Edgar Filing: Philip Morris International Inc.

PM-06.30.12-10Q-DOC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012


( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33708



Philip Morris International Inc.

(Exact name of registrant as specified in its charter)



Virginia	13-3435103
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



120 Park Avenue New York, New York	10017
(Address of principal executive offices)	(Zip Code)



Registrant’s telephone number, including area code	(917) 663-2000

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

At July 31, 2012, there were 1,685,722,302 shares outstanding of the registrant’s common stock, no par value per share.

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Table of Contents

PHILIP MORRIS INTERNATIONAL INC.

TABLE OF CONTENTS



		Page No.

PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at
	June 30, 2012 and December 31, 2011	3 – 4

	Condensed Consolidated Statements of Earnings for the
	Six Months Ended June 30, 2012 and 2011	5
	Three Months Ended June 30, 2012 and 2011	6

	Condensed Consolidated Statements of Comprehensive Earnings for the
	Six Months Ended June 30, 2012 and 2011	7
	Three Months Ended June 30, 2012 and 2011	8

	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
	Six Months Ended June 30, 2012 and 2011	9

	Condensed Consolidated Statements of Cash Flows for the
	Six Months Ended June 30, 2012 and 2011	10 – 11

	Notes to Condensed Consolidated Financial Statements	12 – 35

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36 – 68

Item 4.	Controls and Procedures	69

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 6.	Exhibits	72

Signature		73

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

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)



	June 30, 2012		December 31, 2011
ASSETS
Cash and cash equivalents	$	3,846	$	2,550
Receivables (less allowances of $49 in 2012 and $45 in 2011)	3,553		3,201
Inventories:
Leaf tobacco	3,583		3,463
Other raw materials	1,102		1,185
Finished product	2,627		3,472
	7,312		8,120
Deferred income taxes	415		397
Other current assets	435		591
Total current assets	15,561		14,859
Property, plant and equipment, at cost	12,954		12,913
Less: accumulated depreciation	6,793		6,663
	6,161		6,250
Goodwill	9,737		9,928
Other intangible assets, net	3,614		3,697
Other assets	725		754
TOTAL ASSETS	$	35,798	$	35,488

See notes to condensed consolidated financial statements.

Continued

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Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

(in millions of dollars, except share data)

(Unaudited)



	June 30, 2012			December 31, 2011
LIABILITIES
Short-term borrowings	$	2,694		$	1,511
Current portion of long-term debt	3,284			2,206
Accounts payable	1,019			1,031
Accrued liabilities:
Marketing and selling	477			519
Taxes, except income taxes	5,344			5,346
Employment costs	769			894
Dividends payable	1,314			1,341
Other	833			873
Income taxes	968			897
Deferred income taxes	128			176
Total current liabilities	16,830			14,794
Long-term debt	14,824			14,828
Deferred income taxes	1,964			1,976
Employment costs	1,601			1,665
Other liabilities	433			462
Total liabilities	35,652			33,725
Contingencies (Note 10)
Redeemable noncontrolling interest (Note 7)	1,262			1,212
STOCKHOLDERS’ (DEFICIT) EQUITY
Common stock, no par value (2,109,316,331 shares issued in 2012 and 2011)	—			—
Additional paid-in capital	1,233			1,235
Earnings reinvested in the business	23,599			21,757
Accumulated other comprehensive losses	(3,376		)	(2,863		)
	21,456			20,129
Less: cost of repurchased stock (416,738,735 and 383,407,665 shares in 2012 and 2011, respectively)	22,822			19,900
Total PMI stockholders’ (deficit) equity	(1,366		)	229
Noncontrolling interests	250			322
Total stockholders’ (deficit) equity	(1,116		)	551
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	35,798		$	35,488

See notes to condensed consolidated financial statements.

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)



	For the Six Months Ended June 30,
	2012		2011
Net revenues	$	38,059	$	36,764
Cost of sales	5,108		5,139
Excise taxes on products	22,491		21,700
Gross profit	10,460		9,925
Marketing, administration and research costs	3,388		3,141
Asset impairment and exit costs	16		17
Amortization of intangibles	49		48
Operating income	7,007		6,719
Interest expense, net	422		421
Earnings before income taxes	6,585		6,298
Provision for income taxes	1,946		1,826
Net earnings	4,639		4,472
Net earnings attributable to noncontrolling interests	161		144
Net earnings attributable to PMI	$	4,478	$	4,328
Per share data (Note 8):
Basic earnings per share	$	2.60	$	2.42
Diluted earnings per share	$	2.60	$	2.42
Dividends declared	$	1.54	$	1.28

See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)



	For the Three Months Ended June 30,
	2012		2011
Net revenues	$	20,037	$	20,234
Cost of sales	2,666		2,844
Excise taxes on products	11,917		11,961
Gross profit	5,454		5,429
Marketing, administration and research costs	1,817		1,692
Asset impairment and exit costs	8		1
Amortization of intangibles	25		24
Operating income	3,604		3,712
Interest expense, net	209		208
Earnings before income taxes	3,395		3,504
Provision for income taxes	988		1,019
Net earnings	2,407		2,485
Net earnings attributable to noncontrolling interests	90		76
Net earnings attributable to PMI	$	2,317	$	2,409
Per share data (Note 8):
Basic earnings per share	$	1.36	$	1.35
Diluted earnings per share	$	1.36	$	1.35
Dividends declared	$	0.77	$	0.64

See notes to condensed consolidated financial statements.

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

(Unaudited)



	For the Six Months Ended June 30,
	2012			2011
Net earnings	$	4,639		$	4,472
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments, net of income taxes of ($33) in 2012 and $93 in 2011	(566		)	828
Change in net loss and prior service cost:
Net losses and prior service costs, net of income taxes of $- in 2012 and ($2) in 2011	(1		)	8
Less amortization of net losses, prior service costs and net transition costs, net of income taxes of ($21) in 2012 and ($12) in 2011	78			44
Change in fair value of derivatives accounted for as hedges:
(Gains)/losses transferred to earnings, net of income taxes of $1 in 2012 and ($2) in 2011	(12		)	14
Gains recognized, net of income taxes of ($1) in 2012 and $- in 2011	12			5
Change in fair value of equity securities	—			(1		)
Total other comprehensive (losses) earnings	(489		)	898
Total comprehensive earnings	4,150			5,370
Less comprehensive earnings attributable to:
Noncontrolling interests	86			112
Redeemable noncontrolling interest	99			52
Comprehensive earnings attributable to PMI	$	3,965		$	5,206

See notes to condensed consolidated financial statements.

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

(Unaudited)



	For the Three Months Ended June 30,
	2012			2011
Net earnings	$	2,407		$	2,485
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments, net of income taxes of ($55) in 2012 and ($20) in 2011	(1,027		)	(135		)
Change in net loss and prior service cost:
Net losses and prior service costs, net of income taxes of $- in 2012 and ($2) in 2011	(1		)	8
Less amortization of net losses, prior service costs and net transition costs, net of income taxes of ($9) in 2012 and ($5) in 2011	40			22
Change in fair value of derivatives accounted for as hedges:
(Gains)/losses transferred to earnings, net of income taxes of $- in 2012 and ($1) in 2011	(2		)	7
Losses recognized, net of income taxes of $4 in 2012 and $2 in 2011	(34		)	(17		)
Change in fair value of equity securities	—			(1		)
Total other comprehensive losses	(1,024		)	(116		)
Total comprehensive earnings	1,383			2,369
Less comprehensive earnings attributable to:
Noncontrolling interests	25			51
Redeemable noncontrolling interest	50			25
Comprehensive earnings attributable to PMI	$	1,308		$	2,293

See notes to condensed consolidated financial statements

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Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

for the Six Months Ended June 30, 2012 and 2011

(in millions of dollars, except per share amounts)

(Unaudited)



	PMI Stockholders’ (Deficit) Equity
	Common Stock		Additional Paid-in Capital			Earnings Reinvested in the Business			Accumulated Other Comprehensive Losses			Cost of Repurchased Stock			Noncontrolling Interests				Total
Balances, January 1, 2011	$	—	$	1,225		$	18,133		$	(1,140	)	$	(14,712	)	$	427			$	3,933
Net earnings						4,328									94			^(a)	4,422			^(a)
Other comprehensive earnings, net of income taxes									878						18			^(a)	896			^(a)
Exercise of stock options and issuance of other stock awards			(65		)							210							145
Dividends declared ($1.28 per share)						(2,283		)											(2,283		)
Payments to noncontrolling interests															(231		)		(231		)
Purchase of subsidiary shares from noncontrolling interests			(1		)										(1		)		(2		)
Common stock repurchased												(2,904		)					(2,904		)
Balances, June 30, 2011	$	—	$	1,159		$	20,178		$	(262	)	$	(17,406	)	$	307			$	3,976
Balances, January 1, 2012	$	—	$	1,235		$	21,757		$	(2,863	)	$	(19,900	)	$	322			$	551
Net earnings						4,478									74			^(a)	4,552			^(a)
Other comprehensive earnings (losses), net of income taxes									(513		)				12			^(a)	(501		)	^(a)
Exercise of stock options and issuance of other stock awards			(2		)							113							111
Dividends declared ($1.54 per share)						(2,636		)											(2,636		)
Payments to noncontrolling interests															(158		)		(158		)
Common stock repurchased												(3,035		)					(3,035		)
Balances, June 30, 2012	$	—	$	1,233		$	23,599		$	(3,376	)	$	(22,822	)	$	250			$	(1,116	)

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

See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)



	For the Six Months Ended June 30,
	2012			2011
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Net earnings	$	4,639		$	4,472

Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization	449			488
Deferred income tax benefit	(34		)	(30		)
Asset impairment and exit costs, net of cash paid	(4		)	(8		)
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net	(413		)	(250		)
Inventories	577			996
Accounts payable	80			186
Income taxes	20			142
Accrued liabilities and other current assets	(150		)	426
Pension plan contributions	(56		)	(50		)
Other	270			143
Net cash provided by operating activities	5,378			6,515

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

Capital expenditures	(476		)	(345		)
Purchases of businesses, net of acquired cash	—			(62		)
Other	(36		)	(14		)
Net cash used in investing activities	(512		)	(421		)

See notes to condensed consolidated financial statements.

Continued

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Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(in millions of dollars)

(Unaudited)



	For the Six Months Ended June 30,
	2012			2011
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Short-term borrowing activity by original maturity:
Net issuances (repayments) - maturities of 90 days or less	$	1,930		$	(1,206	)
Issuances - maturities longer than 90 days	478			—
Repayments - maturities longer than 90 days	(1,215		)	—
Long-term debt proceeds	2,981			990
Long-term debt repaid	(1,725		)	(35		)
Repurchases of common stock	(3,059		)	(2,922		)
Issuance of common stock	—			75
Dividends paid	(2,663		)	(2,308		)
Other	(215		)	(292		)
Net cash used in financing activities	(3,488		)	(5,698		)
Effect of exchange rate changes on cash and cash equivalents	(82		)	79

Cash and cash equivalents:
Increase	1,296			475
Balance at beginning of period	2,550			1,703
Balance at end of period	$	3,846		$	2,178

See notes to condensed consolidated financial statements.

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Background and Basis of Presentation:

Background

Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Throughout these financial statements, the term “PMI” refers to Philip Morris International Inc. and its subsidiaries.

Basis of Presentation

The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and such principles are applied on a consistent basis. It is the opinion of PMI’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings attributable to PMI for any interim period are not necessarily indicative of results that may be expected for the entire year.

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income, which became effective for PMI in the first quarter of 2012. Under the new guidance, PMI evaluated the presentation options and elected to present comprehensive earnings in a separate statement. As a result of this new standard, certain amounts reported in the prior year statements have been reclassified to conform to the current year presentation.

These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report to Shareholders and which are incorporated by reference into PMI’s Annual Report on Form 10-K for the year ended December 31, 2011.

