ES - PM-09.30.13-10Q-DOC
Table of Contents


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 September 30, 2013
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 October 30, 2013, there were 1,602,166,187 shares outstanding of the registrant’s common stock, no par value per share.

-1-
Table of Contents

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 – 36
 
 
 
Item 2.
37 – 71
 
 
 
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-
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Cash and cash equivalents
$
3,382

 
$
2,983

Receivables (less allowances of $58 in 2013 and $56 in 2012)
3,659

 
3,589


Inventories:
 
 
 
Leaf tobacco
3,821

 
3,548

Other raw materials
1,730

 
1,610

Finished product
2,475

 
3,791

 
8,026

 
8,949

Deferred income taxes
364

 
450

Other current assets
585

 
619


Total current assets
16,016

 
16,590


Property, plant and equipment, at cost
13,898

 
13,879

Less: accumulated depreciation
7,315

 
7,234

 
6,583

 
6,645

Goodwill (Note 5)
9,177

 
9,900

Other intangible assets, net (Note 5)
3,290

 
3,619

Investments in unconsolidated subsidiaries (Note 17)
665

 
24

Other assets
1,064

 
892

TOTAL ASSETS
$
36,795

 
$
37,670









See notes to condensed consolidated financial statements.
Continued

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Table of Contents

Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
 
 
September 30,
2013
 
December 31,
2012
LIABILITIES
 
 
 
Short-term borrowings (Note 12)
$
3,668

 
$
2,419

Current portion of long-term debt (Note 12)
1,255

 
2,781

Accounts payable
1,125

 
1,103

Accrued liabilities:
 
 
 
Marketing and selling
520

 
527

Taxes, except income taxes
4,991

 
5,350

Employment costs
865

 
896

Dividends payable
1,522

 
1,418

Other
1,031

 
952

Income taxes
925

 
1,456

Deferred income taxes
116

 
114

Total current liabilities
16,018

 
17,016


Long-term debt (Note 12)
21,877

 
17,639

Deferred income taxes
1,807

 
1,875

Employment costs
2,500

 
2,574

Other liabilities
501

 
419

Total liabilities
42,703

 
39,523


Contingencies (Note 10)

 


Redeemable noncontrolling interest (Note 7)
1,283

 
1,301


STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 

Common stock, no par value
(2,109,316,331 shares issued in 2013 and 2012)
—

 
—

Additional paid-in capital
679

 
1,334

Earnings reinvested in the business
27,359

 
25,076

Accumulated other comprehensive losses
(4,820
)
 
(3,604
)
 
23,218

 
22,806

Less: cost of repurchased stock
   (503,235,692 and 455,703,347 shares in 2013 and 2012, respectively)
30,647

 
26,282

Total PMI stockholders’ deficit
(7,429
)
 
(3,476
)
Noncontrolling interests
238

 
322

Total stockholders’ deficit
(7,191
)
 
(3,154
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
36,795

 
$
37,670



See notes to condensed consolidated financial statements.

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Table of Contents

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

 
 
 
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
Net revenues
$
59,639

 
$
57,651

Cost of sales
7,808

 
7,692

Excise taxes on products
36,211

 
34,163

Gross profit
15,620

 
15,796

Marketing, administration and research costs
5,229

 
5,043

Asset impairment and exit costs (Note 2)
8

 
50

Amortization of intangibles
71

 
73

Operating income
10,312

 
10,630

Interest expense, net
721

 
633

Earnings before income taxes
9,591

 
9,997

Provision for income taxes
2,777

 
3,034

Net earnings
6,814

 
6,963

Net earnings attributable to noncontrolling interests
225

 
258

Net earnings attributable to PMI
$
6,589

 
$
6,705


Per share data (Note 8):
 
 
 
Basic earnings per share
$
4.02

 
$
3.92

Diluted earnings per share
$
4.02

 
$
3.92

Dividends declared
$
2.64

 
$
2.39
















See notes to condensed consolidated financial statements.


