continue to leverage our leadership of the combustible
tobacco category – and related infrastructure, expertise and
access to adult smokers – to support our smoke-free expansion.
Sustainability
Sustainability is at the core of our smoke-free strategy, and
the company made considerable progress in this important
area in 2020.
Recognizing that fully integrating sustainability into the
business can significantly enhance our company’s financial
performance, our Chief Sustainability Officer now reports to
our Chief Financial Officer.
PMI’s Board of Directors issued the company’s Statement
of Purpose, a declaration that clearly articulates our corporate
purpose and reaffirms our commitment to deliver a smoke-free
future. It explains how we harmonize commercial success with
social accountability and responsibility, and recognizes those
stakeholders most critical to the company’s long-term value
creation and sustainability.
We published our first Integrated Report, a comprehensive
overview of PMI’s performance and progress toward delivering
on our strategic initiatives. It includes our 2025 Roadmap – a set
of aspirational goals based on our sustainability materiality2
assessment that focuses on areas where we can have the greatest
impact. We look forward to reporting our progress towards
achieving these goals in our 2020 Integrated Report, in May.
External recognition of our environmental, social and
governance (ESG) performance included being listed, for the first
time, in the Dow Jones Sustainability Index North America and
being recognized by CDP with the prestigious “Triple A” score for
our disclosure on climate change, forests and water. These are just
two of many examples; for more, please refer to the inside back
cover of this report.
Inclusion & Diversity
PMI is taking important steps to further diversify its workplace,
reflecting its belief that fostering a culture built on broader
perspectives increases creativity and productivity, ultimately
driving innovation and consumer centricity.
With this in mind, we continue to increase the representation
of women in the organization and in management2 roles
specifically. At year-end 2020, women held 37% of management
positions and represented 40% of management promotions for
the year. Importantly, we added two additional women to our
Company Management – in the roles of General Counsel and Chief
Diversity Officer – with women now representing 16% of the total.
Earlier this year, PMI was added to the 2021 Bloomberg Gender-
Equality Index (GEI) for its transparency in gender reporting and
advancing women’s equity. This recognition underscores PMI’s
work to progress gender equity in the workplace and to ensure
equal opportunities for all employees.
In addition, PMI’s CEO joined The Valuable 500 – a global
movement putting disability inclusion on the business leadership
agenda. This better positions PMI to tap into a population
of talented individuals whose diverse perspectives and life
experiences will help us unlock the creativity and innovation
needed to propel us toward our vision of a smoke-free future.
Board of Directors
In December 2020, Louis C. Camilleri retired from his position as
Chairman of the Board.3 On behalf of the entire organization,
we want to thank Louis for his tremendous contributions to the
company throughout his 40-year career at PMI and its former
parent. We have all witnessed with admiration his inspiring
leadership, immense intellect, strategic vision, and genuine passion
for the PMI family. We will all miss dearly an exemplary executive
and an exceptional human being. Louis set a high standard we
should all aspire to.
We also thank Jennifer Li, who joined the Board in 2010 and will
not stand for re-election this year, for her valued contributions to
the company as Board member and Chair of the Audit Committee.
We warmly welcome PMI’s newest Board members: Michel
Combes and Bonin Bough, who joined in December 2020 and
February 2021, respectively. Together, they bring with them a
wealth of senior leadership experience in the technology, telecom
and consumer products industries, and will serve as valuable
resources supporting PMI’s continued transformation.
Looking Ahead
Last year brought unprecedented challenges for the world and
PMI. As an organization, we demonstrated enormous solidarity,
agility, resilience and learning ability. We are well positioned
to build on this experience as we continue the company’s
transformation in 2021 and beyond.
In May, we will begin a new chapter at PMI with the
appointment of Jacek Olczak as Chief Executive Officer.4 Jacek
has played an integral role in driving PMI’s business forward,
growing IQOS, and taking ever-greater strides toward our
shared vision of a smoke-free future. Jacek’s great passion for
our company and its employees, and his deep knowledge of our
products, business strategies, and transformation, make him the
ideal leader to ensure the continued growth of our business and to
deliver shareholder value.
As recently outlined at our Investor Day in February, we are
confident in the company’s next growth phase and are targeting
compound annual organic growth in net revenues and adjusted
diluted EPS of more than 5% and 9%, respectively, for the 2021
to 2023 period.5 Our confidence is underpinned by our leading
smoke-free product portfolio, including IQOS ILUMA – the next
generation of our IQOS heat-not-burn product, featuring a new
internal heating induction technology – set to launch in the second
half of 2021. We now aim for smoke-free products to account
for the majority of our total net revenues by 2025, an important
milestone toward our ambition to deliver a smoke-free future.
André Calantzopoulos,
Chief Executive Officer
Lucio A. Noto,
Interim Chairman of the Board
March 12, 2021
(2) See page G-1 for definition.
(3) As announced on December 10, 2020, PMI’s current Chief Executive Officer, André Calantzopoulos, was appointed Executive Chairman of the Board, to
take effect immediately prior to the Annual Meeting of Shareholders on May 5, 2021. Lucio A. Noto, PMI’s independent director, will serve as interim
Chairman until Mr. Calantzopoulos’ succession in May.
(4) As announced on December 10, 2020, PMI’s current Chief Operating Officer, Jacek Olczak, will succeed André Calantzopoulos as Chief Executive Officer
immediately after the Annual Meeting of Shareholders on May 5, 2021.
(5) Please refer to the Forward-Looking and Cautionary Statements section of the 10-K.
2
2020 Philip Morris Annual Report_March 1, 2021
Board of Directors
André Calantzopoulos†
Chief Executive Officer
Director since 2013
Bonin Bough 3,4
Founder & Chief
Growth Officer,
Bonin Ventures
Director since 2021
Michel Combes 1,4,5,6
President,
SoftBank Group
International
Director since 2020
Werner Geissler 1,2,3,4
Operating Partner,
Advent International
Director since 2015
Lisa A. Hook 1,2,3,4,6
Managing Partner,
Two Island Partners LLC
Director since 2018
Jennifer Li 1,3,4,5††
General Partner,
Changcheng
Investment Partners
Director since 2010
Jun Makihara 1,4,6
Retired Businessman
Director since 2014
Kalpana Morparia 3,4,5
Independent Director
Director since 2011
Lucio A. Noto 1,2,3,4,5,6†††
Managing Partner,
Midstream Partners, LLC
Director since 2008
Frederik Paulsen 4,6
Chairman, Ferring Group
Director since 2014
Robert B. Polet 2,3,4,5
Chairman,
Rituals Cosmetics
Enterprise B.V.
Chairman, Arica
Holding B.V.
Chairman, SFMS B.V.
Senior Independent
Director,
William Grant & Sons, Ltd.
Director since 2011
Board and Committee
Leadership
Interim Chairman of the Board,
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 Consumer
Relationships and Regulation
Committee,
Lisa A. Hook, Chair
4 Member of Finance Committee,
Jun Makihara, Chair
5 Member of Nominating and
Corporate Governance
Committee,
Kalpana Morparia, Chair
6 Member of Product Innovation and
Regulatory Affairs Committee,
Frederik Paulsen, Chair
Company Management
André Calantzopoulos†
Chief Executive Officer
Jacek Olczak††††
Chief Operating Officer
Massimo Andolina
Senior Vice President,
Operations
Drago Azinovic
President, Middle East
& Africa Region
and PMI Duty Free
Emmanuel Babeau
Chief Financial Officer
Werner Barth
Senior Vice President,
Commercial
Charles Bendotti
Global Head,
People & Culture
Martin G. King
Chief Executive Officer,
PMI America
Frank de Rooij
Vice President,
Treasury & Corporate
Finance
Frederic de Wilde
President, European
Union Region
Suzanne R. Folsom
Senior Vice President &
General Counsel
Jorge Insuasty
Chief Life Sciences Officer
Stacey Kennedy
President, South &
Southeast Asia Region
Michael Kunst
Senior Vice President,
Commercial Transformation
Andreas Kurali
Vice President
and Controller
Bin Li
Chief Product Officer
Marco Mariotti
President, Eastern
Europe Region
Mario Masseroli
President, Latin America
& Canada Region
Deepak Mishra
Chief Strategy Officer
Silke Muenster
Chief Diversity Officer
Paul Riley
President, East Asia
& Australia Region
Marian Salzman
Senior Vice President,
Global Communications
Grégoire Verdeaux
Senior Vice President,
External Affairs
Michael Voegele
Chief Digital &
Information Officer
Stefano Volpetti
Chief Consumer Officer
† Will become Executive Chairman of the Board effective immediately before the 2021 Annual Meeting of Shareholders on May 5, 2021.
†† Not standing for re-election at the Annual Meeting of Shareholders on May 5, 2021.
††† Interim Chairman of the Board until May 5, 2021.
†††† Will succeed Mr. Calantzopoulos as Chief Executive Officer effective immediately after the Annual Meeting of Shareholders on May 5, 2021.
Anticipated to be nominated for election to the Board of Directors at the Annual Meeting of Shareholders.
3
2020 Philip Morris Annual Report_March 1, 2021
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 Products S.A.
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 505005
Louisville, KY 40233-5005
USA
2021 Virtual Annual
Meeting of Shareholders
The Philip Morris International Inc.
Annual Meeting of Shareholders
will be held solely online via a live
webcast on Wednesday, May 5, 2021,
at 9:00 a.m. Eastern Daylight Time.
For further information, call toll-free:
1-866-713-8075
Shareholder Publications
Philip Morris International Inc. makes
a variety of publications and reports
publicly 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 505005
Louisville, KY 40233-5005
USA
E-mail address:
pmi@computershare.com
New PMI Investor Relations Mobile App Is Now Available!
Our newly designed Investor Relations mobile application provides
users with easier, more dynamic and comprehensive access to the
company’s Investor Relations information, such as stock quotes,
press releases, SEC filings, investor materials, and live and archived
webcast playback of earnings calls and investor presentations.
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”).
Internet Access Helps Reduce Costs
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:
www.pmi.com/investors
To eliminate duplicate mailings, please
contact Computershare (if you are a
registered shareholder) or your broker
(if you hold your stock through a
brokerage firm).
Additional Information
Information on our website is not, and shall
not be deemed to be, a part of this report
or incorporated into any filings we make
with the SEC.
Philip Morris International: Delivering a Smoke-Free Future
Philip Morris International (PMI) is leading a transformation in the tobacco industry to create a smoke-free future
and ultimately replace cigarettes with smoke-free products to the benefit of adults who would otherwise continue
to smoke, society, the company and its shareholders. PMI is a leading international tobacco company engaged in the
manufacture and sale of cigarettes, as well as smoke-free products, associated electronic devices and accessories,
and other nicotine-containing products in markets outside the U.S. In addition, PMI ships versions of its IQOS Platform
1 device and consumables to Altria Group, Inc. for sale under license in the U.S., where these products have received
marketing authorizations from the U.S. Food and Drug Administration (FDA) under the premarket tobacco product
application (PMTA) pathway; the FDA has also authorized the marketing of a version of IQOS and its consumables as a
Modified Risk Tobacco Product (MRTP), finding that an exposure modification order for these products is appropriate
to promote the public health. PMI is building a future on a new category of smoke-free products that, while not risk
free, are a much better choice than continuing to smoke. Through multidisciplinary capabilities in product development,
state-of-the-art facilities and scientific substantiation, PMI aims to ensure that its smoke-free products meet adult
consumer preferences and rigorous regulatory requirements. PMI’s smoke-free product portfolio includes heat-not-burn
and nicotine-containing vapor products. As of December 31, 2020, IQOS is available for sale in 64 markets in key cities or
nationwide, and PMI estimates that approximately 12.7 million adults around the world have already switched to IQOS
and stopped smoking. For more information, please visit www.pmi.com and www.pmiscience.com.
Design: RWI www.rwidesign.com Photography: George Brooks, Vickers & Beechler Printer: Phoenix Lithographing, USA © Copyright 2021 Philip Morris International Inc.
4
2020 Philip Morris Annual Report_March 1, 2021 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, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
917-663-2000
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, no par value
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
2.875% Notes due 2024
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
Trading Symbol(s)
PM
PM21B
PM21
PM21A
PM22A
PM22B
PM22
PM22C
PM23
PM23B
PM23A
PM24
PM24C
PM24B
PM24A
PM25
PM25A
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
Title of each class
2.750% Notes due 2026
2.875% Notes due 2026
0.125% Notes due 2026
3.125% Notes due 2027
3.125% Notes due 2028
2.875% Notes due 2029
3.375% Notes due 2029
0.800% Notes due 2031
3.125% Notes due 2033
2.000% Notes due 2036
1.875% Notes due 2037
6.375% Notes due 2038
1.450% Notes due 2039
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
Trading Symbol(s)
PM26A
PM26
PM26B
PM27
PM28
PM29
PM29A
PM31
PM33
PM36
PM37A
PM38
PM39
PM41
PM42
PM42A
PM43
PM43A
PM44
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
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an 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
Non-accelerated filer
☑
☐
Accelerated filer
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☑
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, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $109 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.
Class
Common Stock,
no par value
Outstanding at January 29, 2021
1,557,451,856 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 5, 2021, to be filed with the Securities and
Exchange Commission (“SEC”) on or about March 25, 2021.
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.
Item 7A.
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
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
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
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6
12
12
12
13
13
16
16
57
58
118
118
118
119
121
121
121
121
122
126
In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.
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.
Item 1.
Business.
General Development of Business
PART I
General
Philip Morris International Inc. is a Virginia holding company incorporated in 1987. We are a leading international tobacco company
engaged in the manufacture and sale of cigarettes, as well as smoke-free products, associated electronic devices and accessories, and
other nicotine-containing products in markets outside the United States of America. In addition, we ship versions of our Platform 1
device and consumables to Altria Group, Inc. for sale under license in the United States, where these products have received
marketing authorizations from the U.S. Food and Drug Administration ("FDA") under the premarket tobacco product application
("PMTA") pathway; the FDA has also authorized the marketing of a version of our Platform 1 device and its consumables as a
Modified Risk Tobacco Product ("MRTP"), finding that an exposure modification order for these products is appropriate to promote
the public health.
We are leading a transformation in the tobacco industry to create a smoke-free future, based on a new category of reduced-risk
products that, while not risk free, are a much better choice than continuing to smoke. Our goal is to ultimately replace cigarettes with
smoke-free products to the benefit of adults who would otherwise continue to smoke, society, the company and its shareholders.
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 continuing 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. Through
multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure that our
RRPs meet adult consumer preferences and rigorous regulatory requirements.
Our IQOS smoke-free product brand portfolio includes heated tobacco and nicotine-containing vapor products. Our leading smoke-
free platform ("Platform 1") is a precisely controlled device into which a specially designed heated tobacco unit is inserted and heated
to generate an aerosol. Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which for us include
our HEETS, HEETS Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as
HEETS), Marlboro Dimensions, Marlboro HeatSticks and Parliament HeatSticks, as well as the KT&G-licensed brands, Fiit and Miix
(outside of Korea). Platform 1 was first introduced in Nagoya, Japan, in 2014. As of December 31, 2020, Platform 1 is available for
sale in 64 markets in key cities or nationwide.
Our cigarettes are sold in more than 175 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 37% of our total
2020 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 79% of our cigarette shipment volume in 2020. We also own a number of important local cigarette brands,
such as Dji Sam Soe, Sampoerna A and Sampoerna U in Indonesia, and Fortune and Jackpot in the Philippines.
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 that are otherwise compliant
with law.
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Description of Business
We manage our business in six operating segments as follows:
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The European Union Region (“EU”) is headquartered in Lausanne, Switzerland, and covers all the European Union countries
and also Switzerland, Norway, Iceland and the United Kingdom;
The Eastern Europe Region (“EE”) is also headquartered in Lausanne and includes Southeast Europe, Central Asia, Ukraine,
Israel and Russia;
The Middle East & Africa Region (“ME&A”) 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 (“S&SA”) is headquartered in Hong Kong and includes Indonesia, the Philippines and
other markets in this region;
The East Asia & Australia Region (“EA&A”) 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 (“LA&C”) is headquartered in New York and covers the South American continent,
Central America, Mexico, the Caribbean and Canada. LA&C also includes transactions under license with Altria Group,
Inc., for the distribution of our Platform 1 product in the United States.
As of March 22, 2019, we deconsolidated the financial results of our Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH")
from our financial statements. For further details, see Item 8, Financial Statements and Supplementary Data of this Annual Report on
Form 10-K (“Item 8”) Note 20. Deconsolidation of RBH.
Following the deconsolidation of our Canadian subsidiary, we will continue to report the volume of brands sold by RBH for which
other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop.
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 and may, in defined instances, exclude the People's Republic of China and/or our
duty free business. Unless otherwise stated, references to total industry, total market, our shipment volume and our market share
performance reflect cigarettes and heated tobacco units. In addition, to reflect the deconsolidation of RBH, effective March 22, 2019,
PMI's total market share has been restated for previous periods.
2020 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of
industry data during pandemic-related restrictions.
Our total shipments, including cigarettes and heated tobacco units, decreased by 8.1% in 2020 to 704.6 billion units. We estimate that
international industry volumes, including cigarettes and heated tobacco units, were approximately 4.9 trillion units in 2020, a 3.0%
decrease from 2019. Excluding the People’s Republic of China (“PRC”), we estimate that international cigarette and heated tobacco
unit volume was 2.5 trillion units in 2020, a 5.8% decrease from 2019. 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
14.4% in 2020, 15.1% in 2019 and 15.2% in 2018. Excluding the PRC, we estimate that our reported share of the international market
was approximately 27.7%, 28.4%, and 28.3% in 2020, 2019 and 2018, respectively.
Shipments of our principal cigarette brand, Marlboro, decreased by 11.3% in 2020 and represented approximately 9.5% of the
international cigarette market, excluding the PRC, in 2020, 10.0% in 2019 and 9.7% in 2018.
Total shipment volume of heated tobacco units reached 76.1 billion units in 2020, up from 59.7 billion units in 2019.
We have a market share of at least 15% in approximately 95 markets, including Algeria, Argentina, Australia, Austria, Belgium,
Brazil, the Czech Republic, Egypt, France, Germany, Hong Kong, Hungary, Indonesia, Israel, Italy, Japan, Korea, Kuwait, Mexico,
the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Switzerland, Turkey and Ukraine.
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Distribution & Sales
Our main types of distribution are tailored to the characteristics of each market and are often used simultaneously:
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Direct sales and distribution, where we have set up our own distribution selling directly to the retailers;
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. 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 Platform 1 devices and heated tobacco units under the IQOS
brand umbrella. We seek to compete in all profitable retail price categories, although our brand portfolio is weighted towards the
premium-price category.
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 and restricts adult consumer access to truthful and non-misleading information about our RRPs. Competitors include
three large international tobacco companies, new market entrants, particularly with respect to innovative products, 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. Certain new market entrants may alienate consumers from innovative
products through inappropriate marketing campaigns, messaging and inferior product satisfaction, while not relying on scientific
substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase the speed and
extent of the dissemination of inaccurate and misleading information about our RRPs.
Procurement and Raw Materials
We purchase tobacco leaf of various types, grades and styles throughout the world, mostly through independent tobacco suppliers. In
2020, we also contracted directly with farmers in several countries, including Argentina, Brazil, Colombia, Italy, Pakistan and Poland.
In 2020, direct sourcing from farmers represented approximately 25% of PMI’s global leaf requirements. The largest supplies of
tobacco leaf are sourced from Argentina, Brazil, China, Italy, Indonesia (mostly for domestic use in kretek products), Malawi,
Mozambique, the 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 400 suppliers. In 2020, our top
ten suppliers of direct materials combined represented approximately 55% 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.
We discuss the details of our supply chain for our RRPs in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Annual Report on Form 10-K (“Item 7”) in Business Environment—Reduced-Risk Products.
3
Business Environment
Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Business Environment.
Customers
Other Matters
As described in more detail in “Distribution & Sales” above, in many of our markets we sell our products to distributors. In 2020,
sales to a distributor in the European Union Region and a distributor in the East Asia & Australia Region each amounted to 10 percent
or more of our consolidated net revenues. See Item 8, Note 12. Segment Reporting for more information. We believe that 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. In some of our markets, particularly in the European Union and in the East Asia & Australia
Regions, a loss of a distributor may result in a temporary market disruption.
Employees
Our Workforce. At December 31, 2020, we employed approximately 71,000 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. We engage with legally recognized employee
representative bodies and we have collective bargaining agreements in many of the countries in which we operate. 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 we maintain good relations with our employees and their representative organizations.
Our Internal Transformation. To be successful in our transformation to a smoke-free future, we must continue transforming our culture
and ways of working, align our talent with our business needs and innovate to become a truly consumer-centric business. To achieve
our strategic goals, we need to attract, retain and motivate the best global talent with the right degree of diversity, experience and
skills. Therefore, we strive to ensure the development of our existing talent while increasingly recruiting those with the expertise in
areas that are new to us such as digital and technical solutions. We set the levels of our compensation and benefit programs that we
believe are necessary to achieve these goals and remain competitive with other consumer product companies.
Oversight and Management. Our Board of Directors provides oversight of various matters pertaining to our workforce, and the
Compensation and Leadership Development Committee of the Board is responsible for executive compensation matters and oversight
of the risks and programs related to talent management. As part of our commitment to workplace diversity in 2020, our Board
appointed a Chief Diversity Officer who reports directly to our CEO. Our Code of Conduct highlights our commitment to diversity,
inclusion, fairness, safety and equal opportunity in all aspects of employment. We were the first multinational company to receive a
global EQUAL-SALARY certification from the EQUAL-SALARY Foundation. This achievement is an important building block on
the road to creating a more inclusive gender-balanced workplace and continuing our reputation as a top employer.
Our Initiatives in Response to COVID-19. We focused on business continuity, health and safety of our employees, and rapidly
adapting our ways of working to a new environment. We implemented additional safety measures for essential employees in our
facilities and offices and continue to pay salaries to those employees who are unable to work due to government restrictions. We
enhanced remote work arrangements and digital collaboration and related risk management, and to date, a large majority of our
employees continues to work remotely.
Government Regulation
As a company with global operations in a heavily regulated industry, we are subject to multiple laws and regulations of jurisdictions in
which we operate. We discuss our regulatory environment in Item 7, Business Environment.
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, 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 known as the Carbon
Disclosure Project), the leading international non-governmental organization assessing the work of thousands of companies worldwide
in the area of environmental impact, including climate change. Our environmental and occupational health and safety management
program includes policies, standard practices and procedures at all our manufacturing centers. Furthermore, we have engaged an
external certification body to validate the effectiveness of this management program at our manufacturing centers around the world, in
accordance with internationally recognized standards for safety and environmental management. Our subsidiaries expect to continue to
4
make investments in order to drive improved performance and maintain compliance with environmental laws and regulations. We
assess and report to our management the compliance status of all our legal entities on a regular basis. Based on current regulations, 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.
Based on current regulations, compliance with government regulations, including environmental regulations, has not had, and is not
expected to have a material adverse effect on our results of operations, capital expenditures, financial position, earnings, or
competitive position.
As discussed in more detail in Item 1A. Risk Factors, our financial results could be significantly affected by regulatory initiatives that
could result in a significant decrease in demand for our brands. More specifically, any regulatory requirements that lead to a
commoditization of tobacco products or impede adult consumers' ability to convert to our RRPs, as well as any significant increase in
the cost of complying with new regulatory requirements could have a material adverse effect on our financial results.
Information About Our Executive Officers
The disclosure regarding executive officers is hereby incorporated by reference to the discussion under the heading “Information about
our Executive Officers as of February 8, 2021” in Part III, Item 10. Directors, Executive Officers and Corporate Governance of this
Annual Report on Form 10-K (“Item 10”).
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, HEETS and IQOS, or have the right to use them in all countries where we use them.
In addition, we have a large number of granted patents and pending patent applications worldwide. 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., a wholly owned
subsidiary of Altria Group, Inc. (“PM USA”). The Intellectual Property Agreement allocates ownership of jointly funded intellectual
property as follows:
•
•
PMI owns all rights to jointly funded intellectual property outside the United States, its territories and possessions; and
PM USA owns all rights to jointly funded intellectual property in the United States, its territories and possessions.
The parties agreed to submit disputes under the Intellectual Property Agreement first to negotiation between senior executives and
then to binding arbitration.
Seasonality
Our business segments are not significantly affected by seasonality, although in certain markets cigarette consumption may be lower
during the winter months due to the cold weather and may rise during the summer months due to outdoor use, longer daylight, and
tourism.
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”). 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
5
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," "aims," "goals," "targets," "forecasts" 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. Our RRPs constitute a new product category in its early stages that is less predictable than our mature cigarette business.
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 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.
Overall Business Risks
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 and health concerns, 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."
6
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 continue to 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"). Since it came into force in 2005, 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:
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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 mandating 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 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 and use of tobacco and nicotine-containing products in public and work places and, in
some instances, in private places and outdoors;
restrictions or prohibitions of novel tobacco or nicotine-containing products;
elimination of duty free sales and duty free allowances for travelers;
encouraging litigation against tobacco companies; and
excluding tobacco companies from transparent public dialogue regarding public health and other policy matters.
Our financial results could be significantly affected by regulatory initiatives resulting in a significant decrease in demand for our
brands. More specifically, requirements that lead to a commoditization of tobacco products or impede adult consumers' ability to
convert to our RRPs, as well as any significant increase in the cost of complying with new regulatory requirements could have a
material adverse effect on our financial results.
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 and other regulations.
We are subject to income tax laws in the United States and numerous foreign jurisdictions. The results of the 2020 U.S. presidential
and congressional elections could lead to changes in the U.S. tax system, including significant increases in the U.S. corporate income
tax rate and the minimum tax rate on certain earnings of foreign subsidiaries. If ultimately enacted into law, such changes could have
a material adverse impact on our effective tax rate thereby reducing our net earnings. Further changes in the tax laws of foreign
jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-
operation and Development, which recommended changes to numerous long-standing tax principles. If implemented, such changes, as
well as changes in taxing jurisdictions’ administrative interpretations, decisions, policies, or positions, could also have a material
adverse impact on our effective tax rate thereby reducing our net earnings. In future periods, 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 and other regulations 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.
7
Risks Related to our International Operations
Because we have operations in numerous countries, our results may be adversely impacted by economic, regulatory and
political developments, natural disasters, pandemics 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. Natural disasters,
pandemics, economic, political, regulatory or other developments could disrupt our supply chain, manufacturing capabilities or
distribution capabilities. In addition, such developments could increase costs of our materials and operations and lead to loss of
property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, all of
which could reduce our volumes, revenues and net earnings. We discuss risks associated with the COVID-19 pandemic below.
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.
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, operating income and EPS will be reduced because the local currency translates into fewer U.S. dollars.
During periods of economic crises, such as during the ongoing COVID-19 pandemic, 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.
Risks Related to Legal Challenges and Investigations
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 in which we operate. 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 17. Contingencies to our
condensed consolidated financial statements for a discussion of pending litigation and "Business Environment—Reduced-Risk
Products (RRPs)—Legal Challenges to RRPs."
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 income taxes, customs duties and/or excise taxes, allegations of false and misleading usage of
descriptors, allegations of unlawful advertising, and allegations of unlawful labor practices. 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 Item 8, Note 17. Contingencies—Other Litigation and
“Management's Discussion and Analysis of Financial Condition and Results of Operations—Operating Results by Business Segment
—Business Environment—Governmental Investigations” for a description of certain governmental investigations to which we are
subject.
We may be unable to adequately protect our intellectual property rights, and disputes relating to intellectual property rights
could harm our business.
Our intellectual property rights are valuable assets, and their protection is important to our business. If the steps we take to protect our
intellectual property rights globally, including through a combination of trademark, design, patent and other intellectual property
rights, are inadequate, or if others infringe or misappropriate our intellectual property rights, notwithstanding legal protection, our
business could be adversely impacted. Intellectual property rights of third parties may limit our ability to commercialize our products
or improve product quality in one or more markets. Competitors or other third parties may claim that we infringe their intellectual
property rights. Any such claims, regardless of merit, could divert management’s attention, be costly, disruptive, time-consuming and
unpredictable and expose us to litigation costs and damages, and impede our ability to manufacture, commercialize and improve our
products. If, as a result, we are unable to manufacture or sell our RRPs or improve their quality in one or more markets, our ability to
8
convert adult smokers to our RRPs in such markets would be adversely affected. See Item 8, Note 17. Contingencies—Other
Litigation to our condensed consolidated financial statements for a description of certain intellectual property proceedings.
Risks Related to our Competitive Environment
We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability
and results of operations.
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. 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 and restricts adult consumer access to truthful and
non-misleading information about our RRPs. Competitors include three large international tobacco companies, new market entrants,
particularly with respect to innovative products, 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. Certain new market
entrants may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior
product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing
use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our
RRPs.
We may be unable to anticipate changes in adult consumer preferences.
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 effective adult consumer engagement, including communication about product characteristics and usage of RRPs;
provide excellent customer care;
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 be materially adversely impacted as a result. Such down-trading trends may be
reinforced by regulation that limits branding, communication and product differentiation.
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 be adversely impacted 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.
9
Our ability to achieve our strategic goals may be impaired if we fail to attract, motivate and retain the best global talent and
effectively align our organizational design with the goals of our transformation.
To be successful, we must continue transforming our culture and ways of working, align our talent and organizational design with our
increasingly complex business needs, and innovate and transform to a consumer-centric business. We compete for talent, including in
areas that are new to us, such as digital and technical solutions, with companies in the consumer products, technology and other
sectors that enjoy greater societal acceptance. As a result, we may be unable to attract, motivate and retain the best global talent with
the right degree of diversity, experience and skills to achieve our strategic goals.
Risks Related to the Impact of COVID-19 on our Business
Our business, results of operations, cash flows and financial position will be adversely impacted during the continuation of the
COVID-19 pandemic.
The COVID-19 pandemic has created significant societal and economic disruption, and resulted in closures of stores, factories and
offices, and restrictions on manufacturing, distribution and travel, all of which have and will continue to adversely impact our
business, results of operations, cash flows and financial position while the pandemic continues. Our business continuity plans and
other safeguards may not be effective to mitigate the impact of the pandemic.
Currently, significant risks include our diminished ability to convert adult smokers to our RRPs, significant volume declines in our
duty-free business and certain other key markets, disruptions or delays in our manufacturing and supply chain, increased currency
volatility, and delays in certain cost saving, transformation and restructuring initiatives. Our business could also be adversely impacted
if key personnel or a significant number of employees or business partners become unavailable due to the COVID-19 outbreak. The
significant adverse impact of COVID-19 on the economic or political conditions in markets in which we operate could result in
changes to the preferences of our adult consumers and lower demand for our products, particularly for our mid-price or premium-price
brands. Continuation of the pandemic could disrupt our access to the credit markets or increase our borrowing costs. Governments
may temporarily be unable to focus on the development of science-based regulatory frameworks for the development and
commercialization of RRPs or on the enforcement or implementation of regulations that are significant to our business. In addition,
messaging about the potential negative impacts of the use of our products on COVID-19 risks may lead to increasingly restrictive
regulatory measures on the sale and use of our products, negatively impact demand for our products and the willingness of adult
consumers to switch to our RRPs, and adversely impact our efforts to advocate for the development of science-based regulatory
frameworks for the development and commercialization of RRPs.
