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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
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☐ | 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
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Philip Morris International Inc. |
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(Exact name of registrant as specified in its charter)
| | | | | |
Virginia | 13-3435103 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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120 Park Avenue | New York | New York | 10017 |
(Address of principal executive offices) | | | (Zip Code) |
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Registrant’s telephone number, including area code | (917) | 663-2000 |
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, no par value | | PM | | New York Stock Exchange |
2.375% Notes due 2022 | | PM22B | | New York Stock Exchange |
2.500% Notes due 2022 | | PM22 | | New York Stock Exchange |
2.500% Notes due 2022 | | PM22C | | New York Stock Exchange |
2.625% Notes due 2023 | | PM23 | | New York Stock Exchange |
2.125% Notes due 2023 | | PM23B | | New York Stock Exchange |
3.600% Notes due 2023 | | PM23A | | New York Stock Exchange |
2.875% Notes due 2024 | | PM24 | | New York Stock Exchange |
2.875% Notes due 2024 | | PM24C | | New York Stock Exchange |
0.625% Notes due 2024 | | PM24B | | New York Stock Exchange |
3.250% Notes due 2024 | | PM24A | | New York Stock Exchange |
2.750% Notes due 2025 | | PM25 | | New York Stock Exchange |
3.375% Notes due 2025 | | PM25A | | New York Stock Exchange |
2.750% Notes due 2026 | | PM26A | | New York Stock Exchange |
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
2.875% Notes due 2026 | | PM26 | | New York Stock Exchange |
0.125% Notes due 2026 | | PM26B | | New York Stock Exchange |
3.125% Notes due 2027 | | PM27 | | New York Stock Exchange |
3.125% Notes due 2028 | | PM28 | | New York Stock Exchange |
2.875% Notes due 2029 | | PM29 | | New York Stock Exchange |
3.375% Notes due 2029 | | PM29A | | New York Stock Exchange |
0.800% Notes due 2031 | | PM31 | | New York Stock Exchange |
3.125% Notes due 2033 | | PM33 | | New York Stock Exchange |
2.000% Notes due 2036 | | PM36 | | New York Stock Exchange |
1.875% Notes due 2037 | | PM37A | | New York Stock Exchange |
6.375% Notes due 2038 | | PM38 | | New York Stock Exchange |
1.450% Notes due 2039 | | PM39 | | New York Stock Exchange |
4.375% Notes due 2041 | | PM41 | | New York Stock Exchange |
4.500% Notes due 2042 | | PM42 | | New York Stock Exchange |
3.875% Notes due 2042 | | PM42A | | New York Stock Exchange |
4.125% Notes due 2043 | | PM43 | | New York Stock Exchange |
4.875% Notes due 2043 | | PM43A | | New York Stock Exchange |
4.250% Notes due 2044 | | PM44 | | New York Stock Exchange |
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 þ 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 þ 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 þ Accelerated filer ☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
At April 22, 2022, there were 1,550,110,316 shares outstanding of the registrant’s common stock, no par value per share.
PHILIP MORRIS INTERNATIONAL INC.
TABLE OF CONTENTS
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| | Page No. |
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PART I - | | |
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Item 1. | | |
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| Condensed Consolidated Statements of Earnings for the | |
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| Three Months Ended March 31, 2022 and 2021 | |
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| Condensed Consolidated Statements of Comprehensive Earnings for the | |
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| Three Months Ended March 31, 2022 and 2021 | |
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| Condensed Consolidated Balance Sheets at | |
| March 31, 2022 and December 31, 2021 | |
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| Condensed Consolidated Statements of Cash Flows for the | |
| Three Months Ended March 31, 2022 and 2021 | |