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Table of Contents

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 September 30,
 
2013
 
2012
Net revenues
$
20,629

 
$
19,592

Cost of sales
2,618

 
2,584

Excise taxes on products
12,702

 
11,672

Gross profit
5,309

 
5,336

Marketing, administration and research costs
1,693

 
1,655

Asset impairment and exit costs (Note 2)
—

 
34

Amortization of intangibles
23

 
24

Operating income
3,593

 
3,623

Interest expense, net
239

 
211

Earnings before income taxes
3,354

 
3,412

Provision for income taxes
952

 
1,088

Net earnings
2,402

 
2,324

Net earnings attributable to noncontrolling interests
62

 
97

Net earnings attributable to PMI
$
2,340

 
$
2,227


Per share data (Note 8):
 
 
 
Basic earnings per share
$
1.44

 
$
1.32

Diluted earnings per share
$
1.44

 
$
1.32

Dividends declared
$
0.94

 
$
0.85









See notes to condensed consolidated financial statements.


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Table of Contents

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

 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
 
2013
 
2012
Net earnings
 
$
6,814

 
$
6,963

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Currency translation adjustments, net of income taxes of $119 in 2013 and $31 in 2012
 
(1,383
)
 
(20
)

Change in net loss and prior service cost:
 
 
 
 
Net losses and prior service costs, net of income taxes of $- in 2013 and ($1) in 2012
 
—

 
(2
)
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($41) in 2013 and ($29) in 2012
 
178

 
121


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
Gains transferred to earnings, net of income taxes of $23 in 2013 and $1 in 2012
 
(158
)
 
(8
)
Gains (losses) recognized, net of income taxes of ($23) in 2013 and $3 in 2012
 
158

 
(17
)
Total other comprehensive (losses) earnings
 
(1,205
)
 
74

Total comprehensive earnings
 
5,609

 
7,037

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
183

 
161

Redeemable noncontrolling interest
 
52

 
143

Comprehensive earnings attributable to PMI
 
$
5,374

 
$
6,733


















See notes to condensed consolidated financial statements


- 7-
Table of Contents

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

 
 
For the Three Months Ended September 30,
 
 
2013
 
2012
Net earnings
 
$
2,402

 
$
2,324

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Currency translation adjustments, net of income taxes of $95 in 2013 and $64 in 2012
 
(661
)
 
546


Change in net loss and prior service cost:
 
 
 
 
Net losses and prior service costs, net of income taxes of $- in 2013 and ($1) in 2012
 
—

 
(1
)
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($14) in 2013 and ($8) in 2012
 
60

 
43


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
(Gains) losses transferred to earnings, net of income taxes of $9 in 2013 and $- in 2012
 
(63
)
 
4

Gains (losses) recognized, net of income taxes of $- in 2013 and $4 in 2012
 
2

 
(29
)
Total other comprehensive (losses) earnings
 
(662
)
 
563

Total comprehensive earnings
 
1,740

 
2,887

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
95

 
75

Redeemable noncontrolling interest
 
9

 
44

Comprehensive earnings attributable to PMI
 
$
1,636

 
$
2,768



















See notes to condensed consolidated financial statements

- 8-
Table of Contents

Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
for the Nine Months Ended September 30, 2013 and 2012
(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, 2012
$
—

 
$
1,235

 
$
21,757

 
$
(2,863
)
 
$
(19,900
)
 
$
322

 
 
$
551

 
Net earnings
 
 
 
 
6,705

 
 
 
 
 
132

(a) 
 
6,837

(a) 
Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
28

 
 
 
29

(a) 
 
57

(a) 
Issuance of stock awards and exercise of stock options
 
 
50

 
 
 
 
 
115

 
 
 
 
165

 
Dividends declared ($2.39 per share)
 
 
 
 
(4,068
)
 
 
 
 
 
 
 
 
(4,068
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(162
)
 
 
(162
)
 
Common stock repurchased
 
 
 
 
 
 
 
 
(4,540
)
 
 
 
 
(4,540
)
 
Balances, September 30, 2012
$
—

 
$
1,285

 
$
24,394

 
$
(2,835
)
 
$
(24,325
)
 
$
321

 
 
$
(1,160
)
 
Balances, January 1, 2013
$
—

 
$
1,334

 
$
25,076

 
$
(3,604
)
 
$
(26,282
)
 
$
322

 
 
$
(3,154
)
 
Net earnings
 
 
 
 
6,589

 
 
 
 
 
150

(a) 
 
6,739

(a) 
Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(1,165
)
 
 
 
(17
)
(a) 
 
(1,182
)
(a) 
Issuance of stock awards and exercise of stock options
 
 
17

 
 