The impact of these risks also depends on factors beyond our knowledge or control, including the duration and severity of the
COVID-19 pandemic in general and specifically in the jurisdictions in which we operate, its recurrence in our key markets, actions
taken to contain its spread and to mitigate its public health effects, and the ultimate economic consequences thereof.
Risks Related to Sourcing of Materials, Products and Services
Use of third-party resources may negatively impact quality of our products and services, and we may be required to replace
third-party contract manufacturers or service providers with our own resources.
We increasingly rely on third-party resources to manufacture some of our products and product parts (particularly, the electronic
devices and accessories) and to provide services, including to support our finance and information technology processes. While many
of these arrangements improve efficiencies and decrease our operating costs, they also diminish our direct control. Such diminished
control may have an adverse effect on the quality of products or services, our supply chain, and the speed and flexibility in our
response to changing market conditions and adult consumer preferences, all of which may place us at a competitive disadvantage. In
addition, we may be unable to renew these agreements on satisfactory terms for numerous reasons, including government regulations,
and our costs may increase significantly if we must replace such third parties with our own resources.
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 the impacts of natural disasters and pandemics such as COVID-19. Furthermore, crop quality may 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.
10
Risks Related to the Success of our Reduced-Risk Products
The financial and business performance of our reduced-risk products is less predictable than our cigarette business.
Our RRPs are novel products in a new category, and the pace at which adult smokers adopt them may vary, depending on the
competitive, regulatory, fiscal and cultural environment, and other factors in a specific market. There may be periods of accelerated
growth and periods of slower growth for these products, the timing and drivers of which may be more difficult for us to predict versus
our mature cigarette business. The impact of this lower predictability on our projected results for a specific period may be significant,
particularly during the early stages of this new product category and during the COVID-19 pandemic.
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 information and 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
the development and
effectively advocate for
commercialization of RRPs, including communication of scientifically substantiated information to enable adult smokers to
make better consumer choices.
the development of science-based regulatory frameworks for
We might not succeed in our efforts. If we do not succeed, but others do, or if heat-not-burn products are inequitably regulated
compared to other RRP categories without regard to the totality of the scientific evidence available for such products, we may be at a
competitive disadvantage. In addition, actions of some market entrants, such as the inappropriate marketing of e-vapor products to
youth, as well as alleged health consequences associated with the use of certain e-vapor products, may unfavorably impact public
opinion and/or mischaracterize all e-vapor products or other RRPs to consumers, regulators and policy makers without regard to the
totality of scientific evidence for specific products. This may impede our efforts to advocate for the development of science-based
regulatory frameworks for the development and commercialization of RRPs. We cannot predict whether regulators will permit the sale
and/or marketing of RRPs with scientifically substantiated information and claims. Such restrictions could limit the success of our
RRPs.
Our RRPs and commercial activities for these products are designed for, and directed toward, current adult smokers and users of
nicotine-containing products, and not for non-smokers or youth. If nonetheless there is a significant usage of our products or
competitive products among youth or non-smokers, even in situations over which we have no control, our credibility may suffer, and
our efforts to advocate for the development of science-based regulatory frameworks for the commercialization of RRPs may be
significantly impacted.
Moreover, the FDA’s premarket tobacco product and modified risk tobacco product authorizations of a version of our Platform 1
product are subject to strict marketing, reporting and other requirements. Although we have received these product authorizations from
the FDA, there is no guarantee that the product will remain authorized, particularly if there is a significant uptake in youth or non-
smoker initiation.
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 due to the absence of
combustion, 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.
Risks Related to Illicit Trade
We lose revenues as a result of counterfeiting, contraband, cross-border purchases, "illicit whites," non-tax-paid volume
produced by local manufacturers, and counterfeiting of our Platform 1 device and heated tobacco units.
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
11
manufacturers. Our revenues and consumer satisfaction with our Platform 1 device and heated tobacco units may be adversely affected
by counterfeit products that do not meet our product quality standards and scientific validation procedures.
Risks Related to Cybersecurity and Data Governance
The failure of our information systems to function as intended or their penetration with the intent to corrupt them or our
failure to adhere to strict data governance and cybersecurity protocols and to comply with privacy laws and regulations could
result in business disruption, loss of reputation, 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 data and communicate internally and externally
with employees, suppliers, consumers, 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 work with our internal specialists and these third-
party service providers to protect these systems and data from unauthorized access. Nevertheless, failure of these systems to function
as intended, or penetration of these systems by 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, respect the rights of data subjects, and adhere to strict data governance and cybersecurity protocols
could subject us to substantial fines and other legal challenges under regulations such as the EU General Data Protection Regulation.
As we are increasingly relying on digital platforms in our business, and as privacy laws in the jurisdictions in which we do business
become more stringent, the magnitude of these risks is likely to increase.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We own or lease various manufacturing, office and research and development facilities in locations primarily outside the United
States. We own properties in Switzerland where our operations center and state-of-the-art research and development facility are
located.
At December 31, 2020, we operated and owned a total of 39 manufacturing facilities across our six operating segments. Among them,
7 factories produced heated tobacco units.
In 2020, certain facilities each manufactured over 30 billion units (cigarettes and heated tobacco units combined). The largest
manufacturing facilities, in terms of volume, are located in Indonesia (S&SA), Poland (EU), Turkey (ME&A), Russia (EE), the
Philippines (S&SA), Lithuania (EU), Italy (EU), the Czech Republic (EU) and Portugal (EU). As part of our global operating model,
products manufactured in a particular manufacturing facility are not necessarily distributed in the operating segment where the facility
is located.
We have integrated the production of our heated tobacco units into a number of our existing manufacturing facilities, and we are
progressing with our plans to build manufacturing capacity for our other RRP platforms. We will continue to optimize our
manufacturing infrastructure.
We believe the properties owned or leased by our subsidiaries are maintained in good condition and are believed to be suitable and
adequate for our present needs.
Item 3.
Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8, Note 17. Contingencies.
12
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 (ticker symbol
"PM"). At January 29, 2021, there were approximately 48,300 holders of record of our common stock.
13
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, 2015, 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, 2015
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2019
December 31, 2020
PMI
$100.00
$108.60
$130.20
$86.90
$117.30
$121.80
PMI Peer Group (1)
$100.00
$101.70
$119.60
$107.80
$133.50
$143.10
S&P 500 Index
$100.00
$112.00
$136.40
$130.40
$171.50
$203.00
(1) The PMI Peer Group presented in this graph is the same as that used in the prior year. 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., Mondelēz 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.
14
Comparison of Five-Year Cumulative Total Shareholder ReturnPMIPMI Peer Group (1)S&P 500 Index201520162017201820192020$75$100$125$150$175$200$225 Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2020
Our share repurchase activity for each of the three months in the quarter ended December 31, 2020, was as follows:
Period
October 1, 2020 –
October 31, 2020 (1)
November 1, 2020 –
November 30, 2020 (1)
December 1, 2020 –
December 31, 2020 (1)
Pursuant to Publicly Announced
Plans or Programs
October 1, 2020 –
October 31, 2020 (2)
November 1, 2020 –
November 30, 2020 (2)
December 1, 2020 –
December 31, 2020 (2)
For the Quarter Ended
December 31, 2020
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
— $
— $
— $
—
—
—
— $
— $
— $
— $
1,126 $
3,139 $
1,155 $
5,420 $
—
—
—
—
75.97
70.54
75.82
72.79
(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 and performance share unit awards
and used shares to pay all, or a portion of, the related taxes.
15
Item 6. Selected Financial Data.
(in millions of dollars, except per share data)
2020
2019
2018
2017
2016
Summary of Operations:
Revenues including excise taxes
$
76,047 $
77,921 $
79,823 $
78,098 $
Excise taxes on products
Net revenues
Operating income
Net earnings attributable to PMI
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Total assets
Long-term debt (1)
Total debt
47,353
28,694
11,668
8,056
5.16
5.16
4.74
44,815
28,168
31,536
48,116
29,805
10,531
7,185
4.61
4.61
4.62
42,875
26,656
31,045
50,198
29,625
11,377
7,911
5.08
5.08
4.49
39,801
26,975
31,759
49,350
28,748
11,581
6,035
3.88
3.88
4.22
42,968
31,334
34,339
74,953
48,268
26,685
10,903
6,967
4.48
4.48
4.12
36,851
25,851
29,067
(1) Excluding current portion of long-term debt.
This Selected Financial Data should be read in conjunction with Item 7 and Item 8.
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 leading a transformation in the tobacco industry to create a smoke-free future and ultimately replace cigarettes with smoke-
free products to the benefit of adults who would otherwise continue to smoke, society, the company and its shareholders. We are a
leading international tobacco company engaged in the manufacture and sale of cigarettes, as well as smoke-free products, associated
electronic devices and accessories, and other nicotine-containing products in markets outside the United States. In addition, we ship
versions of our Platform 1 device and consumables to Altria Group, Inc. for sale under license in the United States, where these
products have received marketing authorizations from the U.S. Food and Drug Administration ("FDA") under the premarket tobacco
product application ("PMTA") pathway; the FDA has also authorized the marketing of a version of our Platform 1 device and its
consumables as a Modified Risk Tobacco Product ("MRTP"), finding that an exposure modification order for these products is
appropriate to promote the public health. We are building a future on a new category of smoke-free products that, while not risk-free,
are a much better choice than continuing to smoke. 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 smoke-free product portfolio includes heat-not-burn and nicotine-containing vapor products.
We manage our business in six operating segments:
•
•
European Union ("EU");
Eastern Europe ("EE");
• Middle East & Africa ("ME&A"), which includes our international duty free business;
•
South & Southeast Asia ("S&SA");
16
•
•
East Asia & Australia ("EA&A"); and
Latin America & Canada ("LA&C"), which includes transactions under license with Altria Group, Inc. for the distribution of
our Platform 1 product in the United States.
Our cigarettes are sold in more than 175 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 continuing smoking.
We use the term net revenues to refer to our operating revenues from the sale of our products, including shipping and handling
charges billed to customers, net of sales and promotion incentives, and excise taxes. 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).
Our cost of sales consists principally of: tobacco leaf, non-tobacco raw materials, labor and manufacturing costs; shipping and
handling costs; and the cost of devices produced by third-party electronics manufacturing service providers. Estimated costs
associated with device warranty programs are generally provided for in cost of sales in the period the related revenues are recognized.
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.
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
that are otherwise compliant with law.
17
Executive Summary
The following executive summary provides the business update and significant highlights from the Discussion and Analysis that
follows.
Consolidated Operating Results
•
Net Revenues – Net revenues of $28.7 billion for the year ended December 31, 2020, decreased by $1.1 billion, or 3.7%, from
the comparable 2019 amount, and were impacted by the effects of the COVID-19 pandemic, particularly in the second quarter of
2020 and continuing throughout the second half of the year. The change in our net revenues from the comparable 2019 amount
was driven by the following (variances not to scale):
Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting: unfavorable volume/mix, primarily due to lower
cigarette volume (mainly in Argentina, Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Poland, Russia and
Ukraine, partly offset by Germany), partially offset by higher heated tobacco unit volume (notably in the EU, Japan, Russia and
Ukraine, partly offset by PMI Duty Free); and the unfavorable impact of $253 million, shown in "Cost/Other," mainly resulting
from the deconsolidation of our Canadian subsidiary, Rothman, Benson & Hedges, Inc. ("RBH"), effective March 22, 2019, and
lower fees for certain distribution rights billed to customers in certain markets; partly offset by a favorable pricing variance
(notably driven by the Gulf Cooperation Council, Germany, Japan, Mexico, North Africa, the Philippines, PMI Duty Free, Russia
and Ukraine, partially offset by Indonesia, Poland and Turkey). For further details on the deconsolidation of RBH, see Item 8,
Note 17. Contingencies and Note 20. Deconsolidation of RBH. The Gulf Cooperation Council ("GCC") is defined as Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).
18
(in millions)$29,805$(469)$794$(1,183)$(253)$28,6942019CurrencyPriceVolume/MixOther2020 Net revenues by product category for the years ended December 31, 2020 and 2019, are shown below:
•
Diluted Earnings Per Share – The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended
December 31, 2020, from the comparable 2019 amounts, were as follows:
For the year ended December 31, 2019
2019 Asset impairment and exit costs
2019 Canadian tobacco litigation-related expense
2019 Loss on deconsolidation of RBH
2019 Russia excise and VAT audit charge
2019 Fair value adjustment for equity security investments
2019 Tax items
Subtotal of 2019 items
2020 Asset impairment and exit costs
2020 Brazil indirect tax credit
2020 Fair value adjustment for equity security investments
2020 Tax items
Subtotal of 2020 items
Currency
Interest
Change in tax rate
Operations
Diluted EPS
$
4.61
% Growth
(Decline)
0.23
0.09
0.12
0.20
(0.02)
(0.04)
0.58
(0.08)
0.05
(0.04)
0.06
(0.01)
(0.32)
(0.02)
0.05
0.27
5.16
11.9 %
For the year ended December 31, 2020
$
Asset impairment and exit costs – During 2019, as part of the optimization of our global manufacturing infrastructure, we
recorded pre-tax asset impairment and exit costs of $422 million, representing $362 million net of income tax and a diluted EPS
charge of $0.23 per share. This 2019 charge primarily related to a cigarette plant closure in Berlin, Germany (approximately
$0.19 per share), as well as the closure of cigarette plants in Argentina, Colombia and Pakistan. During 2020, we recorded pre-
tax asset impairment and exit costs of $149 million, representing $124 million net of income tax and a diluted EPS charge of
19
2020 ($ in millions)CombustibleProducts$21,86776.2%RRPs$6,82723.8%2019 ($ in millions)CombustibleProducts$24,21881.3%RRPs$5,58718.7%
$0.08 per share, related to the organizational design optimization plan, primarily in Switzerland. The total pre-tax charges in 2019
and 2020 were included in marketing, administration and research costs on the consolidated statements of earnings. For further
details, see Item 8, Note 19. Asset Impairment and Exit Costs.
Canadian tobacco litigation-related expense – In the first quarter of 2019, we recorded a pre-tax charge of $194 million,
representing $142 million net of tax, relating to the judgment against RBH in two Québec smoking and health class actions. The
charge of $0.09 per share reflects our assessment of the portion of the judgment that represents a probable and estimable loss prior
to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment. The total pre-tax charge
was included in marketing, administration and research costs on the consolidated statements of earnings and was included in the
operating income of the Latin America & Canada segment. For further details, see Item 8, Note 17. Contingencies and Item 8,
Note 20. Deconsolidation of RBH.
Loss on deconsolidation of RBH – Following the judgment in the two Québec smoking and health class actions, RBH obtained an
initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act
(“CCAA”), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its
business in the ordinary course with minimal disruption to its customers, suppliers and employees. The administration of the
CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements
of control of the business from both PMI and RBH. As a result, we have determined that we no longer have a controlling
financial interest over RBH and that we do not exert "significant influence" over RBH under U.S. GAAP. Therefore, we
deconsolidated RBH as of the date of the CCAA filing on March 22, 2019, and have accounted for our continuing investment in
RBH as an equity security, without readily determinable fair value.
A loss on the deconsolidation of RBH of $239 million was included in marketing, administration and research costs on the
consolidated statements of earnings for the year ended December 31, 2019, and was included in the operating income of the Latin
America & Canada segment. The $0.12 per share impact also included a tax benefit of $49 million within the provision for
income taxes, as discussed below, related to the reversal of a deferred tax liability on the unremitted earnings of RBH. For further
details, see Item 8, Note 17. Contingencies and Item 8, Note 20. Deconsolidation of RBH.
Russia excise and VAT audit charge – As a result of the final tax assessment for the 2015-2017 financial years received by our
Russian affiliate, in the third quarter of 2019, PMI recorded a pre-tax charge of $374 million in marketing, administration and
research costs in the consolidated statements of earnings, representing $315 million net of income tax and a diluted EPS charge of
$0.20. The pre-tax charge of $374 million was included in the operating income of the Eastern Europe segment. For further
details, see Item 8, Note 17. Contingencies.
Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI
recorded a gain of $119 million for tax credits ($79 million net of income tax and $0.05 per share increase in diluted EPS)
representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits will be
applied to future tax liabilities in Brazil. This amount was included as a reduction in marketing, administration and research costs
in the consolidated statements of earnings for the year ended December 31, 2020 and was included in the operating income of the
Latin America & Canada segment. A decision regarding an additional amount of overpaid indirect taxes of approximately
$90 million is still pending before this court.
Fair Value adjustment for equity security investments – In the fourth quarter of 2019, PMI recorded a favorable fair value
adjustment for its equity security investments of $35 million after tax (or $0.02 per share increase in diluted EPS). The fair value
adjustment for its equity security investments was included in equity investments and securities (income)/loss, net ($44 million
income) and provision for income taxes ($9 million expense) on the consolidated statements of earnings in 2019. During 2020,
we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share
decrease in diluted EPS). The fair value adjustment for our equity security investments was included in equity investments and
securities (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated
statements of earnings. For further details, see Item 8, Note 4. Related Parties - Equity Investments and Other.
Income taxes – The 2019 Tax items that increased our 2019 diluted EPS by $0.04 per share in the table above were primarily due
to a reduction in estimated U.S. federal income tax on dividend repatriation for the years 2015 - 2018 ($67 million). The 2020
Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S. tax regulations under
the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019
($93 million). For further details, see Item 8, Note 11. Income Taxes.
The change in the tax rate that increased our diluted EPS by $0.05 per share in the table above was primarily due to changes in
earnings mix by taxing jurisdiction, a reduction of U.S. state tax expense and the corporate income tax rate reduction in Indonesia,
20
partially offset by a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019 and
repatriation cost differences. For further details, see Item 8, Note 11. Income Taxes.
Currency – The unfavorable currency impact during 2020 results from the fluctuations of the U.S. dollar, especially against the
Argentine peso, Brazilian real, Indonesian rupiah, Mexican peso, Russian ruble, Swiss franc and Turkish lira, partially offset by
the Egyptian pound, Japanese yen and Philippine peso. This unfavorable currency movement has impacted our profitability
across our primary revenue markets and local currency cost bases.
Interest – The unfavorable impact of interest was due primarily to lower interest earned on cash balances.
Operations – The increase in diluted EPS of $0.27 from our operations in the table above was due primarily to the following
segments:
•
•
•
European Union: Favorable volume/mix, favorable pricing and lower manufacturing costs, partially offset by higher
marketing, administration and research costs;
East Asia & Australia: Lower marketing, administration and research costs, lower manufacturing costs and favorable pricing,
partially offset by unfavorable volume/mix; and
Eastern Europe: Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by higher
marketing, administration and research costs ;
partially offset by
• Middle East & Africa: Unfavorable volume/mix and lower fees for certain distribution rights billed to customers in certain
markets, partially offset by favorable pricing, and lower marketing, administration and research costs;
•
•
South & Southeast Asia: Unfavorable volume/mix and unfavorable pricing, partially offset by lower marketing,
administration and research costs; and
Latin America & Canada: Unfavorable volume/mix, as well as the unfavorable impact resulting from the deconsolidation of
RBH, partially offset by favorable pricing and lower marketing, administration and research costs.
For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following
Discussion and Analysis.
COVID-19 Impact on Our Business
COVID-19: Business Continuity Update
Since the onset of the COVID-19 pandemic, PMI has undertaken a number of business continuity measures to mitigate potential
disruption to its operations and route-to-market in order to preserve the availability of products to its customers and adult consumers.
Currently:
•
•
•
•
PMI has sufficient access to the inputs for its products and is not facing any significant business continuity issues with respect to
key suppliers;
All of of PMI's cigarette and heated tobacco unit manufacturing facilities globally are operational;
COVID-related restrictions do not have a significant impact on the availability of PMI's products to its customers and adult
consumers; and
PMI has sufficient liquidity resources through cash on hand, the ongoing cash generation of its business, and its access to the
commercial paper and debt markets.
Nonetheless, significant uncertainty remains as the spread of the disease is increasing in a number of markets, resulting in additional
restrictions and increasing risk of disruptions.
21
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 as performance obligations are satisfied. Our primary performance obligation is the
distribution and sales of cigarettes and other nicotine-containing products, including reduced-risk products. Our performance
obligations are typically satisfied upon shipment or delivery to our customers. 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. The transaction price is typically based on the amount billed to the
customer and includes estimated variable consideration where applicable. Such variable consideration is typically not constrained and
is estimated based on the most likely amount that PMI expects to be entitled to under the terms of the contracts with customers,
historical experience of discount or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs,
which may change from time to time as the business and product categories evolve.
Inventories - Our inventories are valued at the lower of cost or market based upon assumptions about future demand and market
conditions. The valuation of inventory also requires us to estimate obsolete and excess inventory. We perform regular reviews of our
inventory on hand, as well as our future purchase commitments with our suppliers, considering multiple factors, including demand
forecasts, product life cycle, current sales levels, pricing strategy and cost trends. If our review indicates that inventories of raw
materials, components or finished products have become obsolete or are in excess of anticipated demand or that inventory cost
exceeds net realizable value, we may be required to make adjustments that will impact the results of operations.
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. 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 the market approach using earnings multiples of comparable global companies within the tobacco
industry, supported by a discounted cash flow model. At December 31, 2020, the carrying value of our goodwill was $6.0 billion,
which is related to ten reporting units, each of which consists of a group of markets with similar operating and economic
characteristics. The estimated fair value of each of our ten reporting units exceeded the carrying value as of December 31, 2020. 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 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
22
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 pension and postretirement plan obligations at December 31, 2020 and 2019 are as
follows:
Pension plans
Postretirement plans
2020
0.56%
2.84%
2019
0.83%
3.28%
We anticipate that assumption changes will increase 2021 pre-tax pension and postretirement expense to approximately $300 million
as compared with approximately $264 million in 2020, excluding amounts related to employee severance and early retirement
programs. The anticipated increase is primarily due to higher amortization of unrecognized actuarial gains/losses of $50 million,
coupled with higher service cost of $24 million, partially offset by lower interest cost of $18 million and higher expected return on
plan assets of $17 million and other movements of $3 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 2021 pension and postretirement
expense by approximately $80 million, and a fifty-basis-point increase in our discount rate would decrease our 2021 pension and
postretirement expense by approximately $70 million. Similarly, a fifty-basis-point decrease (increase) in the expected return on plan
assets would increase (decrease) our 2021 pension expense by approximately $40 million.
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.
We are required to assess the likelihood of recovering deferred tax assets against future sources of taxable income. If we determine,
using all available evidence, that we do not reach the more likely than not threshold for recovery, a valuation allowance is recorded.
Significant judgment is required in determining the need for and amount of valuation allowances for deferred tax assets including
estimates of future taxable income in the applicable jurisdictions and the feasibility of on-going tax planning strategies, as applicable.
The effective tax rates used for interim reporting are based on our full-year geographic earnings mix projections. Changes in currency
exchange rates, earnings mix by taxing jurisdiction or future regulatory developments may have an impact on the effective tax rates.
Significant judgment is required in determining income tax provisions and in evaluating tax positions.
23
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 into the same line
item as the impact of the underlying transaction and 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.
Fair value of non-marketable equity securities - For further details, see Item 8, Note 20. Deconsolidation of RBH.
Contingencies - As discussed in Item 8, Note 17. 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 tobacco-related litigation is in its early stages, and
litigation is subject to uncertainty. At the present time, except as stated otherwise in Item 8, Note 17. Contingencies, 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.
Consolidated Operating Results
Our net revenues and operating income by segment were as follows:
(in millions)
Net Revenues
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada (1)
Net revenues
Operating Income
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada (1)
2020
2019
2018
$
10,702 $
9,817 $
3,378
3,088
4,396
5,429
1,701
3,282
4,042
5,094
5,364
2,206
9,298
2,921
4,114
4,656
5,580
3,056
$
$
28,694 $
29,805 $
29,625
5,098 $
3,970 $
871
1,026
1,709
2,400
564
547
1,684
2,163
1,932
235
4,105
902
1,627
1,747
1,851
1,145
Operating income
11,377
(1) As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's
financial statements. For further details, see Item 8, Note 20. Deconsolidation of RBH.
10,531 $
11,668 $
$
24
Items affecting the comparability of results from operations were as follows:
•
•
•
•
•
Asset impairment and exit costs - See Item 8, Note 19. Asset Impairment and Exit Costs for details of the $149 million and $422
million pre-tax charges for the years ended December 31, 2020 and 2019, respectively, as well as a breakdown of these costs by
segment.
Russia excise and VAT audit charge - See Item 8, Note 17. Contingencies for details of the $374 million pre-tax charge
included in the Eastern Europe segment for the year ended December 31, 2019.
Canadian tobacco litigation-related expense - See Item 8, Note 17. Contingencies and Note 20. Deconsolidation of RBH for
details of the $194 million pre-tax charge included in the Latin America & Canada segment for the year ended December 31,
2019.
Loss on deconsolidation of RBH - See Item 8, Note 20. Deconsolidation of RBH for details of the $239 million loss included in
the Latin America & Canada segment for the year ended December 31, 2019.
Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI
recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012
through December 2019; these tax credits will be applied to future tax liabilities in Brazil. This amount was included as a
reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December
31, 2020 and was included in the operating income of the Latin America & Canada segment. A decision regarding an additional
amount of overpaid indirect taxes of approximately $90 million is still pending before this court.
Our net revenues by product category were as follows:
PMI Net Revenues by Product Category
(in millions)
Combustible Products
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Combustible Products
Reduced-Risk Products
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Reduced-Risk Products
Total PMI Net Revenues
2020
2019
2018
$
8,053 $
8,093 $
2,250
3,031
4,395
2,468
1,670
2,438
3,721
5,094
2,693
2,179
8,433
2,597
3,732
4,656
3,074
3,037
$
$
$
$
21,867 $
24,218 $
25,529
2,649 $
1,128
57
1
2,961
31
6,827 $
1,724 $
844
321
—
2,671
27
5,587 $
865
324
382
—
2,506
19
4,096
28,694 $
29,805 $
29,625
Note: Sum of product categories or Regions might not foot to total PMI due to rounding.
Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including
shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. 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, including
shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue
25
amounts consist of the sale of our heated tobacco units, heat-not-burn devices and related accessories, and other nicotine-containing
products, which primarily include our e-vapor products.
PMI's heat-not-burn products include licensed KT&G heat-not-burn products.
Revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third
quarter of 2019, for sale under license in the United States, are included in Net Revenues of the Latin America & Canada segment.
References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six operating segments throughout this
"Discussion and Analysis" reflects the currency-neutral variances of: cost of sales (excluding the volume/mix cost component);
marketing, administration and research costs (including asset impairment and exit costs, the Canadian tobacco litigation-related
expense, the charge related to the deconsolidation of RBH in Canada, and the Russia excise and VAT audit charge); and amortization
of intangibles. “Cost/Other” also includes the currency-neutral net revenue variance, unrelated to volume/mix and price components,
attributable to fees for certain distribution rights billed to customers in certain markets in the ME&A Region, as well as the impact of
the deconsolidation in RBH.
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
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Cigarettes
Heated Tobacco Units
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada (1)
Total Heated Tobacco Units
Cigarettes and Heated Tobacco Units
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Cigarettes and Heated Tobacco Units
2020
2019
2018
163,420
93,462
117,999
144,788
45,100
63,749
174,319
100,644
134,568
174,934
49,951
72,293
628,518
706,709
19,842
20,898
1,022
36
33,862
451
76,111
183,262
114,360
119,021
144,824
78,962
64,200
704,629
12,569
13,453
2,654
—
30,677
299
59,652
186,888
114,097
137,222
174,934
80,628
72,592
766,361
179,622
108,718
136,605
178,469
56,163
80,738
740,315
5,977
4,979
3,403
—
26,866
147
41,372
185,599
113,697
140,008
178,469
83,029
80,885
781,687
(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.
Following the deconsolidation of our Canadian subsidiary, we will continue to report the volume of brands sold by RBH for which
other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop.
26
Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which for us include our HEETS, HEETS
Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), Marlboro
Dimensions, Marlboro HeatSticks and Parliament HeatSticks, as well as the KT&G-licensed brands, Fiit and Miix (outside of Korea).
Market share for HTUs is defined as the total sales volume for HTUs as a percentage of the total estimated sales volume for cigarettes
and HTUs.
Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Latin
America & Canada segment.
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 and may, in defined instances, exclude the People's
Republic of China and/or our duty free business. In addition, to reflect the deconsolidation of RBH, effective March 22, 2019, PMI's
total market share has been restated for previous periods.
2020 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of
industry data during pandemic-related restrictions.
In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.
North Africa is defined as Algeria, Egypt, Libya, Morocco and Tunisia.
The Gulf Cooperation Council ("GCC") is defined as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates
(UAE).
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect
cigarettes and heated tobacco units.
From time to time, PMI’s shipment volumes are subject to the impact of distributor inventory movements, and estimated total
industry/market volumes are subject to the impact of inventory movements in various trade channels that include estimated trade
inventory movements of PMI’s competitors arising from market-specific factors that significantly distort reported volume disclosures.
Such factors may include changes to the manufacturing supply chain, shipment methods, consumer demand, timing of excise tax
increases or other influences that may affect the timing of sales to customers. In such instances, in addition to reviewing PMI
shipment volumes and certain estimated total industry/market volumes on a reported basis, management reviews these measures on an
adjusted basis that excludes the impact of distributor and/or estimated trade inventory movements. Management also believes that
disclosing PMI shipment volumes and estimated total industry/market volumes in such circumstances on a basis that excludes the
impact of distributor and/or estimated trade inventory movements improves the comparability of performance and trends for these
measures over different reporting periods.
2020 compared with 2019
The following discussion compares our consolidated operating results for the year ended December 31, 2020, with the year ended
December 31, 2019.
Estimated international industry cigarette and heated tobacco unit volume, excluding China and the United States, of 2.5 trillion,
decreased by 5.8%, due to all PMI Regions, as described in the Regional sections below.
Our total shipment volume decreased by 8.1%, due to:
•
the EU, reflecting lower cigarette shipment volume, notably in Italy, Poland and Spain, partly offset by higher heated tobacco
unit shipment volume across the Region, particularly in Italy and Poland;
• Middle East & Africa, reflecting lower cigarette shipment volume, primarily in PMI Duty Free and Turkey, as well as lower
heated tobacco unit shipment volume due to PMI Duty Free;
•
South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia, Pakistan and the Philippines;
27
•
•
East Asia & Australia, reflecting lower cigarette shipment volume, predominantly in Japan, partly offset by higher heated tobacco
unit shipment volume driven by Japan; and
Latin America & Canada, reflecting lower cigarette shipment volume, primarily in Argentina and Mexico, partially offset by
Brazil. Excluding the volume impact from the RBH deconsolidation, our total shipment volume in the Region decreased by
10.3%;
partly offset by
•
Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, notably in Russia and Ukraine, partly
offset by lower cigarette shipment volume, mainly in Russia and Ukraine.
Excluding the volume impact from the RBH deconsolidation of approximately 1.0 billion units (reflecting first quarter 2019 volume of
RBH-owned brands and including Duty-Free sales of these brands in Canada), PMI's total shipment volume decreased by 7.9%.
Impact of Inventory Movements
The net impact of estimated distributor inventory movements for the full year was immaterial. Excluding the volume impact from the
deconsolidation of RBH, our total in-market sales declined by 7.8%.
Our cigarette shipment volume by brand and heated tobacco unit shipment volume was as follows:
PMI Shipment Volume by Brand (Million Units)
Cigarettes
Marlboro
L&M
Chesterfield
Philip Morris
Parliament
Sampoerna A
Dji Sam Soe
Bond Street
Lark
Next
Others
Total Cigarettes
Heated Tobacco Units (1)
Total Cigarettes and Heated Tobacco Units
Full-Year
2020
2019
Change
233,158
262,908
91,098
52,139
45,645
34,737
32,862
24,754
24,113
15,489
8,980
65,543
628,518
76,111
704,629
92,873
57,185
49,164
38,723
35,133
32,435
28,025
19,602
8,602
82,059
706,709
59,652
766,361
(11.3) %
(1.9) %
(8.8) %
(7.2) %
(10.3) %
(6.5) %
(23.7) %
(14.0) %
(21.0) %
4.4 %
(20.1) %
(11.1) %
27.6 %
(8.1) %
(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.
Note: Sampoerna A includes Sampoerna; Philip Morris includes Philip Morris/Dubliss; Lark includes Lark Harmony; and Next includes Next/
Dubliss
Our cigarette shipment volume of the following brands decreased:
• Marlboro, mainly due to Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Saudi Arabia and Turkey, partly offset
by Russia;
•
•
•
•
•
L&M, notably due to PMI Duty Free and Poland, partly offset by Mexico and Turkey;
Chesterfield, mainly due to Poland, Russia and Turkey, partly offset by Brazil and Saudi Arabia;
Philip Morris, primarily due to Argentina and Italy, partly offset by Russia;
Parliament, mainly due to PMI Duty Free, Russia and Turkey;
Sampoerna A in Indonesia, mainly due to premium A Mild;
28
•
•
•
•
Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild;
Bond Street, largely due to Russia and Ukraine;
Lark, primarily due to Japan and Turkey; and
"Others," notably due to: the impact of the deconsolidation of RBH in Canada; mid-price Fortune and Hope in the Philippines,
Muratti in Turkey and Sampoerna U in Indonesia; and low-price Baronet (morphed to L&M) in Mexico, Jackpot in the
Philippines and Morven in Pakistan; partly offset by mid-price Sampoerna Hijau in Indonesia.
Our cigarette shipment volume of the following brand increased:
•
Next, notably driven by Israel and Russia.
The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Italy and Poland), Eastern Europe
(notably Russia and Ukraine) and Japan, partly offset by PMI Duty Free.
2020 International Share of Market (excluding China and the United States)
Our total international market share (excluding China and the U.S.), defined as our cigarette and heated tobacco unit sales volume as a
percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.7 points to 27.7%, reflecting:
•
•
Total international market share for cigarettes of 24.7%, down by 1.5 points; and
Total international market share for heated tobacco units of 3.0%, up by 0.8 points.
Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 1.2 points to 25.7%,
mainly reflecting: out-switching to heated tobacco units, as well as lower cigarette market share and/or an unfavorable geographic mix
impact, notably in Indonesia, Mexico, the Philippines and PMI Duty Free, partly offset by Brazil and Germany.
In 2020, we owned five of the world's top 15 international cigarette brands, with international cigarette market shares as follows:
Marlboro, 9.5%; L&M, 3.7%; Chesterfield, 2.2%; Philip Morris, 1.9%; and Parliament, 1.4%.
29
Key Market Data
Key market data regarding total market size, our shipments and market share were as follows:
Market
Total Market
(billion units)
Total
Cigarette
Heated
Tobacco Unit
2020
2019
2020
2019
2020
2019
2020
2019
Total
2,548.4 2,705.0
704.6 766.4
628.5 706.7
76.1
59.7
PMI Shipments (billion units)
PMI Market Share (%)(1)
Heated
Tobacco Unit
Total
2020
27.7
2019
28.4
2020
2019
3.0
2.2
European Union
France
Germany
Italy
Poland
Spain
Eastern Europe
Russia
Middle East & Africa
Saudi Arabia
Turkey
South & Southeast Asia
36.6
74.6
67.4
45.6
41.8
37.9
73.3
67.9
46.2
45.4
16.3
29.1
34.6
17.8
13.2
17.0
27.9
34.9
19.0
14.5
16.1
27.4
29.0
15.4
12.8
16.9
27.0
31.4
17.9
14.1
0.2
1.6
5.6
2.4
0.4
0.1
0.9
3.5
1.1
0.3
44.9
39.0
52.2
39.0
31.4
45.0
38.0
51.8
41.2
31.3
0.5
2.2
8.1
5.2
1.0
0.2
1.2
4.8
2.5
0.7
219.1
226.5
69.2
68.0
55.6
58.8
13.6
9.2
32.3
30.1
6.3
3.8
21.7
20.8
114.8
119.7
9.1
47.5
9.2
51.9
9.0
47.5
9.2
51.9
Indonesia
Philippines
276.3
305.7
62.1
70.5
79.5
41.7
98.5
49.7
79.5
41.7
98.5
49.7
East Asia & Australia
Australia
Japan
Korea
Latin America & Canada
11.0
12.0
142.9
157.8
71.6
68.6
3.3
51.1
14.8
3.3
52.4
15.5
3.3
22.2
10.2
3.3
26.6
10.8
—
28.9
4.6
—
25.8
4.6
Argentina
Mexico
33.6
30.7
33.4
35.5
20.5
19.5
23.3
23.8
20.5
19.5
23.3
23.8
—
0.1
—
—
(1) Market share estimates are calculated using IMS data
0.1
—
—
—
—
—
—
—
39.0
41.3
28.8
67.2
29.9
37.1
20.7
61.0
63.7
43.0
43.4
32.2
70.5
27.5
34.5
22.6
70.0
67.1
0.3
—
—
0.1
—
20.4
6.5
—
0.2
—
—
—
—
—
17.1
6.8
—
—
Note: % change for Total Market and PMI shipments is computed based on millions of units; PMI Market Share estimates for previous periods are
restated to reflect RBH deconsolidation and exclude RBH-owned brands.
30
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Cost of Sales
Financial Summary
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other(1)
$ 28,694 $ 29,805
(3.7) % (2.2) % $ (1,111) $ (469) $ 794 $ (1,183) $
(253)
(9,569) (10,513)
9.0 % 7.5 %
944
158 —
464
322
Marketing, Administration and Research
Costs (2)
(7,384) (8,695)
15.1 % 17.0 % 1,311
(166) — —
1,477
Amortization of Intangibles
(73)
(66)
(10.6) % (13.6) %
(7)
2 — —
(9)
Operating Income
$ 11,668 $ 10,531
10.8 % 15.3 % $ 1,137 $ (475) $ 794 $ (719) $ 1,537
(1) Cost/Other variance includes the impact of the RBH deconsolidation.
(2) Favorable Cost/Other variance includes the 2019 Russia excise and VAT audit charge of $374 million, the 2019 Canadian tobacco litigation-
related expense of $194 million, the 2019 loss on deconsolidation of RBH of $239 million, the 2019 asset impairment and exit costs of $422 million,
the 2020 asset impairment and exit costs of ($149 million) and the 2020 Brazil indirect tax credit of $119 million, as well as the impact of the RBH
deconsolidation.
Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing
in the third quarter of 2019, for sale under license in the United States.
Net revenues, excluding unfavorable currency, decreased by 2.2%, reflecting: unfavorable volume/mix, primarily due to lower
cigarette volume (mainly in Argentina, Indonesia, Italy, Japan, Mexico, the Philippines, PMI Duty Free, Poland, Russia and Ukraine,
partly offset by Germany), partially offset by higher heated tobacco unit volume (notably in the EU, Japan, Russia and Ukraine, partly
offset by PMI Duty Free); and the unfavorable impact of $253 million, shown in "Cost/Other," mainly resulting from the
deconsolidation of RBH and lower fees for certain distribution rights billed to customers in certain markets; partly offset by a
favorable pricing variance (notably driven by the GCC, Germany, Japan, Mexico, North Africa, the Philippines, PMI Duty Free,
Russia and Ukraine, partially offset by Indonesia, Poland and Turkey).
The unfavorable currency in net revenues was due primarily to the Brazilian real, Indonesian rupiah, Mexican pesos, Russian ruble
and Turkish lira, partially offset by the Euro, Japanese yen and Philippine peso.
Net revenues include $6.8 billion in 2020 and $5.6 billion in 2019 related to the sale of RRPs. IQOS devices accounted for
approximately 7% of RRP net revenues for the year ended December 31, 2020, mainly due to a naturally lower ratio of new users to
existing users, longer replacement cycles and geographic mix.
Operating income, excluding unfavorable currency, increased by 15.3%, notably reflecting a favorable comparison, shown in "Cost/
Other," of a net charge of $30 million recorded in 2020 related to asset impairment and exit costs of $149 million (associated with
organizational design optimization) and the Brazil indirect tax credit of $119 million, to charges recorded in 2019 of $1.2 billion,
related to: asset impairment and exit costs ($422 million), associated with plant closures in Argentina, Colombia, Germany and
Pakistan), the loss on the deconsolidation of RBH ($239 million), the Canadian tobacco litigation-related expense ($194 million), and
the Russia excise and VAT audit charge ($374 million).
Excluding these 2020 and 2019 items noted above, and unfavorable currency of $475 million, operating income increased by 3.5%,
primarily reflecting: a favorable pricing variance; lower manufacturing costs (driven by productivity gains related to reduced-risk and
combustible products) and lower marketing, administration and research costs (partly driven by cost efficiencies); partially offset by
unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Indonesia, Italy, Japan, Mexico, the Philippines, PMI
Duty Free, Poland and Russia), partly offset by higher heated tobacco unit volume (notably in the EU, Japan, Russia and Ukraine,
partially offset by PMI Duty Free); and the unfavorable impact of the deconsolidation of RBH, included in "Cost/Other."
Interest expense, net, of $618 million increased by $48 million (8.4%) due primarily to lower interest earned on cash balances.
Our effective tax rate decreased by 1.5 percentage points to 21.7%. The effective tax rate for the year ended December 31, 2020 was
favorably impacted by changes in earnings mix by taxing jurisdiction, a reduction of U.S. state tax expense, a reduction of estimated
U.S. federal income tax liabilities for years 2018 and 2019 due to final regulations under the GILTI provisions of the Internal Revenue
Code ($93 million) and the corporate income tax rate reduction in Indonesia, partially offset by a decrease in deductions related to
31
foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences. We estimate that our 2021 effective
tax rate will be around 22%, excluding discrete tax events. Changes in currency exchange rates, earnings mix by taxing jurisdiction or
future regulatory developments may have an impact on the effective tax rates, which we monitor each quarter. Significant judgment is
required in determining income tax provisions and in evaluating tax positions. For further details, see Item 8, Note 11. Income Taxes.
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 $8.1 billion increased by $871 million or 12.1%. This increase was due primarily to higher
operating income as discussed above and a lower effective tax rate. Diluted and basic EPS of $5.16 increased by 11.9%. Excluding
an unfavorable currency impact of $0.32, diluted EPS increased by 18.9%.
2019 compared with 2018
For a discussion comparing our consolidated operating results for the year ended December 31, 2019, with the year ended December
31, 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation -
Discussion and Analysis - Consolidated Operating Results in our Annual Report on Form 10-K for the year ended December 31,
2019, which was filed with the U.S. Securities and Exchange Commission on February 7, 2020.
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 company 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 and nicotine-containing 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 17. 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.
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 has as its main
objective to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use. To date, 181 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. In October 2018, the CoP
recognized the need for more scientific assessment and improved reporting to define policy on heated tobacco products. Similar to its
previous policy recommendations on e-cigarettes, the CoP invited countries to regulate, restrict or prohibit heated tobacco products, as
appropriate under their national laws.
32
In July 2019, the WHO issued the Report on the Global Tobacco Epidemic 2019. While citing insufficient independent studies
regarding the benefits and the unknown long-term health impacts of electronic nicotine delivery systems and heated tobacco products,
the WHO has taken the position that such products are not risk-free and should be regulated in the same manner as cigarettes and in
line with the FCTC provisions. It is not possible to predict whether or to what extent measures recommended by the WHO, including
the FCTC guidelines, will be implemented.
We believe that when better alternatives to cigarettes exist, the discussion should not be whether these alternatives should be made
available to the more than one billion men and women who smoke today, but how fast, and within what regulatory framework to
maximize their adoption while minimizing unintended use. Therefore, we advocate for regulatory frameworks that recognize a
significant difference on a risk continuum between combustible tobacco on the one hand and non-combustible tobacco and other
nicotine-containing products on the other. Regulation should include measures that will accelerate switching to non-combustible
products, for example, by allowing adult consumers who would not otherwise quit to receive truthful and non-misleading information
about such products to enable them to make informed decisions and by applying uniform product standards to enable manufacturers to
demonstrate the safety of these products as well as the absence of combustion. Regulation should also include specific rules for
ingredients, labeling 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. Importantly, regulation must include measures designed
to prevent initiation by youth and non-smokers. We support mandated health warnings, minimum age laws, restrictions on advertising,
and public place smoking restrictions. We also support regulatory measures that help reduce illicit trade.
Certain measures are discussed in more detail below and in the Reduced-Risk Products (RRPs) section.
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.
World Customs Organization Developments: In 2020, the World Customs Organization (“WCO”) amended the harmonized system
nomenclature to introduce dedicated custom codes for novel tobacco and nicotine products, including heated tobacco products, e-
cigarettes and other nicotine-containing products. The amendments will be effective as of January 1, 2022. These amendments require
WCO member states to transfer products from customs codes in the current nomenclature to the new one. These amendments are not
expected to significantly impact current customs duty rates.
EU Tobacco Products Directive: In April 2014, the EU adopted a significantly revised EU Tobacco Products Directive (TPD), which
entered into force in May 2016. All member states 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 that expired in May 2020;
security features and tracking and tracing measures that became effective on May 20, 2019; 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.
The EU Commission’s Directorate General for Health and Food Safety is preparing a report on the implementation of the TPD,
including the evaluation of whether the TPD has achieved its objectives and is still relevant considering scientific, international and
technical developments, including in novel tobacco products and e-cigarettes. The report is expected to include recommendations on
potential revisions of the TPD to account for such developments. The report is due by May 2021.
EU Tobacco Excise Directive: The EU Commission is preparing a legislative proposal for the revision of the 2011 EU Tobacco Excise
Directive that may include definitions and tax treatment for novel tobacco and nicotine-containing products, including heated tobacco
products and e-cigarettes. The proposal is expected to be finalized by the end of 2021. The adoption of the proposal will require
unanimous agreement by all EU member states.
33
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, plain
packaging laws have been adopted in certain markets in all of our operating segments, including the key markets of Australia, France,
Saudi Arabia and Turkey. Some countries, such as Canada, New Zealand, Israel and Denmark adopted plain packaging regulations
that apply to all tobacco products, including RRPs. Other countries are also considering plain packaging legislation.
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. In many countries, menthol bans would eliminate the entire category of mentholated tobacco products.
The European Union banned cigarettes and roll-your-own tobacco products with characterizing flavors. Other tobacco products,
including heated tobacco products, are exempted from this flavor ban. The EU Commission is required to withdraw this exemption for
a particular product category if it determines that there is a substantial change of circumstances, such as a significant increase of EU-
wide sales volumes in such product category. Other countries may follow the EU’s approach. Turkey banned menthol as of May 2020.
Broader ingredient bans have been adopted by Canada and Brazil.
Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia and Russia,
governments have banned the display of tobacco products at the point of sale. Other countries are 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 and Use of Nicotine-Containing Products in Public: The pace and scope of restrictions on the use of
our products 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 and use of nicotine-containing products 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 specified
distances of certain public facilities. In addition, South Africa banned the sale of tobacco products, e-cigarettes, and electronic devices
that heat tobacco for several months during the COVID-19 pandemic. The ban, which was lifted on August 17, 2020, resulted in a
significant increase of illicit trade of tobacco products.
In a limited number of markets, most notably Japan, we are dependent on governmental approvals that may limit our pricing
flexibility.
The EU Single-Use Plastics Directive, which will require tobacco manufacturers and importers to cover the costs of public collection
systems for tobacco product filters, entered into force on July 2, 2019, after which member states will have two years to transpose it
into national law. While we cannot predict the impact of this initiative on our business at this time, we are monitoring developments
in this area.
Illicit Trade: Illicit tobacco trade creates a cheap and unregulated supply of tobacco products, undermines efforts to reduce smoking
prevalence, especially among youth, damages legitimate businesses and intellectual property rights, stimulates organized crime,
34
increases corruption and reduces government tax revenue. Without accounting for any potential COVID-19-related impact, we
generally estimate that, excluding China and the U.S., illicit trade may account for as much as 10 to 12% of global cigarette
consumption; this includes counterfeit, contraband and the persistent 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. Currently, we estimate that illicit trade in the European Union accounted for approximately 8% of total cigarette consumption
in 2019.
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 of these control measures in free trade zones, controls on duty free and Internet channels
and the implementation of tracking and tracing technologies. To date, 62 Parties, including the European Union, have ratified it. The
Protocol came into force in September 2018. Parties must start implementing its provisions in their national legislation. In October
2018, the first Meeting of the Parties to the Protocol decided to produce a comprehensive report on good practices for the
implementation of tracking and tracing systems and to prepare a conceptual framework for global information sharing to combat illicit
tobacco trade. We welcome this decision and expect that other Parties will ratify the Protocol.
We devote substantial resources to help prevent illicit trade in combustible tobacco products and RRPs. For example, we engage with
governments, our business partners and other stakeholders to implement effective measures to combat illicit trade and, in some
instances, pursue legal remedies to protect our intellectual property rights.
The tracking and tracing regulations for cigarettes and roll-your-own products manufactured or destined for the EU became effective
on May 20, 2019. The effective date for other tobacco-containing products, including some of our RRPs such as heated tobacco units,
is May 20, 2024. While we expect that this regulation will increase our operating expenses, we do not expect this increase to be
significant.
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 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 in the fields of law, anti-corruption and law enforcement. The experts are 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.
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 adult smokers who would otherwise continue to smoke, we believe that RRPs, while not risk-free, 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.
35
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 PMI-developed RRP platforms are in various stages of development and commercialization readiness:
Platform 1 uses a precisely controlled heating device incorporating our IQOS HeatControl technology, 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. We completed a 6+6-month exposure response study and shared the results with the FDA in April 2020. The study showed
that for the group that switched to our Platform 1 product, the eight clinical risk endpoints that were tested as co-primary endpoints in
the first six-month term moved in the same direction as observed for smoking cessation after 12 months of use of this product. In
addition, we completed an 18-month combined chronic toxicity and carcinogenicity study in mice, which was on-going at the time of
our FDA submission. We shared the results with the FDA in August 2018.
Platform 2 uses a pressed carbon heat source which, when ignited, generates a nicotine-containing aerosol by heating
tobacco. The results of our pharmacokinetic study (that measured the nicotine pharmacokinetic profile as well as subjective effects)
and of our five-day reduced exposure study indicate that this platform could be an acceptable substitute for adult smokers who seek an
alternative to cigarettes. The reduced exposure study results showed a substantial reduction in relevant biomarkers of exposure to the
measured 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 three-month reduced exposure study,
which was completed in 2018.
Platform 3 provides an aerosol of nicotine salt. We have explored two routes for this platform, one with electronics and one
without, and conducted nicotine pharmacokinetic studies with both versions. The results of our pharmacokinetic study related to the
version without electronics indicate this product's potential as an acceptable alternative to continued cigarette smoking in terms of
product satisfaction. In February 2020, we completed a product use and adaptation study in adult smokers for the product variant
without electronics.
Platform 4 covers e-vapor products, which are battery-powered devices that produce an aerosol by vaporizing a nicotine-
containing liquid solution. In 2020, our e-vapor products comprised devices with the “coil and wick” technology as well as our e-
vapor mesh technology designed to ensure the consistency and quality of the generated aerosol compared to the products with the “coil
and wick” technology. Recently, we discontinued the commercialization of devices with the “coil and wick” technology. We
conducted a nicotine pharmacokinetic study with respect to products with our e-vapor mesh technology in 2017. The results of this
study indicate that these products are an effective means of nicotine delivery while being a satisfying alternative for e-cigarette users.
In March 2019, a six-month pre-clinical study in mice evaluating the impact of e-cigarette vapor on the risks of pulmonary and
cardiovascular disease compared to cigarette smoke was completed; this study did not pertain to a specific product. The study
demonstrated that e-cigarette vapors induce significantly lower biological responses associated with cardiovascular and pulmonary
diseases compared with cigarette smoke.
36
After we receive the results of our scientific studies mentioned above, 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.
The research and development expense for our RRP portfolio accounted for 99%, 98% and 92% of our total research and development
expense for the years ended December 31, 2020, 2019 and 2018, respectively. The research and development expense for the years
ended December 31, 2020, 2019 and 2018, is set forth in Item 8, Note 14. Additional Information to the consolidated financial
statements.
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 consumer retail experience, guided consumer trials and customer
care, and increasingly, digital communication programs and e-commerce. In order to accelerate switching to our Platform 1 products,
our initial market introductions typically entail one-to-one consumer engagement (in person or by digital means) and device
discounts. These initial commercialization efforts require substantial investment, which we believe will moderate over time and
further benefit from the increased use of digital engagement capabilities. During the COVID-19 pandemic, we accelerated our
investments in, and pivot to, digital consumer engagement.
In 2014, we introduced our Platform 1 product in pilot city launches in Nagoya, Japan, and in Milan, Italy. Since then, we have
continuously expanded our commercialization activities, and as of December 31, 2020 the product has been commercialized in 64
markets in key cities or nationwide. While our Platform 1 products are currently available for sale in Mexico, that country banned the
importation of e-cigarettes and devices that heat tobacco.
We believe that only a very small percentage of adult smokers who convert to our Platform 1 product switch back to cigarettes.
We have integrated the production of our heated tobacco units into a number of our existing manufacturing facilities, are progressing
with our plans to build manufacturing capacity for our other RRP platforms, and continue to optimize our manufacturing
infrastructure.
An 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 Platform 1 and IQOS VEEV devices and a small number of
other providers for other products in our RRP portfolio and related accessories. Due to the COVID-19 pandemic, the operations of our
two electronic manufacturing service providers were temporarily suspended at different times. Even though these suspensions did not
materially affect our operations, if both of these service providers were significantly constrained at the same time, the supply of the
devices could be disrupted. Although we work closely with these service providers on monitoring their production capability and
financial health, we cannot guarantee that they will remain capable of meeting their commitments, particularly during the COVID-19
pandemic; if they will not, the commercialization of our RRPs could be adversely affected. 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. While we were successful in maintaining adequate supply of such components and materials so far, we may not be able
to secure such supply going forward, particularly during the COVID-19 pandemic; this could negatively impact the commercialization
of our RRPs. For details on the impact of COVID-19 on our production and supply chain, see the "Executive Summary" section within
this Item 7 of this Form 10-K.
Our Platform 1 and IQOS VEEV 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 Item 8, Note 5. Product
Warranty. The significance of warranty claims is dependent on a number of factors, including device version mix, product failure
rates, logistics and service delivery costs, and warranty policies, and may increase with the number of devices sold.
Product quality may affect consumer acceptance of our RRPs.
Our commercialization efforts for the other RRP platforms are as follows:
•
In 2020, we started commercializing an improved version of our IQOS MESH product in New Zealand and the Czech
Republic under the IQOS VEEV brand name. We currently plan to launch this product in additional markets under the IQOS
VEEV or VEEV brand names.
37
• With respect to TEEPS, our Platform 2 product, we are finalizing our improvements to this product and plan to conduct a
consumer test in 2021.
•
Following the consumer test conducted in 2020 and the results of the product use and adaptation study described above, we
are incorporating our learnings into our plans to improve our Platform 3 product.
Due to the COVID-19 pandemic, these plans may be delayed.
RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. As we describe in more detail above, we support science-
based regulation and taxation of RRPs and believe that 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 and should recognize a continuum of risk for tobacco and other nicotine-containing products. Regulation, as
well as industry practices, 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 and communication of truthful and non-misleading information about such products. For example, the commercialization of
e-cigarettes and heat-not-burn products is prohibited in Australia, the commercialization of e-cigarettes is prohibited in Argentina, the
importation of e-cigarettes and heat-not-burn products is prohibited in Turkey, and the importation of e-cigarettes and devices that heat
tobacco is prohibited in Mexico.
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. During the COVID-19 pandemic, governments may temporarily be unable to focus on the
development of science-based regulatory frameworks for the development and commercialization of RRPs or on the enforcement or
implementation of regulations that are significant to our business.
We oppose 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 for all RRP categories 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 our Platform 1 product in December 2016, and a Premarket Tobacco Product Application (“PMTA”) for our Platform
1 product in March 2017.
On April 30, 2019, the FDA determined that a version of our Platform 1 product, namely, IQOS 2.4 and three related consumables, is
appropriate for the protection of public health and authorized it for sale in the United States. The FDA’s decision followed its
comprehensive assessment of our PMTA. On December 7, 2020, the FDA reached the same determination for the IQOS 3 device and
authorized that version of our Platform 1 product for sale in the United States.
On July 7, 2020, the FDA determined that the available scientific evidence demonstrates that the issuance of an exposure modification
order would be appropriate for the promotion of public health and authorized the marketing of a version of our Platform 1 product,
namely IQOS 2.4 and three related consumables, as a "modified risk tobacco product." The FDA authorized the marketing of this
product in the U.S. with the following information:
"AVAILABLE EVIDENCE TO DATE:
•
•
•
reduces your body’s exposure to harmful or potentially harmful chemicals."
the IQOS system heats tobacco but does not burn it.
this significantly reduces the production of harmful and potentially harmful chemicals.
scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly
We must request and receive authorization from the FDA in order to continue marketing this product with the same modified exposure
information after the present order expires in four years.
There are two types of MRTP orders the FDA may issue: a “risk modification” order or an “exposure modification” order. We had
requested both types of orders. After review, the FDA determined that the evidence did not support issuing a "risk modification" order
at this time but that it did support issuing an "exposure modification" order for the product. This determination included a finding that
issuance of the exposure modification order is expected to benefit the health of the population as a whole.
38
We look forward to working with the FDA to provide any additional information they may require in order to market this product with
reduced risk claims.
The FDA’s PMTA and MRTP orders do not mean that the agency “approved” our Platform 1 product. These authorizations are
subject to strict marketing, reporting and other requirements and are not a guarantee that the product will remain authorized,
particularly if there is a significant uptake in youth or non-smoker initiation. The FDA will monitor the marketing of the product.
Some states and municipalities in the U.S. have introduced severe restrictions for the sale of certain e-cigarettes and tobacco products,
including those authorized by the FDA. We believe that such restrictions on FDA-authorized products will not advance public health
and will unreasonably limit adult consumer access to products that are shown to be a better alternative to continued smoking.
In March 2020, we requested a clarification from the FDA regarding the applicability of its new health warning requirements to our
heated tobacco units sold in the United States.
In the U.S., tobacco and nicotine-containing products that were not commercially marketed as of February 15, 2007 are subject to
review and authorization by the FDA. Manufacturers of all non-authorized products currently on the market were required to file a
PMTA with the FDA by September 9, 2020. The FDA announced on September 9, 2020 that it will prioritize enforcement against any
tobacco and nicotine-containing product sold without a PMTA.
FDA actions may influence the regulatory approach of other governments.
Until recently, there were no countries with specific product standards for heat-not-burn products. Currently, national standards setting
minimum quality and safety requirements for such products have been adopted in several countries with technical heat-not-burn
specifications and/or methods for demonstrating the absence of combustion. They are mandatory in Egypt, Jordan, Saudi Arabia,
Tunisia and the UAE, and voluntary in the U.K., Russia, Ukraine, Kazakhstan, Kyrgyzstan, Vietnam, and Indonesia. In Japan, a
voluntary standard sets minimum safety requirements for tobacco heating devices. We expect other governments to consider similar
product standards and encourage making them mandatory.
All EU member states 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 our Platform 1 product in over 20
member states.
In addition, in Italy, in April 2018, we submitted an application for HEETS, used with the IQOS device, requesting regulatory
recognition of the reduction of toxic substances and potential risk reduction resulting from switching to this product compared to
continued cigarette smoking. In January 2019, our application was not granted primarily on the grounds of insufficient data and
questions of methodology. Due to the constraints of the review process, we had been unable to supplement the application with all the
data we subsequently filed with the FDA and to address methodological questions during the review. We plan to submit a new
application where we will clarify the concerns raised by the decision and further strengthen our application by submitting additional
evidence that became available since we submitted our first application, consistent with our FDA filings. We are confident that our
evidence supports our application.
On October 31, 2019, our Australian subsidiary, Philip Morris Limited (“PML”), submitted an application to the Scheduling
Committee of the Therapeutic Goods Administration of Australia (“TGA”) seeking to exempt heated tobacco products from being
prohibited in Australia. In August 2020, the TGA issued its decision denying the application and stating that it did not present
compelling evidence to establish a public health benefit from greater access to nicotine in heated tobacco products.
To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain
RRPs versus continuing smoking, including:
In December 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 heat-not-burn products relative to cigarette smoking. This assessment included analysis of
scientific data for two heat-not-burn products, one of which was our Platform 1 product. The assessment concluded that, while still
harmful to health, compared with the known risks from cigarettes, heat-not-burn products are probably less harmful. Subsequently, in
February 2018, Public Health England published a report stating that the available evidence suggests that heat-not-burn products may
be considerably less harmful than cigarettes and more harmful than e-cigarettes.
39
In May 2018, the German Federal Institute for Risk Assessment (“BfR”) published a study on the Platform 1 aerosol relative to
cigarette smoke using the Health Canada Intense Smoking Regimen. BfR found reductions in selected HPHCs in a range of 80-99%.
This publication indicates that significant reductions in the levels of selected toxicants are likely to reduce toxicant exposure, which
BfR stated might be regarded as a discrete benefit compared to combustible cigarettes.
In May 2018, the Dutch National Institute for Public Health and Environment (“RIVM”) published a factsheet on novel tobacco
products that heat rather than burn tobacco, focusing on our Platform 1 product. RIVM analyzed the aerosol generated by our
Platform 1 product and concluded that the use of this product, while still harmful to health, is probably less harmful than continued
smoking.
In June 2018, the Korean Food and Drug Administration (“KFDA”) issued a statement on products that heat rather than burn tobacco.
The KFDA tested three heat-not-burn products, one of which was our Platform 1 product. The KFDA confirmed that the levels of the
nine HPHCs tested in the aerosol of these products were on average approximately 90% lower compared to those measured in the
cigarette smoke of the top five cigarette brands in South Korea. However, the KFDA stated that it could not establish that the tested
heat-not-burn products are less harmful than cigarettes. In October 2018, our Korean subsidiary filed a request with a local court
seeking information underlying KFDA’s analysis, conclusions and public statements. In May 2020, the court ordered KFDA to
produce certain records.
In August 2018, the Science & Technology Committee of the U.K. House of Commons published a report of its inquiry into e-
cigarettes and heat-not-burn products. The report concluded that e-cigarettes are significantly less harmful to health than smoking
tobacco. The report also observed that for those smokers who do not accept e-cigarettes, heat-not-burn products may offer a public
health benefit despite their relative risk. The report called for a risk-proportionate regulatory environment for both e-cigarettes and
heat-not-burn products and noted that e-cigarettes should remain the least taxed, cigarettes the most taxed, with heat-not-burn products
falling between the two. The U.K. Committee on Advertising Practice announced the removal of a prohibition of health claims in the
advertising of e-cigarettes in the U.K. effective November 2018.
In November 2018, the Eurasian Economic Commission (regulatory body of the Eurasian Union consisting of Armenia, Belarus,
Kazakhstan, Kyrgyzstan and Russia) published the results of its commissioned study on novel nicotine-containing products, including
our Platform 1 product. The study confirms significantly lower levels of HPHCs in the aerosol generated by this product compared to
cigarette smoke.
In January 2019, scientific media published the results of the study of the China National Tobacco Quality Supervision and Test
Centre (“CNTQST”) comparing the aerosol generated by our Platform 1 product with cigarette smoke. The CNTQST found that the
former contained fewer, and lower levels of, harmful constituents than the latter and concluded that the lower temperature of heating
tobacco in our Platform 1 product contributed to the difference. The CNTQST stated that the reduction in emissions of harmful
constituents cannot be interpreted as equivalent to a proportionate harm/risk reduction for smokers.
The foregoing scientific findings of government agencies may not be indicative of the measures that the relevant government
authorities could take in regulating our products.
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 and 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. The dissemination of
scientifically unsubstantiated information or studies with a strong confirmation bias by third parties may cause confusion among adult
smokers and affect their decision to switch to better alternatives to continued smoking, such as our RRPs.
To date, we have been largely successful in demonstrating to regulators that our heated tobacco units are not cigarettes due to the
absence of combustion, 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 about our RRPs, including making scientifically substantiated risk-reduction
claims, or to treat RRPs differently from cigarettes.
40
Legal Challenges to RRPs: We face various administrative and legal challenges related to certain RRP activities, including allegations
concerning product classification, advertising restrictions, corporate communications, product coach activities, scientific
substantiation, product liability, and unfair competition. While we design our programs to comply with relevant regulations, we
expect these or similar challenges to continue as we expand our efforts to commercialize RRPs and to communicate publicly. The
outcomes of these matters may affect our RRP commercialization and public communication activities and performance in one or
more markets.
Our RRP Business Development Initiatives: In December 2013, we established a strategic framework with Altria Group, Inc.
(“Altria”) setting out terms on how the parties would collaborate to develop and commercialize e-vapor products and commercialize
two of our RRPs in the U.S. In late 2018, Altria announced that it will participate in the e-vapor category only through another e-vapor
company in which Altria acquired a minority interest. In September 2019, Altria's subsidiary, Philip Morris USA Inc. (“PM USA”),
began commercialization of a version of our Platform 1 product in the U.S. PM USA is responsible for the marketing of this product
in the U.S. and communication of the reduced exposure information authorized by the FDA in its MRTP marketing order described
above.
In January 2020, we announced an agreement with KT&G, a leading tobacco and nicotine company in South Korea, for the
commercialization of KT&G’s smoke-free products outside of South Korea on an exclusive basis. For more information, see
Acquisitions and Other Business Arrangements below.
Other Developments: In September 2017, we announced our support of the Foundation for a Smoke-Free World. In September 2020,
our pledge agreement with the Foundation was amended. We contributed $45 million in 2020 and expect to contribute $40 million in
2021 and $35 million annually from 2022 through 2029, as specified in the amended pledge agreement. To date, we contributed a total
of $209.5 million. 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, including tax, customs, antitrust, advertising,
and labor practices. We describe certain matters pending in Thailand, Russia and South Korea in Item 8, Note 17. 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 17. 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 Department of Special Investigations of the government of Thailand (“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 and commenced challenges at the WTO Appellate Body. The WTO Appellate
Body is not operational, and the appeals by Thailand are suspended indefinitely. In December 2020, the Philippines and Thailand
agreed to pursue facilitator-assisted discussions aimed at progressing and resolving outstanding issues. It is not possible to predict any
future developments in these proceedings or the outcome of these discussions.
The Public Prosecutor’s office of Rome, Italy, notified our Italian subsidiary, Philip Morris Italia S.r.l. (“PM Italia”), as well as three
former or current employees and a former external consultant of PM Italia in July 2020 and March 2020, respectively, that it
concluded a preliminary investigation against them for alleged contravention of anti-corruption laws and related disruption of trade
freedom. The Public Prosecutor alleges that the individuals involved promised certain personal favors to government officials from
January to July of 2018 in exchange for favorable treatment for PM Italia, and that PM Italia lacked appropriate organizational
controls to prevent the alleged actions by the individuals. In September 2020, the Public Prosecutor referred the matter to trial. PM
Italia believes the charges brought against it by the Public Prosecutor are without merit and will defend them vigorously.
Asset Impairment and Exit Costs
We discuss asset impairment and exit costs in Item 8, Note 19. Asset Impairment and Exit Costs to our consolidated financial
statements.
41
Acquisitions and Other Business Arrangements
We discuss our acquisitions in Item 8, Note 6. Acquisitions to our consolidated financial statements.
Global Collaboration Agreement with KT&G
In January 2020, PMI announced a global collaboration agreement with the leading tobacco and nicotine company in South
Korea, KT&G, to commercialize KT&G’s smoke-free products outside of the country. The agreement will run for an initial period of
three years. The two companies plan for global collaboration with the intention to actively expand to cover many markets, based on
commercial success. The agreement allows PMI to distribute current KT&G smoke-free products, and their evolutions, on an
exclusive basis, and does not restrict PMI from distributing its own or third-party products. KT&G’s smoke-free product brand
portfolio includes heat-not-burn tobacco products (e.g., LIL Mini and LIL Plus), hybrid technologies that combine heat-not-burn
tobacco and e-vapor technologies (e.g., LIL HYBRID), and e-vapor products (e.g., LIL Vapor). PMI will be responsible for the
commercialization of smoke-free products supplied under the agreement.
Products sold under the agreement are subject to careful assessment to ensure they meet the regulatory requirements in the markets
where they are launched, as well as our standards of quality and scientific substantiation to confirm the absence of combustion and
significant reductions of emissions of harmful chemicals compared to cigarettes. PMI and KT&G will seek any necessary regulatory
approvals that may be required on a market-by-market basis. There are no current plans to commercialize KT&G products in the
United States.
In the third quarter of 2020, we launched commercial initiatives for licensed KT&G products in select markets.
Equity Investments
We discuss our equity investments in Item 8, Note 4. Related Parties - Equity Investments and Other 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.
A subsidiary sells products to distributors that, in turn, sell those products to duty free customers that supply U.N. peacekeeping
forces around the world, including those in the U.N. peacekeeping mission located in Abyei, a special administrative territory in
Sudan. We do not believe that these sales, which are not subject to Trade Sanctions, and are de minimis in volume and value, present
a material risk to our shareholders, our reputation or the value of our shares. We have no employees, operations or assets in Sudan.
We do not sell products in Iran, 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.
We sell cigarettes in Cuba under a distribution agreement. These sales are permitted by U.S. law under a License Exception for
Agricultural Commodities, issued by the United States Department of Commerce (Bureau of Industry and Security), granted to our
distributor.
Certain states within the U.S. have enacted legislation permitting or requiring 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. Because we do business in
certain of these countries, these state pension funds may have divested of our stock or may not invest in our stock. We do not believe
such legislation has had a material effect on the price of our shares.
42
2020 compared with 2019
The following discussion compares operating results within each of our operating segments for 2020 with 2019.
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect
cigarettes and heated tobacco units. Estimates for total industry volume and market share in certain geographies reflect limitations on
the availability and accuracy of industry data.
European Union:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other
$ 10,702 $ 9,817
9.0 %
8.8 % $
885 $
21 $
187 $
677 $ —
Operating Income
$ 5,098 $ 3,970
28.4 % 29.0 % $ 1,128 $
(24) $
187 $
663 $
302
Net revenues, excluding favorable currency, increased by 8.8%, reflecting: favorable volume/mix, mainly driven by higher heated
tobacco unit volume across the Region (notably in the Czech Republic, Germany, Hungary, Italy and Poland), partly offset by lower
cigarette volume (notably in the Czech Republic, Italy, Poland and Spain, partly offset by Germany) and lower cigarette mix (mainly
in Germany); and a favorable pricing variance (driven by higher combustible pricing, notably in Germany, partly offset by lower
heated tobacco unit and IQOS device pricing).
Operating income, excluding unfavorable currency, increased by 29.0%, notably reflecting a favorable comparison, shown in "Cost/
Other," of asset impairment and exit costs recorded in 2020 associated with organizational design optimization ($57 million), to those
recorded in 2019 associated with a plant closure in Germany ($342 million).
Excluding these asset impairment and exit costs, as well as unfavorable currency of $24 million, operating income increased by
20.1%, primarily reflecting: favorable volume/mix, mainly driven by the same factors as for net revenues noted above; a favorable
pricing variance; and lower manufacturing costs (notably in Germany); partly offset by higher marketing, administration and research
costs (mainly related to increased investments behind reduced-risk products, notably in Germany and Poland).
43
European Union - Total Market, PMI Shipment and Market Share Commentaries
Total market, PMI shipment volume and market share performance are shown in the table below:
European Union Key Data
Full-Year
Total Market (billion units)
PMI Shipment Volume (million units)
Cigarettes
Heated Tobacco Units
Total European Union
PMI Market Share
Marlboro
L&M
Chesterfield
Philip Morris
HEETS
Others
Total European Union
Note: HEETS includes HEETS Dimensions.
2020
472.7
163,420
19,842
183,262
17.5 %
6.2 %
5.5 %
2.4 %
4.2 %
3.1 %
38.9 %
2019
482.8
174,319
12,569
186,888
18.0 %
6.7 %
5.8 %
2.7 %
2.5 %
3.1 %
38.8 %
Change
% / pp
(2.1) %
(6.3) %
57.9 %
(1.9) %
(0.5)
(0.5)
(0.3)
(0.3)
1.7
—
0.1
The estimated total market in the EU decreased by 2.1% to 472.7 billion units, notably due to:
•
•
•
Czech Republic, down by 10.9%, primarily reflecting lower border sales due to lockdown measures;
France, down by 3.6%, mainly reflecting the impact of significant excise tax-driven price increases, partly offset by the pandemic-
related impact of lower cross-border (non-domestic) purchases and a lower estimated prevalence of illicit trade due to border
restrictions; and
Spain, down by 7.8%, primarily reflecting lower in-bound tourism and border sales due to the pandemic;
partly offset by
•
Germany, up by 1.9%, notably reflecting the pandemic-related impact of lower cross-border (non-domestic) purchases and
reduced out-bound tourism, partly offset by the impact of retail price increases in the first quarter of 2020 and adult smoker out-
switching to other combustible tobacco products.
Our total shipment volume decreased by 1.9% to 183.3 billion units, reflecting:
•
lower cigarette shipment volume, mainly due to the lower total market and lower cigarette market share (notably in Italy and
Poland, partly reflecting out-switching to heated tobacco units);
partly offset by
•
higher heated tobacco unit shipment volume across the Region (notably in Germany, Italy and Poland), driven by higher market
share.
Our Regional market share increased by 0.1 point to 38.9%, with gains in Germany and Italy, partly offset by a decline in Poland.
44
Eastern Europe:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Operating Income
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other
$ 3,378 $ 3,282
2.9 % 10.9 % $ 96 $ (263) $ 162 $ 197 $ —
$ 871 $ 547
59.2 % +100% $ 324 $ (299) $ 162 $ 146 $ 315
Net revenues, excluding unfavorable currency, increased by 10.9%, reflecting: favorable volume/mix, predominantly driven by higher
heated tobacco unit volume across the Region (notably in Russia and Ukraine) and higher heated tobacco unit mix (mainly in Russia),
partly offset by unfavorable cigarette volume (primarily in Russia and Ukraine, partially offset by Israel) and unfavorable cigarette
mix (mainly in Russia); and a favorable pricing variance, driven by higher combustible pricing (primarily in Russia and Ukraine),
partly offset by lower IQOS device pricing (mainly in Russia).
Operating income, excluding unfavorable currency, increased by over 100%, primarily reflecting a favorable comparison, shown in
"Cost/Other," mainly due to a charge recorded in 2019 of $374 million, related to the Russia excise and VAT audit.
Excluding the 2019 Russia excise and VAT audit charge of $374 million, the 2020 charge for asset impairment and exit costs of $15
million and unfavorable currency of $299 million, operating income increased by 28.7%, reflecting: a favorable pricing variance;
favorable volume/mix, driven by the same factors as for net revenues noted above; and lower manufacturing costs; partly offset by
higher marketing, administration and research costs (partly related to increased investments behind reduced-risk products, notably in
Russia and Ukraine).
Eastern Europe - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in Eastern Europe decreased by 4.6% to 379.4 billion units, notably due to:
•
•
Russia, down by 3.3%, primarily reflecting the impact of price increases, partly offset by a lower estimated prevalence of illicit
trade due to pandemic-related border restrictions; and
Ukraine, down by 10.2%, mainly reflecting the impact of excise tax-driven price increases.
Our Regional market share increased by 1.8 points to 30.5%.
PMI Shipment Volume (million units)
Full-Year
Cigarettes
Heated Tobacco Units
Total Eastern Europe
2020
2019
Change
93,462
20,898
100,644
13,453
114,360
114,097
(7.1) %
55.3 %
0.2 %
Our total shipment volume increased by 0.2% to 114.4 billion units, mainly due to:
•
Russia, up by 1.8%, or by 3.9% excluding the net unfavorable impact of estimated distributor inventory movements, primarily
reflecting a higher market share, driven by heated tobacco units, partly offset by the lower total market;
partly offset by
•
Ukraine, down by 4.3%, mainly due to the lower total market, partly offset by a higher market share driven by heated tobacco
units.
45
Middle East & Africa:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other
$ 3,088 $ 4,042
(23.6) % (21.7) % $ (954) $
(77) $ 186 $ (1,001) $
(62)
Operating Income
$ 1,026 $ 1,684
(39.1) % (35.2) % $ (658) $
(65) $ 186 $ (784) $
5
Net revenues, excluding unfavorable currency, decreased by 21.7%, reflecting: unfavorable volume/mix, mainly due to lower cigarette
volume, heated tobacco unit volume and IQOS device volume in PMI Duty Free, as well as lower cigarette volume in South Africa
and Turkey; and lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other"; partially offset
by a favorable pricing variance, driven by combustible pricing (mainly in the GCC, particularly Saudi Arabia, as well as North Africa
and PMI Duty Free, partly offset by Turkey).
Operating income, excluding unfavorable currency, decreased by 35.2%, mainly reflecting: unfavorable volume/mix, predominantly
due to lower cigarette and heated tobacco unit volume in PMI Duty Free; and lower fees for certain distribution rights as noted above
for net revenues; partially offset by a favorable pricing variance; and lower marketing, administration and research costs.
Excluding asset impairment and exit costs of $19 million in 2020 and unfavorable currency of $65 million, operating income
decreased by 34.1%.
Middle East & Africa - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in the Middle East & Africa decreased by 8.0% to 546.4 billion units, mainly due to:
•
•
•
•
International Duty Free, down by 62.0%, reflecting the impact of government travel restrictions and reduced passenger traffic due
to the pandemic;
South Africa, down by 35.5%, primarily reflecting the impact of the pandemic-related ban on all tobacco sales from March 27,
2020, through August 17, 2020;
Turkey, down by 4.2%, mainly reflecting the impact of lockdown measures on adult smoker average daily consumption, as well
as a higher prevalence of illicit trade related to cut tobacco, particularly during the first-half of 2020, following significant
industry-wide cigarette price increases in 2019; and
The UAE, down by 38.1%, primarily reflecting the adverse impact on low-price brands from the implementation of a minimum
excise tax and digital tax stamps in the second half of 2019.
Our Regional market share decreased by 1.4 points to 22.0%.
PMI Shipment Volume (million units)
Full-Year
Cigarettes
Heated Tobacco Units
Total Middle East & Africa
2020
2019
Change
117,999
134,568
1,022
2,654
119,021
137,222
(12.3) %
(61.5) %
(13.3) %
Our total shipment volume decreased by 13.3% to 119.0 billion units, notably due to:
•
PMI Duty Free, down by 70.8%, or by 58.8% excluding the net unfavorable impact of estimated distributor inventory movements
(principally due to cigarettes), mainly reflecting the lower total market; and
46
•
Turkey, down by 8.5%, mainly reflecting the lower total market and a lower market share, notably due to adult smoker down-
trading following the 2019 price increases.
South & Southeast Asia:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other
$ 4,396 $ 5,094
(13.7) % (13.3) % $ (698) $
(19) $ (44) $ (635) $ —
Operating Income
$ 1,709 $ 2,163
(21.0) % (21.1) % $ (454) $
2 $ (44) $ (457) $
45
Net revenues, excluding unfavorable currency, decreased by 13.3%, reflecting: unfavorable volume/mix, primarily due to lower
cigarette volume in Indonesia and the Philippines, partly offset by favorable cigarette mix in Indonesia; and an unfavorable pricing
variance, due to combustible pricing in Indonesia, partly offset by the Philippines.
Operating income, excluding favorable currency, decreased by 21.1%, mainly reflecting: unfavorable volume/mix, due to the same
factors as for net revenues noted above; and an unfavorable pricing variance; partly offset by lower marketing, administration and
research costs (primarily in Indonesia).
Excluding asset impairment and exit costs of $23 million in 2020 and $20 million in 2019, as well as favorable currency of $2 million,
operating income decreased by 20.8%.
South & Southeast Asia - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in South & Southeast Asia decreased by 8.7% to 672.3 billion units, notably due to:
•
•
•
•
India, down by 17.9%, mainly reflecting the impact of lockdown restrictions on the movement of certain products, including
tobacco;
Indonesia, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and pandemic-related measures on
adult smoker average daily consumption;
Pakistan, down by 10.3%, mainly reflecting the impact of excise tax-driven price increases in June 2019 and price increases on
PMI value brands in February 2020; and
the Philippines, down by 12.0%, mainly reflecting the impact of pandemic-related quarantines, as well as industry-wide price
increases in the third quarter of 2019 and the fourth quarter of 2020.
Our Regional market share decreased by 2.2 points to 21.5%.
PMI Shipment Volume (million units)
Full-Year
Cigarettes
Heated Tobacco Units
Total South & Southeast Asia
2020
2019
Change
144,788
174,934
36
—
144,824
174,934
(17.2) %
— %
(17.2) %
Our total shipment volume decreased by 17.2% to 144.8 billion units, notably due to:
•
Indonesia, down by 19.3%, reflecting the lower total market, as well as a lower market share, mainly due to: adult smoker down-
trading to the tax-advantaged 'below tier one' segment, the impact of elevated price gaps in the tier one segment (partly due to the
47
delay in minimum price enforcement), and the disproportionate impact of stricter public mobility restrictions in urban areas,
where PMI’s share is higher;
Pakistan, down by 20.0%, mainly reflecting the lower total market and a lower market share, mainly due to low-price Morven;
and
the Philippines, down by 16.1%, mainly reflecting the lower total market and a lower market share, primarily for mid-price
Fortune due to the impact of price increases in the third quarter of 2019 and the fourth quarter of 2020.
•
•
East Asia & Australia:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency Price
Vol/
Mix
Cost/
Other
$ 5,429 $ 5,364
1.2 % 0.6 % $
65 $ 33 $ 168 $ (136) $ —
Operating Income
$ 2,400 $ 1,932
24.2 % 23.1 % $ 468 $ 21 $ 168 $
(68) $ 347
Net revenues, excluding favorable currency, increased by 0.6%, reflecting: a favorable pricing variance, mainly driven by higher
heated tobacco and combustible pricing in Japan, partly offset by lower IQOS device pricing in Japan; and unfavorable volume/mix,
mainly due to lower cigarette volume (primarily in Japan), unfavorable cigarette mix in Australia, lower device volume/mix in Japan
and lower heated tobacco unit mix in Japan, partly offset by higher heated tobacco unit volume in Japan.
Operating income, excluding favorable currency, increased by 23.1%, mainly reflecting: lower marketing, administration and research
costs (notably in Japan); lower manufacturing costs (mainly related to Japan and Korea); and a favorable pricing variance; partly offset
by unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Japan), unfavorable cigarette mix in Australia and
lower heated tobacco unit mix in Japan, partly offset by higher heated tobacco unit volume in Japan.
Excluding asset impairment and exit costs of $26 million in 2020 and favorable currency of $21 million, operating income increased
by 24.5%.
East Asia & Australia - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in East Asia & Australia, excluding China, decreased by 3.6% to 288.6 billion units, notably due to:
•
•
Australia, down by 8.8%, primarily reflecting the impact of excise tax-driven price increases; and
Japan, down by 9.4%, mainly reflecting the impact of excise tax-driven price increases, reduced adult smoker consumption
occasions due to pandemic-related measures, as well as adult smoker out-switching from cigarettes to the cigarillo category;
partly offset by
•
•
Korea, up by 4.4%, mainly reflecting the shift of adult smokers from duty-free to domestic purchases due to the pandemic-related
decline in international travel; and
Taiwan, up by 5.4%, primarily driven by the same factor as for Korea.
Our Regional market share, excluding China, increased by 0.3 points to 27.2%.
48
PMI Shipment Volume (million units)
Full-Year
Cigarettes
Heated Tobacco Units
Total East Asia & Australia
2020
2019
Change
45,100
33,862
78,962
49,951
30,677
80,628
(9.7) %
10.4 %
(2.1) %
Our total shipment volume decreased by 2.1% to 79.0 billion units, notably in:
•
•
Japan, down by 2.4%, mainly due to the lower total market, partly offset by a higher market share driven by heated tobacco units;
and
Korea, down by 4.3%, primarily due to a lower market share, mainly reflecting the unfavorable impact of the growth of the
cigarette new taste dimension segment, in which PMI has a relatively low share, partly offset by the higher total market.
Latin America & Canada:
Financial Summary -
Years Ended
December 31,
(in millions)
Net Revenues
Change
Fav./(Unfav.)
Variance
Fav./(Unfav.)
2020
2019
Total
Excl.
Curr.
Total
Cur-
rency
Price
Vol/
Mix
Cost/
Other(1)
$ 1,701 $ 2,206
(22.9) % (15.5) % $ (505) $ (164) $ 135 $ (285) $ (191)
Operating Income
$ 564 $
235
+100% +100% $ 329 $ (110) $ 135 $ (219) $ 523
(1) Cost/Other variance includes the impact of the RBH deconsolidation.
Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing
in the third quarter of 2019, for sale under license in the United States.
Net revenues, excluding unfavorable currency, decreased by 15.5%, reflecting: unfavorable volume/mix, due to lower cigarette
volume, mainly in Argentina and Mexico, partly offset by Brazil; and the unfavorable impact of the deconsolidation of RBH shown in
"Cost/Other"; partially offset by a favorable pricing variance, driven by higher combustible pricing across the Region (notably in
Brazil and Mexico).
Operating income, excluding unfavorable currency, increased by over 100%, notably reflecting a favorable comparison, shown in
"Cost/Other," of net favorable items recorded in 2020 of $110 million related to the Brazil indirect tax credit of $119 million and asset
impairment and exit costs of $9 million (associated with organizational design optimization), and charges recorded in 2019 of $493
million related to: asset impairment and exit costs ($60 million) associated with plant closures in Argentina and Colombia, the loss on
the deconsolidation of RBH ($239 million), and the Canadian tobacco litigation-related expense ($194 million).
Excluding these 2020 and 2019 items noted above, and unfavorable currency of $110 million, operating income decreased by 22.5%,
mainly reflecting: unfavorable volume/mix, due to the same factors as for net revenues noted above; and the unfavorable impact of the
deconsolidation of RBH, included in "Cost/Other"; partly offset by a favorable pricing variance; and lower marketing, administration
and research costs (notably in Argentina).
Latin America & Canada - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in Latin America & Canada decreased by 2.8% to 189.0 billion units, notably due to:
•
Colombia, down by 14.2%, primarily reflecting reduced product availability (mainly in the second quarter of 2020) and lower
adult smoker average daily consumption due to the impact of pandemic-related mobility restrictions; and
• Mexico, down by 13.6%, mainly due to the impact of excise tax-driven price increases in January 2020 and pandemic-related
measures on adult smoker average daily consumption;
49
partly offset by
•
Brazil, up by 13.4%, mainly reflecting a lower estimated prevalence of illicit trade due to: reduced price gaps with legal products
and the impact of border restrictions imposed as a result of the pandemic.
Our Regional market share decreased by 3.0 points to 33.9%.
PMI Shipment Volume (million units)
Full-Year
Cigarettes
Heated Tobacco Units
Total Latin America & Canada
2020
2019
Change
63,749
451
64,200
72,293
299
72,592
(11.8) %
50.8 %
(11.6) %
Our total shipment volume decreased by 11.6% to 64.2 billion units, or by 10.3% excluding the impact of the RBH deconsolidation,
notably due to
•
•
•
Argentina, down by 12.2%, primarily reflecting a lower market share, mainly due to adult smoker down-trading to ultra-low-price
brands produced by local manufacturers, as well as the impact of retail out-of-stock of PMI brands during the second quarter;
Canada, down by 18.6%, due to the unfavorable impact of the deconsolidation of RBH;
Colombia, down by 14.2%, primarily reflecting the lower total market; and
• Mexico, down by 18.0%, mainly due to the lower total market and a lower market share, primarily reflecting: adult smoker down-
trading following the January 2020 price increases and the impact of the pandemic on adult smoker consumption patterns;
partly offset by
•
Brazil, up by 13.2%, mainly reflecting the higher total market.
2019 compared with 2018
For a discussion comparing our consolidated operating results within each of our operating segments for the year ended December 31,
2019, with the year ended December 31, 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation - Operating Results by Business Segment in our Annual Report on Form 10-K for the year ended December
31, 2019, which was filed with the U.S. Securities and Exchange Commission on February 7, 2020.
50
Financial Review
(in millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
2020 compared with 2019
∙
Net Cash Provided by Operating Activities
For the Years Ended December 31,
2020
2019
2018
$
9,812 $
(1,154)
(8,496)
10,090 $
(1,811)
(8,061)
9,478
(998)
(9,651)
Net cash provided by operating activities for the year ended December 31, 2020 decreased by $0.3 billion compared with 2019.
Excluding unfavorable currency movements of $0.5 billion, net cash provided by operating activities increased by $0.2 billion, due
primarily to higher net earnings (excluding 2019 non-cash charges related to the Canadian tobacco litigation-related expense and the
loss on deconsolidation of RBH), partially offset by higher working capital requirements of $0.5 billion and higher cash payments in
2020 for asset impairment and exit costs. For further details, see Item 8, Note 19. Asset Impairment and Exit Costs for additional
information.
Higher net earnings in 2020, excluding the impact of the above 2019 non-cash charges, were partly attributable to the Russia excise
and VAT audit charge of $374 million which was paid in the third quarter of 2019. For further details, Item 8, Note 17.
Contingencies for additional information.
The higher working capital requirements were primarily due to net cash used in inventories and accrued liabilities and other current
assets reflecting COVID-19 pandemic related build-up of inventory in our supply chain, and the timing of excise tax-paid inventory
movements and excise tax payments. This change was partially offset by cash provided by accounts receivable due to the varying
levels of usage of our factoring arrangements to sell trade receivables and timing of sales and cash collections.
∙
Net Cash Used in Investing Activities
Net cash used in investing activities of $1.2 billion for the year ended December 31, 2020, decreased by $0.7 billion from the
comparable 2019 period. This decrease in net cash used in investing activities was primarily due to the reduction of cash in 2019
resulting from the deconsolidation of RBH and lower capital expenditures, partially offset by higher cash collateral posted to secure
derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and
the U.S. dollar. For further details on deconsolidation of RBH, see Item 8. Note 20. Deconsolidation of RBH. For further details on
51
Net Cash Provided byOperating Activities($ in millions)$9,478$10,090$9,812201820192020Capital Expenditures($ in millions)$1,436$852$602201820192020Dividends Paid($ in millions)$6,885$7,161$7,364201820192020
our derivatives designated as net investment hedges, see Item 8. Note 15. Financial Instruments.
Our capital expenditures were $0.6 billion in 2020 and $0.9 billion in 2019. The 2020 expenditures were primarily related to our
ongoing investments in RRPs. We expect total capital expenditures in 2021 of approximately $0.8 billion (including capital
expenditures related to our ongoing investment in RRPs), to be funded by operating cash flows.
∙
Net Cash Used in Financing Activities
Net cash used in financing activities of $8.5 billion for the year ended December 31, 2020, increased by $0.4 billion from the
comparable 2019 period. The change was due primarily to higher payments to noncontrolling interests and higher dividends paid,
partially offset by debt activity.
Dividends paid in 2020 and 2019 were $7.4 billion and $7.2 billion, respectively.
2019 compared with 2018
For a discussion comparing our net cash activities (operating, investing and financing) for the year ended December 31, 2019, with the
year ended December 31, 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation - Financial Review in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the
U.S. Securities and Exchange Commission on February 7, 2020.
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. For 2020 and 2019, the activities for such reverse repurchase agreements were not material.
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 8, 2021, 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
Stable
Stable
52
Credit Facilities – On January 29, 2021, we entered into an agreement to amend and extend the term of our 364-day revolving credit
facility from February 2, 2021, to February 1, 2022 in the amount of $1.75 billion.
At February 8, 2021, our committed credit facilities were as follows:
(in billions)
Type
364-day revolving credit, expiring February 1, 2022
Multi-year revolving credit, expiring October 1, 2022
Multi-year revolving credit, expiring February 10, 2025(a)
Total facilities
Committed
Credit
Facilities
$
$
1.75
3.50
2.00
7.25
(a) On January 29, 2021, we entered into an agreement, effective February 10, 2021, to amend and extend the term of our $2.0 billion multi-year
revolving credit facility, for an additional year covering the period February 11, 2025 to February 10, 2026, in the amount of $1.86 billion.
At February 8, 2021, 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.
These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require us to
post collateral. The $3.5 billion multi-year revolving credit facility in the table above 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, 2020, our ratio calculated in accordance with the agreement was 12.6
to 1.0. 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 $2.7 billion at
December 31, 2020 and December 31, 2019, respectively, are for the sole use of our subsidiaries. Borrowings under these
arrangements and other bank loans amounted to $244 million at December 31, 2020, and $338 million at December 31, 2019.
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, 2020, and December 31, 2019, we
had no commercial paper outstanding. The average commercial paper balance outstanding during 2020 and 2019 was $1.2 billion and
$2.3 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, 2020, 2019 and 2018, were $1.2 billion, $0.9 billion and $1.0
billion, 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 18. Sale of Accounts Receivable to our consolidated financial statements.
Debt – Our total debt was $31.5 billion at December 31, 2020, and $31.0 billion at December 31, 2019. Our total debt is primarily
fixed rate in nature. The weighted-average all-in financing cost of our total debt was 2.4% in 2020 and 2.5% in 2019. For further
53
details, including the fair value of our debt, see Item 8, Note 7. Indebtedness. The amount of debt that we can issue is subject to
approval by our Board of Directors.
On February 11, 2020, 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 2020 were as follows:
(in millions)
Type
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
(a)
(a)
(a)
(b)
(b)
Face Value
$750
$750
$750
$750
$750
Interest
Rate
1.125%
1.500%
2.100%
0.875%
1.750%
Issuance
Maturity
May 2020
May 2020
May 2020
November 2020
November 2020
May 2023
May 2025
May 2030
May 2026
November 2030
(a) Interest on these notes is payable semi-annually in arrears beginning in November 2020.
(b) Interest on these notes is payable semi-annually in arrears beginning in May 2021.
The net proceeds from the sale of the securities listed in the table above have been and will be used for general corporate purposes,
including repayment of outstanding commercial paper and redemption on January 25, 2021, of our outstanding $750 million 1.875%
U.S. dollar notes due February 25, 2021.
The weighted-average time to maturity of our long-term debt was 9.7 years at the end of 2020 and 10.2 years at the end of 2019.
• 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, 2020, we were contingently liable for guarantees of our own performance, of which $0.3 billion were
related to our obligations under indemnity agreements to enable appeals of customs assessments against our distributors. In October
2020, we guaranteed an obligation for an equity method investee. For further details, see Item 8, Note 17. Contingencies to our
consolidated financial statements. Additionally, we have other guarantees of our own performance, which are primarily related to
excise taxes on the shipment of our products. There is no liability in the consolidated financial statements associated with these
guarantees. These guarantees have not had, and are not expected to have, a significant impact on PMI’s liquidity.
54
Aggregate Contractual Obligations – The following table summarizes our contractual obligations at December 31, 2020:
(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
2021
2022-2023
2024-2025
2026 and
Thereafter
$31,552
$3,124
$5,122
$5,866
$17,440
9,781
896
2,902
1,719
4,621
1,699
874
215
1,531
1,275
271
119
6,101
291
2,048
1,038
3,086
267
584
363
947
361
267
157
424
845
3
161
164
226
$48,549
$7,566
$8,232
$8,529
$24,222
(1) Amounts represent the expected cash payments at the face value of our long-term debt and finance lease obligations. For further details, see Item 8, Note 7.
Indebtedness to our consolidated financial statements.
(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, 2020. 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 maturity of PMI's operating lease liabilities, on an undiscounted basis.
(4) Purchase obligations for inventory and production costs (such as raw materials, electonic devices, 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. Other purchase obligations also include the
expected future contributions to the Foundation for a Smoke-Free World. For further details see Business Environment—Other Developments. 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 transition tax (as discussed in Item 8, Note 11. Income Taxes to our consolidated financial statements),
postretirement health care costs, accruals established for employment costs and accruals established for Exit activities (for further details, see Note 19. Asset
impairment and Exit 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 $262 million in 2021, 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, 2020, in Item 8, Note 9. Stock Plans to our consolidated financial statements.
During 2020, 2019 and 2018, we did not repurchase any shares under a share repurchase program.
Dividends paid in 2020 were $7.4 billion. During the third quarter of 2020, our Board of Directors approved a 2.6% increase in the
quarterly dividend to $1.20 per common share. As a result, the present annualized dividend rate is $4.80 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 with maturities of less than
30 days.
We continuously monitor and assess the credit worthiness of all our counterparties.
55
Derivative Financial Instruments - We operate in markets outside of the United States of America, 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 exchange and interest 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 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 and foreign currency price-sensitive derivative financial instruments. This computation includes our debt 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 and a one-day holding
period using a "parametric delta-gamma" approximation technique to determine the observed interrelationships between movements
in interest rates and various currencies and in calculating the risk of the underlying positions in the portfolio. These interrelationships
were determined by observing interest rate and forward currency rate movements primarily over the preceding quarter for determining
value at risk at December 31, 2020 and 2019, and primarily over each of the four preceding quarters for the calculation of average,
high and low value at risk amounts during each year.
(in millions)
Instruments sensitive to:
Foreign currency rates
Interest rates
(in millions)
Instruments sensitive to:
Foreign currency rates
Interest rates
Fair Value Impact
At
December 31, 2020
Average
High
Low
$59
$180
$78
$136
$54
$445
$1,146
$180
Fair Value Impact
At
December 31, 2019
Average
High
Low
$18
$301
$20
$24
$18
$247
$346
$169
The significant year-over-year increase in "average" and "high" impact on the value at risk computation above was primarily due to an
increase in interest rate and foreign currency volatility during the first quarter of 2020 resulting from the impact of the COVID-19
pandemic.
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.
Contingencies
See Item 3 and Item 8, Note 17. Contingencies to our consolidated financial statements for a discussion of contingencies.
56
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," "aims," "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. Our RRPs constitute a new product category in its early stages that is less predictable than our mature cigarette business.
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 this discussion of potential risks or uncertainties to be complete. 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.
57
Item 8.
Financial Statements and Supplementary Data.
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
for the years ended December 31,
Revenues including excise taxes
Excise taxes on products
Net revenues
Cost of sales
Gross profit
2020
2019
2018
$ 76,047 $ 77,921 $ 79,823
47,353
48,116
50,198
28,694
29,805
29,625
9,569
10,513
10,758
19,125
19,292
18,867
Marketing, administration and research costs (Notes 12, 17, 19 & 20)
7,384
8,695
7,408
Amortization of intangibles
Operating income
Interest expense, net (Note 14)
Pension and other employee benefit costs (Note 13)
Earnings before income taxes
Provision for income taxes (Note 11)
73
66
82
11,668
10,531
11,377
618
97
570
89
665
41
10,953
9,872
10,671
2,377
2,293
2,445
Equity investments and securities (income)/loss, net
(16)
(149)
(60)
Net earnings
8,592
7,728
8,286
Net earnings attributable to noncontrolling interests
536
543
375
Net earnings attributable to PMI
$
8,056 $
7,185 $
7,911
Per share data (Note 10):
Basic earnings per share
Diluted earnings per share
$
$
5.16 $
4.61 $
5.08
5.16 $
4.61 $
5.08
See notes to consolidated financial statements.
58
Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
for the years ended December 31,
2020
2019
2018
Net earnings
$
8,592 $
7,728 $
8,286
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustments:
Unrealized gains (losses), net of income taxes of $94 in 2020,
$(161) in 2019 and $(47) in 2018
(1,265)
505
(812)
(Gains)/losses transferred to earnings - deconsolidation of RBH,
net of income taxes of $0 in 2020, 2019 and 2018 (Note 20)
—
502
—
Change in net loss and prior service cost:
Net gains (losses) and prior service costs, net of income taxes of
$139 in 2020, $247 in 2019 and $65 in 2018
(726)
(454)
(1,046)
Amortization of net losses, prior service costs and net transition
costs, net of income taxes of $(67) in 2020, $(69) in 2019 and
$(43) in 2018
(Gains)/losses transferred to earnings - deconsolidation of RBH,
net of income taxes of $0 in 2020, $(15) in 2019 and $0 in 2018
(Note 20)
299
243
218
—
27
—
Change in fair value of derivatives accounted for as hedges:
Gains (losses) recognized, net of income taxes of $13 in 2020, $2
in 2019 and $(4) in 2018
(68)
(18)
24
(Gains) losses transferred to earnings, net of income taxes of $0
in 2020, $3 in 2019 and $5 in 2018
(20)
(14)
(31)
Total other comprehensive earnings (losses)
(1,780)
791
(1,647)
Total comprehensive earnings
6,812
8,519
6,639
Less comprehensive earnings attributable to:
Noncontrolling interests
574
586
304
Comprehensive earnings attributable to PMI
$
6,238 $
7,933 $
6,335
See notes to consolidated financial statements.
59
Consolidated Balance Sheets
(in millions of dollars, except share data)
at December 31,
Assets
2020
2019
Cash and cash equivalents
$
7,280 $
6,861
Trade receivables (less allowances of $23 in 2020 and $20 in 2019)
Other receivables (less allowances of $38 in 2020 and $35 in 2019)
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)
Equity investments (Note 4)
Deferred income taxes
Other assets (less allowances of $22 in 2020 and $15 in 2019)
2,905
856
2,063
1,712
5,816
9,591
860
3,080
637
2,052
1,596
5,587
9,235
701
21,492
20,514
590
4,410
9,460
449
14,909
8,544
6,365
5,964
2,019
4,798
1,410
2,767
566
4,132
9,354
394
14,446
7,815
6,631
5,858
2,113
4,635
1,153
1,971
Total Assets
$
44,815 $
42,875
See notes to consolidated financial statements.
60
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 17)
Stockholders’ (Deficit) Equity
Common stock, no par value (2,109,316,331 shares issued in 2020 and 2019)
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses
Less: cost of repurchased stock (551,942,600 and 553,421,668 shares in 2020 and
2019, respectively)
Total PMI stockholders’ deficit
Noncontrolling interests
Total stockholders’ deficit
2020
2019
$
244 $
338
3,124
2,780
782
6,403
1,189
1,880
2,122
1,091
4,051
2,299
666
5,837
1,042
1,831
1,973
796
19,615
18,833
28,168
26,656
684
4,470
2,509
908
3,634
2,443
55,446
52,474
—
—
2,105
2,019
31,638
30,987
(11,181)
(9,363)
22,562
23,643
35,129
35,220
(12,567)
(11,577)
1,936
1,978
(10,631)
(9,599)
Total Liabilities and Stockholders’ (Deficit) Equity
$ 44,815 $ 42,875
See notes to consolidated financial statements.
61
Consolidated Statements of Cash Flows
(in millions of dollars)
for the years ended December 31,
2020
2019
2018
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings
$
8,592
$
7,728
$
8,286
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 (Note 19)
Cash effects of changes in:
Receivables, net
Inventories
Accounts payable
Accrued liabilities and other current assets
Income taxes
Pension plan contributions
Other
981
(143)
(14)
26
(165)
406
121
(260)
(102)
370
964
(141)
371
(331)
(548)
451
1,108
75
(200)
(1)
613
989
(100)
(3)
53
(613)
(51)
910
(135)
(110)
252
Net cash provided by operating activities
9,812
10,090
9,478
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures
Equity investments
Deconsolidation of RBH (Note 20)
Net investment hedges
Other
(602)
(47)
—
(551)
46
(852)
(31)
(2)
(1,346)
386
32
(1,436)
(63)
—
416
85
Net cash used in investing activities
(1,154)
(1,811)
(998)
See notes to consolidated financial statements.
62
for the years ended December 31,
2020
2019
2018
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Short-term borrowing activity by original maturity:
Net issuances (repayments) - maturities of 90 days or less
$
(70) $
(364) $
255
Issuances - maturities longer than 90 days
Repayments - maturities longer than 90 days
Long-term debt proceeds
Long-term debt repaid
Dividends paid
45
989
(45)
(989)
3,713
3,819
—
—
—
(3,999)
(3,998)
(2,484)
(7,364)
(7,161)
(6,885)
Payments to noncontrolling interests and Other
(776)
(357)
(537)
Net cash used in financing activities
(8,496)
(8,061)
(9,651)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
258
27
(685)
Cash, cash equivalents and restricted cash(3):
Increase (Decrease)
Balance at beginning of year
Balance at end of year
Cash Paid:
Interest
Income taxes
420
6,865
245
6,620
(1,856)
8,476
$
7,285 $
6,865 $
6,620
$
$
728 $
800 $
882
2,785 $
2,430 $
2,749
(1) Includes the Loss on Deconsolidation of RBH ($239 million) and the Canadian tobacco litigation-related charge ($194 million)
that were included in marketing, administration and research costs in the consolidated statements of earnings for the year ended
December 31, 2019. For further details on these charges, see Note 20. Deconsolidation of RBH.
(2) Includes deconsolidation of RBH cash and cash equivalents of $1,323 million and restricted cash of $23 million.
(3) The amounts for cash and cash equivalents shown above include restricted cash of $5 million, $4 million and $27 million as of
December 31, 2020, 2019 and 2018, respectively, which were included in other current assets in the consolidated balance
sheets.
See notes to consolidated financial statements.
63
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, 2018
$
— $
1,972 $
29,859 $
(8,535) $
(35,382) $
1,856 $
(10,230)
Net earnings
Other comprehensive earnings (losses),
net of income taxes
Issuance of stock awards
Dividends declared ($4.49 per share)
Payments to noncontrolling interests
Adoption of new accounting standards (1)
Other (Note 6)
Balances, December 31, 2018
—
Net earnings
Other comprehensive earnings (losses),
net of income taxes
Issuance of stock awards
Dividends declared ($4.62 per share)
Payments to noncontrolling interests
Deconsolidation of RBH (Note 20)
Other
Balances, December 31, 2019
—
Net earnings
Other comprehensive earnings (losses),
net of income taxes
Issuance of stock awards
Dividends declared ($4.74 per share)
Payments to noncontrolling interests
Other
7,911
(6,994)
238
31,014
7,185
(7,212)
30,987
8,056
(7,405)
47
(80)
1,939
79
1
2,019
69
17
(1,572)
81
(4)
(10,111)
(35,301)
81
219
529
—
(9,363)
(35,220)
375
8,286
(75)
(1,647)
128
(6,994)
(435)
238
(85)
(10,739)
7,728
262
160
(7,212)
(378)
529
51
(9,599)
8,592
(435)
(1)
1,720
543
43
(378)
50
1,978
536
(1,818)
38
(1,780)
91
160
(7,405)
(602)
3
(602)
(14)
—
Balances, December 31, 2020
$
— $
2,105 $
31,638 $
(11,181) $
(35,129) $
1,936 $
(10,631)
(1) Financial Accounting Standard Update ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities”
See notes to consolidated financial statements.
64
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. In addition, PMI ships versions of its Platform 1 device and its
consumables authorized by the U.S. Food and Drug Administration ("FDA") to Altria Group, Inc., for sale in the United States under
license. 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 continuing smoking. PMI has a range of RRPs in various
stages of development, scientific assessment and commercialization.
"Platform 1" is the term PMI uses to refer to PMI’s reduced-risk product that uses a precisely controlled heating device incorporating
our IQOS HeatControl technology, into which a specially designed and proprietary tobacco unit is inserted and heated to generate an
aerosol.
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; valuation assumptions for non-marketable
equity securities; 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 not accounted for under the equity method of accounting are measured at fair value, if it is readily
determinable, with changes in fair value recognized in net income. Investments without readily determinable fair values, non-
marketable equity securities, are measured and recorded using a measurement alternative that values the security at cost minus any
impairment. All intercompany transactions and balances have been eliminated.
PMI has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of December 31, 2020. PMI
has determined that the changes to its significant judgments and estimates did not have a material impact with respect to goodwill,
intangible assets, long-lived assets or its hedge accounting activities.
As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH")
from PMI's financial statements. For further details, see Note 20. Deconsolidation of RBH.
Certain prior years' amounts have been reclassified to conform with the current year's presentation. The changes did not have a
material impact on PMI's consolidated financial position, results of operations or cash flows in any of the periods presented.
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.
65
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.
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.
Fair value measurements
PMI follows ASC 820, Fair Value Measurements and Disclosures with respect to assets and liabilities that are measured at fair value.
The 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. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs
include 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. Level 3 are unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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, into the same line item as the impact of the underlying transaction, 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.
66
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 investment in non-marketable equity securities
Non-marketable equity securities are subject to periodic impairment reviews during which PMI considers both qualitative and
quantitative factors that may have a significant impact on the investees' fair value. Upon determining that an impairment may exist,
the security’s fair value is calculated and compared to its carrying value, and an impairment is recognized immediately if the carrying
value exceeds the fair value. For further details see Note 20. Deconsolidation of RBH.
Impairment of equity method investments
Equity method investments 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 accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on the
consolidated statements of earnings. PMI recognizes income taxes associated with Global Intangible Low-Taxed Income ("GILTI")
taxes as current period expense rather than including these amounts in the measurement of deferred taxes.
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.
Leases
PMI determines that a contract contains a lease if the contract conveys a right to control the use of the identified asset for a period of
time in exchange for consideration. Lease expense is recognized on a straight-line basis over the lease term with the expense recorded
in cost of sales or marketing, administration and research costs depending on the nature of the leased item. At lease commencement,
PMI recognizes lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately
all of its operating leases. The recognition of the right-of-use asset and lease liability includes renewal options when it is reasonably
certain that they will be exercised. Certain of PMI’s leases include payments that are based on changes to an index or on actual usage.
These lease payments are adjusted periodically and are included within variable lease costs. PMI accounts for lease and nonlease
components as a single-lease component with the exception of its vehicle leases, of which PMI accounts for the lease components
separately from the nonlease components. Additionally, leases with an initial term of 12 months or less are not included in the right-
of-use asset or lease liability on the consolidated statement of financial position.
67
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 revenue primarily through the manufacture and sale of cigarettes and other nicotine-containing products, including
reduced-risk products. The majority of PMI revenues are generated by sales through direct and indirect distribution networks with
short-term payment conditions and where control is typically transferred to the customer either upon shipment or delivery of goods.
PMI evaluates the transfer of control through evidence of the customer’s receipt and acceptance, transfer of title, PMI’s right to
payment for those products and the customer’s ability to direct the use of those products upon receipt. Typically, PMI’s performance
obligations are satisfied and revenue is recognized either upon shipment or delivery of goods.
In certain instances, PMI facilitates shipping and handling activities after control has transferred to the customer. PMI has elected to
record all shipping and handling activities as costs to fulfill a contract. The shipping and handling costs that have not been incurred at
the time revenue is recognized are accrued. The transaction price is typically based on the amount billed to the customer and includes
estimated variable consideration, where applicable. Such variable consideration is typically not constrained and is estimated based on
the most likely amount that PMI expects to be entitled to under the terms of the contracts with customers, historical experience of
discount or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs, which may change from
time to time as the business and product categories evolve. PMI has elected to exclude excise taxes collected from customers from the
measurement of the transaction price, thereby presenting revenues net of excise taxes. Estimated costs associated with warranty
programs are generally provided for in cost of sales in the period the related revenues are recognized.
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.
68
Note 3.
Goodwill and Other Intangible Assets, net:
The movements in goodwill were as follows:
(in millions)
Balance at January 1, 2019
Changes due to:
Currency
Deconsolidation of RBH
Balances, December 31, 2019
Changes due to:
Currency
Balances, December 31, 2020
$
European
Union
Eastern
Europe
Middle
East &
Africa
South &
Southeast
Asia
East Asia &
Australia
Latin
America &
Canada
Total
$
1,357 $
303 $
87 $
2,795 $
536 $
2,111 $
7,189
(19)
(3)
2
103
15
1,338
300
89
2,898
551
34
(1,463)
682
132
(1,463)
5,858
96
1,434 $
17
317 $
(3)
86 $
17
2,915 $
8
559 $
(29)
653 $
106
5,964
At December 31, 2020, goodwill primarily reflects PMI’s acquisitions in Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia,
as well as the business combination in the Philippines.
For details on the deconsolidation of RBH, see Note 20. Deconsolidation of RBH.
Details of other intangible assets were as follows:
December 31, 2020
December 31, 2019
Weighted-
Average
Remaining
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
$
1,289
$ 1,289
$
1,319
$ 1,319
(in millions)
Non-amortizable intangible
assets
Amortizable intangible
assets:
Trademarks
13 years
1,233 $
594
639
1,217 $
526
691
Distribution networks
Other*
7 years
8 years
115
104
78
50
37
54
113
106
72
44
41
62
Total other intangible assets
$
2,741 $
722 $ 2,019
$
2,755 $
642 $ 2,113
* Primarily includes intellectual property rights
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico. The decrease
since December 31, 2019, was due to currency movements of $(30) million.
The increase in the gross carrying amount of amortizable intangible assets from December 31, 2019, was mainly due to currency
movements of $15 million.
The change in the accumulated amortization from December 31, 2019 was mainly due to the 2020 amortization of $73 million,
combined with currency movements of $7 million.
Amortization expense for each of the next five years is estimated to be $72 million or less, assuming no additional transactions occur
that require the amortization of intangible assets.
69
During the second quarter of 2020, 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.
Note 4.
Related Parties - Equity Investments and Other:
Equity Method Investments:
At December 31, 2020 and 2019, PMI had total equity method investments of $966 million and $1,053 million, respectively. 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, dividends, capital contributions, changes in ownership interests and movements in currency
translation adjustments. The carrying value of our equity method investments at December 31, 2020 and 2019, exceeded our share of
the investees' book value by $773 million and $901 million, respectively. The difference between the investment carrying value and
the amount of underlying equity in net assets, excluding $745 million and $863 million attributable to goodwill as of December 31,
2020 and 2019, respectively, is being amortized on a straight-line basis over the underlying assets' estimated useful lives of 10 to 20
years. At December 31, 2020 and 2019, PMI received year-to-date dividends from equity method investees of $79 million and $100
million, respectively.
PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in
Russia (Eastern Europe segment).
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 Management et Développement des Actifs et des Ressources Holding ("MADAR
Holding"), which is part of the Middle East & Africa segment, manufactures and distributes under license some of PMI’s brands.
The initial investments in Megapolis Distribution BV and EITA were recorded at cost and are included in equity investments on the
consolidated balance sheets.
Equity securities:
Following the deconsolidation of RBH on March 22, 2019, PMI recorded the continuing investment in RBH, PMI's wholly owned
subsidiary in Canada, at fair value of $3,280 million at the date of deconsolidation, within equity investments. For further details, see
Note 20. Deconsolidation of RBH. Transactions between PMI and RBH are considered to be related-party transactions from the date
of deconsolidation and are included in the tables below.
The fair value of PMI’s other equity securities, which have been classified within Level 1, was $256 million and $332 million for the
years ending December 31, 2020 and 2019, respectively. Unrealized pre-tax gain (loss) of $(76) million and $44 million ($(60)
million and $35 million net of tax) on these equity securities was recorded in the consolidated statement of earnings for the years
ended December 31, 2020 and 2019, respectively. For a description of the fair value hierarchy and the three levels of inputs used to
measure fair values, see Note 2. Summary of Significant Accounting Policies.
Other related parties:
United Arab Emirates-based Trans-Emirates Trading and Investments (FZC) ("TTI") holds a 33% non-controlling interest in Philip
Morris Misr LLC ("PMM"), an entity incorporated in Egypt which is consolidated in PMI’s financial statements in the Middle East &
Africa segment. PMM sells, under license, PMI brands in Egypt through an exclusive distribution agreement with a local entity that is
also controlled by TTI.
Godfrey Phillips India Ltd ("GPI") is one of the non-controlling interest holders in IPM India, which is a 56.3% owned PMI
consolidated subsidiary in the South & Southeast Asia segment. GPI also acts as contract manufacturer and distributor for IPM India.
Amounts in the tables below include transactions between these related parties.
70
Financial activity with the above related parties:
PMI’s net revenues and expenses with the above related parties were as follows:
(in millions)
Net revenues
Megapolis Group
Other
Net revenues (a)
Expenses:
Other
Expenses
For the Years Ended December 31,
2020
2019
2018
$
$
$
$
2,174 $
1,059
3,233 $
2,236 $
1,015
3,251 $
51 $
51 $
63 $
63 $
(a) Net revenues exclude excise taxes and VAT billed to customers.
PMI’s balance sheet activity with the above related parties was as follows:
(in millions)
Receivables:
Megapolis Group
Other
Receivables
Payables:
Other
Payables
At December 31,
2020
2019
$
$
$
$
209 $
156
365 $
13 $
13 $
1,994
720
2,714
21
21
375
148
523
20
20
The activities with the above related parties are in the ordinary course of business, and are primarily for distribution, service fees,
contract manufacturing and license agreements. 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. PMI generally provides in cost of sales for the estimated cost of warranty in the period the related
revenue is recognized. PMI assesses the adequacy of its accrued product warranties and adjusts the amounts as necessary based on
actual experience and changes in future estimates. Factors that affect product warranties may vary across markets but typically
include device version mix, product failure rates, logistics and service delivery costs, and warranty policies. PMI accounts for its
product warranties within other accrued liabilities. At December 31, 2020 and December 31, 2019, these amounts were as follows:
(in millions)
Balance at beginning of period
Changes due to:
Warranties issued
Settlements
Currency/Other
Balance at end of period
At December 31,
2020
2019
$
140 $
67
242
(254)
9
137 $
303
(230)
—
140
$
71
Note 6.
Acquisitions:
On March 21, 2018, PMI acquired the remaining 49% interest in Tabacalera Costarricense, S.A. and Mendiola y Compañía, S.A. for a
net purchase price of $95 million, which included $2 million of contingent consideration. As a result, PMI now owns 100% of these
Costa Rican affiliates. The purchase of the remaining 49% interest resulted in a decrease to PMI’s additional paid-in capital of $86
million.
Note 7.
Indebtedness:
Short-Term Borrowings
At December 31, 2020 and 2019, PMI’s short-term borrowings and related average interest rates consisted of the following:
(in millions)
Commercial paper
$
Bank loans
$
December 31, 2020
December 31, 2019
Amount
Outstanding
Average Year-
End Rate
Amount
Outstanding
Average Year-
End Rate
—
244
244
— % $
5.3
$
—
338
338
— %
5.5
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, 2020 and 2019, based upon current market interest rates,
approximate the amounts disclosed above.
72
Long-Term Debt
At December 31, 2020 and 2019, PMI’s long-term debt consisted of the following:
(in millions)
December 31,
2020
2019
U.S. dollar notes, 0.875% to 6.375% (average interest rate 3.199%), due through 2044
$
21,221 $
19,783
Foreign currency obligations:
Euro notes, 0.125% to 3.125% (average interest rate 1.983%), due through 2039
9,253
9,822
Swiss franc notes, 1.625% to 2.000% (average interest rate 1.830%), due through 2024
Other (average interest rate 3.187%), due through 2025 (a)
Carrying value of long-term debt
Less current portion of long-term debt
622
196
31,292
3,124
$
28,168 $
899
203
30,707
4,051
26,656
(a) Includes mortgage debt in Switzerland as well as $37 million and $56 million in finance leases at December 31, 2020 and 2019, respectively.
The fair value of PMI’s outstanding long-term 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. At December 31,
2020 and 2019 the fair value of PMI's outstanding long-term debt, excluding the aforementioned finance leases, was as follows:
(in millions)
Level 1
Level 2
December 31,
2020
2019
$
35,227
$
32,821
177
167
For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of
Significant Accounting Policies.
Debt Issuances Outstanding:
PMI’s debt issuances outstanding at December 31, 2020, were as follows:
73
(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
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
EURO notes
Swiss franc notes
Swiss franc notes
(a)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
(b)
Face Value
Interest
Rate
Issuance
Maturity
$750
$350
$750
$500
$750
$750
$750
$600
$500
$750
$500
$900
$750
$750
$750
$750
$750
$500
$500
$750
$750
$750
1.875% February 2016
February 2021
4.125%
May 2011
May 2021
2.900% November 2011
November 2021
2.625% February 2017
February 2022
2.375%
2.500%
August 2017
August 2012
August 2022
August 2022
2.500% November 2017
November 2022
2.625%
2.125%
1.125%
March 2013
March 2023
May 2016
May 2020
May 2023
May 2023
3.600% November 2013
November 2023
2.875%
May 2019
May 2024
3.250% November 2014
November 2024
1.500%
3.375%
May 2020
May 2025
August 2015
August 2025
2.750% February 2016
February 2026
0.875% November 2020
May 2026
3.125%
August 2017
August 2027
3.125% November 2017
March 2028
3.375%
2.100%
May 2019
May 2020
August 2029
May 2030
1.750% November 2020
November 2030
$1,500
6.375%
May 2008
May 2038
$750
$700
$750
$850
$750
$750
$500
€750 (approximately $1,029)
€600 (approximately $761)
4.375% November 2011
November 2041
4.500%
3.875%
4.125%
March 2012
August 2012
March 2013
March 2042
August 2042
March 2043
4.875% November 2013
November 2043
4.250% November 2014
November 2044
4.250%
1.875%
2.875%
May 2016
November 2044
March 2014
May 2012
March 2021
May 2024
€500 (approximately $582)
0.625% November 2017
November 2024
€750 (approximately $972)
€1,000 (approximately $1,372)
€500 (approximately $557)
€500 (approximately $697)
€750 (approximately $835)
€500 (approximately $648)
€500 (approximately $578)
€500 (approximately $582)
€750 (approximately $835)
CHF300 (approximately $335)
CHF250 (approximately $283)
74
2.750%
2.875%
0.125%
2.875%
0.800%
3.125%
March 2013
March 2014
March 2025
March 2026
August 2019
August 2026
May 2014
May 2029
August 2019
August 2031
June 2013
June 2033
May 2016
2.000%
1.875% November 2017
1.450%
2.000% December 2011
1.625%
August 2019
May 2014
May 2036
November 2037
August 2039
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.
On January 25, 2021, PMI redeemed all of its outstanding 1.875% U.S. dollar notes due February 25, 2021. As of December 31,
2020, $750 million aggregate principal amount of the U.S. dollar notes were outstanding. The pre-tax loss related to this debt
extinguishment, which was not material, will be included in Interest expense, net on PMI’s condensed consolidated statements of
earnings for the three months ended March 31, 2021.
Aggregate maturities:
Aggregate maturities of long-term debt are as follows:
(in millions)
2021
2022
2023
2024
2025
2026-2030
2031-2035
Thereafter
Debt discounts
Total long-term debt
Credit Facilities
At December 31, 2020, PMI’s total committed credit facilities were as follows:
Type
(in billions of dollars)
364-day revolving credit, expiring February 2, 2021
Multi-year revolving credit, expiring October 1, 2022
Multi-year revolving credit, expiring February 10, 2025
Total facilities
$
$
3,124
2,760
2,362
3,442
2,424
7,206
1,535
8,699
31,552
(260)
31,292
Committed
Credit
Facilities
$
$
2.0
3.5
2.0
7.5
At December 31, 2020, there were no borrowings under these committed credit facilities, and the entire committed amounts were
available for borrowing.
These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require PMI to
post collateral. The $3.5 billion multi-year revolving credit facility in the table above 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, 2020, PMI’s ratio calculated in accordance with the agreement was
12.6 to 1.0. PMI expects to continue to meet PMI's 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.
75
On January 29, 2021, PMI entered into an agreement to amend and extend the term of its 364-day revolving credit facility from
February 2, 2021, to February 1, 2022 in the amount of $1.75 billion. On January 29, 2021, PMI also entered into an agreement,
effective February 10, 2021, to amend and extend the term of its $2.0 billion multi-year revolving credit facility, for an additional year
covering the period February 11, 2025 to February 10, 2026, in the amount of $1.86 billion.
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 $2.7 billion at December 31,
2020 and December 31, 2019, respectively, are for the sole use of the subsidiaries. Borrowings under these arrangements and other
bank loans amounted to $244 million at December 31, 2020, and $338 million at December 31, 2019.
Note 8.
Capital Stock:
Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares were as follows:
Balances, January 1, 2018
Issuance of stock awards
Shares Issued
Shares
Repurchased
Shares
Outstanding
2,109,316,331
(556,098,569) 1,553,217,762
1,361,959
1,361,959
Balances, December 31, 2018
2,109,316,331
(554,736,610) 1,554,579,721
Issuance of stock awards
1,314,942
1,314,942
Balances, December 31, 2019
2,109,316,331
(553,421,668) 1,555,894,663
Issuance of stock awards
1,479,068
1,479,068
Balances, December 31, 2020
2,109,316,331
(551,942,600) 1,557,373,731
At December 31, 2020, 25,148,458 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.
Note 9.
Stock Plans:
In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 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, 2020, shares available for grant under the 2017 Plan were 17,293,960.
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”). 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. At December 31, 2020,
shares available for grant under the plan were 933,338.
76
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 2020, the activity for RSU awards was as follows:
Balance at January 1, 2020
Granted
Vested
Forfeited
Balance at December 31, 2020
Number of
Shares
Weighted-
Average Grant
Date Fair Value
Per Share
3,725,870 $
1,728,680
(1,206,871)
(149,439)
4,098,240 $
89.85
85.79
96.91
85.50
86.21
During the years ended December 31, 2020, 2019 and 2018, the 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)
2020
2019
2018
Total Grant Date
Fair Value of RSU
Awards Granted
Weighted-
Average Grant
Date Fair Value
Per RSU Award
Granted
Compensation
Expense related
to RSU Awards
$
$
$
148 $
133 $
129 $
85.79 $
77.28 $
100.19 $
129
118
114
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, 2020, PMI had $133 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 approximately two years, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2020, 2019 and 2018, share and fair value information for PMI RSU awards that vested were as
follows:
(dollars in millions)
2020
2019
2018
Shares of RSU
Awards that Vested
Grant Date Fair
Value of Vested
Shares of RSU
Awards
Total Fair Value
of RSU Awards
that Vested
1,206,871 $
1,126,057 $
1,451,876 $
117 $
101 $
121 $
102
95
149
77
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, typically over a
three-year performance cycle. The performance metrics for such PSU's granted during the 2020 consisted of PMI's Total Shareholder
Return ("TSR") relative to a predetermined peer group and on an absolute basis (40% weight), PMI’s currency-neutral compound
annual adjusted diluted earnings per share growth rate (30% weight), and PMI’s performance against specific measures of PMI’s
transformation, defined as net revenues from PMI's RRPs and any other non-combustible products as a percentage of PMI's total net
revenues in the last year of the performance cycle (30% weight). The performance metrics for such PSUs granted during the years
ended 2019 and 2018 consisted of PMI’s TSR relative to a predetermined peer group and on an absolute basis (50% weight), PMI’s
currency-neutral compound annual adjusted operating income growth rate, excluding acquisitions (30% weight), and PMI’s
performance against specific measures of PMI’s transformation (20% weight).
The aggregate of the weighted performance factors for the three metrics in each such PSU award determines the percentage of PSUs
that will vest at the end of the three-year performance cycle. The minimum percentage of such PSUs that can vest is zero, with a
target percentage of 100 and a maximum percentage of 200. Each such 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 2020, the activity for PSU awards was as follows:
Balance at January 1, 2020
Granted
Vested
Forfeited
Balance at December 31, 2020
Grant Date
Fair Value
Subject to Other
Performance
Factors
(Per Share)
Grant Date
Fair Value
Subject to TSR
Performance
Factor
(Per Share)
Number of
Shares
1,347,460 $
671,220
(343,806)
(202,074)
1,472,800 $
88.19 $
86.04
85.72
95.66
86.76 $
107.61
80.36
128.72
116.67
90.48
During the years ended December 31, 2020, 2019 and 2018, 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)
2020
2019
2018
PSU Grant Date Fair Value
Subject to Other
Performance Factors
PSU Grant Date Fair Value
Subject to TSR
Performance Factor
Compensation
Expense related
to PSU Awards
Total
Per PSU
Award
Total
Per PSU
Award
Total
$
$
$
28 $
30 $
20 $
86.04 $
77.23 $
100.69 $
28 $
21 $
24 $
80.36 $
83.59 $
118.98 $
38
54
24
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 the grant. 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. The following assumptions were used to
determine the grant date fair value of the PSU awards subject to the TSR performance factor for the years ended December 31, 2020,
2019 and 2018:
Risk-free interest rate (a)
Expected volatility
For the Years Ended December 31,
2020
2019
1.4 %
(b)
23.5 %
2.4 %
(b)
21.4 %
2018
2.3 %
(c)
19.6 %
78
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
(c) Determined using a weighted-average of historical and implied volatility.
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, 2020, PMI had $39 million
of total unrecognized compensation cost related to non-vested PSU awards. This cost is recognized over a weighted-average
performance cycle period of approximately two years, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2020, and 2019, share and fair value information for PMI PSU awards that vested were as
follows:
(dollars in millions)
2020
2019
Shares of PSU
Awards that Vested
Grant Date Fair
Value of Vested
Shares of PSU
Awards
Total Fair Value
of PSU Awards
that Vested
343,806 $
330,616 $
35 $
32 $
30
28
During the year ended December 31, 2018, there were no PSU awards that vested.
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
For the Years Ended December 31,
2020
2019
2018
$
8,056 $
7,185 $
7,911
Less distributed and undistributed earnings attributable to share-based payment awards
20
17
16
Net earnings for basic and diluted EPS
$
8,036 $
7,168 $
7,895
Weighted-average shares for basic EPS
Plus contingently issuable performance stock units (PSUs)
Weighted-average shares for diluted EPS
1,557
1,555
1,555
1
1
1,558
1,556
—
1,555
For the 2020, 2019 and 2018 computations, there were no antidilutive stock options.
79
Note 11.
Income Taxes:
Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2020, 2019
and 2018:
(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
2020
2019
2018
$
10,953 $
9,872 $
10,671
$
(80) $
53
(27)
17 $
24
41
2,600
(196)
2,404
2,417
(165)
2,252
120
(113)
7
2,425
13
2,438
2,445
Total provision for income taxes
$
2,377 $
2,293 $
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act and, on December 27, 2020, the Consolidated
Appropriations Act, 2021 (“U.S. COVID-19 Acts”) were signed into law in the U.S. to provide certain relief as a result of the
COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in
response to the economic conditions in the wake of COVID-19. As of December 31, 2020, PMI has determined that neither the U.S.
COVID-19 Acts nor changes to income tax laws or regulations in other jurisdictions had a significant impact on PMI’s effective tax
rate, with the exception of the corporate income tax rate reduction in Indonesia.
On July 20, 2020, the U.S. Department of the Treasury and the Internal Revenue Service released final and proposed regulations under
the Global Intangible Low-Taxed Income (“GILTI”) and other provisions of the Internal Revenue Code. PMI has analyzed these
elective regulations and recorded the impact in its consolidated financial statements, as described below.
At December 31, 2017, PMI recorded a one-time transition tax liability on its accumulated foreign earnings, which is payable over an
eight-year period beginning in 2018. At December 31, 2020 and December 31, 2019, $1.1 billion and $1.2 billion of PMI's remaining
transition tax liability, respectively, was recorded in "income taxes and other liabilities" on PMI's consolidated balance sheets.
At December 31, 2020 and December 31, 2019, U.S. federal and foreign deferred income taxes have been provided on all accumulated
earnings of PMI's foreign subsidiaries.
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 2017 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 (2018 onward), Switzerland (2017 onward), and Turkey (2015
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.
80
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,
2020
2019
2018
$
63 $
56 $
11
1
(4)
(1)
—
2
$
72 $
10
1
(2)
(1)
—
(1)
63 $
145
10
15
(94)
(3)
(19)
2
56
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, 2020 December 31, 2019 December 31, 2018
$
$
72 $
17
(9)
80 $
63 $
16
(12)
67 $
56
12
(14)
54
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $62 million at December 31,
2020. The remainder, if recognized, would principally affect deferred taxes.
For the years ended December 31, 2020, 2019 and 2018, PMI recognized income (expense) in its consolidated statements of earnings
of $(1) million, $(4) million and $4 million, respectively, related to interest and penalties associated with uncertain tax positions.
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, 2020, 2019 and 2018:
U.S. federal statutory rate
Increase (decrease) resulting from:
Foreign rate differences
Dividend repatriation cost
Global intangible low-taxed income
U.S. state taxes
Foreign derived intangible income
Other
Effective tax rate
2020
2019
2018
21.0 %
21.0 %
21.0 %
0.6
0.4
0.1
0.2
(0.6)
—
1.8
(0.5)
1.4
0.7
(1.2)
—
1.3
2.5
1.2
(1.1)
(1.1)
(0.9)
21.7 %
23.2 %
22.9 %
The 2020 effective tax rate decreased 1.5 percentage points to 21.7%. The change in the effective tax rate for 2020, as compared to
2019, was favorably impacted by changes in earnings mix by taxing jurisdiction, a reduction of U.S. state tax expense, a reduction of
estimated U.S. income tax liabilities for years 2018 and 2019 due to the GILTI regulations mentioned above ($93 million) and the
corporate income tax rate reduction in Indonesia, partially offset by a decrease in deductions related to foreign-derived intangible
income for the years 2018 and 2019 and repatriation cost differences.
The 2019 effective tax rate increased 0.3 percentage points to 23.2%. The change in the effective tax rate for 2019, as compared to
2018, was unfavorably impacted by changes in earnings mix by taxing jurisdiction and U.S. state deferred income tax expense,
partially offset by the reversal of a deferred tax liability on the unremitted earnings of PMI's Canadian subsidiary, RBH ($49 million),
a reduction in estimated U.S. federal income tax on dividend repatriation for the years 2015-2018 ($67 million), and other repatriation
cost differences.
81
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:
At December 31,
2020
2019
Accrued postretirement and postemployment benefits
$
225 $
Accrued pension costs
Inventory
Accrued liabilities
Net operating loss carryforwards and tax credits
Foreign exchange
Other
Total deferred income tax assets
Less: valuation allowance
Deferred income tax assets, net of valuation allowance
Deferred income tax liabilities:
Trade names
Property, plant and equipment
Unremitted earnings
Foreign exchange
Total deferred income tax liabilities
Net deferred income tax assets
720
232
182
351
27
124
1,861
(250)
1,611
(374)
(200)
(311)
—
184
620
176
130
486
—
101
1,697
(304)
1,393
(469)
(180)
(243)
(256)
(885)
(1,148)
$
726 $
245
At December 31, 2020, PMI recorded deferred tax assets for net operating loss carryforwards and tax credits of $351 million, with
varying dates of expiration, primarily after 2025, including $79 million with an unlimited carryforward period. At December 31,
2020, PMI has recorded a valuation allowance of $250 million against deferred tax assets that do not meet the more-likely-than not
recognition threshold.
At December 31, 2019, PMI recorded deferred tax assets for net operating loss carryforwards of $486 million, with varying dates of
expiration, primarily after 2024, including $98 million with an unlimited carryforward period. At December 31, 2019, PMI has
recorded a valuation allowance of $304 million against deferred tax assets that do not meet the more-likely-than-not recognition
threshold.
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. In addition, PMI ships versions of its Platform 1 device and its
consumables authorized by the FDA to Altria Group, Inc. for sale in the United States under license. Operating 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 operating segments are the European Union; Eastern Europe;
Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Latin America & Canada. PMI records net revenues and
operating income to its segments based upon the geographic area in which the customer resides. Revenues from shipments of
Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc. for sale under license in the United States are included
in Net Revenues of the Latin America & Canada segment.
PMI’s chief operating decision maker evaluates segment performance and allocates resources based on regional operating income,
which includes results from all product categories sold in each region. 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 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
82
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.
PMI disaggregates its net revenue from contracts with customers by both geographic location and product category for each of PMI's
six operating segments, as PMI believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows
are affected by economic factors.
Net revenues by segment were as follows:
(in millions)
Net revenues:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Net revenues
For the Years Ended December 31,
2020
2019
2018
$
10,702 $
9,817
$
3,378
3,088
4,396
5,429
1,701
3,282
4,042
5,094
5,364
2,206
9,298
2,921
4,114
4,656
5,580
3,056
$
28,694 $
29,805
$
29,625
Total net revenues attributable to customers located in Japan, PMI's largest market in terms of net revenues, were $4.1 billion, $3.9
billion and $3.8 billion in 2020, 2019 and 2018, respectively. PMI had one customer in the East Asia & Australia segment that
accounted for 14%, 13% and 13% of PMI’s consolidated net revenues, and one customer in the European Union segment that
accounted for 11%, 10% and 10% of PMI’s consolidated net revenues in 2020, 2019 and 2018, respectively.
PMI's net revenues by product category were as follows:
(in millions)
Combustible products:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total combustible products
Reduced-risk products:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total reduced-risk products
Total PMI net revenues
For the Years Ended December 31,
2020
2019
2018
$
8,053 $
8,093
$
2,250
3,031
4,395
2,468
1,670
2,438
3,721
5,094
2,693
2,179
8,433
2,597
3,732
4,656
3,074
3,037
$
21,867 $
24,218
$
25,529
$
2,649 $
1,724
$
1,128
57
1
2,961
31
844
321
—
2,671
27
$
$
6,827 $
5,587
28,694 $
29,805
$
$
865
324
382
—
2,506
19
4,096
29,625
Note: Sum of product categories or Regions might not foot to total PMI due to roundings.
Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including
shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue
amounts consist of the sale of PMI's 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.
83
Net revenues related to reduced-risk products refer to the operating revenues generated from the sale of these products, including
shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts
consist of the sale of PMI's heated tobacco units, heat-not-burn devices and related accessories, and other nicotine-containing
products, which primarily include PMI's e-vapor products.
Operating income by segment were as follows:
(in millions)
Operating income:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Operating income
For the Years Ended December 31,
2020
2019
2018
$
5,098 $
3,970 $
871
1,026
1,709
2,400
564
547
1,684
2,163
1,932
235
4,105
902
1,627
1,747
1,851
1,145
$
11,668 $
10,531 $
11,377
Items affecting the comparability of results from operations were as follows:
•
•
•
•
•
Asset impairment and exit costs - See Note 19. Asset Impairment and Exit Costs for details of the $149 million and $422 million
pre-tax charges for the years ended December 31, 2020 and 2019, respectively, as well as a breakdown of these costs by segment.
Russia excise and VAT audit charge - See Note 17. Contingencies for details of the $374 million pre-tax charge included in the
Eastern Europe segment for the year ended December 31, 2019.
Canadian tobacco litigation-related expense - See Note 17. Contingencies and Note 20. Deconsolidation of RBH for details of
the $194 million pre-tax charge included in the Latin America & Canada segment for the year ended December 31, 2019.
Loss on deconsolidation of RBH - See Note 20. Deconsolidation of RBH for details of the $239 million loss included in the
Latin America & Canada segment for the year ended December 31, 2019.
Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI
recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012
through December 2019; these tax credits will be applied to future tax liabilities in Brazil. This amount was included as a
reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December
31, 2020 and was included in the operating income of the Latin America & Canada segment. A decision regarding an additional
amount of overpaid indirect taxes of approximately $90 million is still pending before this court.
Other segment data were as follows:
(in millions)
Depreciation expense:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Other
Total depreciation expense
For the Years Ended December 31,
2020
2019
2018
$
266 $
254 $
173
75
137
188
58
897
147
90
142
185
69
887
11
908 $
11
898 $
$
269
101
105
154
173
94
896
11
907
84
(in millions)
Capital expenditures:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Other
Total capital expenditures
(in millions)
Long-lived assets:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total long-lived assets
Other
For the Years Ended December 31,
2020
2019
2018
$
326 $
466 $
88
22
115
13
36
600
2
132
35
100
67
52
852
—
813
136
65
129
215
74
1,432
4
$
602 $
852 $
1,436
At December 31,
2020
2019
2018
$
4,500 $
4,275 $
4,216
668
375
1,348
807
433
8,131
1,001
774
369
1,361
829
478
8,086
516
547
362
1,297
781
779
7,982
664
8,646
Total property, plant and equipment, net and Other assets
$
9,132 $
8,602 $
Long-lived assets consist of non-current assets other than goodwill; other intangible assets, net; deferred tax assets, equity investments,
and financial instruments. PMI's largest markets in terms of long-lived assets are Switzerland, Italy and Indonesia. Total long-lived
assets located in Switzerland, which is reflected in the European Union segment above, were $1.3 billion, $1.1 billion and $1.0 billion
at December 31, 2020, 2019 and 2018, respectively. Total long-lived assets located in Italy, which is reflected in the European Union
segment above, were $1.1 billion, $1.1 billion and $1.1 billion at December 31, 2020, 2019 and 2018, respectively. Total long-lived
assets located in Indonesia, which is reflected in the South & Southeast Asia segment above, were $0.7 billion, $0.8 billion and $0.7
billion at December 31, 2020, 2019 and 2018, 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 governed by local statutory requirements. 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.
Pension and other employee benefit costs per the consolidated statements of earnings consisted of the following for December 31,
2020, 2019 and 2018:
85
(in millions)
Net pension costs (income)
Net postemployment costs
Net postretirement costs
Total pension and other employee benefit costs
Pension and Postretirement Benefit Plans
Obligations and Funded Status
2020
2019
2018
$
$
(14) $
103
8
97 $
(18) $
100
7
89 $
(51)
80
12
41
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,
2020 and 2019, were as follows:
(in millions)
Benefit obligation at January 1
Service cost
Interest cost
Benefits paid(2)
Employee contributions(2)
Settlement, curtailment and plan amendment
Actuarial losses (gains)
Currency
Deconsolidation of RBH
Other(2)
Benefit obligation at December 31,
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Employee contributions(2)
Benefits paid(2)
Settlement
Currency
Deconsolidation of RBH
Fair value of plan assets at December 31,
Pension(1)
Postretirement
2020
2019
2020
2019
$
10,612 $
9,152 $
190 $
209
2
6
(7)
—
5
3
—
(1)
198
2
7
(8)
—
27
—
(42)
(5)
190
268
68
214
118
(356)
(333)
130
(117)
653
992
—
(7)
12,243
7,928
206
102
130
(356)
(16)
752
—
8,746
127
50
1,430
29
(166)
(9)
10,612
6,888
1,211
200
127
(333)
—
7
(172)
7,928
Net pension and postretirement liability recognized at December 31,
$
(3,497) $
(2,684) $
(198) $
(190)
(1) Primarily non-U.S. based defined benefit retirement plans.
(2) Certain prior years' amounts pertaining to PMI’s pension plans have been reclassified in the table above to conform with the current year's
presentation.
For the years ended December 31, 2020 and 2019, actuarial losses (gains) consisted primarily of losses for assumption changes related
to lower discount rates year-over-year for Swiss, German and Dutch plans.
At December 31, 2020 and 2019, the Swiss pension plan represented 63% and 62% of the benefit obligation, respectively, and
approximately 59% and 59% of the fair value of plan assets at December 31, 2020 and 2019, respectively. At December 31, 2020 and
2019, the U.S. pension plan represented 4% and 4% of the benefit obligation, respectively, and approximately 4% and 4% of the fair
value of plan assets at December 31, 2020 and 2019, respectively.
86
At December 31, 2020 and 2019, 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
2020
2019
2020
2019
$
43 $
(26)
43
(23) $
(8) $
(8)
(3,514)
(2,704)
(190)
$
(3,497) $
(2,684) $
(198) $
(182)
(190)
The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $11.5 billion and $10.0 billion
at December 31, 2020 and 2019, respectively.
For pension plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of
plan assets were $10.5 billion and $7.7 billion, respectively, as of December 31, 2020. The accumulated benefit obligation and fair
value of plan assets were $9.0 billion and $6.8 billion, respectively, as of December 31, 2019.
For pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan
assets were $12.1 billion and $8.6 billion, respectively, as of December 31, 2020. The projected benefit obligation and fair value of
plan assets were $10.4 billion and $7.7 billion, respectively, as of December 31, 2019.
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
Interest crediting rate
Health care cost trend rate assumed for next year
Ultimate trend rate
Year that rate reaches the ultimate trend rate
Pension
Postretirement
2020
2019
2020
2019
0.56 %
0.83 %
2.84 %
3.28 %
1.79
3.20
1.82
3.20
6.21
4.73
6.21
5.09
2029
2023
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.
87
Components of Net Periodic Benefit Cost
Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2020, 2019 and
2018:
(in millions)
Service cost
Interest cost
Pension
Postretirement
2020
2019
2018
2020
2019
2018
$
268 $
214 $
210 $
2 $
2 $
68
118
109
Expected return on plan assets
(353)
(328)
(349)
Amortization:
Net losses
Prior service cost
Net transition obligation
Settlement and curtailment
265
189
172
1
1
4
(1)
—
4
2
—
15
6
—
2
—
—
—
7
—
—
—
—
—
4
9
—
4
(1)
—
—
Net periodic pension and postretirement costs
$
254 $
196 $
159 $
10 $
9 $
16
Settlement and curtailment charges were due primarily to employee severance and early retirement programs.
The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:
2020
Pension
2019
2018
2020
Postretirement
2019
2018
Discount rate - service cost
1.25 %
2.14 %
1.92 %
3.28 %
3.97 %
3.79 %
Discount rate - interest cost
Expected rate of return on plan assets
Rate of compensation increase
Interest crediting rate
Health care cost trend rate
0.67
4.59
1.82
3.20
1.35
4.70
1.86
3.40
1.25
4.76
1.65
3.40
3.28
3.97
3.79
6.21
6.17
6.17
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 $66 million, $63 million and $66 million for the years ended December 31, 2020, 2019 and 2018, 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 60% in equity securities
and approximately 40% in debt securities and other assets. 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.
88
The fair value of PMI’s pension plan assets at December 31, 2020 and 2019, by asset category was as follows:
Asset Category
(in millions)
At December 31,
2020
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
324 $
Equity securities:
U.S. securities
International securities
Investment funds(a)
International government bonds
Corporate bonds
Other
175
605
6,811
225
292
7
324
175
605
5,206 $
149
292
7
1,605
76
Total assets in the fair value hierarchy
Investment funds measured at net asset
value(b)
Total assets
$
$
8,439 $
6,758 $
1,681 $
—
307
8,746
(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 JP Morgan EMBI for bonds),
primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 63% are invested in U.S. and international
equities; 16% are invested in U.S. and international government bonds; 12% are invested in real estate, and 9% are 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.
Asset Category
(in millions)
At December 31,
2019
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
276 $
Equity securities:
U.S. securities
International securities
Investment funds(a)
International government bonds
Corporate bonds
Other
170
563
6,125
197
282
6
276
170
563
4,625 $
137
282
6
1,500
60
Total assets in the fair value hierarchy
Investment funds measured at net asset
value(b)
Total assets
$
$
7,619 $
6,059 $
1,560 $
—
309
7,928
(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, 63% were invested in U.S. and international
equities; 16% were invested in U.S. and international government bonds; 12% were invested in real estate and other money markets, and 9%
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.
89
For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of
Significant Accounting Policies.
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 $262 million in 2021 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, 2020, are as follows:
(in millions)
2021
2022
2023
2024
2025
2026 - 2030
$
401
383
387
390
399
2,226
PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2030.
Postemployment Benefit Plans
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 $208 million, $171 million and $158 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The amounts recognized in accrued postemployment costs net of plan assets on PMI's consolidated balance sheets at December 31,
2020 and 2019, were $923 million and $751 million, respectively. The change in the liability is primarily due to actuarial losses of
$142 million in 2020 resulting from increased employee severance payout primarily in countries in the European Union and Latin
America & Canada segments, coupled with the periodic expense, partially offset by cash payments.
The accrued postemployment costs were determined using a weighted-average discount rate of 3.0% and 3.0% in 2020 and 2019,
respectively; an assumed ultimate annual weighted-average turnover rate of 3.0% and 3.0% in 2020 and 2019, respectively; assumed
compensation cost increases of 2.1% in 2020 and 2.6% in 2019, 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 $46 million and $40 million at December 31, 2020 and 2019, 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, 2020, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
Post-
retirement
Post-
employment
Total
$
(4,147) $
(64) $
(839) $
(5,050)
22
(3)
570
(3,558) $
$
2
—
24
(38) $
(22)
—
2
(3)
204
(657) $
798
(4,253)
90
The amounts recorded in accumulated other comprehensive losses at December 31, 2019, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
Post-
retirement
Post-
employment
Total
$
(3,718) $
(63) $
(775) $
(4,556)
3
(4)
520
2
—
24
—
—
182
5
(4)
726
$
(3,199) $
(37) $
(593) $
(3,829)
The amounts recorded in accumulated other comprehensive losses at December 31, 2018, consisted of the following:
(in millions)
Net losses
Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized
Pension
Post-
retirement
Post-
employment
Total
$
(3,438) $
(41) $
(702) $
(4,181)
(27)
(4)
379
3
—
20
—
—
164
(24)
(4)
563
$
(3,090) $
(18) $
(538) $
(3,646)
The movements in other comprehensive earnings (losses) during the year ended December 31, 2020, were as follows:
(in millions)
Amounts transferred to earnings:
Amortization:
Net losses
Prior service cost
Net transition obligation
Other income/expense:
Net losses
Prior service cost
Deferred income taxes
Other movements during the year:
Net losses
Prior service cost
Deferred income taxes
Pension
Post-
retirement
Post-
employment
Total
$
250 $
3 $
78 $
29
1
3
2
(49)
236
(682)
(12)
99
(595)
—
—
—
—
(1)
2
(4)
—
1
(3)
—
—
—
—
(17)
61
(142)
(22)
39
(125)
331
29
1
3
2
(67)
299
(828)
(34)
139
(723)
Total movements in other comprehensive earnings (losses)
$
(359) $
(1) $
(64) $
(424)
91
The movements in other comprehensive earnings (losses) during the year ended December 31, 2019, were as follows:
(in millions)
Amounts transferred to earnings:
Amortization:
Net losses
Prior service cost
Other income/expense:
Net losses
Deferred income taxes
Other movements during the year:
Net losses
Prior service cost
Deconsolidation of RBH (net of deferred income taxes)
Deferred income taxes
Pension
Post-
retirement
Post-
employment
Total
$
198 $
32
3
(51)
182
(521)
(2)
26
206
3 $
(1)
—
(1)
1
77 $
—
—
(17)
60
278
31
3
(69)
243
(27)
(150)
(698)
—
1
6
—
—
35
(2)
27
247
(291)
(20)
(115)
(426)
Total movements in other comprehensive earnings (losses)
$
(109) $
(19) $
(55) $
(183)
The movements in other comprehensive earnings (losses) during the year ended December 31, 2018, were as follows:
(in millions)
Amounts transferred to earnings:
Amortization:
Net losses
Prior service cost
Net transition obligation
Other income/expense:
Net losses
Deferred income taxes
Other movements during the year:
Net losses
Prior service cost
Deferred income taxes
Pension
Post-
retirement
Post-
employment
Total
$
180 $
—
1
14
(28)
167
(1,008)
8
80
(920)
5 $
(1)
—
—
(1)
3
34
—
(7)
27
62 $
247
—
—
—
(14)
48
(1)
1
14
(43)
218
(147)
(1,121)
—
(8)
8
65
(155)
(1,048)
Total movements in other comprehensive earnings (losses)
$
(753) $
30 $
(107) $
(830)
92
Note 14.
Additional Information:
(in millions)
Research and development expense
Advertising expense
Foreign currency net transaction (gains)/losses
Interest expense
Interest income
Interest expense, net
Total lease cost
(1) For additional information on total lease costs, see Note 21. Leases.
Note 15.
Financial Instruments:
Overview
For the Years Ended December 31,
2020
2019
2018
$
$
$
$
$
$
$
$
$
$
495
637
90
728
(110)
$
$
$
$
465
730
(95)
796
(226)
618
$
570
$
317 (1) $
332 (1) $
383
896
21
855
(190)
665
312
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. 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. 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 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. Both foreign
exchange contracts and interest rate contracts are collectively referred to as derivative contracts ("derivative contracts"). The primary
currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble
and Swiss franc. At December 31, 2020 and 2019, PMI had contracts with aggregate notional amounts of $26.5 billion and $24.1
billion, respectively. Of the $26.5 billion aggregate notional amount at December 31, 2020, $5.0 billion related to cash flow hedges,
$8.9 billion related to hedges of net investments in foreign operations and $12.6 billion related to other derivatives that primarily offset
currency exposures on intercompany financing. Of the $24.1 billion aggregate notional amount at December 31, 2019, $2.8 billion
related to cash flow hedges, $9.9 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.
93
The fair value of PMI’s derivative contracts included in the consolidated balance sheets as of December 31, 2020 and 2019, were as
follows:
(in millions)
Derivative contracts designated as
hedging instruments
Derivative contracts not designated as
hedging instruments
Total gross amount derivatives
contracts presented in the
consolidated balance sheets
Gross amounts not offset in the
consolidated balance sheets
Financial instruments
Cash collateral received/pledged
Derivative Assets
Derivative Liabilities
Balance Sheet
Classification
Other current
assets
Other assets
Other current
assets
Other assets
Fair Value
2020
2019
$
130 $
319
6
46
—
21
50
—
Balance Sheet
Classification
Other accrued
liabilities
Income taxes and
other liabilities
Other accrued
liabilities
Income taxes and
other liabilities
Fair Value
2020
2019
$
241 $
23
605
207
57
301
70
25
$
182 $
390
$
1,110 $
419
(156)
(297)
(23)
(91)
(156)
(297)
(892)
(59)
Net amount
$
3 $
2
$
62 $
63
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, foreign currency swaps and
interest rate 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 contracts have been classified within Level 2 at December 31, 2020 and 2019.
94
For the years ended December 31, 2020, 2019 and 2018, PMI's derivative contracts impacted the consolidated statements of earnings
and comprehensive earnings as follows:
(pre-tax, in millions)
For the Years Ended December 31,
Amount of Gain/
(Loss) Recognized in
Other Comprehensive
Earnings/(Losses) on
Derivatives
2019
2020
2018
Statement of
Earnings
Classification of
Gain/(Loss)
on Derivatives
Amount of Gain/(Loss)
Reclassified from
Other Comprehensive
Earnings/(Losses) into
Earnings
2019
2018
2020
Amount of Gain/(Loss)
Recognized in
Earnings
2019
2018
2020
Derivative contracts
designated as hedging
instruments:
Cash flow hedges
$ (81) $ (20) $
28
Net revenues
$
(3) $
22 $
18
Cost of sales
Marketing,
administration and
research costs
7
1 —
27
2
6
Interest expense, net
(11)
(8)
(1)
Net investment hedges (a)
Derivative contracts not
designated as hedging
instruments
(514) 369
324
Interest expense, net (b)
$ 194 $ 230 $ 260
Interest expense, net
Marketing,
administration and
research costs (c)
71
94
62
(368)
(115)
378
$ (595) $ 349 $ 352
Total
(a) Amount of gains (losses) on hedges of net investments principally related to changes in exchange and interest rates between the Euro and U.S.
dollar
(b) Represent the gains for amounts excluded from the effectiveness testing
(c) The gains (losses) from these contracts attributable to changes in foreign currency exchange rates substantially offset the (losses) and gains
generated by the underlying intercompany and third-party loans being hedged
23 $ (103) $ 209 $ 700
20 $
17 $
$
95
Cash Flow Hedges
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to certain forecasted
transactions. Gains and losses associated with qualifying cash flow hedge contracts are deferred as components of accumulated other
comprehensive losses until the underlying hedged transactions are reported in PMI’s consolidated statements of earnings. As of
December 31, 2020, PMI has hedged forecasted transactions for periods not exceeding the next eighteen months, with the exception of
one derivative 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 derivative contracts and certain foreign currency denominated debt instruments as net investment hedges, primarily of
its Euro net assets. The amount of pre-tax gain/(loss) related to these debt instruments, that was reported as a component of
accumulated other comprehensive losses within currency translation adjustment, was $(465) million, $234 million and $349 million,
for the years ended December 31, 2020, 2019 and 2018, respectively. 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 derivative 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 gains (losses) relating to these contracts are reported in PMI’s consolidated statements of earnings.
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/(loss) as of December 31,
For the Years Ended December 31,
2020
2019
2018
$
$
3
$
35
$
(20)
(68)
(14)
(18)
(85) $
3
$
42
(31)
24
35
At December 31, 2020, PMI expects $(49) million of derivative losses that are included in accumulated other comprehensive losses to
be reclassified to the consolidated statement of earnings within the next 12 months. These losses are expected to be substantially
offset by the statement of earnings impact of the respective hedged transactions.
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.
96
Note 16.
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,
2020
2019
2018
$
(6,843) $
(5,537) $
(6,500)
(4,253)
(3,829)
(3,646)
(85)
3
35
Total accumulated other comprehensive losses
$ (11,181) $
(9,363) $ (10,111)
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, including those related to the deconsolidation of RBH, are
shown on the consolidated statements of comprehensive earnings for the years ended December 31, 2020, 2019, and 2018. For
additional information, see Note 13. Benefit Plans for disclosures related to PMI's pension and other benefits, Note 15. Financial
Instruments for disclosures related to derivative financial instruments and Note 20. Deconsolidation of RBH for disclosures related to
the deconsolidation of RBH.
Note 17.
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, except as stated
otherwise in this Note 17. Contingencies, 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.
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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.
CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary,
Rothmans, Benson & Hedges Inc. (“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited,
sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22,
March 8, and March 12, 2019 respectively. CCAA is a Canadian federal law that permits a Canadian business to restructure its affairs
while carrying on its business in the ordinary course. The initial CCAA order made by the Ontario Superior Court on March 22, 2019
authorizes RBH to pay all expenses incurred in carrying on its business in the ordinary course after the CCAA filing, including
obligations to employees, vendors, and suppliers. As further described in Note 20. Deconsolidation of RBH, RBH is now
deconsolidated from our consolidated financial statements. As part of the CCAA proceedings, there is currently a comprehensive stay
up to and including March 31, 2021 of all tobacco-related litigation pending in Canada against RBH and the other defendants,
including PMI and our indemnitees (PM USA and Altria), namely, the smoking and health class actions filed in various Canadian
provinces and health care cost recovery actions. These proceedings are presented below under the caption “Stayed Litigation —
Canada.” Ernst & Young Inc. has been appointed as monitor of RBH in the CCAA proceedings. In accordance with the CCAA
process, as the parties work towards a plan of arrangement or compromise in a confidential mediation, it is anticipated that the court
will set additional hearings and further extend the stay of proceedings. On April 17, 2019, the Ontario Superior Court ruled that RBH
and the other defendants will not be allowed to file an application to the Supreme Court of Canada for leave to appeal the Court of
Appeal’s decision in the Létourneau and the Blais cases so long as the comprehensive stay of all tobacco-related litigation in Canada
remains in effect and that the time period to file the application would be extended by the stay period. While RBH believes that the
findings of liability and damages in both Létourneau and the Blais cases were incorrect, the CCAA proceedings will provide a forum
for RBH to seek resolution through a plan of arrangement or compromise of all tobacco-related litigation pending in Canada. It is not
possible to predict the resolution of the underlying legal proceedings or the length of the CCAA process.
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Stayed Litigation — Canada
Smoking and Health Litigation — Canada
In the first 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, RBH
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. The trial court issued its judgment on May 27,
2015. The trial court found RBH 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 $12.1 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 $2.4 billion)). In addition, the trial court awarded CAD 90,000 (approximately
$70,250) in punitive damages, allocating CAD 30,000 (approximately $23,400) to RBH. The trial court estimated the disease class at
99,957 members. RBH appealed to the Court of Appeal of Quebec. In October 2015, the Court of Appeal ordered RBH to furnish
security totaling CAD 226 million (approximately $176.4 million) to cover both the Létourneau and Blais cases, which RBH has paid
in installments through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD
758 million (approximately $592 million) in installments through June 2017. JTI Macdonald Corp. was not required to furnish
security in accordance with plaintiffs’ motion. 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 further order of the Court of Appeal. On March 1, 2019, the Court of
Appeal issued a decision largely affirming the trial court’s findings of liability and the compensatory and punitive damages award
while reducing the total amount of compensatory damages to approximately CAD 13.5 billion including interest (approximately $10.5
billion) due to the trial court’s error in the calculation of interest. The compensatory damages award is on a joint and several basis with
an allocation of 20% to RBH (approximately CAD 2.7 billion, including pre-judgment interest (approximately $2.11 billion)). The
Court of Appeal upheld the trial court’s findings 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 and by
conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either
need not prove, or had adequately proven, that these faults were a cause of the class members’ injuries. In accordance with the
judgment, defendants are required to deposit their respective portions of the damages awarded in both the Létourneau case described
below and the Blais case, approximately CAD 1.1 billion (approximately $859 million), into trust accounts within 60 days. RBH’s
share of the deposit is approximately CAD 257 million (approximately $194 million). PMI recorded a pre-tax charge of $194 million
in its consolidated results, representing $142 million net of tax, as tobacco litigation-related expense, in the first quarter of 2019. The
charge reflects PMI’s assessment of the portion of the judgment that represents probable and estimable loss prior to the
deconsolidation of RBH and corresponds to the trust account deposit required by the judgment.
In the second 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, RBH 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. The trial court
issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and awarded a total of
CAD 131 million (approximately $102.3 million) in punitive damages, allocating CAD 46 million (approximately $36 million) to
RBH. 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 found that a claims process
to allocate the awarded punitive damages to individual class members would be too expensive and difficult to administer. On March
1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the total amount of punitive
damages awarded allocating CAD 57 million including interest (approximately $44.5 million) to RBH. See the Blais description
above and Note 20. Deconsolidation of RBH below for further detail concerning the security order pertaining to both Létourneau and
Blais cases and the impact of the decision on PMI’s financial statements.
RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention
of applicable law on several grounds including the following: (i) defendants had no obligation to warn class members who knew, or
should have known, of the risks of smoking; (ii) defendants cannot be liable to class members who would have smoked regardless of
what warnings were given; and (iii) defendants cannot be liable to all class members given the individual differences between class
members.
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, RBH, 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
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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 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, RBH, 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.
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, RBH, 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.
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, RBH, 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.
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, RBH, 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, RBH, 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, RBH, 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, heart disease, or cancer, as well as
restitution of profits.
Health Care Cost Recovery Litigation — Canada
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, RBH, 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.”
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, RBH,
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.”
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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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
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, RBH, 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.”
__________
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The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our
subsidiaries or indemnitees as of February 5, 2021, February 3, 2020 and February 4, 2019:¹
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 5, 2021
43
9
17
—
5
2
Number of Cases
Pending as of
February 3, 2020
50
10
17
—
5
2
Number of Cases
Pending as of
February 4, 2019
55
10
16
1
7
2
Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 510 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. Ten of these cases have subsequently reached
final resolution in our favor and three remain on appeal.
The table below lists the verdict and significant post-trial developments in the three pending cases where a verdict was returned in
favor of the plaintiff:
______
¹ Includes cases pending in Canada.
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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
May 27, 2015
Location of
Court/Name of
Plaintiff
Canada/Cecilia
Létourneau
Type of
Case
Class Action
Post-Trial
Developments
In June 2015, RBH commenced the
appellate process with the Court of
Appeal of Quebec. On March 1,
2019, the Court of Appeal issued a
decision largely affirming the trial
court's decision. (See “Stayed
Litigation — Canada” for further
detail.)
Post-Trial
Developments
In June 2015, RBH commenced the
appellate process with the Court of
Appeal of Quebec. On March 1,
2019, the Court of Appeal issued a
decision largely affirming the trial
court's decision. (See “Stayed
Litigation — Canada” for further
detail.)
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 $12.1 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 $2.4
billion)). The trial court
awarded CAD 90,000
(approximately $70,250) in
punitive damages, allocating
CAD 30,000 (approximately
$23,400) to our subsidiary.
The trial court ordered
defendants to pay CAD 1
billion (approximately $781
million) of the compensatory
damage award, CAD 200
million (approximately $156.1
million) of which is our
subsidiary’s portion, into a
trust within 60 days.
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
$102.3 million) in punitive
damages, allocating CAD 46
million (approximately $36
million) to RBH. 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.
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Date
Location of
Court/Name of
Plaintiff
August 5, 2016 Argentina/Hugo Lespada
Type of
Case
Individual
Action
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 $1,252), 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.
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.
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 5, 2021, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as
follows:
•
•
43 cases brought by individual plaintiffs in Argentina (31), Brazil (3), Canada (2), Chile (2), China (1), Italy (1), the
Philippines (1), Turkey (1) and Scotland (1), compared with 50 such cases on February 3, 2020, and 55 cases on February 4,
2019; and
9 cases brought on behalf of classes of individual plaintiffs in Canada, compared with 10 such cases on February 3, 2020 and
10 such cases on February 4, 2019.
The class actions pending in Canada are described above under the caption “Smoking and Health Litigation — Canada.”
In a class action 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, sought 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 $186) 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 Superior
Court of Justice denied plaintiff's appeal. Plaintiff filed a further appeal. In August 2020, the Superior Court of Justice confirmed the
denial of plaintiff's appeal finally dismissing the plaintiff's claim.
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
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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 5, 2021, there were 17 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Brazil (1),
Canada (10), Korea (1) and Nigeria (5), compared with 17 such cases on February 3, 2020 and 16 such cases on February 4, 2019.
The health care cost recovery actions pending in Canada are described above under the caption “Health Care Cost Recovery Litigation
— Canada.”
In the health care cost recovery case in Brazil, The Attorney General of Brazil v. Souza Cruz Ltda., et al., Federal Trial Court, Porto
Alegre, Rio Grande do Sul, Brazil, filed May 21, 2019, we, our subsidiaries, and other members of the industry are defendants.
Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past six years, payment of anticipated
costs of treating future alleged smoking-related diseases, and moral damages. Defendants filed answers to the complaint in May 2020.
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.
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 damages 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 trial court dismissed the case in its entirety on November 20, 2020. Plaintiff appealed.
Label-Related Cases: These cases, now brought only by 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.
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As of February 5, 2021, there were 5 label-related cases brought by individual plaintiffs in Italy (1) and Chile (4) pending against our
subsidiaries, compared with 5 such cases on February 3, 2020, and 7 such case on February 4, 2019.
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 5, 2021, there were 2 public civil actions pending against our subsidiaries in Argentina (1) and Venezuela (1),
compared with 2 such cases on February 3, 2020, and 2 such cases on February 4, 2019.
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 awaiting a court decision on the merits.
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.
Reduced-Risk Products
In Colombia, an individual filed a purported class action, Ana Ferrero Rebolledo v. Philip Morris Colombia S.A., et al., in April 2019
against our subsidiaries with the Civil Court of Bogota related to the marketing of our Platform 1 product. Plaintiff alleged that our
subsidiaries advertise the product in contravention of law and in a manner that misleads consumers by portraying the product in a
positive light, and further asserts that the Platform 1 vapor contains many toxic compounds, creates a high level of dependence, and
has damaging second-hand effects. Plaintiff sought injunctive relief and damages on her behalf and on a behalf of two classes (class 1
- all Platform 1 consumers in Colombia who seek damages for the purchase price of the product and personal injuries related to the
alleged addiction, and class 2 - all residents of the neighborhood where the advertising allegedly took place who seek damages for
exposure to the alleged illegal advertising). Our subsidiaries answered the complaint in January 2020, and in February 2020, plaintiff
filed an amended complaint. The amended complaint modifies the relief sought on behalf of the named plaintiff and on behalf of a
single class (all consumers of Platform 1 products in Colombia who seek damages for the product purchase price and personal injuries
related to the use of an allegedly harmful product).
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 $2.7 billion). In May 2017, Thailand
enacted 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. 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. Trial in the case began in November 2017
and concluded in September 2019. In November 2019, the trial court found our subsidiary guilty of under-declaration of the prices
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and imposed a fine of approximately THB 1.2 billion (approximately $39.9 million). The trial court dismissed all charges against the
individual defendants. In December 2019, as required by the Thai law, our subsidiary paid the fine. This payment is included in other
assets on the consolidated balance sheets and negatively impacted net cash provided by operating activities in the consolidated
statements of cash flows in the period of payment. Our subsidiary filed an appeal of the trial court's decision. In addition, the Public
Prosecutor filed an appeal of the trial court's decision challenging the dismissal of charges against the individual defendants and the
amount of the fine imposed. If our subsidiary ultimately prevails on appeal, then Thailand will be required to return this payment to
our subsidiary.
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 $658 million). In May 2017, Thailand enacted 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. 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.
Trial in the case began in November 2018 and concluded in December 2019. In March 2020, the trial court found our subsidiary
guilty of under-declaration of the prices and imposed a fine of approximately THB 130 million (approximately $4.3 million). The trial
court dismissed all charges against the individual defendant. In April 2020, as required by Thai law, our subsidiary paid the fine. Our
subsidiary will appeal the trial court's decision. In addition, the Public Prosecutor filed an appeal of the trial court's decision
challenging the dismissal of charges against the individual defendant and the amount of the fine imposed. If our subsidiary ultimately
prevails on appeal, then Thailand will be required to return this payment to our subsidiary.
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 subsidiary, 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 $243 million), of which KRW 100
billion (approximately $89.3 million) was paid in 2016 and KRW 172 billion (approximately $153.7 million) was paid in the first
quarter of 2017. These paid amounts are included in other assets in the consolidated balance sheets and negatively impacted net cash
provided by operating activities in the consolidated statements of cash flows in the period of payment. PM Korea appealed the
assessments. In January 2020, a trial court ruled that PM Korea did not underpay taxes in the amount of approximately KRW 218
billion (approximately $195 million). The tax authorities appealed this decision to the appellate court. In September 2020, the
appellate court upheld the trial court's decision. The tax authorities have appealed to the Supreme Court of South Korea. In June 2020,
another trial court ruled that PM Korea did not underpay approximately KRW 54 billion (approximately $48 million) of alleged
underpayments. The government agencies appealed this decision. In January 2021, the appellate court upheld the trial court's decision.
The government agencies may appeal. If the tax authorities and government agencies ultimately lose, then they would be required to
return the paid amounts to PM Korea.
The Moscow Tax Inspectorate for Major Taxpayers (“MTI”) conducted an audit of AO Philip Morris Izhora (“PM Izhora”), our
Russian subsidiary, for the 2015-2017 financial years. On July 26, 2019, MTI issued its initial assessment, claiming that intercompany
sales of cigarettes between PM Izhora and another Russian subsidiary prior to excise tax increases and submission by PM Izhora of the
maximum retail sales price notifications for cigarettes to the tax authorities were improper under Russian tax laws and resulted in
underpayment of excise taxes and VAT. In August 2019, PM Izhora submitted its objections disagreeing with MTI’s allegations set
forth in the initial assessment and MTI’s methodology for calculating the alleged underpayments. MTI accepted some of PM Izhora’s
arguments and in September 2019, issued the final tax assessment claiming an underpayment of RUB 24.3 billion (approximately
$374 million), including penalties and interest. In accordance with Russian tax laws, PM Izhora paid the entire amount of MTI’s final
assessment. This amount was neither imposed on, nor concurrent with, the specific revenue-producing transaction, nor was it
collected from customers of our Russian subsidiaries. In the third quarter of 2019, PMI recorded a pre-tax charge of $374 million, in
marketing, administration and research costs in the consolidated statements of earnings, representing $315 million net of an associated
income tax benefit of $59 million.
The Saudi Arabia Customs General Authority issued its assessments requiring our distributors (one former and one current) to pay
additional customs duties in an amount of approximately 1.5 billion Saudi Riyal, or approximately $396 million, in relation to the fees
paid by these distributors under their agreements with our subsidiary for exclusive rights to distribute our products in Saudi Arabia
during the period of 2014 through 2018. In order to challenge these assessments, the distributors posted bank guarantees equaling the
amount of the above assessments. To enable the distributors' challenge, our subsidiary agreed with the banks to bear 80 percent of the
amount the authority may draw on the bank guarantees. In September and October 2020, respectively, the distributors lost their
107
challenges of the assessments; both distributors appealed. Our subsidiary and our distributors believe that customs duties paid in Saudi
Arabia were in compliance with the applicable law and the WTO Customs Valuation Agreement.
A putative shareholder class action lawsuit, In re Philip Morris International Inc. Securities Litigation, is pending in the United States
District Court for the Southern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock
between July 26, 2016 and April 18, 2018. The lawsuit names Philip Morris International Inc. and certain officers and employees as
defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information
about PMI’s business, operations, financial condition, and prospects, related to product sales of, and alleged irregularities in clinical
studies of, PMI’s Platform 1 product. The lawsuit seeks various forms of relief, including damages. In November 2018, the court
consolidated three putative shareholder class action lawsuits with similar allegations previously filed in the Southern District of New
York (namely, City of Westland Police and Fire Retirement System v. Philip Morris International Inc., et al., Greater Pennsylvania
Carpenters’ Pension Fund v. Philip Morris International Inc., et al., and Gilchrist v. Philip Morris International Inc., et al.) into these
proceedings. A putative shareholder class action lawsuit, Rubenstahl v. Philip Morris International Inc., et al., that had been
previously filed in December 2017 in the United States District Court for the District of New Jersey, was voluntarily dismissed by the
plaintiff due to similar allegations in these proceedings. On February 4, 2020, the court granted defendants’ motion in its entirety,
dismissing all but one of the plaintiffs’ claims with prejudice. The court noted that one of plaintiffs’ claims (allegations relating to
four non-clinical studies of PMI’s Platform 1 product) did not state a viable claim but allowed plaintiffs to replead that claim by March
3, 2020. On February 18, 2020, the plaintiffs filed a motion for reconsideration of the court's February 4th decision; this motion was
denied on September 21, 2020. On September 28, 2020, plaintiffs filed an amended complaint seeking to replead allegations relating
to four non-clinical studies of PMI's Platform 1 product. We believe that this lawsuit is without merit and will continue to defend it
vigorously.
In April 2020, affiliates of British American Tobacco plc (“BAT”) commenced patent infringement proceedings, RAI Strategic
Holdings, Inc., et al. v. Altria Client Services LLC, et al., in the federal court in the Eastern District of Virginia, where PMI's
subsidiary, Philip Morris Products S.A., as well as Altria Group, Inc.'s subsidiaries, are defendants. Plaintiffs seek damages and
injunctive relief against the commercialization of the Platform 1 products in the United States. In April 2020, BAT affiliates filed a
complaint against PMI, Philip Morris Products S.A., Altria Group, Inc., and its subsidiaries before the International Trade
Commission (“ITC”). Plaintiffs seek an order to prevent the importation of Platform 1 products into the United States. The ITC
evidentiary hearing closed on February 1, 2021. The administrative law judge has scheduled an initial determination date of May 14,
2021 and the target date for the final determination of the ITC is September 15, 2021. In June 2020, defendants filed their responses in
both proceedings. In the Eastern District of Virginia case, the defendants also counterclaimed that BAT infringed their patents relating
to certain e-vapor products, seeking damages for the commercialization of these products by BAT.
In April 2020, BAT’s affiliate commenced patent infringement proceedings, Nicoventures Trading Limited v. PM GmbH, et al.,
against PMI’s German subsidiary, Philip Morris GmbH, and Philip Morris Products S.A., in the Regional Court in Munich, Germany.
Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 products in Germany.
In July 2020, in response to a challenge in the United Kingdom by PMI’s subsidiary to patents related to the BAT patents in the
German proceedings, BAT affiliates brought a patent infringement action, Nicoventures Trading Limited, et al. v. Philip Morris
Products S.A., et al., against Philip Morris Products S.A. and PMI’s U.K. subsidiary, Philip Morris Limited, in the English High
Court, seeking damages and injunctive relief against the commercialization of the Platform 1 products in the United Kingdom.
In September 2020, BAT’s affiliates commenced patent infringement and unfair competition proceedings, RAI Strategic Holdings,
Inc., et al. v. Philip Morris Products S.A., et al., against Philip Morris Products S.A. and PMI’s Italian subsidiaries, Philip Morris
Manufacturing & Technology Bologna S.p.A. and Philip Morris Italia S.r.l., in the Court of Milan, Italy. Plaintiffs seek damages, as
well as injunctive relief against the manufacture in Italy of the Platform 1 heated tobacco units allegedly infringing the asserted patents
and the commercialization of the Platform 1 products in Italy. As part of this proceeding, in October 2020, BAT’s affiliates filed a
request based on one of the two asserted patents seeking preliminary injunctive relief against the manufacture and commercialization
of the Platform 1 products in Italy.
In October 2020, BAT’s affiliate commenced patent infringement proceedings, Nicoventures Trading Limited v. Philip Morris CR a.s.,
et al., against PMI's Czech subsidiary, Philip Morris CR a.s., and Philip Morris Products S.A., in the Town Court of Prague, Czech
Republic, seeking preliminary injunctive relief against the commercialization of the Platform 1 products in the Czech Republic. In
October 2020, the court dismissed plaintiff’s request for preliminary injunction in its entirety. In October 2020, plaintiff appealed. In
February 2021, the appellate court denied plaintiffs’ appeal, confirming the dismissal of plaintiffs’ request.
In October 2020, BAT’s affiliate commenced patent infringement proceedings, RAI Strategic Holdings, Inc. v. Philip Morris Polska
Distribution sp. z o.o., against PMI’s Polish subsidiary, Philip Morris Polska Distribution Sp. z o.o., in the Regional Court in Warsaw,
IP Division. Plaintiff seeks preliminary injunctive relief against the commercialization of the Platform 1 products in Poland. In
November 2020, the court dismissed plaintiff’s request for preliminary injunction in its entirety. Plaintiff may appeal.
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In October 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris
Japan, Limited, et al., against PMI’s Japanese subsidiary, Philip Morris Japan Limited, and a third-party distributor in the Tokyo
District Court. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 products in Japan.
In November 2020, BAT’s affiliate commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris
Bulgaria EOOD, against PMI’s Bulgarian subsidiary, Philip Morris Bulgaria EOOD, in the Sofia City Court, Bulgaria, seeking
preliminary injunctive relief against the commercialization of the Platform 1 products in Bulgaria. In November 2020, the court
dismissed plaintiffs’ request for preliminary injunction in its entirety. Plaintiffs have appealed. In January 2021, the appellate court
denied plaintiffs’ appeal, confirming the dismissal of plaintiffs’ request.
In November 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris
Romania SRL, et al., against PMI’s Romanian subsidiaries, Philip Morris Romania S.R.L. and Philip Morris Trading S.R.L., and a
third-party distributor in the Court of Law of Bucharest, Civil Registry. Plaintiffs seek damages and preliminary and permanent
injunctive relief against the manufacture and commercialization of the Platform 1 products in Romania.
In December 2020, BAT’s affiliate commenced proceedings, Nicoventures Trading Limited v. Philip Morris Products S.A., et al.,
against PMI’s German subsidiaries, Philip Morris GmbH and f6 Cigarettenfabrik GmbH & Co.KG, and Philip Morris Products S.A.,
in the Hamburg Regional Court, for the alleged infringement of a patent utility model, seeking preliminary injunctive relief against the
manufacture and commercialization of the Platform 1 products in Germany.
Other patent challenges by both parties are pending in various jurisdictions.
We believe that the foregoing proceedings by the affiliates of BAT are without merit and will defend them vigorously.
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.
Third-Party Guarantees
On October 17, 2020, Medicago Inc., an equity method investee of Philip Morris Investments B.V. (“PMIBV”), a PMI subsidiary,
entered into a contribution agreement with the Canadian government (the “Contribution Agreement”) whereby the Canadian
government agreed to contribute up to CAD 173 million (approximately $131 million on the date of signing) to Medicago Inc., to
support its on-going COVID-19 vaccine development and clinical trials, and for the construction of its Quebec City manufacturing
facility (the “Project”). PMIBV and the majority shareholder of Medicago Inc. are also parties to the Contribution Agreement as
guarantors of Medicago Inc.’s obligations thereunder on a joint and several basis (“Co-Guarantors”). The Co-Guarantors agreed to
repay amounts contributed by the Canadian government plus interest, if Medicago Inc. fails to do so, and could be responsible for the
costs of other Medicago’s obligations (such as the achievement of specific milestones of the Project). The maximum amount of these
obligations is currently non-estimable. As of December 31, 2020, PMI has determined that these guarantees did not have a material
impact on its consolidated financial statements.
In connection with the Contribution Agreement, PMIBV and the majority shareholder of Medicago Inc. entered into a guarantors’
agreement that apportions Co-Guarantors’ obligations and limits those of PMIBV to its then share of holdings in Medicago Inc., which
as of December 31, 2020 was approximately 32%. The guarantees are in effect through March 31, 2026.
Note 18.
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, 2020 and 2019. 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.
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Cumulative trade receivables sold, including excise taxes, for the years ended December 31, 2020 and 2019, were $11.5 billion and
$10.7 billion, 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, 2020, 2019 and 2018, were $1.2 billion, $0.9
billion and $1.0 billion, 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, 2020, 2019 and 2018 the loss on sale of trade receivables was immaterial.
Note 19.
Asset Impairment and Exit Costs:
Organizational Design Optimization
As part of PMI’s transformation to a smoke-free future, PMI seeks to optimize its organizational design, which includes the
elimination, relocation and outsourcing of certain operations center and centralized activities. In January 2020, PMI commenced a
multi-phase restructuring project in Switzerland. PMI initiated the employee consultation procedures, as required under Swiss law, for
the impacted employees. In 2020, the consultation procedures for two phases were completed. The third phase commenced in
January 2021 and is expected to impact approximately 230 positions. Until the consultation process for the third phase is concluded,
such phase is not considered probable (under U.S. GAAP), and the total potential costs cannot be determined. As a result, no related
costs were recorded for the year ended December 31, 2020 related to the third phase of the restructuring project. Additionally, PMI
launched a voluntary separation program in Switzerland for certain eligible employees and announced the outsourcing of certain
activities in the United States and Poland.
These activities are expected to impact approximately 600 positions in total, excluding the third phase of the project in Switzerland,
that will be either eliminated, relocated or outsourced. For the year ended December 31, 2020, PMI recorded pre-tax asset impairment
and exit costs of $149 million related to the organizational design optimization.
The amounts related to the potential pension settlement accounting impact of the restructuring, which could be significant, have not
been reflected in 2020 as the thresholds for accounting were not exceeded by December 31, 2020.
Global Manufacturing Infrastructure Optimization
In light of declining PMI cigarette volumes resulting from lower total industry volumes and the shift to smoke-free alternatives, PMI
continues to optimize its global manufacturing infrastructure. During 2019, PMI recorded asset impairment and exit costs related to
plant closures in Argentina, Colombia, Germany and Pakistan as part of its global manufacturing infrastructure optimization.
Germany
On November 4, 2019, PMI announced that, as part of its global manufacturing infrastructure optimization, its German affiliate, Philip
Morris Manufacturing GmbH ("PMMG"), reached an agreement with employee representatives to end cigarette production in its
factory in Berlin, Germany, by January 1, 2020. As a result of this agreement, during 2019, PMI recorded pre-tax asset impairment
and exit costs of $342 million in the European Union segment. This amount included pension and employee separation costs of $251
million, which will be paid in cash, and asset impairment costs of $91 million, primarily related to machinery and equipment, which
are non-cash charges.
Other
During 2019, PMI also recorded pre-tax asset impairment and exit costs of $80 million as part of its global manufacturing
infrastructure optimization. These costs were related to cigarette plant closures in Argentina ($15 million), Colombia ($45 million)
and Pakistan ($20 million). The charges were reflected in the Latin America & Canada segment (Argentina and Colombia) and the
South & Southeast Asia segment (Pakistan).
110
Asset Impairment and Exit Costs by Segment
During 2020 and 2019, PMI recorded the following pre-tax asset impairment and exit costs by segment:
(in millions)
Separation programs: (1)
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total separation programs
Asset impairment charges (1)
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total asset impairment charges
Asset impairment and exit costs
2020
2019
$
$
53
14
18
22
25
9
141
4
1
1
1
1
—
8
149
$
$
251
—
—
3
—
49
303
91
—
—
17
—
11
119
422
(1) Organizational design optimization pre-tax charges in 2020 were allocated across all operating segments.
The total pre-tax asset impairment and exit costs above were included in marketing, administration and research costs on the
consolidated statements of earnings. During 2018, PMI did not incur asset impairment and exit costs.
Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the year ended December 31, 2020 was as follows:
(in millions)
Liability balance, January 1, 2020
Charges, net
Cash spent
Currency/other
Liability balance, December 31, 2020
$
$
191
141
(163)
11
180
Future cash payments for exit costs incurred to date are anticipated to be substantially paid by the end of 2022, with approximately
$150 million expected to be paid in 2021.
Note 20.
Deconsolidation of RBH:
As discussed in Note 17. Contingencies, following the March 1, 2019, judgment of the Court of Appeal of Québec in two class action
lawsuits against PMI's Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), PMI recorded in its consolidated results a
pre-tax charge of $194 million, representing $142 million net of tax, in the first quarter of 2019. This pre-tax Canadian tobacco
litigation-related expense was included in marketing, administration and research costs on PMI's consolidated statement of earnings
for the year ended December 31, 2019. The charge reflects PMI’s assessment of the portion of the judgment that represents probable
and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment. RBH’s
share of the deposit is approximately CAD 257 million.
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On March 22, 2019, RBH obtained an initial order from the Ontario Superior Court of Justice granting it protection under the
Companies’ Creditors Arrangement Act ("CCAA"), which is a Canadian federal law that permits a Canadian business to restructure its
affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliers and employees.
The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor,
removes certain elements of control of the business from both PMI and RBH. As a result, PMI has determined that it no longer has a
controlling financial interest over RBH as defined in ASC 810 (Consolidation), and PMI deconsolidated RBH as of the date of the
CCAA filing. PMI has also determined that it does not exert "significant influence" over RBH as that term is defined in ASC 323
(Investments-Equity Method and Joint Ventures). Therefore, as of March 22, 2019, PMI accounted for its continuing investment in
RBH in accordance with ASC 321 (Investments-Equity Securities) as an equity security, without readily determinable fair value.