Note 2. Asset Impairment and Exit Costs:

Pre-tax asset impairment and exit costs consisted of the following:



(in millions)	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2012		2011		2012		2011
Separation programs:
European Union	$	—	$	12	$	—	$	1
Eastern Europe, Middle East & Africa	—		2		—		—
Asia	—		2		—		—
Latin America & Canada	16		1		8		—
Total separation programs	16		17		8		1
Asset impairment and exit costs	$	16	$	17	$	8	$	1

Exit Costs

Separation Programs

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

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Movement in Exit Cost Liabilities

The movement in exit cost liabilities for the six months ended June 30, 2012 was as follows:



(in millions)
Liability balance, January 1, 2012	$	28
Charges	16
Cash spent	(20		)
Currency/other	(2		)
Liability balance, June 30, 2012	$	22

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

Note 3. Stock Plans:

In May 2012, PMI’s stockholders approved the Philip Morris International Inc. 2012 Performance Incentive Plan (the “2012 Plan”). The 2012 Plan replaced the 2008 Performance Incentive Plan (the “2008 Plan”) and, as a result, there will be no additional grants out of the 2008 Plan. Under the 2012 Plan, PMI may grant to eligible employees restricted stock, restricted stock units and deferred stock units, performance-based cash incentive awards and performance-based equity awards. While the 2008 Plan authorized incentive stock options, non-qualified stock options and stock appreciation rights, the 2012 Plan does not authorize any stock options or stock appreciation rights. Up to 30 million shares of PMI’s common stock may be issued under the 2012 Plan. At June 30, 2012, shares available for grant under the 2012 Plan were 29,998,940.

In 2008, PMI adopted the Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (the “Non-Employee Directors Plan”). A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the Non-Employee Directors Plan. As of June 30, 2012, shares available for grant under the plan were 798,801.

During the six months ended June 30, 2012, PMI granted 3.2 million shares of restricted and deferred stock awards to eligible employees at a weighted-average grant date fair value of $79.57 per share. During the six months ended June 30, 2011, PMI granted 3.8 million shares of restricted and deferred stock awards to eligible employees at a weighted average grant date fair value of $59.40 per share. PMI recorded compensation expense for restricted stock and deferred stock awards of $136 million and $81 million during the six months ended June 30, 2012 and 2011, respectively, and $59 million and $43 million during the three months ended June 30, 2012 and 2011, respectively. During the first quarter of 2012, compensation expense included approximately $27 million of accelerated expense primarily associated with employees approaching or reaching certain age milestones that accelerate the vesting. As of June 30, 2012, PMI had $337 million of total unrecognized compensation cost related to non-vested restricted and deferred stock awards. The cost is recognized over the original restriction period of the awards, which is typically three or more years after the date of the award, subject to earlier vesting on death or disability or normal retirement, or separation from employment by mutual agreement after reaching age 58.

During the six months ended June 30, 2012, 3.6 million shares of PMI restricted stock and deferred stock awards vested. The grant date fair value of all the vested shares was approximately $142 million. The total fair value of restricted stock and deferred stock awards that vested during the six months ended June 30, 2012 was approximately $288 million.

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4. Benefit Plans:

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

Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:



	U.S. Plans						Non-U.S. Plans
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
(in millions)	2012			2011			2012			2011
Service cost	$	4		$	3		$	96		$	85
Interest cost	8			9			96			101
Expected return on plan assets	(8		)	(8		)	(162		)	(156		)
Amortization:
Net loss	5			4			62			28
Prior service cost	1			—			4			4
Other	—			1			—			—
Net periodic pension cost	$	10		$	9		$	96		$	62



	U.S. Plans						Non-U.S. Plans
	For the Three Months Ended June 30,						For the Three Months Ended June 30,
(in millions)	2012			2011			2012			2011
Service cost	$	2		$	1		$	47		$	44
Interest cost	4			5			47			52
Expected return on plan assets	(4		)	(4		)	(78		)	(80		)
Amortization:
Net loss	2			2			31			14
Prior service cost	1			—			1			2
Net periodic pension cost	$	5		$	4		$	48		$	32

Employer Contributions

PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded U.S. and non-U.S. plans. Employer contributions of $56 million were made to the pension plans during the six months ended June 30, 2012. Currently, PMI anticipates making additional contributions during the remainder of 2012 of approximately $107 million to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5. Goodwill and Other Intangible Assets, net:

Goodwill and other intangible assets, net, by segment were as follows:



	Goodwill				Other Intangible Assets, net
(in millions)	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
European Union	$	1,351	$	1,392	$	642	$	663
Eastern Europe, Middle East & Africa	613		666		243		250
Asia	4,836		4,966		1,572		1,633
Latin America & Canada	2,937		2,904		1,157		1,151
Total	$	9,737	$	9,928	$	3,614	$	3,697

Goodwill is due primarily to PMI’s acquisitions in Canada, Indonesia, Mexico, Greece, Serbia, Colombia and Pakistan, as well as the business combination in the Philippines in February 2010. The movements in goodwill from December 31, 2011, were as follows:



(in millions)	European Union			Eastern Europe, Middle East & Africa			Asia			Latin America & Canada		Total
Balance at December 31, 2011	$	1,392		$	666		$	4,966		$	2,904	$	9,928
Changes due to:
Acquisitions	—			—			—			—		—
Currency	(41		)	(53		)	(130		)	33		(191		)
Balance at June 30, 2012	$	1,351		$	613		$	4,836		$	2,937	$	9,737

Additional details of other intangible assets were as follows:



	June 30, 2012				December 31, 2011
(in millions)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	2,034			$	2,067
Amortizable intangible assets	1,995		$	415	2,001		$	371
Total other intangible assets	$	4,029	$	415	$	4,068	$	371

Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007. Amortizable intangible assets primarily consist of certain trademarks, distribution networks and non-compete agreements associated with business combinations. The range of useful lives as well as the weighted-average remaining useful life of amortizable intangible assets at June 30, 2012 is as follows:



Description	Initial Estimated Useful Lives	Weighted-Average Remaining Useful Life
Trademarks	2 - 40 years	26	years
Distribution networks	20 - 30 years	16	years
Non-compete agreements	3 - 10 years	3	years
Other (including farmer contracts and intellectual property rights)	12.5 - 17 years	13	years

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Pre-tax amortization expense for intangible assets during the six months ended June 30, 2012 and 2011, was $49 million and $48 million, respectively, and $25 million and $24 million for the three months ended June 30, 2012 and 2011, respectively. Amortization expense for each of the next five years is estimated to be $98 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

The decrease in the gross carrying amount of other intangible assets from December 31, 2011, was due to currency movements.

During the first quarter of 2012, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential impairment, and no impairment charges were required as a result of this review.

Note 6. Financial Instruments:

Overview

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

PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps, foreign currency collars and foreign currency options, collectively referred to as foreign exchange contracts, to mitigate its exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At June 30, 2012, PMI had contracts with aggregate notional amounts of $16.0 billion. Of the $16.0 billion aggregate notional amount at June 30, 2012, $2.5 billion related to cash flow hedges, $3.4 billion related to hedges of net investments in foreign operations and $10.1 billion related to other derivatives that primarily offset currency exposures on intercompany financing.

The fair value of PMI’s foreign exchange contracts included in the condensed consolidated balance sheet as of June 30, 2012 and December 31, 2011, were as follows:



	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
(in millions)	Balance Sheet Classification	At June 30, 2012		At December 31, 2011		Balance Sheet Classification	At June 30, 2012		At December 31, 2011
Foreign exchange contracts designated as hedging instruments	Other current assets	$	91	$	57	Other accrued liabilities	$	6	$	4
	Other assets	3		—		Other liabilities	1		—
Foreign exchange contracts not designated as hedging instruments	Other current assets	50		88		Other accrued liabilities	56		62
						Other liabilities	1		—
Total derivatives		$	144	$	145		$	64	$	66

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Hedging activities, which represent movement in derivatives as well as the respective underlying transactions, had the following effect on PMI’s condensed consolidated statements of earnings and other comprehensive earnings for the six months and three months ended June 30, 2012 and 2011:



(in millions)	For the Six Months Ended June 30, 2012
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives		Income Taxes			Total
Statement of Earnings:
Net revenues	$	24				$	—				$	24
Cost of sales	19					—					19
Marketing, administration and research costs	—					—					—
Operating income	43					—					43
Interest expense, net	(30		)			6					(24		)
Earnings before income taxes	13					6					19
Provision for income taxes	(1		)			—					(1		)
Net earnings attributable to PMI	$	12				$	6				$	18
Other Comprehensive Earnings:
Gains transferred to earnings	$	(13	)					$	1		$	(12	)
Recognized gains	13							(1		)	12
Net impact on equity	$	—						$	—		$	—
Cumulative translation adjustment				$	—						$	—



(in millions)	For the Six Months Ended June 30, 2011
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives			Income Taxes			Total
Statement of Earnings:
Net revenues	$	—				$	—					$	—
Cost of sales	—					—						—
Marketing, administration and research costs	—					—						—
Operating income	—					—						—
Interest expense, net	(16		)			14						(2		)
Earnings before income taxes	(16		)			14						(2		)
Provision for income taxes	2					(4		)				(2		)
Net earnings attributable to PMI	$	(14	)			$	10					$	(4	)
Other Comprehensive Earnings:
Losses transferred to earnings	$	16							$	(2	)	$	14
Recognized gains	5								—			5
Net impact on equity	$	21							$	(2	)	$	19
Cumulative translation adjustment				$	2							$	2

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)



(in millions)	For the Three Months Ended June 30, 2012
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives		Income Taxes		Total
Statement of Earnings:
Net revenues	$	13				$	—			$	13
Cost of sales	4					—				4
Marketing, administration and research costs	—					—				—
Operating income	17					—				17
Interest expense, net	(15		)			5				(10		)
Earnings before income taxes	2					5				7
Provision for income taxes	—					—				—
Net earnings attributable to PMI	$	2				$	5			$	7
Other Comprehensive Earnings:
Gains transferred to earnings	$	(2	)					$	—	$	(2	)
Recognized losses	(38		)					4		(34		)
Net impact on equity	$	(40	)					$	4	$	(36	)
Cumulative translation adjustment				$	—					$	—



(in millions)	For the Three Months Ended June 30, 2011
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives			Income Taxes			Total
Statement of Earnings:
Net revenues	$	—				$	—					$	—
Cost of sales	—					—						—
Marketing, administration and research costs	—					—						—
Operating income	—					—						—
Interest expense, net	(8		)			11						3
Earnings before income taxes	(8		)			11						3
Provision for income taxes	1					(3		)				(2		)
Net earnings attributable to PMI	$	(7	)			$	8					$	1
Other Comprehensive Earnings:
Losses transferred to earnings	$	8							$	(1	)	$	7
Recognized losses	(19		)						2			(17		)
Net impact on equity	$	(11	)						$	1		$	(10	)
Cumulative translation adjustment				$	—							$	—

Each type of hedging activity is described in greater detail below.

Cash Flow Hedges

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

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

flow hedges was not material. As of June 30, 2012, PMI has hedged forecasted transactions for periods not exceeding the next thirteen months. The impact of these hedges is included in operating cash flows on PMI’s condensed consolidated statements of cash flows.

For the six months and three months ended June 30, 2012 and 2011, foreign exchange contracts that were designated as cash flow hedging instruments impacted the condensed consolidated statements of earnings and other comprehensive earnings as follows:



(pre-tax, in millions)	For the Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings						Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings on Derivatives
		2012			2011			2012		2011
Foreign exchange contracts								$	13	$	5
	Net revenues	$	24		$	—
	Cost of sales	19			—
	Marketing, administration and research costs	—			—
	Interest expense, net	(30		)	(16		)
Total		$	13		$	(16	)	$	13	$	5



(pre-tax, in millions)	For the Three Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings						Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings on Derivatives
		2012			2011			2012			2011
Foreign exchange contracts								$	(38	)	$	(19	)
	Net revenues	$	13		$	—
	Cost of sales	4			—
	Marketing, administration and research costs	—			—
	Interest expense, net	(15		)	(8		)
Total		$	2		$	(8	)	$	(38	)	$	(19	)

Hedges of Net Investments in Foreign Operations

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

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the six months and three months ended June 30, 2012 and 2011, foreign exchange contracts that were designated as net investment hedging instruments impacted the condensed consolidated statements of earnings and other comprehensive earnings as follows:



(pre-tax, in millions)	For the Six Months Ended June 30,
Derivatives in Net Investment Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings into Earnings				Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings on Derivatives
		2012		2011		2012		2011
Foreign exchange contracts						$	—	$	2
	Interest expense, net	$	—	$	—



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

Other Derivatives

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

As a result, for the six months and three months ended June 30, 2012 and 2011, these items impacted the condensed consolidated statements of earnings as follows:



(pre-tax, in millions)
Derivatives not Designated as Hedging Instruments	Statement of Earnings Classification of Gain/(Loss)	Amount of Gain/(Loss) Recognized in Earnings
		For the Six Months Ended June 30,				For the Three Months Ended June 30,
		2012		2011		2012		2011
Foreign exchange contracts
	Marketing, administration and research costs	$	—	$	—	$	—	$	—
	Interest expense, net	6		14		5		11
		$	6	$	14	$	5	$	11

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Qualifying Hedging Activities Reported in Accumulated Other Comprehensive Losses

Derivative gains or losses reported in accumulated other comprehensive losses are a result of qualifying hedging activity. Transfers of these gains or losses to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity impacted accumulated other comprehensive losses, net of income taxes, as follows:



(in millions)	For the Six Months Ended June 30,					For the Three Months Ended June 30,
	2012			2011		2012			2011
Gain at beginning of period	$	15		$	2	$	51		$	31
Derivative (gains) losses transferred to earnings	(12		)	14		(2		)	7
Change in fair value	12			5		(34		)	(17		)
Gain as of June 30	$	15		$	21	$	15		$	21

At June 30, 2012, PMI expects $12 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the condensed consolidated statement of earnings within the next twelve months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.

Credit Exposure and Credit Risk

PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.

Contingent Features

PMI’s derivative instruments do not contain contingent features.

Fair Value

See Note 13. Fair Value Measurements for disclosures related to the fair value of PMI’s derivative financial instruments.

Note 7. Redeemable Noncontrolling Interest:

Philippines Business Combination:

On February 25, 2010, PMI's affiliate, Philip Morris Philippines Manufacturing Inc. (“PMPMI”), and Fortune Tobacco Corporation (“FTC”) combined their respective business activities by transferring selected assets and liabilities of PMPMI and FTC to a new company called PMFTC Inc. (“PMFTC”). PMPMI and FTC hold equal economic interests in PMFTC, while PMI manages the day-to-day operations of PMFTC and has a majority of its Board of Directors. Consequently, PMI accounts for the contributed assets and liabilities of FTC as a business combination.

The fair value of the assets and liabilities contributed by FTC in this non-cash transaction has been determined to be $1.17 billion. FTC holds the right to sell its interest in PMFTC to PMI, except in certain circumstances, during the period from February 25, 2015 through February 24, 2018, at an agreed-upon value of $1.17 billion, which was recorded on PMI’s condensed consolidated balance sheet as a redeemable noncontrolling interest at the date of the business combination.

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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



(in millions)
Redeemable noncontrolling interest at December 31, 2011	$	1,212
Share of net earnings	87
Dividend payments	(49		)
Currency translation	12
Redeemable noncontrolling interest at June 30, 2012	$	1,262

The redeemable noncontrolling interest balance at June 30, 2011 was $1,204 million. The increase in redeemable noncontrolling interest from December 31, 2010 through June 30, 2011 of $16 million was due to $50 million of net earnings and currency translation gains of $2 million, partially offset by dividend payments of $36 million.

In future periods, if the fair value of 50% of PMFTC were to drop below the redemption value of $1.17 billion, the difference would be treated as a special dividend to FTC and would reduce PMI’s earnings per share. Reductions in earnings per share may be partially or fully reversed in subsequent periods if the fair value of the redeemable noncontrolling interest increases relative to the redemption value. Such increases in earnings per share would be limited to cumulative prior reductions. At June 30, 2012, PMI determined that 50% of the fair value of PMFTC exceeded the redemption value of $1.17 billion.

Note 8. Earnings Per Share:

Basic and diluted earnings per share (“EPS”) were calculated using the following:



(in millions)	For the Six Months Ended June 30,				For the Three Months Ended June 30,
	2012		2011		2012		2011
Net earnings attributable to PMI	$	4,478	$	4,328	$	2,317	$	2,409
Less distributed and undistributed earnings attributable to share-based payment awards	24		24		12		14
Net earnings for basic and diluted EPS	$	4,454	$	4,304	$	2,305	$	2,395
Weighted-average shares for basic EPS	1,710		1,782		1,701		1,772
Plus incremental shares from assumed conversions: