XLON:0M8V Philip Morris International, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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
13-3435103
(State or other jurisdiction of
    incorporation or organization)
(I.R.S. Employer
    Identification No.)
 
120 Park Avenue
New York, New York
10017
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code
(917) 663-2000
 
 
 
 
 
 
Former name, former address and former fiscal year, if changed since last report
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨     Smaller reporting company  ¨
(Do not check if a smaller reporting company)
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 July 31, 2012, there were 1,685,722,302 shares outstanding of the registrant’s common stock, no par value per share.

-1-


PHILIP MORRIS INTERNATIONAL INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
PART I -
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Balance Sheets at
 
 
3 –  4
 
 
 
 
Condensed Consolidated Statements of Earnings for the
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Earnings for the
 
 
 
 
 
 
 
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the
 
 
10 –  11
 
 
 
 
Notes to Condensed Consolidated Financial Statements
12 – 35
 
 
 
Item 2.
36 – 68
 
 
 
Item 4.
 
 
 
PART II -
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.

- 2-


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and cash equivalents
$
3,846

 
$
2,550


Receivables (less allowances of
$49 in 2012 and $45 in 2011)
3,553

 
3,201


Inventories:

 
 
 
Leaf tobacco
3,583

 
3,463

Other raw materials
1,102

 
1,185

Finished product
2,627

 
3,472

 
7,312

 
8,120

Deferred income taxes
415

 
397

Other current assets
435

 
591


Total current assets
15,561

 
14,859


Property, plant and equipment, at cost
12,954

 
12,913

Less: accumulated depreciation
6,793

 
6,663

 
6,161

 
6,250

Goodwill
9,737

 
9,928

Other intangible assets, net
3,614

 
3,697

Other assets
725

 
754

TOTAL ASSETS
$
35,798

 
$
35,488









See notes to condensed consolidated financial statements.
Continued

- 3-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
 
 
June 30,
2012
 
December 31,
2011
LIABILITIES
 
 
 
Short-term borrowings
$
2,694

 
$
1,511

Current portion of long-term debt
3,284

 
2,206

Accounts payable
1,019

 
1,031

Accrued liabilities:
 
 
 
Marketing and selling
477

 
519

Taxes, except income taxes
5,344

 
5,346

Employment costs
769

 
894

Dividends payable
1,314

 
1,341

Other
833

 
873

Income taxes
968

 
897

Deferred income taxes
128

 
176

Total current liabilities
16,830

 
14,794


Long-term debt
14,824

 
14,828

Deferred income taxes
1,964

 
1,976

Employment costs
1,601

 
1,665

Other liabilities
433

 
462

Total liabilities
35,652

 
33,725


Contingencies (Note 10)

 


Redeemable noncontrolling interest (Note 7)
1,262

 
1,212


STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 

Common stock, no par value
(2,109,316,331 shares issued in 2012 and 2011)

 

Additional paid-in capital
1,233

 
1,235

Earnings reinvested in the business
23,599

 
21,757

Accumulated other comprehensive losses
(3,376
)
 
(2,863
)
 
21,456

 
20,129

Less: cost of repurchased stock
(416,738,735 and 383,407,665 shares in 2012 and 2011, respectively)
22,822

 
19,900

Total PMI stockholders’ (deficit) equity
(1,366
)
 
229

Noncontrolling interests
250

 
322

Total stockholders’ (deficit) equity
(1,116
)
 
551

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
35,798

 
$
35,488



See notes to condensed consolidated financial statements.

- 4-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)

 
For the Six Months Ended
June 30,
 
2012
 
2011
Net revenues
$
38,059

 
$
36,764

Cost of sales
5,108

 
5,139

Excise taxes on products
22,491

 
21,700

Gross profit
10,460

 
9,925

Marketing, administration and research costs
3,388

 
3,141

Asset impairment and exit costs
16

 
17

Amortization of intangibles
49

 
48

Operating income
7,007

 
6,719

Interest expense, net
422

 
421

Earnings before income taxes
6,585

 
6,298

Provision for income taxes
1,946

 
1,826

Net earnings
4,639

 
4,472

Net earnings attributable to noncontrolling interests
161

 
144

Net earnings attributable to PMI
$
4,478

 
$
4,328


Per share data (Note 8):
 
 
 
Basic earnings per share
$
2.60

 
$
2.42

Diluted earnings per share
$
2.60

 
$
2.42

Dividends declared
$
1.54

 
$
1.28















See notes to condensed consolidated financial statements.