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| Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the | |
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| Three Months Ended March 31, 2022 and 2021 | |
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Item 2. | | |
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Item 4. | | |
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PART II - | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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In this report, “PMI,” “we,” “us” and “our” refer 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.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2022 | | 2021 |
Revenues including excise taxes | $ | 19,341 | | | $ | 19,355 | |
Excise taxes on products | 11,595 | | | 11,770 | |
Net revenues | 7,746 | | | 7,585 | |
Cost of sales (Note 18) | 2,608 | | | 2,274 | |
Gross profit | 5,138 | | | 5,311 | |
Marketing, administration and research costs (Notes 16 & 18) | 1,802 | | | 1,849 | |
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| | | |
| | | |
Amortization of intangibles | 38 | | | 18 | |
Operating income | 3,298 | | | 3,444 | |
Interest expense, net | 154 | | | 167 | |
Pension and other employee benefit costs (Note 3) | 4 | | | 28 | |
Earnings before income taxes | 3,140 | | | 3,249 | |
Provision for income taxes | 619 | | | 697 | |
Equity investments and securities (income)/loss, net | 56 | | | (43) | |
Net earnings | 2,465 | | | 2,595 | |
Net earnings attributable to noncontrolling interests | 134 | | | 177 | |
Net earnings attributable to PMI | $ | 2,331 | | | $ | 2,418 | |
Per share data (Note 6): | | | |
Basic earnings per share | $ | 1.50 | | | $ | 1.55 | |
Diluted earnings per share | $ | 1.50 | | | $ | 1.55 | |
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See notes to condensed consolidated financial statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)
| | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2022 | | 2021 |
Net earnings | | $ | 2,465 | | | $ | 2,595 | |
Other comprehensive earnings (losses), net of income taxes: | | | | |
Change in currency translation adjustments: | | | | |
Unrealized gains (losses), net of income taxes of $(31) in 2022 and $(85) in 2021 | | (194) | | | 223 | |
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| | | | |
Change in net loss and prior service cost: | | | | |
| | | | |
Amortization of net losses, prior service costs and net transition costs, net of income taxes of $(13) in 2022 and $(18) in 2021 | | 55 | | | 81 | |
| | | | |
Change in fair value of derivatives accounted for as hedges: | | | | |
Gains (losses) recognized, net of income taxes of $(20) in 2022 and $(14) in 2021 | | 110 | | | 76 | |
(Gains) losses transferred to earnings, net of income taxes of $2 in 2022 and $0 in 2021 | | (9) | | | 21 | |
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Total other comprehensive earnings (losses) | | (38) | | | 401 | |
Total comprehensive earnings | | 2,427 | | | 2,996 | |
Less comprehensive earnings attributable to: | | | | |
Noncontrolling interests | | 279 | | | 143 | |
| | | | |
Comprehensive earnings attributable to PMI | | $ | 2,148 | | | $ | 2,853 | |
See notes to condensed consolidated financial statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 4,622 | | | $ | 4,496 | |
Trade receivables (less allowances of $32 in 2022 and $70 in 2021) | 3,650 | | | 3,123 | |
Other receivables (less allowances of $36 in 2022 and $36 in 2021) | 768 | | | 817 | |
Inventories: | | | |
Leaf tobacco | 1,691 | | | 1,642 | |
Other raw materials | 2,297 | | | 1,652 | |
Finished product | 4,696 | | | 5,426 | |
| 8,684 | | | 8,720 | |
| | | |
Other current assets | 1,000 | | | 561 | |
Total current assets | 18,724 | | | 17,717 | |
Property, plant and equipment, at cost | 14,563 | | | 14,732 | |
Less: accumulated depreciation | 8,559 | | | 8,564 | |
| 6,004 | | | 6,168 | |
Goodwill (Note 4) | 6,632 | | | 6,680 | |
Other intangible assets, net (Note 4) | 2,786 | | | 2,818 | |
Equity investments (Note 12) | 4,312 | | | 4,463 | |
Deferred income taxes | 694 | | | 895 | |
Other assets (less allowances of $21 in 2022 and $21 in 2021) | 2,581 | | | 2,549 | |
TOTAL ASSETS | $ | 41,733 | | | $ | 41,290 | |
See notes to condensed consolidated financial statements.
Continued
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
LIABILITIES | | | |
Short-term borrowings (Note 10) | $ | 2,441 | | | $ | 225 | |
Current portion of long-term debt (Note 10) | 2,897 | | | 2,798 | |
Accounts payable | 3,203 | | | 3,331 | |
Accrued liabilities: | | | |
Marketing and selling | 678 | | | 811 | |
Taxes, except income taxes | 5,618 | | | 6,324 | |
Employment costs | 864 | | | 1,146 | |
Dividends payable | 1,958 | | | 1,958 | |
Other | 1,854 | | | 1,637 | |
Income taxes | 904 | | | 1,025 | |
| | | |
Total current liabilities | 20,417 | | | 19,255 | |
Long-term debt (Note 10) | 24,019 | | | 24,783 | |
Deferred income taxes | 751 | | | 726 | |
Employment costs | 2,880 | | | 2,968 | |
Income taxes and other liabilities | 1,869 | | | 1,766 | |
Total liabilities | 49,936 | | | 49,498 | |
Contingencies (Note 8) | | | |
STOCKHOLDERS’ (DEFICIT) EQUITY | | | |
Common stock, no par value (2,109,316,331 shares issued in 2022 and 2021) | — | | | — | |
Additional paid-in capital | 2,118 | | | 2,225 | |
Earnings reinvested in the business | 33,468 | | | 33,082 | |
Accumulated other comprehensive losses | (9,760) | | | (9,577) | |
| 25,826 | | | 25,730 | |
Less: cost of repurchased stock (559,231,389 and 559,146,338 shares in 2022 and 2021, respectively) | 35,924 | | | 35,836 | |
Total PMI stockholders’ deficit | (10,098) | | | (10,106) | |
Noncontrolling interests | 1,895 | | | 1,898 | |
Total stockholders’ deficit | (8,203) | | | (8,208) | |
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | 41,733 | | | $ | 41,290 | |
See notes to condensed consolidated financial statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
| | | | | | | | | | | | |
| For the Three Months Ended March 31, | |
| 2022 | | 2021 | |
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | | |
| | | | |
Net earnings | $ | 2,465 | | | $ | 2,595 | | |
| | | | |
Adjustments to reconcile net earnings to operating cash flows: | | | | |
Depreciation and amortization | 253 | | | 245 | | |
Deferred income tax (benefit) provision | (1) | | | 33 | | |
Asset impairment and exit costs, net of cash paid (Note 16) | (28) | | | (36) | | |
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Cash effects of changes, net of the effects from acquired companies: | | | | |
Receivables, net | (553) | | | (427) | | |
Inventories | (232) | | | 305 | | |
Accounts payable | 14 | | | (67) | | |
Accrued liabilities and other current assets | (835) | | | (2,108) | | |
Income taxes | (93) | | | (91) | | |
Pension plan contributions | (34) | | | (30) | | |
Other | 162 | | | 16 | | |
Net cash provided by operating activities | 1,118 | | | 435 | | |
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | | | | |
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Capital expenditures | (229) | | | (179) | | |
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Equity investments | (20) | | | — | | |
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Net investment hedges | 121 | | | 199 | | |
Other | (68) | | | 35 | | |
Net cash provided by (used in) investing activities | (196) | | | 55 | | |
See notes to condensed consolidated financial statements.
Continued
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
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| For the Three Months Ended March 31, |
| 2022 | | 2021 |
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | |
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Short-term borrowing activity by original maturity: | | | |
Net issuances (repayments) - maturities of 90 days or less | $ | 1,916 | | | $ | (49) | |
Issuances - maturities longer than 90 days | 305 | | | — | |
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Long-term debt repaid | (496) | | | (1,632) | |
Repurchases of common stock | (209) | | | — | |
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Dividends paid | (1,952) | | | (1,879) | |
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Payments to noncontrolling interests and Other (Note 17) | (265) | | | (89) | |
Net cash used in financing activities | (701) | | | (3,649) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (95) | | | (220) | |
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Cash, cash equivalents and restricted cash (1): | | | |
Increase (Decrease) | 126 | | | (3,379) | |
Balance at beginning of period | 4,500 | | | 7,285 | |
Balance at end of period | $ | 4,626 | | | $ | 3,906 | |
(1) The amounts for cash, cash equivalents and restricted cash shown above include restricted cash of $4 million and $4 million as of March 31, 2022 and 2021, respectively, and $4 million and $5 million as of December 31, 2021 and 2020, respectively, which were included in other current assets in the condensed consolidated balance sheets.
See notes to condensed consolidated financial statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
For the Three Months Ended March 31, 2022 and 2021
(in millions of dollars, except per share amounts)
(Unaudited)
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| 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, 2021 | $ | — | | | $ | 2,105 | | | $ | 31,638 | | | $ | (11,181) | | | $ | (35,129) | | | $ | 1,936 | | | | $ | (10,631) | | |
Net earnings | | | | | 2,418 | | | | | | | 177 | | | | 2,595 | | |
Other comprehensive earnings (losses), net of income taxes | | | | | | | 435 | | | | | (34) | | | | 401 | | |
Issuance of stock awards | | | (25) | | | | | | | 69 | | | | | | 44 | | |
Dividends declared ($1.20 per share) | | | | | (1,878) | | | | | | | | | | (1,878) | | |
Payments to noncontrolling interests | | | | | | | | | | | (105) | | | | (105) | | |
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Balances, March 31, 2021 | $ | — | | | $ | 2,080 | | | $ | 32,178 | | | $ | (10,746) | | | $ | (35,060) | | | $ | 1,974 | | | | $ | (9,574) | | |
Balances, January 1, 2022 | $ | — | | | $ | 2,225 | | | $ | 33,082 | | | $ | (9,577) | | | $ | (35,836) | | | $ | 1,898 | | | | $ | (8,208) | | |
Net earnings | | | | | 2,331 | | | | | | | 134 | | | | 2,465 | | |
Other comprehensive earnings (losses), net of income taxes | | | | | | | (12) | | | | | (26) | | | | (38) | | |
Issuance of stock awards | | | (77) | | | | | | | 111 | | | | | | 34 | | |
Dividends declared ($1.25 per share) | | | | | (1,945) | | | | | | | | | | (1,945) | | |
Payments to noncontrolling interests | | | | | | | | | | | (101) | | | | (101) | | |
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Common stock repurchased | | | | | | | | | (199) | | | | | | (199) | | |
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Other (Note 17) | | | (30) | | | | | (171) | | | | | (10) | | | | (211) | | |
Balances, March 31, 2022 | $ | — | | | $ | 2,118 | | | $ | 33,468 | | | $ | (9,760) | | | $ | (35,924) | | | $ | 1,895 | | | | $ | (8,203) | | |
See notes to condensed consolidated financial statements.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A. (also referred to herein as the U.S., the United States or the United States of America), whose subsidiaries and affiliates and their licensees are primarily engaged in the manufacture and sale of cigarettes and reduced-risk products including heat-not-burn, vapor and oral nicotine products, in markets outside of the United States of America. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.
Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus 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 into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.
Basis of Presentation
The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and such principles are applied on a consistent basis. It is the opinion of PMI’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings attributable to PMI for any interim period are not necessarily indicative of results that may be expected for the entire year.
In the third quarter of 2021, PMI acquired Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. On March 31, 2022, PMI launched a new Wellness and Healthcare business consolidating these entities, Vectura Fertin Pharma. The operating results of this new business is reported in an Other category. For further details, see Note 7. Segment Reporting and Note 17. Acquisitions.
Certain prior years' amounts have been reclassified to conform with the current year's presentation. During the first quarter of 2022, one of Fertin Pharma's product lines was moved from the Other category to the European Union segment (reduced-risk product category). For further details, see Note 4. Goodwill and Other Intangible Assets, net. The change did not have a material impact on PMI's consolidated financial position, results of operations or cash flows in any of the periods presented.
These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report on Form 10-K for the year ended December 31, 2021.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2. 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 March 31, 2022, shares available for grant under the 2017 Plan were 12,644,751.
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 March 31, 2022, shares available for grant under the plan were 914,413.
Restricted share unit (RSU) awards
During the three months ended March 31, 2022 and 2021, shares granted to eligible employees, the weighted-average grant date fair value per share and the recorded compensation expense related to RSU awards were as follows:
| | | | | | | | | | | | | | | | | |
| Number of Shares Granted | | Weighted-Average Grant Date Fair Value Per RSU Award Granted | | Compensation Expense Related to RSU Awards (in millions) |
2022 | 1,551,050 | | | $ 105.04 | | | $ | 39 | |
2021 | 1,972,770 | | | $ 81.86 | | | $ | 40 | |
As of March 31, 2022, PMI had $259 million of total unrecognized compensation cost related to non-vested RSU awards. The cost is recognized over the original restriction period of the awards, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58.
During the three months ended March 31, 2022, 1,447,664 RSU awards vested. The grant date fair value of all the vested awards was approximately $112 million. The total fair value of RSU awards that vested during the three months ended March 31, 2022 was approximately $159 million.
Performance share unit (PSU) awards
During the three months ended March 31, 2022 and 2021, PMI granted PSU awards to certain executives. The PSU awards require the achievement of certain performance metrics, 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 three months ended March 31, 2022 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 a Sustainability Index, which consists of two drivers:
•Product Sustainability (20% weight) measuring progress on PMI's efforts to maximize the benefits of smoke-free products, purposefully phase out cigarettes, seek net positive impact in wellness and healthcare, and reduce post-consumer waste; and
•Operational Sustainability (10% weight) measuring progress on PMI's efforts to tackle climate change, preserve nature, improve the quality of life of people in its supply chain, and foster an empowered, and inclusive workplace.
