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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 March 31, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer    þ                        Accelerated filer            ¨  
Non-accelerated filer    ¨                         Smaller reporting company    ¨
Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
At April 22, 2019, there were 1,555,802,811 shares outstanding of the registrant’s common stock, no par value per share.

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Table of Contents


PHILIP MORRIS INTERNATIONAL INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
PART I -
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Earnings for the
 
 
Three Months Ended March 31, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Comprehensive Earnings for the
 
 
Three Months Ended March 31, 2019 and 2018
 
 
 
 
Condensed Consolidated Balance Sheets at
 
 
March 31, 2019 and December 31, 2018
5 – 6
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the
 
 
Three Months Ended March 31, 2019 and 2018
7 –  8
 
 
 
 
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
 
 
Three Months Ended March 31, 2019 and 2018
 
 
 
 
10 – 39
 
 
 
Item 2.
40 – 73
 
 
 
Item 4.
 
 
 
PART II -
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

In this report, “PMI,” “we,” “us” and “our” refer to Philip Morris International Inc. and its subsidiaries.

Trademarks and service marks in this report are the registered property of, or licensed by, the subsidiaries of Philip Morris International Inc. and are italicized.


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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)

 
For the Three Months Ended March 31,
 
2019
 
2018
Revenues including excise taxes
$
17,705

 
$
18,426

Excise taxes on products
10,954

 
11,530

Net revenues
6,751

 
6,896

Cost of sales
2,465

 
2,615

Gross profit
4,286

 
4,281

Marketing, administration and research costs (Notes 19 & 20)
2,217

 
1,833

Amortization of intangibles
19

 
22

Operating income
2,050

 
2,426

Interest expense, net
152

 
227

Pension and other employee benefit costs (Note 3)
21

 
6

Earnings before income taxes
1,877

 
2,193

Provision for income taxes
424

 
559

Equity investments and securities (income)/loss, net
(11
)
 
(13
)
Net earnings
1,464

 
1,647

Net earnings attributable to noncontrolling interests
110

 
91

Net earnings attributable to PMI
$
1,354

 
$
1,556


Per share data (Note 6):
 
 
 
Basic earnings per share
$
0.87

 
$
1.00

Diluted earnings per share
$
0.87

 
$
1.00








See notes to condensed consolidated financial statements.

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

 
 
For the Three Months Ended March 31,
 
 
2019
 
2018
Net earnings
 
$
1,464

 
$
1,647

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Change in currency translation adjustments:
 
 
 
 
Unrealized gains (losses), net of income taxes of ($128) in 2019 and $192 in 2018
 
286

 
(371
)
(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $- in 2019 and $- in 2018 (Note 20)
 
502

 
—


Change in net loss and prior service cost:
 
 
 
 
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($4) in 2019 and ($11) in 2018
 
63

 
50

(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of ($15) in 2019 and $- in 2018 (Note 20)
 
27

 
—


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
Gains (losses) recognized, net of income taxes of $1 in 2019 and $10 in 2018
 
(1
)
 
(64
)
(Gains) losses transferred to earnings, net of income taxes of $1 in 2019 and ($1) in 2018
 
(4
)
 
2

Total other comprehensive earnings (losses)
 
873

 
(383
)
Total comprehensive earnings
 
2,337

 
1,264

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
109

 
56

Comprehensive earnings attributable to PMI
 
$
2,228

 
$
1,208



















See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
3,081

 
$
6,593

Trade receivables (less allowances of $25 in 2019 and $25 in 2018)
2,958

 
2,950

Other receivables
577

 
614


Inventories:
 
 
 
Leaf tobacco
2,294

 
2,318

Other raw materials
1,548

 
1,405

Finished product
4,476

 
5,081

 
8,318

 
8,804

Other current assets
807

 
481


Total current assets
15,741

 
19,442


Property, plant and equipment, at cost
14,299

 
14,557

Less: accumulated depreciation
7,405

 
7,356

 
6,894

 
7,201

Goodwill (Note 4)
5,775

 
7,189

Other intangible assets, net (Note 4)
2,129

 
2,278

Investments in unconsolidated subsidiaries and equity securities (Notes 11&14)
4,578

 
1,269

Deferred income taxes
951

 
977

Other assets
1,974

 
1,445

TOTAL ASSETS
$
38,042

 
$
39,801










See notes to condensed consolidated financial statements.
Continued

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Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
 
 
March 31,
2019
 
December 31,
2018
LIABILITIES
 
 
 
Short-term borrowings (Note 10)
$
1,551

 
$
730

Current portion of long-term debt (Note 10)
5,582

 
4,054

Accounts payable
1,812

 
2,068

Accrued liabilities:
 
 
 
Marketing and selling
580

 
732

Taxes, except income taxes
4,354

 
5,088

Employment costs
713

 
794

Dividends payable
1,783

 
1,783

Other
1,741

 
1,366

Income taxes
370

 
576

Total current liabilities
18,486

 
17,191


Long-term debt (Note 10)
23,131

 
26,975

Deferred income taxes
921

 
898

Employment costs
2,958

 
3,083

Income taxes and other liabilities
2,731

 
2,393

Total liabilities
48,227

 
50,540


Contingencies (Note 8)

 


STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 

Common stock, no par value
(2,109,316,331 shares issued in 2019 and 2018)
—

 
—

Additional paid-in capital
1,907

 
1,939

Earnings reinvested in the business
30,588

 
31,014

Accumulated other comprehensive losses
(9,237
)
 
(10,111
)
 
23,258

 
22,842

Less: cost of repurchased stock
   (553,520,033 and 554,736,610 shares in 2019 and 2018, respectively)
35,226

 
35,301

Total PMI stockholders’ deficit
(11,968
)
 
(12,459
)
Noncontrolling interests
1,783

 
1,720

Total stockholders’ deficit
(10,185
)
 
(10,739
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
38,042

 
$
39,801






See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
1,464

 
$
1,647

 
 
 
 
Adjustments to reconcile net earnings to operating cash flows:
 
 
 
Depreciation and amortization
240

 
242

Deferred income tax (benefit) provision
(94
)
 
26

Cash effects of changes in:
 
 
 
Receivables, net
4

 
(113
)
Inventories
237

 
338

Accounts payable
(7
)
 
(62
)
Accrued liabilities and other current assets
(855
)
 
(509
)
Income taxes
(251
)
 
(315
)
Pension plan contributions
(17
)
 
(25
)
Other
520

(1) 
151

Net cash provided by operating activities
1,241

 
1,380

 
 
 
 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(324
)
 
(365
)
Investments in unconsolidated subsidiaries and equity securities
(24
)
 
(18
)
Deconsolidation of RBH (Note 20)
(1,346
)
(2) 
—

Net investment hedges
91

 
(665
)
Other
7

 
30

Net cash used in investing activities
(1,596
)
 
(1,018
)
 

















See notes to condensed consolidated financial statements.

Continued

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Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 
 
 
 
 
 
Short-term borrowing activity by original maturity:
 
 
 
    Net issuances - maturities of 90 days or less
$
(167
)
 
$
103

    Issuances - maturities longer than 90 days
989

 
—

Long-term debt repaid
(2,137
)
 
—

Dividends paid
(1,780
)
 
(1,659
)
Sale (purchase) of subsidiary shares to/(from) noncontrolling interests (Note 17)
—

 
(91
)
Other
(56
)
 
(91
)
Net cash used in financing activities
(3,151
)
 
(1,738
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(28
)
 
131

 
 
 
 
Cash, cash equivalents and restricted cash(3):
 
 
 
Increase (Decrease)
(3,534
)
 
(1,245
)
Balance at beginning of period
6,620

 
8,476

Balance at end of period
$
3,086

 
$
7,231

 
 
 
 
(1) Includes the Loss on Deconsolidation of RBH ($239 million), the Canadian tobacco litigation-related charge ($194 million) and the Asset impairment and exit cost charge ($20 million) that were included in marketing, administration and research costs in the condensed consolidated statements of earnings for the three months ended March 31, 2019. For further details on these charges, see Note 19. Asset Impairment and Exit Costs and Note 20. Deconsolidation of RBH.

(2) Includes deconsolidation of RBH cash and cash equivalents of $1,323 million and restricted cash of $23 million.

(3) The amounts for cash and cash equivalents shown above include restricted cash of $5 million and $31 million as of March 31, 2019 and 2018, respectively, and $27 million and $29 million as of December 31, 2018, and 2017, respectively, which were included in other current assets in the condensed consolidated balance sheets.





See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
For the Three Months Ended March 31, 2019 and 2018
(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, 2018
$
—

 
$
1,972

 
$
29,859

 
$
(8,535
)
 
$
(35,382
)
 
$
1,856

 
$
(10,230
)
Net earnings
 
 
 
 
1,556

 
 
 
 
 
91

 
1,647

Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(344
)
 
 
 
(39
)
 
(383
)
Issuance of stock awards
 
 
(29
)
 
 
 
 
 
74

 
 
 
45

Dividends declared ($1.07 per share)
 
 
 
 
(1,668
)
 
 
 
 
 
 
 
(1,668
)
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(36
)
 
(36
)
Adoption of new accounting standards
 
 
 
 
238

 
 
 
 
 
 
 
238

Other (Note 17)
 
 
(87
)
 
 
 
(4
)
 
 
 
(4
)
 
(95
)
Balances, March 31, 2018
$
—

 
$
1,856

 
$
29,985

 
$
(8,883
)
 
$
(35,308
)
 
$
1,868

 
$
(10,482
)
Balances, January 1, 2019
$
—

 
$
1,939

 
$
31,014

 
$
(10,111
)
 
$
(35,301
)
 
$
1,720

 
$
(10,739
)
Net earnings
 
 
 
 
1,354

 
 
 
 
 
110

 
1,464

Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
345

 
 
 
(1
)
 
344

Issuance of stock awards
 
 
(32
)
 
 
 
 
 
75

 
 
 
43

Dividends declared ($1.14 per share)
 
 
 
 
(1,780
)
 
 
 
 
 
 
 
(1,780
)
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(46
)
 
(46
)
Deconsolidation of RBH (Note 20)
 
 
 
 
 
 
529

 
 
 
 
 
529

Balances, March 31, 2019
$
—

 
$
1,907

 
$
30,588

 
$
(9,237
)
 
$
(35,226
)
 
$
1,783

 
$
(10,185
)




 
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 nicotine-containing products, including reduced-risk products, in markets outside of the United States of America. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.

Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continued smoking. PMI has a range of RRPs in various stages of development, scientific assessment and commercialization.

Basis of Presentation

The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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.

As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's financial statements. For further details, see Note 20. Deconsolidation of RBH.

These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report on Form 10-K for the year ended December 31, 2018.

Note 2. Stock Plans:

In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). The 2017 Plan replaced the 2012 Performance Incentive Plan, and there will be no additional grants under the replaced plan. Under the 2017 Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2017 Plan. At March 31, 2019, shares available for grant under the 2017 Plan were 20,190,170.

In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 Non-Employee Directors Plan”). The 2017 Non-Employee Directors Plan replaced the 2008 Stock Compensation Plan for Non-Employee Directors, and there will be no additional grants under the replaced plan. A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors Plan. At March 31, 2019, shares available for grant under the plan were 974,344.

Restricted share unit (RSU) awards

During the three months ended March 31, 2019 and 2018, shares granted to eligible employees, the weighted-average grant date fair value per share and the recorded compensation expense related to RSU awards were as follows:

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

 
Number of
Shares
Granted
 
Weighted-Average Grant Date Fair Value Per RSU Award Granted
 
Compensation Expense Related to RSU Awards (in millions)
2019
1,621,070

 
$
77.13

 
$
36

2018
1,249,650

 
$
100.70

 
$
38

 
 
 
As of March 31, 2019, PMI had $203 million of total unrecognized compensation cost related to non-vested RSU awards. The cost is recognized over the original restriction period of the awards, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58.

During the three months ended March 31, 2019, 1,022,598 RSU awards vested. The grant date fair value of all the vested awards was approximately $91 million. The total fair value of RSU awards that vested during the three months ended March 31, 2019 was approximately $86 million.

Performance share unit (PSU) awards

During the three months ended March 31, 2019 and 2018, PMI granted PSU awards to certain executives. The PSU awards require the achievement of certain performance factors, which are predetermined at the time of grant, typically over a three-year performance cycle with performance metrics for such PSUs consisting of PMI’s Total Shareholder Return (TSR) relative to a predetermined peer group and on an absolute basis (50% weight), PMI’s currency-neutral compound annual adjusted operating income growth rate, excluding acquisitions (30% weight), and PMI’s performance against specific measures of PMI’s transformation (20% weight). The aggregate of the weighted performance factors for the three metrics determines the percentage of PSUs that will vest at the end of the three-year performance cycle. The minimum percentage of such PSUs that can vest is zero, with a target percentage of 100 and a maximum percentage of 200. Each such vested PSU entitles the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 will result in the targeted number of PSUs being vested. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned.

During the three months ended March 31, 2019 and 2018, shares granted to eligible employees, the grant date fair value per share and the recorded compensation expense related to PSU awards were as follows:
 
Number of Shares Granted
PSU Grant Date Fair Value Subject to Other Performance Factors Per Share
PSU Grant Date Fair Value Subject to TSR Performance Factor Per Share
Compensation Expense Related to PSU Awards (in millions)
2019
625,200

$
77.20

$
83.59

$
18

2018
401,500

$
100.69

$
118.98

$
21


The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market price of PMI’s stock at the date of the grant. The grant date fair value of the PSU market based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation model. The following assumptions were used to determine the grant date fair value of the PSU awards subject to the TSR performance factor:
 
 
 
 
2019
 
2018
 
Risk-free interest rate (a)
2.4
%
 
2.3
%
 
Expected volatility
21.4
%
(b) 
19.6
%
(c) 
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
(c) Determined using a weighted-average of historical and implied volatility.
 
 
 
As of March 31, 2019, PMI had $52 million of total unrecognized compensation cost related to non-vested PSU awards. The cost is recognized over the performance cycle of the awards, or upon death, disability or reaching the age of 58.

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


During the three months ended March 31, 2019, 330,616 PSU awards vested. The grant date fair value of all the vested awards was approximately $32 million. The total fair value of PSU awards that vested during the three months ended March 31, 2019 was approximately $28 million.

Note 3. Benefit Plans:

Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.

Pension and other employee benefit costs per the condensed consolidated statements of earnings consisted of the following:
 
For the Three Months Ended March 31,
(in millions)
2019
 
2018
Net pension costs (income)
$
(5
)
 
$
(16
)
Net postemployment costs
24

 
19

Net postretirement costs
2

 
3

Total pension and other employee benefit costs
$
21

 
$
6


Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:
 
Pension (1)
 
For the Three Months Ended March 31,
(in millions)
2019
 
2018
Service cost
$
54

 
$
53

Interest cost
29

 
28

Expected return on plan assets
(79
)
 
(87
)
Amortization:
 
 
 
Net loss
45

 
43

Prior service cost
—

 
—

Net periodic pension cost
$
49

 
$
37

(1) Primarily non-U.S. based defined benefit retirement plans.

Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded pension plans. Employer contributions of $17 million were made to the pension plans during the three months ended March 31, 2019. Currently, PMI anticipates making additional contributions during the remainder of 2019 of approximately $110 million to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.


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

Note 4. Goodwill and Other Intangible Assets, net:

The movements in goodwill were as follows:
(in millions)
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total
Balances, December 31, 2018
1,357

303

87

2,795

536

2,111

7,189

Changes due to:
 
 
 
 
 
 
 
Currency
(18
)
(3
)
(1
)
35

5

31

49

Deconsolidation of RBH










(1,463
)
(1,463
)
Balances, March 31, 2019
$
1,339

$
300

$
86

$
2,830

$
541

$
679

$
5,775


At March 31, 2019, goodwill primarily reflects PMI’s acquisitions in Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the business combination in the Philippines.

For details on the deconsolidation of RBH, see Note 20. Deconsolidation of RBH.

Details of other intangible assets were as follows:
 
 
March 31, 2019
 
December 31, 2018
(in millions)
Weighted-Average Remaining Useful Life
Gross Carrying Amount
Accumulated Amortization
Net
 
Gross Carrying Amount
Accumulated Amortization
Net
Non-amortizable intangible assets
 
$
1,289

 
$
1,289

 
$
1,269

 
$
1,269

Amortizable intangible assets:
 
 
 
 
 
 
 
 
Trademarks
18 years
1,217

$
489

728

 
1,488

$
608

880

Distribution networks
8 years
111

66

45

 
141

82

59

Other*
10 years
106

39

67

 
107

37

70

Total other intangible assets
 
$
2,723

$
594

$
2,129

 
$
3,005

$
727

$
2,278

* Includes farmer contracts and intellectual property rights

Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico. The increase since December 31, 2018 was due to currency movements of $20 million.

The decrease in the gross carrying amount of amortizable intangible assets from December 31, 2018 was mainly due to the deconsolidation of RBH's trademarks of ($275 million) and distribution network of ($29 million), partially offset by currency movements of $4 million.

The decrease in the accumulated amortization from December 31, 2018 was mainly due to the deconsolidation of RBH's trademarks of ($133 million) and distribution network of ($18 million), partially offset by the 2019 amortization of $19 million.

Amortization expense for each of the next five years is estimated to be $65 million or less, assuming no additional transactions occur that require the amortization of intangible assets.


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

Note 5. Financial Instruments:

Overview

PMI operates in markets outside of the United States of America, with manufacturing and sales facilities in various locations around the world. PMI utilizes certain financial instruments to manage foreign currency and interest rate exposure. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.

PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Both foreign exchange contracts and interest rate contracts are collectively referred to as derivative contracts ("derivative contracts"). The primary currencies to which PMI is exposed include the Australian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble, Swiss franc and Turkish lira. At March 31, 2019, PMI had contracts with aggregate notional amounts of $25.4 billion of which $4.8 billion related to cash flow hedges, $8.9 billion related to hedges of net investments in foreign operations and $11.7 billion related to other derivatives that primarily offset currency exposures on intercompany financing.

The fair value of PMI’s derivative contracts included in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, were as follows:

 
 
Derivative Assets
 
Derivative Liabilities
 
 

 
Fair Value
 

 
Fair Value
(in millions)
 
Balance Sheet Classification
 
At March 31, 2019
 
At December 31, 2018
 
Balance Sheet Classification
 
At March 31, 2019
 
At December 31, 2018
Derivative contracts designated as hedging instruments
 
Other current assets
 
$
278

 
$
54

 
Other accrued liabilities
 
$
55

 
$
47

 
 
Other assets
 
42

 
99

 
Other liabilities
 
447

 
525

Derivative contracts not designated as hedging instruments 
 
Other current assets 
 
39

 
67

 
Other accrued liabilities
 
44

 
46

 
 
Other assets
 
—

 
—

 
Other liabilities
 
20

 
13

Total derivatives
 
 
 
$
359

 
$
220

 
 
 
$
566

 
$
631













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

For the three months ended March 31, 2019 and 2018, PMI's cash flow and net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
For the Three Months Ended March 31,
 
Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive
Earnings/(Losses) into
Earnings
 
Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings
 
2019
 
2018
 
 
 
2019
 
2018
Derivatives in Cash Flow Hedging Relationship
 
 
 
 
 
 
 
 
 
Derivative contracts
$
(2
)
 
$
(74
)
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
10

 
$
(9
)
 
 
 
 
 
Cost of sales
 
—

 
—

 
 
 
 
 
Marketing, administration and research costs
 
(3
)
 
8

 
 
 
 
 
Interest expense, net
 
(2
)
 
(2
)
Derivatives in Net Investment Hedging Relationship
 
 
 
 
 
 
 
 
 
Derivative contracts
211

 
(608
)
 
 
 
 
 
 
Total
$
209

 
$
(682
)
 
 
 
$
5

 
$
(3
)

Cash Flow Hedges

PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to certain forecasted transactions. Gains and losses associated with qualifying cash flow hedge contracts 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. As of March 31, 2019, PMI has hedged forecasted transactions for periods not exceeding the next twenty-one months with the exception of one derivative contract that expires in May 2024. The impact of these hedges is primarily included in operating cash flows on PMI’s condensed consolidated statements of cash flows.

Hedges of Net Investments in Foreign Operations

PMI designates certain foreign currency denominated debt and derivative contracts as net investment hedges, primarily of its Euro net assets. For the three months ended March 31, 2019 and 2018, these hedges of net investments resulted in gains (losses), net of income taxes, of $291 million and $(757) million, respectively, principally related to changes in the exchange rates between the Euro and U.S. dollar. These gains (losses) were reported as a component of accumulated other comprehensive losses within currency translation adjustments, and were substantially offset by the losses and gains generated on the underlying assets. For the three months ended March 31, 2019 and 2018, the gains for amounts excluded from the effectiveness testing recognized in earnings were $56 million and $67 million, respectively, and were accounted for in interest expense, net, on the condensed consolidated statement of earnings. The premiums paid for, and settlements of, net investment hedges are included in investing cash flows on PMI’s condensed consolidated statements of cash flows.

Other Derivatives

PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in marketing, administration and research costs in PMI’s condensed consolidated statements of earnings. For the three months ended March 31, 2019 and 2018, the gains (losses) from contracts for which PMI did not apply hedge accounting were $(7) million and $95 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.


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

For the three months ended March 31, 2019 and 2018, the net impact of these contracts on the condensed consolidated statements of earnings was not material.
 
 
 
 
 
 
 
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 Three Months Ended March 31,
 
2019
2018
Gain as of January 1,
$
35

$
42

Derivative (gains)/losses transferred to earnings
(4
)
2

Change in fair value
(1
)
(64
)
Gain/(loss) as of March 31,
$
30

$
(20
)
At March 31, 2019, PMI expects $23 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 12 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 limit and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.
Fair Value
See Note 11. Fair Value Measurements and Note 13. Balance Sheet Offsetting for additional discussion of derivative financial instruments.

Note 6. Earnings Per Share:
Basic and diluted earnings per share (“EPS”) were calculated using the following:
(in millions)
For the Three Months Ended March 31,
 
2019
2018
Net earnings attributable to PMI
$
1,354

$
1,556

Less distributed and undistributed earnings attributable to share-based payment awards
4

3

Net earnings for basic and diluted EPS
$
1,350

$
1,553

Weighted-average shares for basic EPS
1,555

1,553

Plus contingently issuable performance stock units (PSUs)
1

1

Weighted-average shares for diluted EPS
1,556

1,554


Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and therefore are included in PMI’s earnings per share calculation pursuant to the two-class method.


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

For the 2019 and 2018 computations, there were no antidilutive stock awards.

Note 7. Segment Reporting:

PMI’s subsidiaries and affiliates are engaged in the manufacture and sale of cigarettes and other nicotine-containing products, including RRPs, in markets outside of the United States of America. Reportable segments for PMI are organized by geographic region and managed by segment managers who are responsible for the operating and financial results of the regions inclusive of all product categories sold in the region. PMI’s reportable segments are the European Union; Eastern Europe; Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Latin America & Canada. PMI records net revenues and operating income to its segments based upon the geographic area in which the customer resides.

PMI’s chief operating decision maker evaluates segment performance and allocates resources based on regional operating income, which includes results from all product categories sold in each region.

PMI disaggregates its net revenue from contracts with customers by both geographic location and product category for each of PMI's six reportable segments, as PMI believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.

Segment data were as follows:
(in millions)
For the Three Months Ended March 31,
 
2019
2018
Net revenues:
 
 
European Union
$
2,159

$
1,988

Eastern Europe
579

567

Middle East & Africa
927

961

South & Southeast Asia
1,113

1,081

East Asia & Australia
1,321

1,591

Latin America & Canada
652

708

Net revenues
$
6,751

$
6,896

Operating income (loss):
 
 
European Union
$
896

$
740

Eastern Europe
129

151

Middle East & Africa
344

374

South & Southeast Asia
440

429

East Asia & Australia
427

515

Latin America & Canada
(186
)
217

Operating income
$
2,050

$
2,426


Items affecting the comparability of results from operations were as follows:

•
Asset impairment and exit costs - See Note 19. Asset Impairment and Exit Costs for details of the $20 million pre-tax charge included in the South & Southeast Asia segment for the three months ended March 31, 2019.
•
Canadian tobacco litigation-related expense - See Note 8. Contingencies and Note 20. Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Latin America & Canada segment for the three months ended March 31, 2019.
•
Loss on deconsolidation of RBH - See Note 20. Deconsolidation of RBH for details of the $239 million loss included in the Latin America & Canada segment for the three months ended March 31, 2019.

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


PMI's net revenues by product category were as follows:
(in millions)
For the Three Months Ended March 31,
 
2019
2018
Net revenues:
 
 
Combustible products:
 
 
European Union
$
1,812

$
1,836

Eastern Europe
471

527

Middle East & Africa
829

884

South & Southeast Asia
1,113

1,081

East Asia & Australia
638

737

Latin America & Canada
646

704

Total combustible products
$
5,508

$
5,769

Reduced-risk products:
 
 
European Union
$
347

$
152

Eastern Europe
108

40

Middle East & Africa
98

77

South & Southeast Asia
—

—

East Asia & Australia
683

854

Latin America & Canada
6

4

Total reduced-risk products
$
1,243

$
1,127

 
 
 
Total PMI net revenues
$
6,751

$
6,896

Note: Sum of product categories or Regions might not foot to total PMI due to roundings.

Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's cigarettes and other tobacco products combined. Other tobacco products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include reduced-risk products.

Net revenues related to reduced-risk products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's heated tobacco units, IQOS devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor products.

PMI recognizes revenue, when control is transferred to the customer, typically either upon shipment or delivery of goods.


Note 8. Contingencies:
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. Our indemnitees include distributors, licensees, and others that have been named as parties in certain cases and that we have agreed to defend, as well as to pay costs and some or all of judgments, if any, that may be entered against them. Pursuant to the terms of the Distribution Agreement between Altria Group, Inc. (“Altria”) and PMI, PMI will indemnify Altria and Philip Morris USA Inc. (“PM USA”), a U.S. tobacco subsidiary of Altria, for tobacco product claims based in substantial part on products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for tobacco product claims based in substantial part on products manufactured by PM USA, excluding tobacco products contract manufactured for PMI.

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

It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation.
Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Canada, Israel and Nigeria, range into the billions of U.S. dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. However, as discussed below, we have to date been largely successful in defending tobacco-related litigation.
We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, except as stated otherwise in this Note 8. Contingencies, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.
It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.    
CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary, Rothmans, Benson & Hedges Inc. (“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited, sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, March 8, and March 12, respectively. CCAA is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course. The initial CCAA order made by the Ontario Superior Court on March 22, 2019 authorizes RBH to pay all expenses incurred in carrying on its business in the ordinary course after the CCAA filing, including obligations to employees, vendors, and suppliers. As further described in Note 20. Deconsolidation of RBH, RBH is now deconsolidated from our consolidated financial statements. As part of the CCAA proceedings, there is currently a comprehensive stay up to and including June 28, 2019 of all tobacco-related litigation pending in Canada against RBH and the other defendants, including PMI and our indemnitees (PM USA and Altria), namely, the smoking and health class actions filed in various Canadian provinces and health care cost recovery actions. These proceedings are presented below under the caption “Stayed Litigation — Canada.” Ernst & Young Inc. has been appointed as monitor of RBH in the CCAA proceedings. In accordance with the CCAA process, as the parties work towards a plan of arrangement or compromise, it is anticipated that the court will set additional hearings and further extend the stay of proceedings. On April 17, 2019, the Ontario Superior Court ruled that RBH and the other defendants will not be allowed to file an application to the Supreme Court of Canada for leave to appeal the Court of Appeal’s decision in the Létourneau and the Blais cases so long as the comprehensive stay of all tobacco-related litigation in Canada remains in effect and that the time period to file the application would be extended by the stay period. While RBH believes that the findings of liability and damages in both Létourneau and the Blais cases were incorrect, the CCAA proceedings will provide a forum for RBH to seek resolution through a plan of arrangement or compromise of all tobacco-related litigation pending in Canada. It is not possible to predict the resolution of the underlying legal proceedings or the length of the CCAA process.




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

Stayed Litigation — Canada

Smoking and Health Litigation — Canada

In the first class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, RBH and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are defendants. The plaintiffs, an anti-smoking organization and an individual smoker, sought compensatory and punitive damages for each member of the class who allegedly suffers from certain smoking-related diseases. The class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $11.6 billion). The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion, including pre-judgment interest (approximately $2.32 billion)). In addition, the trial court awarded CAD 90,000 (approximately $67,370) in punitive damages, allocating CAD 30,000 (approximately $22,460) to RBH. The trial court estimated the disease class at 99,957 members. RBH appealed to the Court of Appeal of Quebec. In October 2015, the Court of Appeal ordered RBH to furnish security totaling CAD 226 million (approximately $169.2 million) to cover both the Létourneau and Blais cases, which RBH has paid in installments through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD 758 million (approximately $567.4 million) in installments through June 2017. JTI Macdonald Corp. was not required to furnish security in accordance with plaintiffs’ motion. The Court of Appeal ordered that the security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon further order of the Court of Appeal. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the compensatory and punitive damages award while reducing the total amount of compensatory damages to approximately CAD 13.5 billion including interest (approximately $10.1 billion) due to the trial court’s error in the calculation of interest. The compensatory damages award is on a joint and several basis with an allocation of 20% to RBH (approximately CAD 2.7 billion, including pre-judgment interest (approximately $2.02 billion)). The Court of Appeal upheld the trial court’s findings that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking and by conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either need not prove, or had adequately proven, that these faults were a cause of the class members’ injuries. In accordance with the judgment, defendants are required to deposit their respective portions of the damages awarded in both the Létourneau case described below and the Blais case, approximately CAD 1.1 billion (approximately $823.4 million), into trust accounts within 60 days. RBH’s share of the deposit is approximately CAD 257 million (approximately $192.4 million). PMI recorded a pre-tax charge of $194 million in its consolidated results, representing $142 million net of tax, as tobacco litigation-related expense, in the first quarter of 2019. The charge reflects PMI’s assessment of the portion of the judgment that it believes is probable and estimable at this time and corresponds to the trust account deposit required by the judgment.

In the second class action pending in Canada, Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, RBH and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are defendants.  The plaintiff, an individual smoker, sought compensatory and punitive damages for each member of the class who is deemed addicted to smoking. The class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and awarded a total of CAD 131 million (approximately $98.1 million) in punitive damages, allocating CAD 46 million (approximately $34.4 million) to RBH. The trial court estimated the size of the addiction class at 918,000 members but declined to award compensatory damages to the addiction class because the evidence did not establish the claims with sufficient accuracy. The trial court found that a claims process to allocate the awarded punitive damages to individual class members would be too expensive and difficult to administer. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the total amount of punitive damages awarded allocating CAD 57 million including interest (approximately $42.7 million) to RBH. See the Blais description above and Note 20. Deconsolidation of RBH below for further detail concerning the security order pertaining to both Létourneau and Blais cases and the impact of the decision on PMI’s financial statements.

RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention of applicable law on several grounds including the following: (i) defendants had no obligation to warn class members who knew, or should have known, of the risks of smoking; (ii) defendants cannot be liable to class members who would have smoked regardless of what warnings were given; and (iii) defendants cannot be liable to all class members given the individual differences between class members.

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

In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Saskatchewan, Canada, filed July 10, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer, as well as restitution of profits.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al., The Supreme Court (trial court), Nova Scotia, Canada, filed June 18, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with the complaint.
In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.

In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.

In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice, filed June 20, 2012, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution of profits.

Health Care Cost Recovery Litigation — Canada
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British

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

Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related wrong.”
In the second health care cost recovery case filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen's Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario Superior Court of Justice, Toronto, Canada, filed September 29, 2009, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Ontario based on legislation enacted in the province. This legislation is similar to the laws introduced in British Columbia and New Brunswick that authorize the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of Newfoundland and Labrador, St. Johns, Canada, filed February 8, 2011, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Newfoundland and Labrador based on legislation enacted in the province that is similar to the laws introduced in British Columbia, New Brunswick and Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fifth health care cost recovery case filed in Canada, Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court of Quebec, Canada, filed June 8, 2012, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The claim was filed by the government of the province of Quebec based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the sixth health care cost recovery case filed in Canada, Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court of Queen's Bench Alberta, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Alberta based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans, Benson & Hedges, Inc., et al., The Queen's Bench, Winnipeg Judicial Centre, Canada, filed May 31, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Manitoba based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the eighth health care cost recovery case filed in Canada, The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et al., Queen's Bench, Judicial Centre of Saskatchewan, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Saskatchewan based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Prince Edward Island based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action

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against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”

In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”

__________
The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our subsidiaries or indemnitees as of April 23, 2019, April 24, 2018 and April 25, 2017:¹

Type of Case
 
Number of Cases Pending as of April 23, 2019
 
Number of Cases Pending as of April 24, 2018
 
Number of Cases Pending as of April 25, 2017
Individual Smoking and Health Cases
 
53
 
62
 
63
Smoking and Health Class Actions
 
10
 
11
 
11
Health Care Cost Recovery Actions
 
16
 
16
 
16
Label-Related Class Actions
 
1
 
1
 
—
Individual Label-Related Cases
 
7
 
1
 
1
Public Civil Actions
 
2
 
2
 
2

Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 493 Smoking and Health, Label-Related, Health Care Cost Recovery, and Public Civil Actions in which we and/or one of our subsidiaries and/or indemnitees were a defendant have been terminated in our favor. Thirteen cases have had decisions in favor of plaintiffs. Nine of these cases have subsequently reached final resolution in our favor and four remain on appeal.

The table below lists the verdict and significant post-trial developments in the four pending cases where a verdict was returned in favor of the plaintiff:
Date
  
Location of
Court/Name of
Plaintiff
  
Type of
Case
  
Verdict
  
Post-Trial
Developments
February 2004
  
Brazil/The Smoker Health Defense Association
  
Class Action
  
The Civil Court of São Paulo found defendants liable without hearing evidence. In April 2004, the court awarded “moral damages” of R$1,000 (approximately $255) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not assess actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling.
  
Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November 2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In May 2011, the trial court dismissed the claim. In March 2017, plaintiff filed an en banc appeal to the Superior Court of Justice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the lawsuit. Both appeals are still pending.
______
¹ Includes cases pending in Canada.


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Date
  
Location of
Court/Name of
Plaintiff
  
Type of
Case
  
Verdict
  
Post-Trial
Developments
May 27, 2015
  
Canada/Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais

  
Class Action
  
On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Blais class on liability and found the class members’ compensatory damages totaled approximately CAD 15.5 billion (approximately $11.6 billion), including pre-judgment interest. The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion including pre-judgment interest (approximately $2.32 billion)). The trial court awarded CAD 90,000 (approximately $67,370) in punitive damages, allocating CAD 30,000 (approximately $22,460) to our subsidiary. The trial court ordered defendants to pay CAD 1 billion (approximately $748.6 million) of the compensatory damage award, CAD 200 million (approximately $149.7 million) of which is our subsidiary’s portion, into a trust within 60 days.
  
In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.)


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Date
  
Location of
Court/Name of
Plaintiff
  
Type of
Case
  
Verdict
  
Post-Trial
Developments
May 27, 2015
  
Canada/Cecilia Létourneau
  
Class Action
  
On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Létourneau class on liability and awarded a total of CAD 131 million (approximately $98.1 million) in punitive damages, allocating CAD 46 million (approximately $34.4 million) to RBH. The trial court ordered defendants to pay the full punitive damage award into a trust within 60 days. The court did not order the payment of compensatory damages.
  
In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.)

Date
  
Location of
Court/Name of
Plaintiff
  
Type of
Case
  
Verdict
  
Post-Trial
Developments
August 5, 2016
 
Argentina/Hugo Lespada
 
Individual Action
 
On August 5, 2016, the Civil Court No. 14 - Mar del Plata, issued a verdict in favor of plaintiff, an individual smoker, and awarded him ARS 110,000 (approximately $2,628), plus interest, in compensatory and moral damages. The trial court found that our subsidiary failed to warn plaintiff of the risk of becoming addicted to cigarettes.
 
On August 23, 2016, our subsidiary filed its notice of appeal. On October 31, 2017, the Civil and Commercial Court of Appeals of Mar del Plata ruled that plaintiff's claim was barred by the statute of limitations and it reversed the trial court's decision. On November 28, 2017, plaintiff filed an extraordinary appeal of the reversal of the trial court's decision to the Supreme Court of the Province of Buenos Aires.

Pending claims related to tobacco products generally fall within the following categories:
Smoking and Health Litigation: These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a class or purported class of individual plaintiffs. Plaintiffs' allegations of liability in these cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute of limitations.

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As of April 23, 2019, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:

•
53 cases brought by individual plaintiffs in Argentina (32), Brazil (8), Canada (2), Chile (4), Costa Rica (1), Italy (1), the Philippines (1), Poland (2), Turkey (1) and Scotland (1), compared with 62 such cases on April 24, 2018, and 63 cases on April 25, 2017; and
•
10 cases brought on behalf of classes of individual plaintiffs in Brazil (1) and Canada (9), compared with 11 such cases on April 24, 2018 and 11 such cases on April 25, 2017.

The class actions pending in Canada are described above under the caption “Smoking and Health Litigation — Canada.”

In the class action pending in Brazil, The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for all addicted smokers and former smokers, and injunctive relief. In 2004, the trial court found defendants liable without hearing evidence and awarded “moral damages” of R$1,000 (approximately $255) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class was not estimated. Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November 2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In May 2011, the trial court dismissed the claim. In February 2015, the appellate court unanimously dismissed plaintiff's appeal. In September 2015, plaintiff appealed to the Superior Court of Justice. In February 2017, the Chief Justice of the Superior Court of Justice denied plaintiff's appeal. In March 2017, plaintiff filed an en banc appeal to the Superior Court of Justice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the lawsuit. Both appeals are still pending.

Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.
As of April 23, 2019, there were 16 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Canada (10), Korea (1) and Nigeria (5), compared with 16 such cases on April 24, 2018 and 16 such cases on April 25, 2017.

The health care cost recovery actions pending in Canada are described above under the caption “Health Care Cost Recovery Litigation — Canada.”
In the first health care cost recovery case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed March 13, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.
In the second health care cost recovery case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.

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In the third health care cost recovery case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2011, the court ruled that the plaintiff had not complied with the procedural steps necessary to serve us. As a result of this ruling, plaintiff must re-serve its claim. We have not yet been re-served.
In the fourth health care cost recovery case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, we and other members of the industry are defendants. Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We challenged service as improper. In June 2010, the court ruled that plaintiffs did not have leave to serve the writ of summons on the defendants and that they must re-serve the writ. We have not yet been re-served.
In the fifth health care cost recovery case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In May 2010, the trial court rejected our service objections. We have appealed.
In the health care cost recovery case in Korea, the National Health Insurance Service v. KT&G, et. al., filed April 14, 2014, our subsidiary and other Korean manufacturers are defendants. Plaintiff alleges that defendants concealed the health hazards of smoking, marketed to youth, added ingredients to make their products more harmful and addictive, and misled consumers into believing that Lights cigarettes are safer than regular cigarettes. The National Health Insurance Service seeks to recover damages allegedly incurred in treating 3,484 patients with small cell lung cancer, squamous cell lung cancer, and squamous cell laryngeal cancer from 2003 to 2012. The case is now in the evidentiary phase.

Label-Related Cases: These cases, brought by individual plaintiffs, or on behalf of a class or purported class of individual plaintiffs, allege that the use of the descriptor “Lights” or other alleged misrepresentations or omissions of labeling information constitute fraudulent and misleading conduct. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution, injunctive relief, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the risk, and statute of limitations.

As of April 23, 2019, there were 7 label-related cases brought by individual plaintiffs in Italy (1) and Chile (6) pending against our subsidiaries, compared with 1 such case on April 24, 2018, and 1 such case on April 25, 2017, and one purported class action in Israel (1).

An individual plaintiff filed a purported class action certification motion, Aharon Ringer v. Philip Morris Ltd. and Globrands Ltd., on July 18, 2017, in the Central District Court of Israel. Our Israeli affiliate and an Israeli importer and distributor for other multinational tobacco companies are defendants. Plaintiff seeks to represent a class of smokers in Israel who have purchased cigarettes imported by defendants since July 18, 2010. Plaintiff estimates the class size to be 7,000,000 smokers. Plaintiff alleges that defendants misled consumers by not disclosing sufficient information about carbon monoxide, tar, and nicotine yields of, and tobacco contained in, the imported cigarettes. Plaintiff seeks various forms of relief, including an order for defendants to label cigarette packs in accordance with plaintiff’s demands, and damages for misleading consumers, breach of autonomy and unjust enrichment. Pre-class certification hearings began in March 2019, and the next hearing has been scheduled for September 2019.

Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.

As of April 23, 2019, there were 2 public civil actions pending against our subsidiaries in Argentina (1) and Venezuela (1), compared with 2 such cases on April 24, 2018, and 2 such cases on April 25, 2017.


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In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Argentina, filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer association, seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly caused by smoking. Our subsidiary filed its answer in September 2007. In March 2010, the case file was transferred to the Federal Court on Administrative Matters after the Civil Court granted plaintiff's request to add the national government as a co-plaintiff in the case. The case is currently in closing arguments.

In the public civil action in Venezuela, Federation of Consumers and Users Associations (“FEVACU”), et al. v. National Assembly of Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court, filed April 29, 2008, we were not named as a defendant, but the plaintiffs published a notice pursuant to court order, notifying all interested parties to appear in the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to health of the citizens of Venezuela and claim that the government failed to protect adequately its citizens' right to health. The claim asks the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and BAT's subsidiary as interested third parties. In February 2013, our subsidiary answered the complaint.

Reduced-Risk Products

In Israel, an individual filed a purported class action certification motion, Adir Natan vs. Philip Morris Ltd., in June 2017 against our subsidiary with the Israeli District Court of Haifa related to the marketing of our Platform 1 product. Plaintiff alleges that our affiliate misleads consumers by marketing such a product as a "better alternative to smoking" and as a reduced-risk product, while not disclosing the risks associated with the product.  Plaintiff alleges that this product is more addictive and more dangerous than cigarettes. Plaintiff claims that the first time he used this product, he experienced tightness in the chest, difficulty breathing, chills, nausea and dizziness.  Plaintiff seeks damages on his behalf, and on behalf of the class (defined as all Platform 1 consumers in Israel), for personal injuries, emotional distress, breach of autonomy, and unjust enrichment. Pre-class certification hearings have been scheduled to begin in May 2019.

Other Litigation

The Department of Special Investigations of the government of Thailand ("DSI") conducted an investigation into alleged underpayment by our subsidiary, Philip Morris (Thailand) Limited ("PM Thailand"), of customs duties and excise taxes relating to imports from the Philippines covering the period 2003-2007. On January 18, 2016, the Public Prosecutor filed charges against our subsidiary and seven former and current employees in the Bangkok Criminal Court alleging that PM Thailand and the individual defendants jointly and with the intention to defraud the Thai government, under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries of cigarettes from the Philippines during the period of July 2003 to June 2006. The government is seeking a fine of approximately THB 80.8 billion (approximately $2.53 billion). In May 2017, the King of Thailand signed a new customs act. The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies. Trial in the case began in November 2017. In March 2018, acting on a request from the Public Prosecutor, the court suspended the trial proceedings indefinitely and struck the case from the court list. In June 2018, the court reinstated the case and scheduled the remaining trial proceedings to resume in May 2019.

The DSI also conducted an investigation into alleged underpayment by PM Thailand of customs duties and excise taxes relating to imports from Indonesia covering the period 2000-2003. On January 26, 2017, the Public Prosecutor filed charges against PM Thailand and its former Thai employee in the Bangkok Criminal Court alleging that PM Thailand and its former employee jointly and with the intention to defraud the Thai government under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries during the period from January 2002 to July 2003. The government is seeking a fine of approximately THB 19.8 billion (approximately $620 million). In May 2017, the King of Thailand signed a new customs act. The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation Agreement of

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the World Trade Organization and Thai law, and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and a Thai court. Trial in the case began in November 2018.

The South Korean Board of Audit and Inspection (“BAI”) conducted an audit of certain Korean government agencies and the tobacco industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies, including Philip Morris Korea Inc. ("PM Korea"), our South Korean affiliate, were in compliance with South Korean tax laws.  In November 2016, the tax authorities completed their audit and assessed allegedly underpaid taxes and penalties.  In order to avoid nonpayment financial costs, PM Korea paid approximately KRW 272 billion (approximately $238 million), of which KRW 100 billion (approximately $87.6 million) was paid in 2016 and KRW 172 billion (approximately $151 million) was paid in the first quarter of 2017.  These amounts are included in other assets in the condensed consolidated balance sheets and in cash used in operating activities in the condensed consolidated statements of cash flows.  PM Korea is appealing the assessments. The tax authorities have also referred the matter to the Public Prosecutor. On June 19, 2018, the Public Prosecutor decided not to file criminal charges against PM Korea and/or other alleged co-offenders. The Public Prosecutor also decided not to prosecute PM Korea and its managing director in connection with a criminal complaint against them that had been filed by the South Korean Ministry of Strategy and Finance (“MOSF”). In the criminal complaint, the MOSF alleged that PM Korea exceeded the monthly product withdrawal limits that the MOSF had set in its notice. On March 5, 2019, the Supreme Prosecutor's Office dismissed both the tax authorities' and the MOSF's appeals on the decisions of the Public Prosecutor, concluding the criminal investigations in these matters.

A putative shareholder class action lawsuit, Rubenstahl v. Philip Morris International Inc., et al., was filed in December 2017, in the United States District Court for the District of New Jersey, purportedly on behalf of purchasers of Philip Morris International Inc. stock between July 26, 2016 and December 20, 2017.  The lawsuit names Philip Morris International Inc. and certain officers as defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information about PMI’s business, operations, financial condition, and prospects, related to alleged irregularities in clinical studies of PMI’s Platform 1 product.  The lawsuit sought various forms of relief, including damages. On March 4, 2019, this lawsuit was voluntarily dismissed by the plaintiff due to similar allegations in the cases below.
 
A putative shareholder class action lawsuit, City of Westland Police and Fire Retirement System v. Philip Morris International Inc., et al., was filed in September 2018, in the United States District Court for the Southern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between February 8, 2018 and April 18, 2018.  The lawsuit names Philip Morris International Inc. and certain officers as defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information about PMI’s business, operations, financial condition, and prospects related to product sales, including those of PMI's Platform 1 products.  The lawsuit seeks various forms of relief, including damages. We believe that this lawsuit is without merit and intend to defend it vigorously. In November 2018, the Court consolidated this lawsuit with the other putative shareholder class action lawsuits pending in the Southern District of New York.
 
A putative shareholder class action lawsuit, Greater Pennsylvania Carpenters’ Pension Fund v. Philip Morris International Inc., et al., was filed in September 2018, in the United States District Court for the Southern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between July 26, 2016 and April 18, 2018. The lawsuit names Philip Morris International Inc. and certain officers as defendants and seeks to combine the allegations and putative classes of the two cases discussed immediately above. The lawsuit seeks various forms of relief, including damages. We believe that this lawsuit is without merit and intend to defend it vigorously.

A putative shareholder class action lawsuit, Gilchrist v. Philip Morris International Inc., et al., was filed in October 2018, in the United States District Court for the Southern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between February 8, 2018 and April 18, 2018. The lawsuit names Philip Morris International Inc. and certain officers as defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information about PMI's business, operations, financial condition, and prospects related to product sales, including those of PMI's Platform 1 products. The lawsuit seeks various forms of relief, including damages. We have not yet been served with the complaint, but believe this lawsuit is without merit and intend to defend it vigorously.

We are also involved in additional litigation arising in the ordinary course of our business. While the outcomes of these proceedings are uncertain, management does not expect that the ultimate outcomes of other litigation, including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our consolidated results of operations, cash flows or financial position.

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Note 9. Income Taxes:
Income tax provisions for jurisdictions outside the United States of America, as well as state and local income tax provisions, were determined on a separate company basis, and the related assets and liabilities were recorded in PMI’s condensed consolidated balance sheets.

PMI’s effective tax rates for the three months ended March 31, 2019 and 2018 were 22.6% and 25.5%, respectively. The effective tax rate for the three months ended March 31, 2019 was favorably impacted by the reversal of a deferred tax liability on the unremitted earnings of PMI's Canadian subsidiary, RBH ($49 million) and by the Tax Cuts and Jobs Act. PMI estimates that its full-year 2019 effective tax rate will be approximately 23%. Changes in currency exchange rates, earnings mix by taxing jurisdiction or future regulatory developments may have an impact on the effective tax rates, which PMI monitors each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S. federal statute of limitations remains open for the years 2015 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years.

It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time.

Note 10. Indebtedness:
Short-term Borrowings:
PMI's short-term borrowings, consisting of commercial paper and bank loans to certain PMI subsidiaries at March 31, 2019 and December 31, 2018, had a carrying value of $1,551 million and $730 million, respectively. The fair value of PMI’s short-term borrowings, based on current market interest rates, approximates carrying value.

Long-term Debt:
At March 31, 2019 and December 31, 2018, PMI’s long-term debt consisted of the following:

(in millions)
 
March 31, 2019
 
December 31, 2018
U.S. dollar notes, 1.875% to 6.375% (average interest rate 3.499%), due through 2044
 
$
18,879

 
$
20,819

Foreign currency obligations:
 
 
 
 
Euro notes, 0.625% to 3.125% (average interest rate 2.250%), due through 2037
 
8,498

 
8,656

Swiss franc notes, 0.750% to 2.000% (average interest rate 1.337%), due through 2024
 
1,155

 
1,374

Other (average interest rate 3.272%), due through 2024
 
181

 
180

 
 
28,713

 
31,029

Less current portion of long-term debt
 
5,582

 
4,054

 
 
$
23,131

 
$
26,975


Other foreign currency debt above includes mortgage debt in Switzerland and finance lease obligations at March 31, 2019 and December 31, 2018.
 
 
 
 
 
 
 
 
 
Credit Facilities:

On January 28, 2019, PMI entered into an agreement to extend the term of its $2.0 billion 364-day revolving credit facility from February 5, 2019, to February 4, 2020.

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


At March 31, 2019, PMI's total committed credit facilities were as follows:

(in billions)


Type
 
Committed
Credit
Facilities
364-day revolving credit, expiring February 4, 2020
 
$
2.0

Multi-year revolving credit, expiring February 28, 2021
 
2.5

Multi-year revolving credit, expiring October 1, 2022
 
3.5

Total facilities
 
$
8.0


At March 31, 2019, there were no borrowings under these committed credit facilities, and the entire committed amounts were available for borrowing.

Note 11. Fair Value Measurements:
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of input that may be used to measure fair value, which are as follows:
Level 1 -
Quoted prices in active markets for identical assets or liabilities;
Level 2 -
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 -
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Equity Securities

The fair value of PMI’s equity securities, which are determined by using quoted prices in active markets, have been classified within Level 1.

Derivative Financial Instruments

PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative financial instruments have been classified within Level 2 in the table shown below. See Note 5. Financial Instruments for additional discussion of derivative financial instruments.

Debt

The fair value of PMI’s outstanding debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest rates currently available to PMI for issuances of debt with similar terms and remaining maturities. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $36 million of finance leases, was $28,677 million at March 31, 2019.

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

The fair value of PMI’s outstanding debt, excluding the aforementioned short-term borrowings and finance leases, was classified within Level 1 and Level 2 in the table shown below.

The aggregate fair values of PMI’s equity securities, derivative financial instruments and debt as of March 31, 2019, were as follows:
(in millions)
 
Fair Value at March 31, 2019
 
Quoted Prices
in Active
Markets for
Identical
Assets/Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
320

 
$
320

 
$
—

 
$
—

Derivative contracts
 
359

 
—

 
359

 
—

Total assets
 
$
679

 
$
320

 
$
359

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Debt
 
$
29,787

 
$
29,626

 
$
161

 
$
—

Derivative contracts
 
566

 
—

 
566

 
—

Total liabilities
 
$
30,353

 
$
29,626

 
$
727

 
$
—


Note 12. Accumulated Other Comprehensive Losses:
PMI’s accumulated other comprehensive losses, net of taxes, consisted of the following:
 
(in millions)
 
At March 31, 2019
 
At December 31, 2018
 
At March 31, 2018
Currency translation adjustments
 
$
(5,711
)
 
$
(6,500
)
 
$
(6,097
)
Pension and other benefits
 
(3,556
)
 
(3,646
)
 
(2,766
)
Derivatives accounted for as hedges
 
30

 
35

 
(20
)
Total accumulated other comprehensive losses
 
$
(9,237
)
 
$
(10,111
)
 
$
(8,883
)

Reclassifications from Other Comprehensive Earnings

The movements in accumulated other comprehensive losses and the related tax impact, for each of the components above, that are due to current period activity and reclassifications to the income statement, including those related to the deconsolidation of RBH, are shown on the condensed consolidated statements of comprehensive earnings for the three months ended March 31, 2019 and 2018. For additional information, see Note 3. Benefit Plans for disclosures related to PMI's pension and other benefits, Note 5. Financial Instruments for disclosures related to derivative financial instruments and Note 20. Deconsolidation of RBH for disclosures related to the deconsolidation of RBH.

Note 13. Balance Sheet Offsetting:

Derivative Financial Instruments

PMI uses foreign exchange contracts and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the condensed consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. See Note 5. Financial Instruments for disclosures related to PMI's derivative financial instruments.


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

The effects of these derivative financial instrument assets and liabilities on PMI's condensed consolidated balance sheets were as follows:
 
(in millions)
Gross Amounts Recognized
Gross Amount Offset in the Condensed Consolidated Balance Sheet
Net Amounts Presented in the Condensed Consolidated Balance Sheet
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
 
 
Financial Instruments
Cash Collateral Received/Pledged
Net Amount
 
 
 
 
 
 
 
 
 
 
At March 31, 2019
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Derivative contracts
$
359

$
—

$
359

$
(291
)
$
(46
)
$
22

 
Liabilities
 
 
 
 
 
 
 
Derivative contracts
$
566

$
—

$
566

$
(291
)
$
(268
)
$
7

 
At December 31, 2018
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Derivative contracts
$
220

$
—

$
220

$
(124
)
$
(80
)
$
16

 
Liabilities
 
 
 
 
 
 
 
Derivative contracts
$
631

$
—

$
631

$
(124
)
$
(427
)
$
80



Note 14. Investments in Unconsolidated Subsidiaries, Equity Securities and Other Related Parties:

Investments in unconsolidated subsidiaries:

At March 31, 2019 and December 31, 2018, PMI had total investments in unconsolidated subsidiaries of $1,024 million and $981 million, respectively, which were accounted for under the equity method of accounting. Equity method investments are initially recorded at cost. Under the equity method of accounting, the investment is adjusted for PMI's proportionate share of earnings or losses, dividends, capital contributions and movements in currency translation adjustments. The carrying value of our equity method investments at March 31, 2019 and December 31, 2018 exceeded our share of the unconsolidated subsidiaries' book value by $863 million and $835 million, respectively. The difference between the investment carrying value and the amount of underlying equity in net assets, excluding $821 million and $793 million attributable to goodwill as of March 31, 2019 and December 31, 2018, respectively, is being amortized on a straight-line basis over the underlying assets' estimated useful lives of 10 to 20 years. At March 31, 2019 and December 31, 2018, PMI received year-to-date dividends from unconsolidated subsidiaries of $16 million and $118 million, respectively.

PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in Russia (Eastern Europe segment).

PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25% economic interest in Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by the Algerian state-owned enterprise Management et Développement des Actifs et des Ressources Holding ("MADAR Holding"), formerly known as Société Nationale des Tabacs et Allumettes SpA. STAEM, which is part of the Middle East & Africa segment, manufactures and distributes under license some of PMI’s brands.

The initial investments in Megapolis Distribution BV and EITA were recorded at cost and are included in investments in unconsolidated subsidiaries and equity securities on the condensed consolidated balance sheets.



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

Equity securities:

Following the deconsolidation of RBH, PMI recorded the continuing investment in RBH, PMI's wholly owned subsidiary, at fair value of $3,280 million at the date of deconsolidation, within investments in unconsolidated subsidiaries and equity securities. For further details, see Note 20. Deconsolidation of RBH. Transactions between PMI and RBH are considered to be related party transactions from the date of deconsolidation. For the period from the date of deconsolidation until March 31, 2019, transactions between PMI and RBH were not material.

Other related parties:

United Arab Emirates-based Trans-Emirates Trading and Investments (FZC) ("TTI") holds a 33% non-controlling interest in Philip Morris Misr LLC ("PMM"), an entity incorporated in Egypt which is consolidated in PMI’s financial statements in the Middle East & Africa segment. PMM sells, under license, PMI brands in Egypt through an exclusive distribution agreement with a local entity that is also controlled by TTI. Amounts in the tables below have been updated to reflect the transactions with this other related party for all periods. 

IPM India, PMI's consolidated subsidiary in the South & Southeast Asia segment, has a non-controlling interest of 43.7% held by Godfrey Phillips India Ltd, who also acts as contract manufacturer and distributor for IPM. Amounts in the tables below include transactions between these related parties, beginning in 2019. Prior periods do not include these transactions as they were not material.

Financial activity with unconsolidated subsidiaries and other related parties:

PMI’s net revenues with unconsolidated subsidiaries and the other related parties were as follows:
 
For the Three Months Ended March 31,
(in millions)
2019
2018
 
 
 
Net revenues:


Megapolis Group
$
359

$
357

Other
213

164

Net revenues (a)
$
572

$
521

(a) Net revenues exclude excise taxes and VAT billed to customers. Prior year's amounts have been reclassified to conform with the current year's presentation.

PMI’s balance sheet activity related to unconsolidated subsidiaries and the other related parties was as follows:
(in millions)
 
At March 31, 2019
At December 31, 2018
 
 
 
 
Receivables:
 



Megapolis Group
 
$
434

$
172

Other
 
150

136

Receivables
 
$
584

$
308

 
 
 
 
Payables:
 
 
 
Megapolis Group
 
$
2

$
—

Other
 
57

8

Payables
 
$
59

$
8

   

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

The activity primarily related to agreements with PMI’s unconsolidated subsidiaries and other related parties, which are in the ordinary course of business, and are primarily for distribution, contract manufacturing and licenses. PMI eliminated its respective share of all significant intercompany transactions with the equity method investees.

Note 15. Sale of Accounts Receivable:
To mitigate risk and enhance cash and liquidity management PMI sells trade receivables to unaffiliated financial institutions. These arrangements allow PMI to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from the condensed consolidated balance sheets. PMI sells trade receivables under two types of arrangements, servicing and non-servicing. For servicing arrangements, PMI continues to service the sold trade receivables on an administrative basis and does not act on behalf of the unaffiliated financial institutions. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material as of March 31, 2019 and March 31, 2018. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables have been sold to the unaffiliated financial institutions.

Cumulative trade receivables sold, including excise taxes, for the three months ended March 31, 2019 and 2018, were $2,407 million and $2,509 million, respectively. PMI’s operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the condensed consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as of March 31, 2019 and March 31, 2018, were $523 million, and $878 million, respectively. The net proceeds received are included in cash provided by operating activities in the condensed consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of trade receivables within marketing, administration and research costs in the condensed consolidated statements of earnings. For the three months ended March 31, 2019 and 2018, the loss on sale of trade receivables was immaterial.

Note 16. Product Warranty:

PMI's IQOS devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law. PMI generally provides in cost of sales for the estimated cost of warranty in the period the related revenue is recognized. PMI assesses the adequacy of its accrued product warranties and adjusts the amounts as necessary based on actual experience and changes in future estimates. Factors that affect product warranties may vary across markets but typically include product failure rates, logistics and service delivery costs, and warranty policies. PMI accounts for its product warranties within other accrued liabilities. At March 31, 2019 and December 31, 2018, these amounts were as follows:
 
For the Three Months Ended
For the Year Ended
(in millions)
March 31, 2019
December 31, 2018
Balance at beginning of period
$
67

$
71

Changes due to:
 
 
   Warranties issued
78

179

    Settlements
(39
)
(183
)
Balance at end of period
$
106

$
67


Note 17. Acquisitions:

On March 21, 2018, PMI acquired the remaining 49% interest in Tabacalera Costarricense, S.A. and Mendiola y Compañía, S.A. for a net purchase price of $95 million, which includes $2 million of contingent consideration. As a result, PMI now owns 100% of these Costa Rican affiliates. The purchase of the remaining 49% interest resulted in a decrease to PMI’s additional paid-in capital of $86 million.


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



Note 18. Leases:

PMI determines that a contract contains a lease if the contract conveys a right to control the use of the identified asset for a period of time in exchange for consideration. PMI’s operating leases are principally for real estate (office space, warehouses and retail store space) and vehicles. Lease expense is recognized on a straight-line basis over the lease term. Lease terms range from 1 year to 75 years, some of which include options to renew, which are reasonably certain to be renewed. Lease terms may also include options to terminate the lease. At lease commencement PMI recognizes lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately all of its operating leases. The recognition of the right of use asset and lease liability includes renewal options when it is reasonably certain that they will be exercised. The exercise of a lease renewal or termination option is at PMI’s discretion. Certain of PMI’s leases include payments that are based on changes to an index or on actual usage. These lease payments are adjusted periodically and are included within variable lease costs. For information regarding PMI’s immaterial finance leases, see Note 11. Fair Value Measurements.

Beginning in 2019, PMI accounts for lease and nonlease components as a single lease component with the exception of its vehicle leases, of which PMI accounts for the lease components separately from the nonlease components. Additionally, leases with an initial term of 12 months or less are not included in the right of use asset or lease liability on the condensed consolidated statement of financial position.

PMI’s operating leases at March 31, 2019 were as follows:
(in millions)
March 31, 2019
Assets:
 
Other assets

$
707

 
 
Liabilities:

 
Current

 
Accrued liabilities - Other
$
180

Noncurrent

 
Income taxes and other liabilities

526

Total lease liabilities

$
706


The components of PMI’s lease cost were as follows for the three months ended March 31, 2019:
(in millions)
March 31, 2019
Operating lease cost

$
60

Short-term lease cost
12

Variable lease cost
8

Total lease cost

$
80


For the three months ended March 31, 2019, lease costs of $19 million were recorded in cost of sales and $61 million were recorded in marketing, administration and research cost.


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

Maturity of PMI’s operating lease liabilities, on an undiscounted basis, as of March 31, 2019, were as follows (as calculated under the new guidance ASC 842 (Leases)):
(in millions)
Total
2019
$
159

2020
164

2021
120

2022
85

2023
63

Thereafter
313

Total lease payments

904

Less: Interest

198

Present value of lease liabilities

$
706


Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2018, were as follows (as calculated under legacy guidance ASC 840 (Leases)):
(in millions)
Total
2019
$
147

2020
103

2021
73

2022
52

2023
43

Thereafter
354

 
$
772


Other information related to PMI’s operating leases were as follows for the three months ended March 31, 2019:
(in millions)
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities in Operating cash flows

$
59

Leased assets obtained in exchange for new operating lease liabilities

$
53

Weighted-average remaining lease term (years)

10.4

Weighted-average discount rate(1)

4.7
%
(1) PMI’s weighted-average discount rate is based on its estimated pre-tax cost of debt adjusted for country-specific risk.

For further details, see Note 21. New Accounting Standards.

Note 19. Asset Impairment and Exit Costs:

As a part of global manufacturing footprint optimization, PMI recorded pre-tax asset impairment and exit costs of $20 million for the three months ended March 31, 2019, related to a plant closure in Pakistan. This total pre-tax charge was included in marketing, administration and research costs on the condensed consolidated statements of earnings and was included in the operating income of the South and Southeast Asia segment.


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



Note 20. Deconsolidation of RBH:

As discussed in Note 8. Contingencies, following the March 1, 2019 judgment of the Court of Appeal of Québec in two class action lawsuits against PMI's Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), PMI recorded in its consolidated results a pre-tax charge of $194 million, representing $142 million net of tax, in the first quarter of 2019. This pre-tax Canadian tobacco litigation-related expense was included in marketing, administration and research costs on PMI's condensed consolidated statement of earnings. The charge reflects PMI’s assessment of the portion of the judgment that it believes is probable and estimable at this time and corresponds to the trust account deposit required by the court. RBH’s share of the deposit is approximately CAD 257 million.

On March 22, 2019, RBH obtained an initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act ("CCAA"), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliers and employees.

The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements of control of the business from both PMI and RBH. As a result, PMI has determined that it no longer has a controlling financial interest over RBH as defined in ASC 810 (Consolidation), and PMI deconsolidated RBH as of the date of the CCAA filing. PMI has also determined that it does not exert "significant influence" over RBH as that term is defined in ASC 323 (Investments-Equity Method and Joint Ventures). Therefore, PMI will account for its continuing investment in RBH in accordance with ASC 321 (Investments-Equity Securities) as an equity security, without readily determinable fair value.

Following the deconsolidation, the carrying value of assets and liabilities of RBH was removed from the consolidated balance sheet of PMI, and the continuing investment in RBH was recorded at fair value at the date of deconsolidation. The total amount deconsolidated from PMI’s balance sheet was $3,519 million, including $1,323 million of cash, $1,463 million of goodwill, $529 million of accumulated other comprehensive earnings, primarily related to historical currency translation and $204 million of other assets and liabilities, net. While PMI is accounting for its investment in RBH as an equity security, PMI would recognize dividends as income upon receipt. However, while it remains under creditor protection, RBH does not anticipate paying dividends.

The fair value of PMI’s continuing investment in RBH of $3,280 million was determined at the date of deconsolidation, recorded within Investments in unconsolidated subsidiaries and equity securities and will be assessed for impairment on an ongoing basis. The estimated fair value of the underlying business was determined based on an income approach using a discounted cash flow analysis, as well as a market approach for certain contingent liabilities. The information used in the estimate includes observable inputs, primarily a discount rate of 8%, a terminal growth rate of 2.5% and information about total tobacco market size in Canada and RBH’s share of the market, as well as unobservable inputs such as operating budgets and strategic plans, various inflation scenarios, estimated shipment volumes, and expected product pricing and projected margins.

The difference between the carrying value of the assets and liabilities of RBH that were deconsolidated, and the fair value of the continuing investment, as determined at the date of deconsolidation, was $239 million, before tax, and this loss on deconsolidation is reflected within marketing, administration and research costs on PMI’s condensed consolidated statement of earnings for three months ended March 31, 2019. PMI also recorded a tax benefit of $49 million within the provision for income taxes, related to the reversal of a deferred tax liability on unremitted earnings of RBH.

RBH is party to transactions with PMI and its consolidated subsidiaries entered into prior to deconsolidation in the normal course of business; these transactions include royalty payments and recharge of various corporate expenses for services benefiting RBH. Up to the date of CCAA filing, these transactions were eliminated on consolidation and had no impact on PMI’s consolidated statement of earnings. After deconsolidating RBH, these transactions are treated as third-party transactions in PMI’s financial statements. From the date of deconsolidation to March 31, 2019, the amount of these related party transactions was not material. Additionally PMI’s consolidated balance sheet included an immaterial amount of receivables from RBH at March 31, 2019.

Developments in the CCAA process, including resolution through a plan of arrangement or compromise of all pending tobacco-related litigation currently stayed in Canada, as discussed in Note 8. Contingencies, could result in a material change in the fair value of PMI’s continuing investment in RBH.


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

Note 21. New Accounting Standards:

Recently adopted

On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. PMI has identified its lease management system and has identified and evaluated the applicable leases. In addition to the guidance in ASU 2016-02, PMI has evaluated ASU 2018-11, which was issued in July 2018 and provides an optional transitional method. As a result of this evaluation, PMI elected to use the optional transition method, which allows companies to use the effective date as the date of initial application on transition and not adjust comparative period financial information or make the new required disclosures for periods prior to the effective date. Additionally, PMI elected to use the hindsight practical expedient, as well as the package of practical expedients permitted under the transition guidance within the new standard. Upon adoption, PMI recognized lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately all of its operating leases in place at that time. At January 1, 2019, PMI's adoption of ASU 2016-02 resulted in an increase of approximately $0.7 billion on its assets and liabilities in its statement of financial position. ASU 2016-02 did not have a material impact on its results of operations or cash flows. For further details, see Note 18. Leases.

On January 1, 2019, PMI elected to early adopt ASU 2018-15 “Intangibles - Goodwill and Other-Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”  The adoption of ASU 2018-15 did not have a material impact on PMI's consolidated financial position or results of operations.

- 39-
Table of Contents


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of Our Company

We are leading a transformation in the tobacco industry to create a smoke-free future and ultimately replace cigarettes with smoke-free products to the benefit of adults who would otherwise continue to smoke, society, the company and its shareholders. We are a leading international tobacco company engaged in the manufacture and sale of cigarettes, smoke-free products and associated electronic devices and accessories, and other nicotine-containing products in markets outside the United States of America. We are building a future on a new category of smoke-free products that, while not risk-free, are a much better choice than continuing to smoke. Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure that our smoke-free products meet adult consumer preferences and rigorous regulatory requirements. Our smoke-free IQOS product portfolio includes heat-not-burn and nicotine-containing vapor products.

We manage our business in six reportable segments:

•
European Union ("EU");
•
Eastern Europe ("EE");
•
Middle East & Africa ("ME&A"), which includes our international duty free business;
•
South & Southeast Asia ("S&SA");
•
East Asia & Australia ("EA&A"); and
•
Latin America & Canada ("LA&C").

Our cigarettes are sold in more than 180 markets, and in many of these markets they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands. In addition to the manufacture and sale of cigarettes, we are engaged in the development and commercialization of reduced-risk products ("RRPs"). RRPs is the term we use to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continued smoking. 

We use the term net revenues to refer to our operating revenues from the sale of our products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume in more profitable markets versus shipment volume in less profitable markets (geographic mix).

Our cost of sales consists principally of: tobacco leaf, non-tobacco raw materials, labor and manufacturing costs; shipping and handling costs; and the cost of the IQOS devices produced by third-party electronics manufacturing service providers. Estimated costs associated with IQOS warranty programs are generally provided for in cost of sales in the period the related revenues are recognized.

Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related to the manufacture of our products (including general corporate expenses), and costs incurred to develop new products. The most significant components of our marketing, administration and research costs are marketing and sales expenses and general and administrative expenses.
Philip Morris International Inc. is a legal entity separate and distinct from its direct and indirect subsidiaries. Accordingly, our right, and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of dividends and repayment of debt from our subsidiaries. Our principal wholly owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or to make other distributions with respect to their common stock that are otherwise compliant with law.


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Executive Summary
The following executive summary provides significant highlights from the "Discussion and Analysis" that follows.

Consolidated Operating Results for the Three Months Ended March 31, 2019

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Net Revenues - Net revenues of $6.8 billion for the three months ended March 31, 2019 decreased by $145 million, or (2.1)%, from the comparable 2018 amount. The change in our net revenues from the comparable 2018 amount was driven by the following:
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During the quarter, net revenues, excluding unfavorable currency, increased by 3.2%, driven primarily by a favorable pricing variance, notably in Canada, Germany, Indonesia, Japan and the Philippines, partly offset by Argentina, Saudi Arabia and Turkey. Unfavorable geographic cigarette mix was largely offset by favorable volume of heated tobacco units. The currency-neutral growth in net revenues of 3.2% in the quarter came despite a challenging comparison with the first quarter of 2018 in which net revenues grew by 8.3%, excluding currency, partly fueled by higher IQOS device shipments in Japan. In addition, net revenues in the first quarter of 2018 were not impacted at that point by the move to highly inflationary accounting in Argentina that became effective July 1, 2018. Combined, these two items unfavorably impacted the currency-neutral net revenue growth rate of 3.2% in the quarter by approximately 3.4 points.

Net revenues by product category for the three months ended March 31, 2019 and 2018, are shown below:
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Diluted Earnings Per Share - The changes in our reported diluted earnings per share ("diluted EPS") for the three months ended March 31, 2019, from the comparable 2018