 
 
 
135

 
 
 
 
152

 
Dividends declared ($2.64 per share)
 
 
 
 
(4,306
)
 
 
 
 
 
 
 
 
(4,306
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(176
)
 
 
(176
)
 
Purchase of subsidiary shares from noncontrolling interests
 
 
(672
)
 
 
 
(51
)
 
 
 
(41
)
 
 
(764
)
 
Common stock repurchased
 
 

 
 
 
 
 
(4,500
)
 
 
 
 
(4,500
)
 
Balances, September 30, 2013
$
—

 
$
679

 
$
27,359

 
$
(4,820
)
 
$
(30,647
)
 
$
238

 
 
$
(7,191
)
 
(a) For the nine months ended September 30, 2012, net earnings attributable to noncontrolling interests exclude $126 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 $17 million of net currency translation adjustment gains related to the redeemable noncontrolling interest at September 30, 2012. For the nine months ended September 30, 2013, net earnings attributable to noncontrolling interests exclude $75 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 $23 million of net currency translation adjustment losses related to the redeemable noncontrolling interest at September 30, 2013.


See notes to condensed consolidated financial statements.

- 9-
Table of Contents

Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
6,814

 
$
6,963

 
 
 
 
Adjustments to reconcile net earnings to operating cash flows:
 
 
 
Depreciation and amortization
659

 
665

Deferred income tax provision (benefit)
73

 
(109
)
Asset impairment and exit costs, net of cash paid
(9
)
 
19

Cash effects of changes, net of the effects from acquired and divested companies:
 
 
 
Receivables, net
(206
)
 
(392
)
Inventories
546

 
(137
)
Accounts payable
26

 
—

Income taxes
(606
)
 
326

Accrued liabilities and other current assets
183

 
177

Pension plan contributions
(82
)
 
(84
)
Other
417

 
343

Net cash provided by operating activities
7,815

 
7,771

 
 
 
 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(821
)
 
(719
)
Investments in unconsolidated subsidiaries
(656
)
 
(3
)
Other
6

 
31

Net cash used in investing activities
(1,471
)
 
(691
)
 

















See notes to condensed consolidated financial statements.

Continued

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Table of Contents

Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 
 
 
 
 
 
Short-term borrowing activity by original maturity:
 
 
 
    Net issuances - maturities of 90 days or less
$
215

 
$
1,367

    Issuances - maturities longer than 90 days
1,610

 
478

    Repayments - maturities longer than 90 days
(516
)
 
(1,220
)
Long-term debt proceeds
5,205

 
5,516

Long-term debt repaid
(2,738
)
 
(2,237
)
Repurchases of common stock
(4,516
)
 
(4,557
)
Dividends paid
(4,202
)
 
(3,973
)
Purchase of subsidiary shares from noncontrolling interests
(703
)
 
—

Other
(258
)
 
(262
)
Net cash used in financing activities
(5,903
)
 
(4,888
)
Effect of exchange rate changes on cash and cash equivalents
(42
)
 
75

 
 
 
 
Cash and cash equivalents:
 
 
 
Increase
399

 
2,267

Balance at beginning of period
2,983

 
2,550

Balance at end of period
$
3,382

 
$
4,817








See notes to condensed consolidated financial statements.

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Table of Contents

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.
Certain prior years' amounts have been reclassified to conform with the current year's presentation, due to the separate disclosure of investments in unconsolidated subsidiaries. For further details, see Note 17. Investments in Unconsolidated Subsidiaries.
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, 2012.

Note 2. Asset Impairment and Exit Costs:
Pre-tax asset impairment and exit costs consisted of the following:

(in millions)
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Separation programs:
 
 
 
 
 
 
 
Asia
$
—

 
$
13

 
$
—

 
$
13

Latin America & Canada
—

 
24

 
—

 
8

Total separation programs
—

 
37

 
—

 
21

Contract termination charges:
 
 
 
 
 
 
 
Asia
8

 
5

 
—

 
5

Total contract termination charges
8

 
5

 
—

 
5

Asset impairment charges:
 
 
 
 
 
 
 
Asia
—

 
6

 
—

 
6

Latin America & Canada
—

 
2

 
—

 
2

Total asset impairment charges
—

 
8

 
—

 
8

Asset impairment and exit costs
$
8

 
$
50

 
$
—

 
$
34


Exit Costs
Separation Programs
On September 30, 2013, PMI announced its intention to restructure its global and regional functions based in Switzerland. The potential restructuring is expected to result in the elimination or relocation of approximately 170 positions. PMI expects to finalize its plans during the fourth quarter of 2013.

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

In another initiative, PMI recorded pre-tax separation program charges of $37 million and $21 million for the nine months and three months ended September 30, 2012, respectively. The 2012 pre-tax separation program charges primarily related to severance costs associated with factory restructurings.

Contract Termination Charges
During the nine months ended September 30, 2013, PMI recorded exit costs of $8 million related to the termination of distribution agreements. During the third quarter of 2012, PMI recorded exit costs of $5 million related to the termination of a distribution agreement.
Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the nine months ended September 30, 2013 was as follows:
 
(in millions)
 
Liability balance, January 1, 2013
$
20

Charges
8

Cash spent
(17
)
Currency/other
—

Liability balance, September 30, 2013
$
11

Cash payments related to exit costs at PMI were $17 million and $5 million for the nine months and three months ended September 30, 2013, respectively, and $31 million and $11 million for the nine months and three months ended September 30, 2012, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $11 million, and will be substantially paid in 2014.
Asset Impairment Charges
During the third quarter of 2012, PMI recorded pre-tax asset impairment charges of $8 million related to factory restructurings.

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 under 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. Up to 30 million shares of PMI’s common stock may be issued under the 2012 Plan. At September 30, 2013, shares available for grant under the 2012 Plan were 27,211,610.
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. At September 30, 2013, shares available for grant under the plan were 783,905.
During the nine months ended September 30, 2013, PMI granted 2.8 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $88.43 per share. During the nine months ended September 30, 2012, PMI granted 3.2 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $79.58 per share. PMI recorded compensation expense related to stock awards of $172 million and $191 million during the nine months ended September 30, 2013 and 2012, respectively and $48 million and $55 million during the three months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, PMI had $278 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.


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

During the nine months ended September 30, 2013, 3.2 million shares of PMI restricted stock and deferred stock awards vested. The grant date fair value of all the vested shares was approximately $157 million. The total fair value of restricted stock and deferred stock awards that vested during the nine months ended September 30, 2013 was approximately $288 million.

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 Nine Months Ended September 30,
 
For the Nine Months Ended September 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Service cost
 
$
5

 
$
5

 
$
190

 
$
143

Interest cost
 
12

 
12

 
126

 
142

Expected return on plan assets
 
(11
)
 
(11
)
 
(257
)
 
(243
)
Amortization:
 

 

 

 

Net loss
 
8

 
7

 
151

 
92

Prior service cost
 
1

 
1

 
7

 
8

  Net transition obligation
 
—

 
—

 
1

 
1

Net periodic pension cost
 
$
15

 
$
14

 
$
218

 
$
143

 
 
U.S. Plans
 
Non-U.S. Plans
 
 
For the Three Months Ended September 30,
 
For the Three Months Ended September 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Service cost
 
$
1

 
$
1

 
$
63

 
$
47

Interest cost
 
4

 
4

 
42

 
46

Expected return on plan assets
 
(3
)
 
(3
)
 
(84
)
 
(81
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
2

 
2

 
49

 
30

Prior service cost
 
—

 
—

 
2

 
4

Net transition obligation
 
—

 
—

 
—

 
1

Net periodic pension cost
 
$
4

 
$
4

 
$
72

 
$
47


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 $82 million were made to the pension plans during the nine months ended September 30, 2013. Currently, PMI anticipates making additional contributions during the remainder of 2013 of approximately $138 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-
Table of Contents
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)
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
European Union
 
$
1,463

 
$
1,448

 
$
609

 
$
647

Eastern Europe, Middle East & Africa
 
614

 
637

 
230

 
242

Asia
 
4,183

 
4,791

 
1,327

 
1,542

Latin America & Canada
 
2,917

 
3,024

 
1,124

 
1,188

Total
 
$
9,177

 
$
9,900

 
$
3,290

 
$
3,619

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, 2012 were as follows:
(in millions)
 
European
Union
 
Eastern
Europe,
Middle East
&
Africa
 
Asia
 
Latin
America &
Canada
 
Total
Balances, December 31, 2012
 
$
1,448

 
$
637

 
$
4,791

 
$
3,024

 
$
9,900

Changes due to:
 
 
 
 
 
 
 
 
 
 
Currency
 
15

 
(23
)
 
(608
)
 
(107
)
 
(723
)
Balances, September 30, 2013
 
$
1,463

 
$
614

 
$
4,183

 
$
2,917

 
$
9,177

Additional details of other intangible assets were as follows:
 
 
September 30, 2013
 
December 31, 2012
(in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizable intangible assets
 
$
1,855

 
 
 
$
2,046

 
 
Amortizable intangible assets
 
1,964

 
$
529

 
2,046

 
$
473

Total other intangible assets
 
$
3,819

 
$
529

 
$
4,092

 
$
473


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 September 30, 2013 is as follows:

Description
Initial Estimated
Useful Lives
    
Weighted-Average
Remaining Useful Life
Trademarks
2 - 40 years
    
25 years
Distribution networks
20 - 30 years
    
14 years
Non-compete agreements
3 - 10 years
    
2 years
Other (including farmer
  contracts and intellectual property rights)
12.5 - 17 years
    
12 years

Pre-tax amortization expense for intangible assets during the nine months ended September 30, 2013 and 2012, was $71 million and $73 million, respectively, and $23 million and $24 million for the three months ended September 30, 2013 and 2012,

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

respectively. Amortization expense for each of the next five years is estimated to be $94 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, 2012 was due primarily to currency movements.
During the first quarter of 2013, 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 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 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 and foreign currency options, collectively referred to as foreign exchange contracts, to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Australian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At September 30, 2013, PMI had contracts with aggregate notional amounts of $16.2 billion. Of the $16.2 billion aggregate notional amount at September 30, 2013, $3.5 billion related to cash flow hedges, $2.6 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 values of PMI’s foreign exchange contracts included in the condensed consolidated balance sheet as of September 30, 2013 and December 31, 2012, were as follows:

 
 
Asset Derivatives
 
Liability Derivatives
 
 

 
Fair Value
 

 
Fair Value
(in millions)
 
Balance Sheet Classification
 
At September 30, 2013
 
At December 31, 2012
 
Balance Sheet Classification
 
At September 30, 2013
 
At December 31, 2012
Foreign exchange contracts designated as hedging instruments
 
Other current assets
 
$
142

 
$
146

 
Other accrued liabilities
 
$
14

 
$
8

 
 
Other assets
 
21

 
—

 
Other liabilities
 
24

 
—

Foreign exchange contracts not designated as hedging instruments 
 
Other current assets 
 
52

 
14

 
Other accrued liabilities
 
32

 
47

 
 
 
 
 
 
 
 
Other liabilities
 
8

 
—

Total derivatives
 
 
 
$
215

 
$
160

 
 
 
$
78

 
$
55



- 16-
Table of Contents
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 nine months and three months ended September 30, 2013 and 2012:
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Nine Months Ended September 30, 2013
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
213

 
 
 
$
—

 
 
 
$
213

Cost of sales
 
6

 
 
 
—

 
 
 
6

Marketing, administration and research costs
 
—

 
 
 
—

 
 
 
—

Operating income
 
219

 
 
 
—

 
 
 
219

Interest expense, net
 
(38
)
 
 
 
—

 
 
 
(38
)
Earnings before income taxes
 
181

 
 
 
—

 
 
 
181

Provision for income taxes
 
(23
)
 
 
 
2

 
 
 
(21
)
Net earnings attributable to PMI
 
$
158

 
 
 
$
2

 
 
 
$
160


Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(181
)
 
 
 
 
 
$
23

 
$
(158
)
Recognized gains
 
181

 
 
 
 
 
(23
)
 
158

Net impact on equity
 
$
—

 
 
 
 
 
$
—

 
$
—

Currency translation adjustments
 
 
 
$
(28
)
 
 
 
$
9

 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Nine Months Ended September 30, 2012
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
33

 
 
 
$
—

 
 
 
$
33

Cost of sales
 
19

 
 
 
—

 
 
 
19

Marketing, administration and research costs
 
—

 
 
 
—

 
 
 
—

Operating income
 
52

 
 
 
—

 
 
 
52

Interest expense, net
 
(43
)
 
 
 
11

 
 
 
(32
)
Earnings before income taxes
 
9

 
 
 
11

 
 
 
20

Provision for income taxes
 
(1
)
 
 
 
1

 
 
 
—

Net earnings attributable to PMI
 
$
8

 
 
 
$
12

 
 
 
$
20


Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(9
)
 
 
 
 
 
$
1

 
$
(8
)
Recognized losses
 
(20
)
 
 
 
 
 
3

 
(17
)
Net impact on equity
 
$
(29
)
 
 
 
 
 
$
4

 
$
(25
)
Currency translation adjustments
 
 
 
$
(11
)
 
 
 
$
4

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 

- 17-
Table of Contents
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(in millions)
 
For the Three Months Ended September 30, 2013
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
88

 
 
 
$
—

 
 
 
$
88

Cost of sales
 
—

 
 
 
—

 
 
 
—

Marketing, administration and research costs
 
—

 
 
 
—

 
 
 
—

Operating income
 
88

 
 
 
—

 
 
 
88

Interest expense, net
 
(16
)
 
 
 
(2
)
 
 
 
(18
)
Earnings before income taxes
 
72

 
 
 
(2
)
 
 
 
70

Provision for income taxes
 
(9
)
 
 
 
1

 
 
 
(8
)
Net earnings attributable to PMI
 
$
63

 
 
 
$
(1
)
 
 
 
$
62

Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(72
)
 
 
 
 
 
$
9

 
$
(63
)
Recognized gains
 
2

 
 
 
 
 
—

 
2

Net impact on equity
 
$
(70
)
 
 
 
 
 
$
9

 
$
(61
)
Currency translation adjustments
 
 
 
$
(44
)
 
 
 
10

 
$
(34
)
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Three Months Ended September 30, 2012
Gain (Loss)
 
Cash Flow
Hedges    
 
Net
Investment
Hedges    
 
Other
Derivatives    
 
Income
Taxes    
 
Total    
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
9

 
 
 
$
—

 
 
 
$
9

Cost of sales
 
—

 
 
 
—

 
 
 
—

Marketing, administration and research costs
 
—

 
 
 
—

 
 
 
—

Operating income
 
9

 
 
 
—

 
 
 
9

Interest expense, net
 
(13
)
 
 
 
5

 
 
 
(8
)
Earnings before income taxes
 
(4
)
 
 
 
5

 
 
 
1

Provision for income taxes
 
—

 
 
 
1

 
 
 
1

Net earnings attributable to PMI
 
$
(4
)
 
 
 
$
6

 
 
 
$
2

Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Losses transferred to earnings
 
$
4

 
 
 
 
 
$
—

 
$
4

Recognized losses
 
(33
)
 
 
 
 
 
4

 
(29
)
Net impact on equity
 
$
(29
)
 
 
 
 
 
$
4

 
$
(25
)
Currency translation adjustments
 
 
 
$
(11
)
 
 
 
4

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 

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 nine months and three months ended September 30, 2013 and 2012, ineffectiveness related to cash flow hedges was not material. As of September 30, 2013, PMI has hedged forecasted transactions for periods not exceeding

- 18-
Table of Contents
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

the next fifteen months. The impact of these hedges is included in operating cash flows on PMI’s condensed consolidated statements of cash flows.
 
For the nine months and three months ended September 30, 2013 and 2012, foreign exchange contracts that were designated as cash flow hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
 
 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
 
For the Nine Months Ended September 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive  Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
 
 
 
 
 
 
$
181

 
$
(20
)
 
 
Net revenues
 
$
213

 
$
33

 
 
 
 
 
 
Cost of sales
 
6

 
19

 
 
 
 
 
 
Interest expense, net
 
(38
)
 
(43
)
 
 
 
 
Total
 
 
 
$
181

 
$
9

 
$
181

 
$
(20
)
(pre-tax, in millions)
 
For the Three Months Ended September 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive  Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
 
 
 
 
 
 
$
2

 
$
(33
)
 
 
Net revenues
 
$
88

 
$
9

 
 
 
 
 
 
Interest expense, net
 
(16
)
 
(13
)
 
 
 
 
Total
 
 
 
$
72

 
$
(4
)
 
$
2

 
$
(33
)


Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and foreign exchange contracts as net investment hedges of its foreign operations. For the nine months ended September 30, 2013 and 2012, these hedges of net investments resulted in losses, net of income taxes, of $163 million and $30 million, respectively. For the three months ended September 30, 2013 and 2012, these hedges of net investments resulted in losses, net of income taxes, of $199 million and $70 million, respectively. These losses were reported as a component of accumulated other comprehensive losses within currency translation adjustments. For the nine months and three months ended September 30, 2013 and 2012, ineffectiveness related to net investment hedges was not material. Other investing cash flows on PMI’s condensed consolidated statements of cash flows include the premiums paid for and settlements of net investment hedges.


- 19-
Table of Contents
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

For the nine months and three months ended September 30, 2013 and 2012, foreign exchange contracts that were designated as net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
 
 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
 
For the Nine Months Ended September 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
 
 
 
 
 
 
$
(28
)
 
$
(11
)
 
 
Interest expense, net
 
$
—

 
$
—

 
 
 
 
(pre-tax, in millions)
 
For the Three Months Ended September 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
 
 
 
 
 
 
$
(44
)
 
$
(11
)
 
 
Interest expense, net
 
$
—

 
$
—

 
 
 
 

Other Derivatives
PMI has entered into foreign exchange contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s condensed consolidated statements of earnings. For the nine months ended September 30, 2013 and 2012, the gains from contracts for which PMI did not apply hedge accounting were $67 million and $66 million, respectively. For the three months ended September 30, 2013 and 2012, the gains from contracts for which PMI did not apply hedge accounting were $87 million and $190 million, respectively. The gains from these contracts substantially offset the losses generated by the underlying intercompany and third-party loans being hedged.

As a result, for the nine months and three months ended September 30, 2013 and 2012, these items impacted the condensed consolidated statements of earnings as follows:
 
(pre-tax, in millions)
 
For the Three Months Ended September 30,
Derivatives not Designated
   as Hedging Instruments
 
Statement of Earnings
Classification of
Gain/(Loss)
 
Amount of Gain/(Loss)
Recognized in Earnings
 
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
 
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
$
—

 
$
11

 
$
(2
)
 
$
5


- 20-
Table of Contents
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 affected accumulated other comprehensive losses, net of income taxes, as follows:

(in millions)
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Gain at beginning of period
 
$
92

 
$
15

 
$
153

 
$
15

Derivative (gains)/losses transferred to earnings
 
(158
)
 
(8
)
 
(63
)
 
4

Change in fair value
 
158

 
(17
)
 
2

 
(29
)
Gain/(loss) as of September 30,
 
$
92

 
$
(10
)
 
$
92

 
$
(10
)
At September 30, 2013, PMI expects $82 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.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Credit Exposure and Credit Risk
PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.
Fair Value
See Note 13. Fair Value Measurements and Note 15. Balance Sheet Offsetting for additional discussion of 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 accounted 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 was 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-
Table of Contents
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 nine months ended September 30, 2013 was as follows:
(in millions)
  
Redeemable noncontrolling interest at December 31, 2012
$
1,301

Share of net earnings
75

Dividend payments
(70
)
Currency translation losses
(23
)
Redeemable noncontrolling interest at September 30, 2013
$
1,283

The redeemable noncontrolling interest balance at September 30, 2012 was $1,276 million. The increase in redeemable noncontrolling interest from December 31, 2011 through September 30, 2012 of $64 million was due to $126 million of net earnings and $17 million of currency translation gains, partially offset by dividend payments of $79 million.
In future periods, if the fair value of 50% of PMFTC were to drop below the redemption value of $1.17 billion, the difference would be treated as a special dividend to FTC and would reduce PMI’s earnings per share. Reductions in earnings per share may be partially or fully reversed in subsequent periods if the fair value of the redeemable noncontrolling interest increases relative to the redemption value. Such increases in earnings per share would be limited to cumulative prior reductions. At September 30, 2013, PMI determined that 50% of the fair value of PMFTC exceeded the redemption value of $1.17 billion.


Note 8. Earnings Per Share:
Basic and diluted earnings per share (“EPS”) were calculated using the following:
(in millions)
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net earnings attributable to PMI
 
$
6,589

 
$
6,705

 
$
2,340

 
$
2,227

Less distributed and undistributed earnings attributable to share-based payment awards
 
35

 
36

 
12

 
12