The performance metrics for such PSU's granted during the three months ended March 31, 2021 consisted of PMI's 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).
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
During the three months ended March 31, 2022 and 2021, shares granted to eligible employee, the grant date fair value per share and the recorded compensation expense related to PSU awards were as follows:
| | | | | | | | | | | | | | |
| Number of Shares Granted | Grant Date Fair Value Subject to Other Performance Metrics | Grant Date Fair Value Subject to TSR Performance Metric | Compensation Expense Related to PSU Awards (in millions) |
| (Per Share) | (Per Share) |
2022 | 451,790 | | $ 105.07 | | $ 143.94 | | $ | 21 | |
2021 | 574,410 | | $ 81.86 | | $ 106.93 | | $ | 12 | |
The grant date fair value of the PSU awards subject to the other performance metrics was determined by using the market price of PMI’s stock on the date of the grant. The grant date fair value of the PSU market based awards subject to the TSR performance metric 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 metric:
| | | | | | | | | | | | |
| 2022 | | 2021 | |
Risk-free interest rate (a) | 1.6 | % | | 0.2 | % | |
Expected volatility (b) | 28.6 | % | | 31.7 | % | |
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
As of March 31, 2022, PMI had $76 million of total unrecognized compensation cost related to non-vested PSU awards. The cost is recognized over the performance cycle of the awards, or upon death, disability or reaching the age of 58.
During the three months ended March 31, 2022, 669,960 PSU awards vested. The grant date fair value of all the vested awards was approximately $54 million. The total fair value of PSU awards that vested during the three months ended March 31, 2022 was approximately $74 million.
Note 3. 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 condensed consolidated statements of earnings consisted of the following:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
(in millions) | | | | | 2022 | | 2021 |
Net pension costs (income) | | | | | $ | (25) | | | $ | (1) | |
Net postemployment costs | | | | | 27 | | | 28 | |
Net postretirement costs | | | | | 2 | | | 1 | |
Total pension and other employee benefit costs | | | | | $ | 4 | | | $ | 28 | |
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Pension Plans
Components of Net Periodic Benefit Cost
Net periodic pension cost consisted of the following:
| | | | | | | | | | | | | | | |
| | | | | Pension (1) |
| | | For the Three Months Ended March 31, |
(in millions) | | | | | 2022 | | 2021 |
Service cost | | | | | $ | 60 | | | $ | 75 | |
Interest cost | | | | | 20 | | | 13 | |
Expected return on plan assets | | | | | (92) | | | (95) | |
Amortization: | | | | | | | |
Net loss | | | | | 48 | | | 80 | |
Prior service cost | | | | | (1) | | | 1 | |
| | | | | | | |
| | | | | | | |
Net periodic pension cost | | | | | $ | 35 | | | $ | 74 | |
(1) Primarily non-U.S. based defined benefit retirement plans.
Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and meet specific funding requirements of its funded pension plans. Employer contributions of $34 million were made to the pension plans during the three months ended March 31, 2022. Currently, PMI anticipates making additional contributions during the remainder of 2022 of approximately $73 million 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.
Note 4. Goodwill and Other Intangible Assets, net:
The movements in goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | European Union | Eastern Europe | Middle East & Africa | South & Southeast Asia | East Asia & Australia | Americas | Other | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balances, December 31, 2021 | $ | 1,397 | | $ | 295 | | $ | 79 | | $ | 2,828 | | $ | 539 | | $ | 611 | | $ | 931 | | $ | 6,680 | |
Changes due to: | | | | | | | | |
| | | | | | | | |
Currency | (19) | | (8) | | 8 | | (29) | | (7) | | 27 | | (20) | | (48) | |
| | | | | | | | |
Balances, March 31, 2022 | $ | 1,378 | | $ | 287 | | $ | 87 | | $ | 2,799 | | $ | 532 | | $ | 638 | | $ | 911 | | $ | 6,632 | |
At March 31, 2022, goodwill primarily reflects PMI’s business combinations in Colombia, Greece, Indonesia, Mexico, Pakistan, the Philippines and Serbia, as well as the preliminary purchase price allocation of Fertin Pharma A/S and Vectura Group plc., which were acquired in September 2021.
As discussed in Note 1. Background and Basis of Presentation, during the first quarter of 2022, one of Fertin Pharma's product lines was moved from the Other category to the European Union segment. As a result, the December 31, 2021 opening goodwill balance in the table above included a reclassification of $24 million from the Other category to the European Union segment.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Details of other intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
(in millions) | Weighted-Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net | | Gross Carrying Amount | Accumulated Amortization | Net |
Non-amortizable intangible assets | | $ | 1,321 | | | $ | 1,321 | | | $ | 1,312 | | | $ | 1,312 | |
Amortizable intangible assets: | | | | | | | | |
Trademarks | 11 years | 1,205 | | $ | 656 | | 549 | | | 1,201 | | $ | 639 | | 562 | |
| | | | | | | | |
Developed technology, including patents | 12 years | 855 | | 82 | | 773 | | | 859 | | 63 | | 796 | |
Other(1) | 11 years | 238 | | 95 | | 143 | | | 238 | | 90 | | 148 | |
Total other intangible assets | | $ | 3,619 | | $ | 833 | | $ | 2,786 | | | $ | 3,610 | | $ | 792 | | $ | 2,818 | |
(1) Primarily includes distribution networks and customer relationships.
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico, as well as the preliminary purchase price allocation associated with PMI's business combinations in 2021 (primarily in-process research and development). The increase since December 31, 2021 was due to currency movements of $9 million.
The change in the accumulated amortization from December 31, 2021, was mainly due to the 2022 amortization of $38 million, and currency movements of $3 million.
Amortization expense for each of the next five years is estimated to be $150 million or less, assuming no additional transactions occur that require the amortization of intangible assets.
Note 5. Financial Instruments:
Overview
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 exposures. 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
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 March 31, 2022, PMI had contracts with aggregate notional amounts of $25.8 billion of which $4.9 billion related to cash flow hedges, $7.9 billion related to hedges of net investments in foreign operations, $1.0 billion related to fair value hedges and $12.0 billion related to other derivatives that primarily offset currency exposures on intercompany financing.
The fair value of PMI’s derivative contracts included in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| | | Fair Value | | | | Fair Value |
| | | At | | At | | | | At | | At |
(in millions) | Balance Sheet Classification | | March 31, 2022 | | December 31, 2021 | | Balance Sheet Classification | | March 31, 2022 | | December 31, 2021 |
Derivative contracts designated as hedging instruments | Other current assets | | $ | 291 | | | $ | 173 | | | Other accrued liabilities | | $ | 46 | | | $ | 34 | |
| Other assets | | 63 | | | 22 | | | Income taxes and other liabilities | | 182 | | | 190 | |
Derivative contracts not designated as hedging instruments | Other current assets | | 55 | | | 37 | | | Other accrued liabilities | | 83 | | | 75 | |
| Other assets | | — | | | — | | | Income taxes and other liabilities | | 14 | | | — | |
Total gross amount derivatives contracts presented in the condensed consolidated balance sheets | | | $ | 409 | | | $ | 232 | | | | | $ | 325 | | | $ | 299 | |
Gross amounts not offset in the condensed consolidated balance sheets | | | | | | | | | | | |
Financial instruments | | | (199) | | | (126) | | | | | (199) | | | (126) | |
Cash collateral received/pledged | | | (200) | | | (93) | | | | | (87) | | | (151) | |
Net amount | | | $ | 10 | | | $ | 13 | | | | | $ | 39 | | | $ | 22 | |
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 March 31, 2022 and December 31, 2021.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the three months ended March 31, 2022 and 2021, PMI's derivative contracts impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(pre-tax, in millions) | For the Three Months Ended March 31, |
| Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives | | | | Statement of Earnings Classification of Gain/(Loss) on Derivatives | | Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings | | Amount of Gain/(Loss) Recognized in Earnings | | |
| 2022 | | 2021 | | | | | | 2022 | | 2021 | | 2022 | | 2021 | | |
Derivative contracts designated as hedging instruments: | | | | | | | | | | | | | | | | | |
Cash flow hedges | $ | 130 | | | $ | 90 | | | | | | | | | | | | | | | |
| | | | | | | Net revenues | | $ | 17 | | | $ | — | | | | | | | |
| | | | | | | Cost of sales | | — | | | — | | | | | | | |
| | | | | | | Marketing, administration and research costs | | (3) | | | (18) | | | | | | | |
| | | | | | | Interest expense, net | | (3) | | | (3) | | | | | | | |
Fair value hedges | | | | | | | Interest expense, net | | | | | | $ | (37) | | | $ | — | | | |
Net investment hedges (a) | 105 | | | |