- 5-



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
June 30,
 
2012
 
2011
Net revenues
$
20,037

 
$
20,234

Cost of sales
2,666

 
2,844

Excise taxes on products
11,917

 
11,961

Gross profit
5,454

 
5,429

Marketing, administration and research costs
1,817

 
1,692

Asset impairment and exit costs
8

 
1

Amortization of intangibles
25

 
24

Operating income
3,604

 
3,712

Interest expense, net
209

 
208

Earnings before income taxes
3,395

 
3,504

Provision for income taxes
988

 
1,019

Net earnings
2,407

 
2,485

Net earnings attributable to noncontrolling interests
90

 
76

Net earnings attributable to PMI
$
2,317

 
$
2,409


Per share data (Note 8):
 
 
 
Basic earnings per share
$
1.36

 
$
1.35

Diluted earnings per share
$
1.36

 
$
1.35

Dividends declared
$
0.77

 
$
0.64









See notes to condensed consolidated financial statements.


- 6-



Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

 
 
For the Six Months Ended
June 30,
 
 
2012
 
2011
Net earnings
 
$
4,639

 
$
4,472

Other comprehensive earnings (losses), net of income taxes:
 


 


Currency translation adjustments, net of income taxes of ($33) in 2012 and $93 in 2011
 
(566
)
 
828


Change in net loss and prior service cost:
 

 

Net losses and prior service costs, net of income taxes of $- in 2012 and ($2) in 2011
 
(1
)
 
8

Less amortization of net losses, prior service costs and net transition costs, net of income taxes of ($21) in 2012 and ($12) in 2011
 
78

 
44


Change in fair value of derivatives accounted for as hedges:
 

 

(Gains)/losses transferred to earnings, net of income taxes of $1 in 2012 and ($2) in 2011
 
(12
)
 
14

Gains recognized, net of income taxes of ($1) in 2012 and $- in 2011
 
12

 
5


Change in fair value of equity securities
 

 
(1
)
Total other comprehensive (losses) earnings
 
(489
)
 
898

Total comprehensive earnings
 
4,150

 
5,370

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
86

 
112

Redeemable noncontrolling interest
 
99

 
52

Comprehensive earnings attributable to PMI
 
$
3,965

 
$
5,206


















See notes to condensed consolidated financial statements.

- 7-



Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

 
 
For the Three Months Ended
June 30,
 
 
2012
 
2011
Net earnings
 
$
2,407

 
$
2,485

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Currency translation adjustments, net of income taxes of ($55) in 2012 and ($20) in 2011
 
(1,027
)
 
(135
)

Change in net loss and prior service cost:
 
 
 
 
Net losses and prior service costs, net of income taxes of $- in 2012 and ($2) in 2011
 
(1
)
 
8

Less amortization of net losses, prior service costs and net transition costs, net of income taxes of ($9) in 2012 and ($5) in 2011
 
40

 
22


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
(Gains)/losses transferred to earnings, net of income taxes of $- in 2012 and ($1) in 2011
 
(2
)
 
7

Losses recognized, net of income taxes of $4 in 2012 and $2 in 2011
 
(34
)
 
(17
)

Change in fair value of equity securities
 

 
(1
)
Total other comprehensive losses
 
(1,024
)
 
(116
)
Total comprehensive earnings
 
1,383

 
2,369

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
25

 
51

Redeemable noncontrolling interest
 
50

 
25

Comprehensive earnings attributable to PMI
 
$
1,308

 
$
2,293



















See notes to condensed consolidated financial statements

- 8-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
for the Six Months Ended June 30, 2012 and 2011
(in millions of dollars, except per share amounts)
(Unaudited)
 
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, 2011
$

 
$
1,225

 
$
18,133

 
$
(1,140
)
 
$
(14,712
)
 
$
427

 
 
$
3,933

 
Net earnings
 
 
 
 
4,328

 
 
 
 
 
94

(a) 
 
4,422

(a) 
Other comprehensive earnings,
net of income taxes
 
 
 
 
 
 
878

 
 
 
18

(a) 
 
896

(a) 
Exercise of stock options and issuance of other stock awards
 
 
(65
)
 
 
 
 
 
210

 
 
 
 
145

 
Dividends declared ($1.28 per share)
 
 
 
 
(2,283
)
 
 
 
 
 
 
 
 
(2,283
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(231
)
 
 
(231
)
 
Purchase of subsidiary shares from noncontrolling interests
 
 
(1
)
 
 
 
 
 
 
 
(1
)
 
 
(2
)
 
Common stock repurchased
 
 
 
 
 
 
 
 
(2,904
)
 
 
 
 
(2,904
)
 
Balances, June 30, 2011
$

 
$
1,159

 
$
20,178

 
$
(262
)
 
$
(17,406
)
 
$
307

 
 
$
3,976

 
Balances, January 1, 2012
$

 
$
1,235

 
$
21,757

 
$
(2,863
)
 
$
(19,900
)
 
$
322

 
 
$
551

 
Net earnings
 
 
 
 
4,478

 
 
 
 
 
74

(a) 
 
4,552

(a) 
Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(513
)
 
 
 
12

(a) 
 
(501
)
(a) 
Exercise of stock options and issuance of other stock awards
 
 
(2
)
 
 
 
 
 
113

 
 
 
 
111

 
Dividends declared ($1.54 per share)
 
 
 
 
(2,636
)
 
 
 
 
 
 
 
 
(2,636
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(158
)
 
 
(158
)
 
Common stock repurchased
 
 

 
 
 
 
 
(3,035
)
 
 
 
 
(3,035
)
 
Balances, June 30, 2012
$

 
$
1,233

 
$
23,599

 
$
(3,376
)
 
$
(22,822
)
 
$
250

 
 
$
(1,116
)
 
(a) For the six months ended June 30, 2011, net earnings attributable to noncontrolling interests exclude $50 million of earnings related to the redeemable noncontrolling interest, which is reported outside of the equity section in the condensed consolidated balance sheet. Other comprehensive earnings, net of income taxes, also exclude $2 million of net currency translation adjustment gains related to the redeemable noncontrolling interest at June 30, 2011. For the six months ended June 30, 2012, net earnings attributable to noncontrolling interests exclude $87 million of earnings related to the redeemable noncontrolling interest, which is reported outside of the equity section in the condensed consolidated balance sheet. Other comprehensive earnings, net of income taxes, also exclude $12 million of net currency translation adjustment gains related to the redeemable noncontrolling interest at June 30, 2012.


See notes to condensed consolidated financial statements.

- 9-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
For the Six Months Ended
June 30,
 
2012
 
2011
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
4,639

 
$
4,472

 
 
 
 
Adjustments to reconcile net earnings to operating cash flows:
 
 
 
Depreciation and amortization
449

 
488

Deferred income tax benefit
(34
)
 
(30
)
Asset impairment and exit costs, net of cash paid
(4
)
 
(8
)
Cash effects of changes, net of the effects from acquired and divested companies:
 
 
 
Receivables, net
(413
)
 
(250
)
Inventories
577

 
996

Accounts payable
80

 
186

Income taxes
20

 
142

Accrued liabilities and other current assets
(150
)
 
426

Pension plan contributions
(56
)
 
(50
)
Other
270

 
143

Net cash provided by operating activities
5,378

 
6,515

 
 
 
 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(476
)
 
(345
)
Purchases of businesses, net of acquired cash

 
(62
)
Other
(36
)
 
(14
)
Net cash used in investing activities
(512
)
 
(421
)
 

















See notes to condensed consolidated financial statements.

Continued

- 10-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Six Months Ended
June 30,
 
2012
 
2011
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 
 
 
 
 
 
Short-term borrowing activity by original maturity:
 
 
 
    Net issuances (repayments) - maturities of 90 days or less
$
1,930

 
$
(1,206
)
    Issuances - maturities longer than 90 days
478

 

    Repayments - maturities longer than 90 days
(1,215
)
 

Long-term debt proceeds
2,981

 
990

Long-term debt repaid
(1,725
)
 
(35
)
Repurchases of common stock
(3,059
)
 
(2,922
)
Issuance of common stock

 
75

Dividends paid
(2,663
)
 
(2,308
)
Other
(215
)
 
(292
)
Net cash used in financing activities
(3,488
)
 
(5,698
)
Effect of exchange rate changes on cash and cash equivalents
(82
)
 
79

 
 
 
 
Cash and cash equivalents:
 
 
 
Increase
1,296

 
475

Balance at beginning of period
2,550

 
1,703

Balance at end of period
$
3,846

 
$
2,178








See notes to condensed consolidated financial statements.