Following the deconsolidation, the carrying value of assets and liabilities of RBH was removed from the consolidated balance sheet of
PMI, and the continuing investment in RBH was recorded at fair value at the date of deconsolidation. The total amount
deconsolidated from PMI’s balance sheet was $3,519 million, including $1,323 million of cash, $1,463 million of goodwill, $529
million of accumulated other comprehensive earnings, primarily related to historical currency translation and $204 million of other
assets and liabilities, net. While PMI is accounting for its investment in RBH as an equity security, PMI would recognize dividends as
income upon receipt. However, while it remains under creditor protection, RBH does not anticipate paying dividends.
The fair value of PMI’s continuing investment in RBH of $3,280 million was determined at the date of deconsolidation, recorded
within equity investments and is assessed for impairment on an ongoing basis. The estimated fair value of the underlying business
was determined based on an income approach using a discounted cash flow analysis, as well as a market approach for certain
contingent liabilities. The information used in the estimate includes observable inputs, primarily a discount rate of 8%, a terminal
growth rate of 2.5% and information about total tobacco market size in Canada and RBH’s share of the market, as well as
unobservable inputs such as operating budgets and strategic plans, various inflation scenarios, estimated shipment volumes, and
expected product pricing and projected margins.
The difference between the carrying value of the assets and liabilities of RBH that were deconsolidated and the fair value of the
continuing investment, as determined at the date of deconsolidation, was $239 million, before tax, and this loss on deconsolidation is
reflected within marketing, administration and research costs on PMI’s consolidated statement of earnings for the year ended
December 31, 2019. PMI also recorded a tax benefit of $49 million within the provision for income taxes for the year ended
December 31, 2019, related to the reversal of a deferred tax liability on unremitted earnings of RBH.
RBH is party to transactions with PMI and its consolidated subsidiaries entered into in the normal course of business; these
transactions include royalty payments and recharge of various corporate expenses for services benefiting RBH. Up to the date of the
CCAA filing, these transactions were eliminated on consolidation and had no impact on PMI’s consolidated statement of earnings.
After deconsolidating RBH, these transactions are treated as third-party transactions in PMI’s financial statements. The amount of
these related-party transactions is included within Note 4. Related Parties - Equity investments and Other.
Developments in the CCAA process, including resolution through a plan of arrangement or compromise of all pending tobacco-related
litigation currently stayed in Canada, as discussed in Note 17. Contingencies, could result in a material change in the fair value of
PMI’s continuing investment in RBH.
Note 21.
Leases:
PMI’s operating leases are principally for real estate (office space, warehouses and retail store space) and vehicles. Lease terms range
from 1 year to 73 years, some of which include options to renew, which are reasonably certain to be renewed. Lease terms may also
include options to terminate the lease. The exercise of a lease renewal or termination option is at PMI’s discretion.
112
PMI’s operating leases at December 31, 2020 and 2019, were as follows:
(in millions)
Assets:
Other assets
Liabilities:
Current
Accrued liabilities - Other
Noncurrent
Income taxes and other liabilities
Total lease liabilities
At December 31,
2020
2019
$
697 $
766
$
$
190 $
517
707 $
194
569
763
For information regarding PMI’s immaterial finance leases, see Note 7. Indebtedness.
The components of PMI’s lease cost were as follows for the years ended December 31, 2020 and 2019:
(in millions)
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
For the Years Ended December 31,
2020
2019
$
$
237 $
49
31
317 $
242
61
29
332
215
161
110
72
47
291
896
189
707
Maturity of PMI’s operating lease liabilities, on an undiscounted basis, as of December 31, 2020, was as follows:
(in millions)
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Total
$
$
Other information related to PMI’s operating leases was as follows for the year ended December 31, 2020 and 2019:
(in millions)
Cash paid for amounts included in the measurement of lease liabilities in Operating cash flows
Leased assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term (years)
Weighted-average discount rate(1)
December 31,
2020
2019
$
$
238
149
$
$
10.1
4.3 %
240
221
9.6
4.4 %
(1) PMI’s weighted-average discount rate is based on its estimated pre-tax cost of debt adjusted for country-specific risk.
113
Note 22.
Quarterly Financial Data (Unaudited):
(in millions, except per share data)
1st
2nd
3rd
4th
2020 Quarters
Net revenues
Gross profit
Net earnings attributable to PMI
Per share data:
Basic EPS
Diluted EPS
Dividends declared
(in millions, except per share data)
Net revenues
Gross profit
Net earnings attributable to PMI
Per share data:
Basic EPS
Diluted EPS
Dividends declared
$
$
$
$
$
$
$
$
$
$
$
$
7,153 $
4,751 $
1,826 $
1.17 $
1.17 $
1.17 $
6,651 $
4,472 $
1,947 $
1.25 $
1.25 $
1.17 $
2019 Quarters
7,446 $
5,030 $
2,307 $
1.48 $
1.48 $
1.20 $
1st
2nd
3rd
4th
6,751 $
4,286 $
1,354 $
0.87 $
0.87 $
1.14 $
7,699 $
5,034 $
2,319 $
1.49 $
1.49 $
1.14 $
7,642 $
5,037 $
1,896 $
1.22 $
1.22 $
1.17 $
7,444
4,872
1,976
1.27
1.27
1.20
7,713
4,935
1,616
1.04
1.04
1.17
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.
114
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Philip Morris International Inc.:
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 (the
“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of earnings, comprehensive earnings,
stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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
the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company'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 the
Company’s consolidated financial statements and on the Company'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.
115
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Tobacco-Related Litigation for Smoking and Health Class Actions and Health Care Cost Recovery Actions
As described in Note 17 to the consolidated financial statements, the Company has 9 smoking and health class actions and 17 health
care cost recovery actions pending. The Company records provisions in the consolidated financial statements for pending litigation
when management determines that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated.
Except as stated otherwise in Note 17, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing
the information available, (i) management has not concluded that it is probable that a loss has been incurred in any of the pending
smoking and health class actions and health care cost recovery cases; (ii) management is unable to estimate the possible loss or range
of loss for any of the pending smoking and health class actions and health care cost recovery cases; and (iii) accordingly, no estimated
loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any.
The principal considerations for our determination that performing procedures relating to tobacco-related litigation for smoking and
health class actions and health care cost recovery actions is a critical audit matter are that there was significant judgment by
management when determining the probability of a loss being incurred and an estimate of the amount or range of the potential loss for
each case, which in turn led to a high degree of auditor subjectivity, judgment and effort in evaluating management’s assessment
related to the loss contingencies associated with smoking and health class actions and health care cost recovery actions related claims.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s
evaluation of smoking and health class actions and health care cost recovery actions, including controls over determining the
probability and range of loss as well as controls over financial statement disclosures. These procedures also included, among others,
obtaining and evaluating the letters of audit inquiry with external and internal legal counsel, evaluating the reasonableness of
management’s assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable,
and evaluating the sufficiency of the Company’s smoking and health class actions and health care cost recovery actions contingencies
disclosures.
/S/ PRICEWATERHOUSECOOPERS SA
PricewaterhouseCoopers SA
/S/ CHAD MUELLER
Chad Mueller
Lausanne, Switzerland
February 9, 2021
/S/ TRAVIS RANDOLPH
Travis Randolph
We have served as the Company’s auditor since 2008.
116
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, 2020. 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, 2020, 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, 2020, as stated in their report herein.
February 9, 2021
117
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 5, 2021, that will be filed with the SEC on
or about March 25, 2021 (the “proxy statement”), and, except as indicated therein, made a part hereof.
118
Item 10. Directors, Executive Officers and Corporate Governance.
Information About Our Executive Officers as of February 8, 2021:
Name
Office
Age
André Calantzopoulos*
Chief Executive Officer
Massimo Andolina
Drago Azinovic
Emmanuel Babeau
Werner Barth
Charles Bendotti
Frank de Rooij
Frederic de Wilde
Senior Vice President, Operations
President, Middle East & Africa Region and PMI Duty Free
Chief Financial Officer
Senior Vice President, Commercial
Global Head, People & Culture
Vice President, Treasury and Corporate Finance
President, European Union Region
Suzanne Rich Folsom
Senior Vice President and General Counsel
Jorge Insuasty
Stacey Kennedy
Martin G. King
Michael Kunst
Andreas Kurali
Bin Li
Marco Mariotti
Mario Masseroli
Deepak Mishra
Silke Muenster
Jacek Olczak*
Paul Riley
Marian Salzman
Gregoire Verdeaux
Michael Voegele
Stefano Volpetti
Chief Life Sciences Officer
President, South and Southeast Asia Region
CEO, PMI America
Senior Vice President, Commercial Transformation
Vice President and Controller
Chief Product Officer
President, Eastern Europe Region
President, Latin America and Canada Region
Chief Strategy Officer
Chief Diversity Officer
Chief Operating Officer
President, East Asia and Australia Region
Senior Vice President, Global Communications
Senior Vice President, External Affairs
Chief Technology Officer
Chief Consumer Officer
63
52
58
53
56
48
55
53
59
62
48
56
52
55
49
56
50
49
60
56
55
61
48
48
49
*André Calantzopoulos will become Executive Chairman of the Board of Directors immediately before the 2021 Annual Meeting of Shareholders to be held on May 5,
2021 ("Annual Meeting"). Jacek Olczak will succeed Mr. Calantzopoulos as Chief Executive Officer effective immediately after the Annual Meeting.
All of the above-mentioned officers, except Mr. Babeau, Ms. Folsom, Dr. Insuasty, Mr. Kunst, Mr. Li, Mr. Mishra, Ms. Salzman, Mr.
Voegele, Mr. Volpetti, and Mr. Verdeaux, have been employed by us in various capacities over the past five years. The business
experience of Mr. Babeau, Ms. Folsom, Dr. Insuasty, Mr. Kunst, Mr. Li, Mr. Mishra, Ms. Salzman, Mr. Voegele, Mr. Volpetti, and
Mr. Verdeaux for the past five years is summarized below.
Mr. Babeau joined Philip Morris International Inc. in May 2020. He was formerly Deputy Chief Executive Officer of Schneider
Electric. During his tenure at Schneider Electric, Mr. Babeau helped grow the company from an €18 billion market cap to c. €60
billion while transforming the business model and winning industry accolades, including from the Harvard Business Review, which in
2019 cited Schneider Electric as one of the top 15 business transformations of the prior decade.
Ms. Folsom joined Philip Morris International Inc. in July 2020. She is a former Partner and Co-Chair of the Investigations,
Compliance and Strategic Response Group at Manatt, Phelps & Phillips, LLP. A veteran general counsel of both public and private
companies, and a transformation and restructuring leader, Ms. Folsom most recently served as the General Counsel, Chief Compliance
Officer and Senior Vice President, Government Affairs and Global Public Policy at United States Steel Corporation.
Dr. Insuasty commenced his role at Philip Morris International Inc. in January 2021. He was formerly Global Franchise Head of
Immunology, Oncology, and Neurology for Sanofi Genzyme, part of Sanofi S.A. His expertise includes orchestrating significant
transformational change within R&D and commercial functions to substantially increase speed and efficiency. He is noted for
119
fostering external collaboration and innovation. Prior to Sanofi, Dr. Insuasty was Global Head of Development, Neuroscience, and
Ophthalmology at Novartis International AG.
Mr. Kunst was appointed to Philip Morris International Inc. in January 2019. He was formerly a Partner at Bain & Company for a
decade, leading Bain’s Healthcare Practice in EMEA, and has worked with a broad set of clients on issues related to growth strategy,
commercial capability building, change management, and organizational effectiveness.
Mr. Li joined Philip Morris International Inc. in August 2019, having served in senior executive capacities at Harman International, a
subsidiary of Samsung Electronics Co. Ltd. He is an entrepreneurial leader with a strong technical, product development, and
operations background and vast experience in product design and innovation developed within world-class consumer electronics
companies. As a forward thinker with a passion for design and technology, he has a proven track record of success in translating the
voice of the customer into product development cycles.
Mr. Mishra joined Philip Morris International Inc. in September 2018. Previously, he was Managing Director, Portfolio Operations at
Centerbridge Partners, a private equity firm, where he led commercial, operational, and digital transformation in various business
sectors. He is a former Partner of McKinsey & Co, where he supported clients in their transformation projects as part of the Consumer
Goods, Retail and Operations leadership team.
Ms. Salzman joined Philip Morris International Inc. in April 2018. One of the most awarded female marketing executives in North
America, she was formerly Chief Executive Officer of Havas PR North America. At Havas, Ms. Salzman also co-created and chaired
the Global Collective, the Havas PR operation across several continents. Ms. Salzman has authored/co-authored 15 books on topics
ranging from current affairs to the commercial workplace.
Mr. Voegele started at Philip Morris International Inc. in February 2019. Prior to that, he held senior roles at the Adidas Group, most
recently as Global Chief Information Officer and part of the core leadership team. He is recognized globally for having initiated the
digital transformation of Adidas and making its IT organization and strategy consumer-centric and supportive of innovation. Mr.
Voegele is noted for implementing large enterprise delivery projects within multinational organizations.
Mr. Volpetti’s appointment at Philip Morris International Inc. commenced in June 2019. He served as Chief Marketing Officer at
Luxottica Group S.p.A before joining Philip Morris International Inc. and has also held executive roles at the Procter & Gamble
Company, including as Vice President of a global business unit. Mr. Volpetti is a globally acclaimed marketer with broad experience
in commercial roles, having obtained a winning track record with consumers in both developed and developing markets. Mr. Volpetti
specializes in consumer-centric marketing programs, business model transformation, digital acceleration, and disruptive innovation.
Mr. Verdeaux joined Philip Morris International Inc. in September 2020. He was a former Partner at Hering Schuppner, a strategic
communications consulting firm. Prior to this position, he was Group International Policy Director at Vodafone and European Policy
Director at Electricité De France (EDF). A veteran of international and domestic politics, he served as Deputy Head of Cabinet of the
French President from 2008 to 2011 and has also held senior positions at the United Nations and the European Commission.
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, Consumer Relationships and Regulation, 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.
120
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 Stock Ownership Information—Delinquent Section 16(a) Reports sections of the
proxy statement.
Item 11.
Executive Compensation.
Refer to Compensation Discussion and Analysis, Compensation of Directors, and Pay Ratio sections of the proxy statement.
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, 2020, 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)
6,921,160 1 $
—
18,227,298
Equity compensation plans
approved by stockholders
1 Represents 4,098,240 shares of common stock that may be issued upon vesting of the restricted share units and 2,822,920 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.
Also refer to Stock Ownership Information—Ownership of Equity Securities section of the proxy statement.
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.
121
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
(a) Index to Consolidated Financial Statements and Schedules
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Earnings for the years ended December 31,
2020, 2019 and 2018
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended
December 31, 2020, 2019 and 2018
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.
(b) The following exhibits are filed as part of this Report:
Page
58
59
60 - 61
62 - 63
64
65 - 114
115 - 116
117
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
3.2
4.1
4.2
4.3
4.4
4.6
10.1
— 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).
— Amended and Restated By-Laws of Philip Morris International Inc., effective as of March 5, 2020
(incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed March 6, 2020).
— 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).
— Description of Common Stock.
— Description of Debt Securities.
— 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.
— 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, 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).
122
10.4
__
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).
10.5
__
10.6
__
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).
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).
10.7
__
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).
10.8
— 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).
10.9
10.10
— 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 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).
10.11
— Extension Agreement, effective as of 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).
10.12
— Extension Agreement, effective as of February 6, 2018, to the Credit Agreement, dated as of
February 12, 2013, among Philip Morris International Inc., the lenders named therein, 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 29,
2018).
10.13
— Extension Agreement, effective as of February 5, 2019, to the Credit Agreement dated as of
February 12, 2013, among Philip Morris International Inc., the lenders named therein, 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 29,
2019).
10.14
— Amendment and Extension Agreement, effective February 4, 2020, among Philip Morris
International Inc., each lender 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 February 3, 2020).
10.15
— Credit Agreement, dated as of February 10, 2020, among Philip Morris International Inc., the
lenders named therein, Citibank Europe PLC, UK Branch, 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 February 11, 2020).
123
10.16
— Philip Morris International Inc. Amended and Restated Automobile Policy, dated as of October 1,
2019.*
10.17
— Philip Morris International Benefit Equalization Plan, amended and restated (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31,
2019).*
10.18
— 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).*
10.19
— 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).*
10.20
— 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).*
10.21
— 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).*
10.22
— 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).*
10.23
— Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (as
amended and restated as of January 1, 2018) (incorporated by reference to Exhibit 10.26 to the
Annual Report on Form 10-K for the year ended December 31, 2017).*
10.24
10.25
10.26
— Philip Morris International Inc. 2008 Deferred Fee Plan for Non-Employee Directors.*
— Supplemental Letter to the Employment Agreement (as amended) with André Calantzopoulos. 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 10.25.*
— 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 10.26.*
10.27
— Employment Agreement with Martin G. King, effective June 1, 2020 (incorporated by reference to
10.28
10.29
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020).*
— Early Retirement Agreement and Release with Marc S. Firestone, effective November 3, 2020.*
— Supplemental Letter to the Employment Agreement (as amended) with Jacek Olczak (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2019. 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
10.29.*
10.30
— Supplemental Letter to the Employment Agreement (as amended) with Miroslaw Zielinski
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2019). 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 10.30.*
10.31
— Early Retirement and Release Agreement with Miroslaw Zielinski, effective April 30, 2020
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed May 1, 2020).*
10.32
— Employment Agreement with Emmanuel Babeau, effective as of May 1, 2020 (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed March 2, 2020).*
10.33
— Restricted Stock Unit Agreement (Vesting in Installments), between Philip Morris International Inc.
and Emmanuel Babeau, effective as of May 1, 2020.*
10.34
— Restricted Stock Unit Agreement, between Philip Morris International Inc. and Emmanuel Babeau,
effective as of May 1, 2020.*
10.35
10.36
— Performance Stock Unit Agreement, between Philip Morris International Inc. and Emmanuel
Babeau, effective as of May 1, 2020.*
— Agreement with Louis C. Camilleri (incorporated by reference to Exhibit 10.25 to the Registration
Statement on Form 10 filed February 7, 2008).*
124
10.37
— 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).*
10.38
— 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).*
10.39
— 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).*
10.40
— 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).*
10.41
10.42
— 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).*
— 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).*
10.43
— Form of Restricted Stock Unit Agreement (2018 Grants) (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed February 13, 2018).*
10.44
— Form of Performance Share Unit Agreement (2018 Grants) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed February 13, 2018).*
10.45
— Form of Restricted Stock Unit Agreement (2019 Grants) (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed February 12, 2019).*
10.46
— Form of Performance Share Unit Agreement (2019 Grants) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed February 12, 2019).*
10.47
— Form of Restricted Stock Unit Agreement (2020 Grants) (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed February 11, 2020).*
10.48
— Form of Performance Share Unit Agreement (2020 Grants) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed February 11, 2020).*
21
23
24
— 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 - the instance document does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL 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.
104
— Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to
participate.
125
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 9, 2021
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
Chief Executive Officer
February 9, 2021
Chief Financial Officer
February 9, 2021
Vice President and Controller
February 9, 2021
Directors
/s/ ANDRÉ CALANTZOPOULOS
(André Calantzopoulos)
/s/ EMMANUEL BABEAU
(Emmanuel Babeau)
/s/ ANDREAS KURALI
(Andreas Kurali)
*MICHEL COMBES,
WERNER GEISSLER,
LISA A. HOOK,
JENNIFER LI,
JUN MAKIHARA,
KALPANA MORPARIA,
LUCIO A. NOTO,
FREDERIK PAULSEN,
ROBERT B. POLET
*By:
/s/ ANDRÉ CALANTZOPOULOS
February 9, 2021
(André Calantzopoulos
Attorney-in-fact)
126
Reconciliation of Non-GAAP Measures
Reconciliation of Reported Diluted EPS to Adjusted Diluted EPS and Adjusted Diluted EPS, excluding Currency
% Change
For the Years Ended December 31, (Unaudited)
2019
2020
Reported Diluted EPS
Adjustments:
Asset impairment and exit costs
Canadian tobacco litigation-related expense
Loss on deconsolidation of RBH
Russia excise and VAT audit charge
Brazil indirect tax credit
Fair value adjustment for equity security investments
Tax items
Adjusted Diluted EPS
Less:
Currency
$
5.16
$
4.61
11.9 %
0.23
0.09
0.12
0.20
—
(0.02)
(0.04)
5.19
0.08
—
—
—
(0.05)
0.04
(0.06)
$
5.17
$
(0.32)
(0.4) %
Adjusted Diluted EPS, excluding Currency
$
5.49
$
5.19
5.8 %
Net Revenues by Product Category & Adjustments of Net Revenues for the Impact of Currency and Acquisitions
For the Years Ended December 31,
(in millions)
(Unaudited) 2020
Net
Revenues
Less
Currency
Net
Revenues
excluding
Currency
Less
Acquisitions
Net
Revenues
excluding
Currency &
Acquisitions
2019
% Change in Net Revenues
Net
Revenues
Total
Excluding
Currency
Excluding
Currency &
Acquisitions
$ 21,867 $
(408) $ 22,275 $
— $
22,275
Combustible Products
$ 24,218
(9.7) %
(8.0) %
(8.0) %
6,827
(61)
6,888
—
6,888
Reduced-Risk Products
5,587
22.2 %
23.3 %
23.3 %
$ 28,694 $
(469) $ 29,163 $
— $
29,163
Total PMI
$ 29,805
(3.7) %
(2.2) %
(2.2) %
R-1
Adjustments for the Impact of RBH, excluding Currency
For the Years Ended December 31, (in millions, except per share data) (Unaudited)
2020
2019
%
Change
Net Revenues
Net Revenues attributable to RBH
Net Revenues
Less: Currency
Net Revenues, ex. currency
Operating Income
Less:
Asset impairment and exit costs
Canadian tobacco litigation-related expense
Loss on deconsolidation of RBH
Russia excise and VAT audit charge
Brazil indirect tax credit
Adjusted Operating Income
Operating Income attributable to RBH
Adjusted Operating Income
Less: Currency
$
28,694
$
29,805
(3.7) %
28,694
(470)
29,164
11,668
$
$
$
$
(181)
29,624
29,624
(1)
(2)
(2)
(3.1) %
(1.6) % (7)
10,531
10.8 %
(149)
—
—
—
119
(422)
(194)
(239)
(374)
—
$
11,698
$
11,760
(0.5) %
(126)
11,634
11,698
(474)
(1)
(2)
(2)
0.6 %
4.6 % (7)
Adjusted Operating Income, ex. currency
$
12,172
$
11,634
Adjusted Operating Income Margin
Adjusted Operating Income Margin attributable to RBH
Adjusted Operating Income Margin
Less: Currency
Adjusted Operating Income Margin, ex. currency
Adjusted Diluted EPS (5)
Net Earnings attributable to RBH
Adjusted Diluted EPS
Less: Currency
Adjusted Diluted EPS, ex. currency
Net cash provided by operating activities(6)
Net cash provided by operating activities attributable to RBH
Net cash provided by operating activities
Less: Currency
40.8 % (3)
40.8 %
(0.9)
41.7 %
5.17
5.17
(0.32)
5.49
9,812
9,812
(524)
$
$
$
$
$
Net cash provided by operating activities, excluding currency
$
10,336
(1) Represents the impact attributable to RBH from January 1, 2019 through March 21, 2019
(2) Pro forma
39.5 % (4)
(1)
(0.2)
39.3 % (2)
1.3
1.5
39.3 % (2)
2.4
(7)
$
$
$
$
$
$
5.19
(0.06)
5.13
5.13
10,090
(102)
9,988
9,988
(1)
(2)
(2)
(1)
(2)
(2)
(0.4) %
0.8 %
7.0 % (7)
(2.8) %
(1.8) %
3.5 %
(3) 2020 Adjusted Operating Income Margin was 40.8%, calculated as 2020 Adjusted Operating Income of $11,698 divided by 2020 Net Revenues of $28,694
(4) 2019 Adjusted Operating Income Margin was 39.5%, calculated as 2019 Adjusted Operating Income of $11,760 divided by 2019 Net Revenues of $29,805
(5) For the calculation, see "Reconciliation of Reported Diluted EPS to Adjusted Diluted EPS and Adjusted Diluted EPS, excluding Currency" in this section
(6) Operating cash flow
(7) On an organic basis
Note: Financials attributable to RBH include Duty Free sales in Canada
R-2
Key Terms, Definitions and Explanatory Notes
Financial
• All references to adjusted results reflect the exclusion of asset impairment, exit costs and other special items.
•
• All references to “like-for-like” performance reflect pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian
“Adjusted Operating Income Margin” is calculated as adjusted operating income, divided by net revenues.
subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), effective March 22, 2019.
• Growth rates presented on an “organic” basis reflect currency-neutral underlying results and “like-for-like” comparisons, where applicable.
• Management reviews net revenues, operating income, operating income margin, operating cash flow and earnings per share, or “EPS,” on an
adjusted basis, which may exclude the impact of currency and other items such as acquisitions, asset impairment and exit costs, tax items and
other special items. Organic growth rates reflect the way management views underlying performance for these measures. PMI believes that such
measures, including pro forma measures, will provide useful insight into underlying business trends and results, and will provide a more
meaningful performance comparison for the period during which RBH remains under CCAA protection.
• Management reviews these measures because they exclude changes in currency exchange rates and other factors that may distort underlying
business trends, thereby improving the comparability of PMI’s business performance between reporting periods. Furthermore, PMI uses several
of these measures in its management compensation program to promote internal fairness and a disciplined assessment of performance against
company targets. PMI discloses these measures to enable investors to view the business through the eyes of management.
• Non-GAAP measures used in this report should neither be considered in isolation nor as a substitute for the financial measures prepared in
accordance with U.S. GAAP. For a reconciliation of non-GAAP measures to the most directly comparable U.S. GAAP measures, see the
relevant schedules provided in this report on pages R-1 and R-2.
Reduced-Risk Products
• 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 continuing smoking. PMI has a range of RRPs in various stages of development,
scientific assessment and commercialization. PMI’s RRPs are smoke-free products that produce an aerosol that contains far lower quantities of
harmful and potentially harmful constituents than found in cigarette smoke.
• References to smoke-free product net revenues are to PMI’s reduced-risk product net revenues.
• Unless otherwise stated, all references to IQOS are to PMI’s Platform 1 IQOS devices and heated tobacco consumables.
•
“Heated tobacco units,” or “HTUs,” is the term PMI uses to refer to heated tobacco consumables, which include the company’s HEETS, HEETS
Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), Marlboro Dimensions,
Marlboro HeatSticks and Parliament HeatSticks, as well as the KT&G-licensed brands, Fiit and Miix (outside of Korea).
“PMI heat-not-burn products” include licensed KT&G heat-not-burn products.
“PMI HTUs” include licensed KT&G HTUs.
“Total IQOS users” is defined as the estimated number of Legal Age (minimum 18 years) users of PMI heat-not-burn products for which PMI
HTUs represented at least 5% of their daily tobacco consumption over the past seven days.
The estimated number of adults who have “switched to IQOS and stopped smoking” reflects:
•
•
•
•
o
o
for markets where there are no heat-not-burn products other than PMI heat-not-burn products: daily individual consumption of PMI
HTUs represents the totality of their daily tobacco consumption in the past seven days;
for markets where PMI heat-not-burn products are among other heat-not-burn products: daily individual consumption of HTUs
represents the totality of their daily tobacco consumption in the past seven days, of which at least 70% is PMI HTUs.
•
“Acquisition” refers to our efforts to switch Legal Age (minimum 18 years) smokers from smoking cigarettes to RRPs or to switch Legal Age
(minimum 18 years) users from competing smoke-free products to PMI’s RRPs.
Sustainability & ESG
•
•
“ESG” stands for environmental, social and governance.
The term “materiality,” when used in the context of ESG topics, is defined in the referenced sustainability standards, and is not meant to
correspond to the concept of materiality under the U.S. securities laws and/or disclosures required by the U.S. Securities and Exchange
Commission.
“Scope 1+2” carbon neutrality refers to PMI’s direct operations; “scope 1+2+3” carbon neutrality refers to PMI’s entire value chain.
•
• Management positions include all employees above a defined grade, encompassing managers, directors and senior management.
G-1
Our Commitment to Sustainability
The pursuit of our purpose – to create a smoke-free
world – must take place sustainably. For PMI, sustain-
ability means creating long-term value while minimizing
the negative externalities associated with our products,
operations and value chain. Sustainability stands at the
core of PMI’s transformation and also helps address some
of the challenges resulting from this transition, while
spurring innovation and securing success in the long run.
Our priority is to address the health impacts
associated with smoking by offering better alternatives
to adult smokers who would not otherwise quit, while
simultaneously working towards phasing out cigarettes.
This is the most important contribution we can make
to society and is the cornerstone of PMI’s purpose and
business strategy.
In early 2020, we introduced our 2025 roadmap, setting
aspirational goals for each of our priority sustainability
topics – the areas in which we believe we can make the
greatest difference, based on our materiality assessment.
Despite challenging circumstances due to the COVID-19
pandemic, we remained committed and focused on
achieving our ambitions and made significant progress
across the four pillars of our strategy last year, as shown
in the 2020 Highlights section below.
“Sustainability strategy is corporate strategy, and ESG issues are business issues. This is what we
want to emphasize. Our Statement of Purpose reaffirms that we are disrupting our business from
the inside, leading the industry toward a future without cigarettes, while meeting the needs of our
stakeholders, and ensuring the long-term viability of our company.” – André Calantzopoulos, CEO
2020 Highlights
Innovating for better products
99%
of R&D expenditure
dedicated to smoke-free products
17.6 Million
Total IQOS users, of which 12.7 million have
switched to IQOS and stopped smoking
(with over a third living in non-OECD countries)
Operating with excellence
Age Verification
With the introduction last year of the IQOS VEEV device in
New Zealand, we began the journey towards our target whereby
100% of PMI’s smoke-free electronic devices introduced on the
market as of 2023 are equipped with age-verification technology
Human Rights
4 human rights impact assessments conducted since 2018;
on track to cover 10 highest-risk countries by 2025.
Industry-best score in S&P Corporate Sustainability
Assessment recognizes our efforts to respect human rights
Caring for the people we work with
93%
of contracted farms for which labor practices have been
systematically monitored; 100% of farmers and farmworkers
have access to personal protective equipment
37.2%
of management positions held by women;
on track to achieving our goal of 40% by 2022
Protecting the environment
CDP Triple A
Awarded “Triple A” score by CDP for our
efforts in combating climate change, as well as
protecting forests and water security
Carbon Neutrality
Well on track to achieving scope 1+2 by 2030
and scope 1+2+3 by 20501
(1) See glossary for definition.
2020 Philip Morris Annual Report_Feb 26, 2021
Philip Morris International Inc.
120 Park Avenue
New York, NY 10017-5579
USA
www.pmi.com
2020 Philip Morris Annual Report_Feb 26, 2021