- 11-


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., whose subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco 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.
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 U.S. generally accepted accounting principles 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 June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income, which became effective for PMI in the first quarter of 2012. Under the new guidance, PMI evaluated the presentation options and elected to present comprehensive earnings in a separate statement. As a result of this new standard, certain amounts reported in the prior year statements have been reclassified to conform to the current year presentation.
These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report to Shareholders and which are incorporated by reference into PMI’s Annual Report on Form 10-K for the year ended December 31, 2011.

Note 2. Asset Impairment and Exit Costs:
Pre-tax asset impairment and exit costs consisted of the following:
 
(in millions)
For the Six Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Separation programs:
 
 
 
 
 
 
 
European Union
$

 
$
12

 
$

 
$
1

Eastern Europe, Middle East & Africa

 
2

 

 

Asia

 
2

 

 

Latin America & Canada
16

 
1

 
8

 

Total separation programs
16

 
17

 
8

 
1

Asset impairment and exit costs
$
16

 
$
17

 
$
8

 
$
1


Exit Costs
Separation Programs
The 2012 pre-tax separation program charges primarily related to severance costs associated with the ongoing optimization of our manufacturing footprint. The 2011 pre-tax separation program charges primarily related to severance costs for factory and R&D restructurings in the European Union.

- 12-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the six months ended June 30, 2012 was as follows:
 
(in millions)
 
Liability balance, January 1, 2012
$
28

Charges
16

Cash spent
(20
)
Currency/other
(2
)
Liability balance, June 30, 2012
$
22

Cash payments related to exit costs at PMI were $20 million and $7 million for the six months and three months ended June 30, 2012, respectively, and $25 million and $20 million for the six months and three months ended June 30, 2011, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $22 million, and will be substantially paid by 2013.

Note 3. Stock Plans:
In May 2012, PMI’s stockholders approved the Philip Morris International Inc. 2012 Performance Incentive Plan (the “2012 Plan”). The 2012 Plan replaced the 2008 Performance Incentive Plan (the “2008 Plan”) and, as a result, there will be no additional grants out of the 2008 Plan. Under the 2012 Plan, PMI may grant to eligible employees restricted stock, restricted stock units and deferred stock units, performance-based cash incentive awards and performance-based equity awards. While the 2008 Plan authorized incentive stock options, non-qualified stock options and stock appreciation rights, the 2012 Plan does not authorize any stock options or stock appreciation rights. Up to 30 million shares of PMI’s common stock may be issued under the 2012 Plan. At June 30, 2012, shares available for grant under the 2012 Plan were 29,998,940.
In 2008, PMI adopted the Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (the “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 Non-Employee Directors Plan. As of June 30, 2012, shares available for grant under the plan were 798,801.
During the six months ended June 30, 2012, PMI granted 3.2 million shares of restricted and deferred stock awards to eligible employees at a weighted-average grant date fair value of $79.57 per share. During the six months ended June 30, 2011, PMI granted 3.8 million shares of restricted and deferred stock awards to eligible employees at a weighted average grant date fair value of $59.40 per share. PMI recorded compensation expense for restricted stock and deferred stock awards of $136 million and $81 million during the six months ended June 30, 2012 and 2011, respectively, and $59 million and $43 million during the three months ended June 30, 2012 and 2011, respectively. During the first quarter of 2012, compensation expense included approximately $27 million of accelerated expense primarily associated with employees approaching or reaching certain age milestones that accelerate the vesting. As of June 30, 2012, PMI had $337 million of total unrecognized compensation cost related to non-vested restricted and deferred stock awards. The cost is recognized over the original restriction period of the awards, which is typically three or more years after the date of the award, subject to earlier vesting on death or disability or normal retirement, or separation from employment by mutual agreement after reaching age 58.
 
During the six months ended June 30, 2012, 3.6 million shares of PMI restricted stock and deferred stock awards vested. The grant date fair value of all the vested shares was approximately $142 million. The total fair value of restricted stock and deferred stock awards that vested during the six months ended June 30, 2012 was approximately $288 million.



- 13-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 4. 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 Plans
Components of Net Periodic Benefit Cost
Net periodic pension cost consisted of the following:
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Service cost
 
$
4

 
$
3

 
$
96

 
$
85

Interest cost
 
8

 
9

 
96

 
101

Expected return on plan assets
 
(8
)
 
(8
)
 
(162
)
 
(156
)
Amortization:
 

 

 

 

Net loss
 
5

 
4

 
62

 
28

Prior service cost
 
1

 

 
4

 
4

Other
 

 
1

 

 

Net periodic pension cost
 
$
10

 
$
9

 
$
96

 
$
62


 
 
U.S. Plans
 
Non-U.S. Plans
 
 
For the Three Months Ended
June 30,
 
For the Three Months Ended
June 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Service cost
 
$
2

 
$
1

 
$
47

 
$
44

Interest cost
 
4

 
5

 
47

 
52

Expected return on plan assets
 
(4
)
 
(4
)
 
(78
)
 
(80
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
2

 
2

 
31

 
14

Prior service cost
 
1

 

 
1

 
2

Net periodic pension cost
 
$
5

 
$
4

 
$
48

 
$
32


Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded U.S. and non-U.S. plans. Employer contributions of $56 million were made to the pension plans during the six months ended June 30, 2012. Currently, PMI anticipates making additional contributions during the remainder of 2012 of approximately $107 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 rates.

- 14-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 5. Goodwill and Other Intangible Assets, net:
Goodwill and other intangible assets, net, by segment were as follows:
 
 
 
Goodwill
 
Other Intangible Assets, net
(in millions)
 
June 30,
2012
 
December 31,
2011
 
June 30,
2012
 
December 31,
2011
European Union
 
$
1,351

 
$
1,392

 
$
642

 
$
663

Eastern Europe, Middle East & Africa
 
613

 
666

 
243

 
250

Asia
 
4,836

 
4,966

 
1,572

 
1,633

Latin America & Canada
 
2,937

 
2,904

 
1,157

 
1,151

Total
 
$
9,737

 
$
9,928

 
$
3,614

 
$
3,697

Goodwill is due primarily to PMI’s acquisitions in Canada, Indonesia, Mexico, Greece, Serbia, Colombia and Pakistan, as well as the business combination in the Philippines in February 2010. The movements in goodwill from December 31, 2011, were as follows:
 
(in millions)
 
European
Union
 
Eastern
Europe,
Middle East
&
Africa
 
Asia
 
Latin
America &
Canada
 
Total
Balance at December 31, 2011
 
$
1,392

 
$
666

 
$
4,966

 
$
2,904

 
$
9,928

Changes due to:
 
 
 
 
 
 
 
 
 
 
Acquisitions
 

 

 

 

 

Currency
 
(41
)
 
(53
)
 
(130
)
 
33

 
(191
)
Balance at June 30, 2012
 
$
1,351

 
$
613

 
$
4,836

 
$
2,937

 
$
9,737

Additional details of other intangible assets were as follows:
 
 
 
June 30, 2012
 
December 31, 2011
(in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizable intangible assets
 
$
2,034

 
 
 
$
2,067

 
 
Amortizable intangible assets
 
1,995

 
$
415

 
2,001

 
$
371

Total other intangible assets
 
$
4,029

 
$
415

 
$
4,068

 
$
371

 
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007. Amortizable intangible assets primarily consist of certain trademarks, distribution networks and non-compete agreements associated with business combinations. The range of useful lives as well as the weighted-average remaining useful life of amortizable intangible assets at June 30, 2012 is as follows:
 
Description
Initial
Estimated
Useful Lives
    
Weighted-Average
Remaining Useful Life
Trademarks
2 - 40 years
    
26
 years
Distribution networks
20 - 30 years
    
16
 years
Non-compete agreements
3 - 10 years
    
3
 years
Other (including farmer
  contracts and intellectual property rights)
12.5 - 17 years
    
13
 years

- 15-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Pre-tax amortization expense for intangible assets during the six months ended June 30, 2012 and 2011, was $49 million and $48 million, respectively, and $25 million and $24 million for the three months ended June 30, 2012 and 2011, respectively. Amortization expense for each of the next five years is estimated to be $98 million or less, assuming no additional transactions occur that require the amortization of intangible assets.
The decrease in the gross carrying amount of other intangible assets from December 31, 2011, was due to currency movements.
During the first quarter of 2012, 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 6. 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 exposure. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings. PMI reports its net transaction gains or losses in marketing, administration and research costs on the condensed consolidated statements of earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps, foreign currency collars and foreign currency options, collectively referred to as foreign exchange contracts, to mitigate its exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At June 30, 2012, PMI had contracts with aggregate notional amounts of $16.0 billion. Of the $16.0 billion aggregate notional amount at June 30, 2012, $2.5 billion related to cash flow hedges, $3.4 billion related to hedges of net investments in foreign operations and $10.1 billion related to other derivatives that primarily offset currency exposures on intercompany financing.
The fair value of PMI’s foreign exchange contracts included in the condensed consolidated balance sheet as of June 30, 2012 and December 31, 2011, were as follows:
 
 
 
Asset Derivatives
 
Liability Derivatives
 
 

 
Fair Value
 

 
Fair Value
(in millions)
 
Balance Sheet Classification
 
At
June 30,
2012
 
At
December 31,
2011
 
Balance Sheet Classification
 
At
June 30,
2012
 
At
December 31,
2011
Foreign exchange contracts designated as hedging instruments
 
Other current assets
 
$
91

 
$
57

 
Other accrued liabilities
 
$
6

 
$
4

 
 
Other assets
 
3

 

 
Other liabilities
 
1

 

Foreign exchange contracts not designated as hedging instruments 
 
Other current assets 
 
50

 
88

 
Other accrued liabilities
 
56

 
62

 
 
 
 
 
 
 
 
Other liabilities
 
1

 

Total derivatives
 
 
 
$
144

 
$
145

 
 
 
$
64

 
$
66


- 16-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Hedging activities, which represent movement in derivatives as well as the respective underlying transactions, had the following effect on PMI’s condensed consolidated statements of earnings and other comprehensive earnings for the six months and three months ended June 30, 2012 and 2011:
(in millions)
 
For the Six Months Ended June 30, 2012
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
24

 
 
 
$

 
 
 
$
24

Cost of sales
 
19

 
 
 

 
 
 
19

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 
43

 
 
 

 
 
 
43

Interest expense, net
 
(30
)
 
 
 
6

 
 
 
(24
)
Earnings before income taxes
 
13

 
 
 
6

 
 
 
19

Provision for income taxes
 
(1
)
 
 
 

 
 
 
(1
)
Net earnings attributable to PMI
 
$
12

 
 
 
$
6

 
 
 
$
18


Other Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(13
)
 
 
 
 
 
$
1

 
$
(12
)
Recognized gains
 
13

 
 
 
 
 
(1
)
 
12

Net impact on equity
 
$

 
 
 
 
 
$

 
$

Cumulative translation adjustment
 
 
 
$

 
 
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Six Months Ended June 30, 2011
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$

 
 
 
$

 
 
 
$

Cost of sales
 

 
 
 

 
 
 

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 

 
 
 

 
 
 

Interest expense, net
 
(16
)
 
 
 
14

 
 
 
(2
)
Earnings before income taxes
 
(16
)
 
 
 
14

 
 
 
(2
)
Provision for income taxes
 
2

 
 
 
(4
)
 
 
 
(2
)
Net earnings attributable to PMI
 
$
(14
)
 
 
 
$
10

 
 
 
$
(4
)

Other Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
Losses transferred to earnings
 
$
16

 
 
 
 
 
$
(2
)
 
$
14

Recognized gains
 
5

 
 
 
 
 

 
5

Net impact on equity
 
$
21

 
 
 
 
 
$
(2
)
 
$
19

Cumulative translation adjustment
 
 
 
$
2

 
 
 
 
 
$
2

 
 
 
 
 
 
 
 
 
 
 


- 17-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(in millions)
 
For the Three Months Ended June 30, 2012
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
13

 
 
 
$

 
 
 
$
13

Cost of sales
 
4

 
 
 

 
 
 
4

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 
17

 
 
 

 
 
 
17

Interest expense, net
 
(15
)
 
 
 
5

 
 
 
(10
)
Earnings before income taxes
 
2

 
 
 
5

 
 
 
7

Provision for income taxes
 

 
 
 

 
 
 

Net earnings attributable to PMI
 
$
2

 
 
 
$
5

 
 
 
$
7


Other Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(2
)
 
 
 
 
 
$

 
$
(2
)
Recognized losses
 
(38
)
 
 
 
 
 
4

 
(34
)
Net impact on equity
 
$
(40
)
 
 
 
 
 
$
4

 
$
(36
)
Cumulative translation adjustment
 
 
 
$

 
 
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
  
(in millions)
 
For the Three Months Ended June 30, 2011
Gain (Loss)
 
Cash Flow
Hedges    
 
Net
Investment
Hedges    
 
Other
Derivatives    
 
Income
Taxes    
 
Total    
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$

 
 
 
$

 
 
 
$

Cost of sales
 

 
 
 

 
 
 

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 

 
 
 

 
 
 

Interest expense, net
 
(8
)
 
 
 
11

 
 
 
3

Earnings before income taxes
 
(8
)
 
 
 
11

 
 
 
3

Provision for income taxes
 
1

 
 
 
(3
)
 
 
 
(2
)
Net earnings attributable to PMI
 
$
(7
)
 
 
 
$
8

 
 
 
$
1


Other Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
Losses transferred to earnings
 
$
8

 
 
 
 
 
$
(1
)
 
$
7

Recognized losses
 
(19
)
 
 
 
 
 
2

 
(17
)
Net impact on equity
 
$
(11
)
 
 
 
 
 
$
1

 
$
(10
)
Cumulative translation adjustment
 


 
$

 
 
 


 
$

 
 
 
 
 
 
 
 
 
 
 

Each type of hedging activity is described in greater detail below.
Cash Flow Hedges
PMI has entered into foreign exchange contracts to hedge foreign currency exchange risk related to certain forecasted transactions. The effective portion of gains and losses associated with qualifying cash flow hedge contracts is deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s condensed consolidated statements of earnings. During the six months and three months ended June 30, 2012 and 2011, ineffectiveness related to cash

- 18-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

flow hedges was not material. As of June 30, 2012, PMI has hedged forecasted transactions for periods not exceeding the next thirteen months. The impact of these hedges is included in operating cash flows on PMI’s condensed consolidated statements of cash flows.
 
For the six months and three months ended June 30, 2012 and 2011, foreign exchange contracts that were designated as cash flow hedging instruments impacted the condensed consolidated statements of earnings and other comprehensive earnings as follows:
 
(pre-tax, in millions)
 
For the Six Months Ended June 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings into
Earnings
 
Amount of Gain/(Loss)
Reclassified  from Other
Comprehensive  Earnings
into
Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
on
Derivatives
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
 
 
 
 
 
 
$
13

 
$
5

 
 
Net revenues
 
$
24

 
$

 
 
 
 
 
 
Cost of sales
 
19

 

 
 
 
 
 
 
Marketing, administration
and research costs
 

 

 
 
 
 
 
 
Interest expense, net
 
(30
)
 
(16
)
 
 
 
 
Total
 
 
 
$
13

 
$
(16
)
 
$
13

 
$
5


(pre-tax, in millions)
 
For the Three Months Ended June 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings into
Earnings
 
Amount of Gain/(Loss)
Reclassified  from Other
Comprehensive  Earnings
into
Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
on
Derivatives
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
 
 
 
 
 
 
$
(38
)
 
$
(19
)
 
 
Net revenues
 
$
13

 
$

 
 
 
 
 
 
Cost of sales
 
4

 

 
 
 
 
 
 
Marketing, administration
and research costs
 

 

 
 
 
 
 
 
Interest expense, net
 
(15
)
 
(8
)
 
 
 
 
Total
 
 
 
$
2

 
$
(8
)
 
$
(38
)
 
$
(19
)
 
Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and forward exchange contracts as net investment hedges of its foreign operations. For the six months ended June 30, 2012 and 2011, these hedges of net investments resulted in gains (losses), net of income taxes, of $40 million and $(276) million, respectively. For the three months ended June 30, 2012 and 2011, these hedges of net investments resulted in gains (losses), net of income taxes, of $82 million and $(69) million, respectively. These gains (losses) were reported as a component of accumulated other comprehensive losses within currency translation adjustments. For the six months and three months ended June 30, 2012 and 2011, ineffectiveness related to net investment hedges was not material. Other investing cash flows on PMI’s condensed consolidated statements of cash flows includes the premiums paid for and settlements of net investment hedges.

- 19-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

For the six months and three months ended June 30, 2012 and 2011, foreign exchange contracts that were designated as net investment hedging instruments impacted the condensed consolidated statements of earnings and other comprehensive earnings as follows:
 
(pre-tax, in millions)
 
For the Six Months Ended June 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings into
Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings
into
Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
on
Derivatives
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
 
 
 
 
 
 
$

 
$
2

 
 
Interest expense, net
 
$

 
$

 
 
 
 

(pre-tax, in millions)
 
For the Three Months Ended June 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings into
Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings
into
Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
on
Derivatives
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
 
 
 
 
 
 
$

 
$

 
 
Interest expense, net
 
$

 
$

 
 
 
 

Other Derivatives
PMI has entered into foreign exchange contracts to hedge the foreign currency exchange risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s condensed consolidated statements of earnings. For the six months ended June 30, 2012 and 2011, the gains (losses) from contracts for which PMI did not apply hedge accounting were $(124) million and $138 million, respectively. For the three months ended June 30, 2012 and 2011, the gains (losses) from contracts for which PMI did not apply hedge accounting were $(186) million and $(157) million, respectively. The gains (losses) from these contracts substantially offset the losses and gains generated by the underlying intercompany and third-party loans being hedged.

As a result, for the six months and three months ended June 30, 2012 and 2011, these items impacted the condensed consolidated statements of earnings as follows:
 
(pre-tax, in millions)
 
 
 
 
 
 
 
 
Derivatives not Designated
   as Hedging Instruments
 
Statement of Earnings
Classification of
Gain/(Loss)
 
Amount of Gain/(Loss)
Recognized in Earnings
 
 
 
 
For the Six Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
Marketing, administration and research costs
 
$

 
$

 
$

 
$

 
 
Interest expense, net
 
6

 
14

 
5

 
11

 
 
 
 
$
6

 
$
14

 
$
5

 
$
11


- 20-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 impacted accumulated other comprehensive losses, net of income taxes, as follows:

(in millions)
 
For the Six Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
Gain at beginning of period
 
$
15

 
$
2

 
$
51

 
$
31

Derivative (gains) losses transferred to earnings
 
(12
)
 
14

 
(2
)
 
7

Change in fair value
 
12

 
5

 
(34
)
 
(17
)
Gain as of June 30
 
$
15

 
$
21

 
$
15

 
$
21

At June 30, 2012, PMI expects $12 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the condensed consolidated statement of earnings within the next twelve months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.
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. 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.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Fair Value
See Note 13. Fair Value Measurements for disclosures related to the fair value of PMI’s derivative financial instruments.

Note 7. Redeemable Noncontrolling Interest:
Philippines Business Combination:
On February 25, 2010, PMI's affiliate, Philip Morris Philippines Manufacturing Inc. (“PMPMI”), and Fortune Tobacco Corporation (“FTC”) combined their respective business activities by transferring selected assets and liabilities of PMPMI and FTC to a new company called PMFTC Inc. (“PMFTC”). PMPMI and FTC hold equal economic interests in PMFTC, while PMI manages the day-to-day operations of PMFTC and has a majority of its Board of Directors. Consequently, PMI accounts for the contributed assets and liabilities of FTC as a business combination.
The fair value of the assets and liabilities contributed by FTC in this non-cash transaction has been determined to be $1.17 billion. FTC holds the right to sell its interest in PMFTC to PMI, except in certain circumstances, during the period from February 25, 2015 through February 24, 2018, at an agreed-upon value of $1.17 billion, which was recorded on PMI’s condensed consolidated balance sheet as a redeemable noncontrolling interest at the date of the business combination.
 

- 21-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

With the consolidation of PMFTC, FTC’s share of PMFTC’s comprehensive income or loss is attributable to the redeemable noncontrolling interest, impacting the carrying value. To the extent that the attribution of these amounts would cause the carrying value to fall below the redemption amount of $1.17 billion, the carrying amount would be adjusted back up to the redemption value through stockholders’ (deficit) equity. The movement in redeemable noncontrolling interest for the six months ended June 30, 2012 was as follows: