Edgar Filing: Philip Morris International Inc.

PM-09.30.14-10Q-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 September 30, 2014


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

For the transition period from to

Commission File Number 001-33708



Philip Morris International Inc.

(Exact name of registrant as specified in its charter)



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



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



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

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

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

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

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

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

(Do not check if a smaller reporting company)

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

At October 29, 2014, there were 1,553,715,140 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
	September 30, 2014 and December 31, 2013	3 – 4

	Condensed Consolidated Statements of Earnings for the
	Nine Months Ended September 30, 2014 and 2013	5
	Three Months Ended September 30, 2014 and 2013	6

	Condensed Consolidated Statements of Comprehensive Earnings for the
	Nine Months Ended September 30, 2014 and 2013	7
	Three Months Ended September 30, 2014 and 2013	8

	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
	Nine Months Ended September 30, 2014 and 2013	9

	Condensed Consolidated Statements of Cash Flows for the
	Nine Months Ended September 30, 2014 and 2013	10 – 11

	Notes to Condensed Consolidated Financial Statements	12 – 38

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39 – 72

Item 4.	Controls and Procedures	73

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	74

Item 1A.	Risk Factors	74

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 6.	Exhibits	76

Signature		77

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)



	September 30, 2014		December 31, 2013
ASSETS
Cash and cash equivalents	$	2,043	$	2,154
Receivables (less allowances of $49 in 2014 and $53 in 2013)	3,785		3,853
Inventories:
Leaf tobacco	3,316		3,709
Other raw materials	1,749		1,596
Finished product	2,914		4,541
	7,979		9,846
Deferred income taxes	381		502
Other current assets	573		497
Total current assets	14,761		16,852
Property, plant and equipment, at cost	13,361		13,957
Less: accumulated depreciation	7,088		7,202
	6,273		6,755
Goodwill (Note 5)	8,707		8,893
Other intangible assets, net (Note 5)	3,134		3,193
Investments in unconsolidated subsidiaries (Note 16)	1,371		1,536
Other assets	1,155		939
TOTAL ASSETS	$	35,401	$	38,168

See notes to condensed consolidated financial statements.

Continued

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

(in millions of dollars, except share data)

(Unaudited)



	September 30, 2014			December 31, 2013
LIABILITIES
Short-term borrowings (Note 12)	$	2,091		$	2,400
Current portion of long-term debt (Note 12)	1,357			1,255
Accounts payable	1,255			1,274
Accrued liabilities:
Marketing and selling	587			503
Taxes, except income taxes	4,961			6,492
Employment costs	1,251			949
Dividends payable	1,568			1,507
Other	1,175			1,382
Income taxes	744			1,192
Deferred income taxes	128			112
Total current liabilities	15,117			17,066
Long-term debt (Note 12)	25,395			24,023
Deferred income taxes	1,709			1,477
Employment costs	1,250			1,313
Other liabilities	607			563
Total liabilities	44,078			44,442
Contingencies (Note 10)
STOCKHOLDERS’ (DEFICIT) EQUITY
Common stock, no par value (2,109,316,331 shares issued in 2014 and 2013)	—			—
Additional paid-in capital	692			723
Earnings reinvested in the business	29,192			27,843
Accumulated other comprehensive losses	(5,022		)	(4,190		)
	24,862			24,376
Less: cost of repurchased stock (553,357,455 and 520,313,919 shares in 2014 and 2013, respectively)	34,974			32,142
Total PMI stockholders’ deficit	(10,112		)	(7,766		)
Noncontrolling interests	1,435			1,492
Total stockholders’ deficit	(8,677		)	(6,274		)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	35,401		$	38,168

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 Nine Months Ended September 30,
	2014			2013
Net revenues	$	60,165		$	59,639
Cost of sales	7,804			7,808
Excise taxes on products	37,595			36,211
Gross profit	14,766			15,620
Marketing, administration and research costs	5,026			5,214
Asset impairment and exit costs (Note 2)	503			8
Amortization of intangibles	67			71
Operating income	9,170			10,327
Interest expense, net	789			721
Earnings before income taxes	8,381			9,606
Provision for income taxes	2,446			2,777
Equity (income)/loss in unconsolidated subsidiaries, net	(74		)	15
Net earnings	6,009			6,814
Net earnings attributable to noncontrolling interests	128			225
Net earnings attributable to PMI	$	5,881		$	6,589
Per share data (Note 8):
Basic earnings per share	$	3.73		$	4.02
Diluted earnings per share	$	3.73		$	4.02
Dividends declared	$	2.88		$	2.64

See notes to condensed consolidated financial statements.

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)



	For the Three Months Ended September 30,
	2014			2013
Net revenues	$	21,335		$	20,629
Cost of sales	2,734			2,618
Excise taxes on products	13,479			12,702
Gross profit	5,122			5,309
Marketing, administration and research costs	1,763			1,687
Asset impairment and exit costs (Note 2)	(9		)	—
Amortization of intangibles	23			23
Operating income	3,345			3,599
Interest expense, net	267			239
Earnings before income taxes	3,078			3,360
Provision for income taxes	918			952
Equity (income)/loss in unconsolidated subsidiaries, net	(38		)	6
Net earnings	2,198			2,402
Net earnings attributable to noncontrolling interests	43			62
Net earnings attributable to PMI	$	2,155		$	2,340
Per share data (Note 8):
Basic earnings per share	$	1.38		$	1.44
Diluted earnings per share	$	1.38		$	1.44
Dividends declared	$	1.00		$	0.94

See notes to condensed consolidated financial statements.

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Table of Contents

Philip Morris International Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

(Unaudited)




	For the Nine Months Ended September 30,
	2014			2013
Net earnings	$	6,009		$	6,814
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustment:
Unrealized losses, net of income taxes of ($346) in 2014 and $119 in 2013	(944		)	(1,383		)
Change in net loss and prior service cost:
Net losses and prior service costs, net of income taxes of $4 in 2014 and $- in 2013	(41		)	—
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($37) in 2014 and ($41) in 2013	119			178
Change in fair value of derivatives accounted for as hedges:
Gains transferred to earnings, net of income taxes of $4 in 2014 and $23 in 2013	(10		)	(158		)
Gains recognized, net of income taxes of ($1) in 2014 and ($23) in 2013	21			158
Total other comprehensive losses	(855		)	(1,205		)
Total comprehensive earnings	5,154			5,609
Less comprehensive earnings attributable to:
Noncontrolling interests	105			183
Redeemable noncontrolling interest (Note 7)	—			52
Comprehensive earnings attributable to PMI	$	5,049		$	5,374

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 September 30,
	2014			2013
Net earnings	$	2,198		$	2,402
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustment:
Unrealized losses, net of income taxes of ($287) in 2014 and $95 in 2013	(830		)	(661		)
Change in net loss and prior service cost:
Net losses and prior service costs, net of income taxes of $1 in 2014 and $- in 2013	—			—
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($11) in 2014 and ($14) in 2013	38			60
Change in fair value of derivatives accounted for as hedges:
Losses (gains) transferred to earnings, net of income taxes of $2 in 2014 and $9 in 2013	3			(63		)
Gains recognized, net of income taxes of ($6) in 2014 and $- in 2013	56			2
Total other comprehensive losses	(733		)	(662		)
Total comprehensive earnings	1,465			1,740
Less comprehensive earnings attributable to:
Noncontrolling interests	18			95
Redeemable noncontrolling interest (Note 7)	—			9
Comprehensive earnings attributable to PMI	$	1,447		$	1,636

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 Nine Months Ended September 30, 2014 and 2013

(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, 2013	$	—	$	1,334		$	25,076		$	(3,604	)	$	(26,282	)	$	322			$	(3,154	)
Net earnings						6,589									150			^(a)	6,739			^(a)
Other comprehensive earnings (losses), net of income taxes									(1,165		)				(17		)	^(a)	(1,182		)	^(a)
Issuance of stock awards and exercise of stock options			17									135							152
Dividends declared ($2.64 per share)						(4,306		)											(4,306		)
Payments to noncontrolling interests															(176		)		(176		)
Purchase of subsidiary shares from noncontrolling interests			(672		)				(51		)				(41		)		(764		)
Common stock repurchased												(4,500		)					(4,500		)
Balances, September 30, 2013	$	—	$	679		$	27,359		$	(4,820	)	$	(30,647	)	$	238			$	(7,191	)
Balances, January 1, 2014	$	—	$	723		$	27,843		$	(4,190	)	$	(32,142	)	$	1,492			$	(6,274	)
Net earnings						5,881									128				6,009
Other comprehensive earnings (losses), net of income taxes									(832		)				(23		)		(855		)
Issuance of stock awards and exercise of stock options			(31		)							168							137
Dividends declared ($2.88 per share)						(4,532		)											(4,532		)
Payments to noncontrolling interests															(168		)		(168		)
Common stock repurchased												(3,000		)					(3,000		)
Other															6				6
Balances, September 30, 2014	$	—	$	692		$	29,192		$	(5,022	)	$	(34,974	)	$	1,435			$	(8,677	)

(a) For the nine months ended September 30, 2013, net earnings attributable to noncontrolling interests exclude $75 million of earnings related to the redeemable noncontrolling interest, which was originally reported outside of the equity section in the condensed consolidated balance sheet at September 30, 2013. Other comprehensive earnings, net of income taxes, also exclude $23 million of net currency translation adjustment losses related to the redeemable noncontrolling interest at September 30, 2013. In December 2013, the redeemable noncontrolling interest balance of $1,275 million was reclassified to noncontrolling interests due to the termination of an exit rights agreement. See Note 7. Redeemable Noncontrolling Interests for further details.

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 Nine Months Ended September 30,
	2014			2013
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Net earnings	$	6,009		$	6,814

Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization	660			659
Deferred income tax provision	52			73
Asset impairment and exit costs, net of cash paid	240			(9		)
Cash effects of changes, net of the effects from acquired companies:
Receivables, net	(176		)	(206		)
Inventories	1,326			546
Accounts payable	127			26
Income taxes	(438		)	(606		)
Accrued liabilities and other current assets	(1,408		)	183
Pension plan contributions	(98		)	(82		)
Other	91			417
Net cash provided by operating activities	6,385			7,815

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

Capital expenditures	(804		)	(821		)
Purchase of businesses, net of acquired cash	(110		)	—
Investments in unconsolidated subsidiaries	(22		)	(656		)
Other	163			6
Net cash used in investing activities	(773		)	(1,471		)

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 Nine Months Ended September 30,
	2014			2013
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Short-term borrowing activity by original maturity:
Net issuances - maturities of 90 days or less	$	233		$	215
Issuances - maturities longer than 90 days	977			1,610
Repayments - maturities longer than 90 days	(1,435		)	(516		)
Long-term debt proceeds	3,632			5,205
Long-term debt repaid	(1,240		)	(2,738		)
Repurchases of common stock	(3,050		)	(4,516		)
Issuance of common stock	1			—
Dividends paid	(4,471		)	(4,202		)
Purchase of subsidiary shares from noncontrolling interests	—			(703		)
Other	(209		)	(258		)
Net cash used in financing activities	(5,562		)	(5,903		)
Effect of exchange rate changes on cash and cash equivalents	(161		)	(42		)

Cash and cash equivalents:
(Decrease) Increase	(111		)	399
Balance at beginning of period	2,154			2,983
Balance at end of period	$	2,043		$	3,382

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, other tobacco products and other nicotine-containing products in markets outside of the United States of America. Throughout these financial statements, the term “PMI” refers to Philip Morris International Inc. and its subsidiaries.

Basis of Presentation

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

Certain prior years' amounts have been reclassified to conform to the current year's presentation, due to the separate disclosure of investments in unconsolidated subsidiaries. For further details, see Note 16. Investments in Unconsolidated Subsidiaries.

These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report to Shareholders and which are incorporated by reference into PMI’s Annual Report on Form 10-K for the year ended December 31, 2013.

Note 2. Asset Impairment and Exit Costs:

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



(in millions)	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2014		2013		2014			2013
Separation programs:
European Union	$	343	$	—	$	(16	)	$	—
Asia	24		—		—			—
Latin America & Canada	3		—		3			—
Total separation programs	370		—		(13		)	—
Contract termination charges:
Asia	—		8		—			—
Total contract termination charges	—		8		—			—
Asset impairment charges:
European Union	129		—		—			—
Latin America & Canada	4		—		4			—
Total asset impairment charges	133		—		4			—
Asset impairment and exit costs	$	503	$	8	$	(9	)	$	—

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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 nine months ended September 30, 2014 was as follows:



(in millions)
Liability balance, January 1, 2014	$	308
Charges, net	370
Cash spent	(263		)
Currency/other	(48		)
Liability balance, September 30, 2014	$	367

Cash payments related to exit costs at PMI were $263 million and $33 million for the nine months and three months ended September 30, 2014, respectively, and $17 million and $5 million for the nine months and three months ended September 30, 2013, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $367 million, and will be substantially paid by the third quarter of 2015.

The pre-tax asset impairment and exit costs shown above are primarily a result of the following:

The Netherlands

On April 4, 2014, PMI announced the initiation by its affiliate, Philip Morris Holland B.V. (“PMH”), of consultations with employee representatives on a proposal to discontinue cigarette production at its factory located in Bergen op Zoom, the Netherlands. PMH reached an agreement with the trade unions and their members on a social plan, and ceased cigarette production on September 1, 2014. For the nine months ended September 30, 2014, total pre-tax asset impairment and exit costs of $472 million were recorded and for the three months ended September 30, 2014 a reversal of $16 million was recorded for this program due to a change in estimate in the European Union segment.

Other

Separation Program Charges

PMI recorded other pre-tax separation program charges of $27 million and $3 million for the nine months and three months ended September 30, 2014 related to severance costs for factory closures in Australia and Canada.

Contract Termination Charges

During the nine months ended September 30, 2013, PMI recorded exit costs of $8 million related to the termination of distribution agreements.

Asset Impairment Charges

PMI recorded other pre-tax asset impairment charges of $4 million for the nine months and three months ended September 30, 2014 related to a factory closure in Canada.

Note 3. Stock Plans:

In May 2012, PMI’s stockholders approved the Philip Morris International Inc. 2012 Performance Incentive Plan (the “2012 Plan”). The 2012 Plan replaced the 2008 Performance Incentive Plan (the “2008 Plan”) and, as a result, there will be no additional grants under the 2008 Plan. Under the 2012 Plan, PMI may grant to eligible employees restricted stock, restricted stock units and deferred stock units, performance-based cash incentive awards and performance-based equity awards. Up to 30 million shares of PMI’s common stock may be issued under the 2012 Plan. At September 30, 2014, shares available for grant under the 2012 Plan were 24,799,010.

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

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

shares of PMI common stock may be awarded under the Non-Employee Directors Plan. At September 30, 2014, shares available for grant under the plan were 715,904.

During the nine months ended September 30, 2014, PMI granted 2.4 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $77.74 per share. During the nine months ended September 30, 2013, PMI granted 2.8 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $88.43 per share. PMI recorded compensation expense related to stock awards of $161 million and $172 million during the nine months ended September 30, 2014 and 2013, respectively and $48 million during the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, PMI had $236 million of total unrecognized compensation cost related to non-vested 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 nine months ended September 30, 2014, 3.5 million shares of PMI restricted stock and deferred stock awards vested. The grant date fair value of all the vested shares was approximately $212 million. The total fair value of restricted stock and deferred stock awards that vested during the nine months ended September 30, 2014 was approximately $277 million.

Note 4. Benefit Plans:

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

Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:




	U.S. Plans						Non-U.S. Plans
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2014			2013			2014			2013
Service cost	$	4		$	5		$	155		$	190
Interest cost	12			12			155			126
Expected return on plan assets	(12		)	(11		)	(265		)	(257		)
Amortization:
Net loss	5			8			87			151
Prior service cost	—			1			5			7
Net transition obligation	—			—			—			1
Net periodic pension cost	$	9		$	15		$	137		$	218

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Philip Morris International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)



	U.S. Plans						Non-U.S. Plans
	For the Three Months Ended September 30,						For the Three Months Ended September 30,
(in millions)	2014			2013			2014			2013
Service cost	$	1		$	1		$	51		$	63
Interest cost	4			4			52			42
Expected return on plan assets	(4		)	(3		)	(88		)	(84		)
Amortization:
Net loss	2			2			30			49
Prior service cost	—			—			1			2
Net periodic pension cost	$	3		$	4		$	46		$	72

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 $98 million were made to the pension plans during the nine months ended September 30, 2014. Currently, PMI anticipates making additional contributions during the remainder of 2014 of approximately $70 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.

Note 5. Goodwill and Other Intangible Assets, net:

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



	Goodwill				Other Intangible Assets, net
(in millions)	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
European Union	$	1,472	$	1,472	$	622	$	604
Eastern Europe, Middle East & Africa	544		617		219		228
Asia	3,957		3,960		1,230		1,251
Latin America & Canada	2,734		2,844		1,063		1,110
Total	$	8,707	$	8,893	$	3,134	$	3,193

Goodwill is due primarily to PMI’s acquisitions in Canada, Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the business combination in the Philippines. The movements in goodwill from December 31, 2013, were as follows:



(in millions)	European Union			Eastern Europe, Middle East & Africa			Asia			Latin America & Canada			Total
Balances, December 31, 2013	$	1,472		$	617		$	3,960		$	2,844		$	8,893
Changes due to:
Acquisitions	114			—			—			2			116
Currency	(114		)	(73		)	(3		)	(112		)	(302		)
Balances, September 30, 2014	$	1,472		$	544		$	3,957		$	2,734		$	8,707

The increase in goodwill from acquisitions was due primarily to the preliminary purchase price allocation for PMI's June 2014 purchase of Nicocigs Limited, a U.K.-based e-vapor company. For further details, see Note 17. Acquisitions and Other Business Arrangements.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Additional details of other intangible assets were as follows:



	September 30, 2014				December 31, 2013
(in millions)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	1,780			$	1,798
Amortizable intangible assets	1,945		$	591	1,940		$	545
Total other intangible assets	$	3,725	$	591	$	3,738	$	545

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 gross carrying amount, the range of useful lives as well as the weighted-average remaining useful life of amortizable intangible assets at September 30, 2014, were as follows:



(dollars in millions)	Gross Carrying Amount		Initial Estimated Useful Lives	Weighted-Average Remaining Useful Life
Trademarks	$	1,553	2 - 40 years	24 years
Distribution networks	174		5 - 30 years	13 years
Non-compete agreements	126		3 - 10 years	1 year
Other (including farmer contracts and intellectual property rights)	92		10 - 17 years	12 years
	$	1,945

Pre-tax amortization expense for intangible assets during the nine months ended September 30, 2014 and 2013 was $67 million and $71 million, respectively, and $23 million for each of the three months ended September 30, 2014 and 2013. Amortization expense for each of the next five years is estimated to be $86 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, 2013, was due primarily to currency movements, partially offset by the preliminary purchase price allocation for PMI's June 2014 purchase of Nicocigs Limited, as well as the purchase of additional patent rights related to an aerosol delivery technology acquired in 2011.

During the first quarter of 2014, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential impairment, and no impairment charges were required as a result of this review.

Note 6. Financial Instruments:

Overview

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

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Notes to Condensed Consolidated Financial Statements

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PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts, to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Australian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At September 30, 2014, PMI had contracts with aggregate notional amounts of $20.7 billion of which $2.9 billion related to cash flow hedges, $2.5 billion related to hedges of net investments in foreign operations and $15.3 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 September 30, 2014 and December 31, 2013, were as follows:



	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
(in millions)	Balance Sheet Classification	At September 30, 2014		At December 31, 2013		Balance Sheet Classification	At September 30, 2014		At December 31, 2013
Foreign exchange contracts designated as hedging instruments	Other current assets	$	151	$	111	Other accrued liabilities	$	15	$	44
	Other assets	66		—		Other liabilities	20		46
Foreign exchange contracts not designated as hedging instruments	Other current assets	36		42		Other accrued liabilities	91		12
	Other assets	2		—		Other liabilities	—		14
Total derivatives		$	255	$	153		$	126	$	116

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Hedging activities, which represent movement in derivatives as well as the respective underlying transactions, had the following effect on PMI’s condensed consolidated statements of earnings and other comprehensive earnings for the nine months and three months ended September 30, 2014 and 2013:




(in millions)	For the Nine Months Ended September 30, 2014
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives			Income Taxes			Total
Statement of Earnings:
Net revenues	$	59				$	—					$	59
Cost of sales	—					—						—
Marketing, administration and research costs	(18		)			—						(18		)
Operating income	41					—						41
Interest expense, net	(27		)			(2		)				(29		)
Earnings before income taxes	14					(2		)				12
Provision for income taxes	(4		)			1						(3		)
Net earnings attributable to PMI	$	10				$	(1	)				$	9
Other Comprehensive Earnings/(Losses):
Gains transferred to earnings	$	(14	)						$	4		$	(10	)
Recognized gains	22								(1		)	21
Net impact on equity	$	8							$	3		$	11
Currency translation adjustments				$	159				$	(52	)	$	107




(in millions)	For the Nine Months Ended September 30, 2013
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges			Other Derivatives		Income Taxes			Total
Statement of Earnings:
Net revenues	$	213					$	—				$	213
Cost of sales	6						—					6
Marketing, administration and research costs	—						—					—
Operating income	219						—					219
Interest expense, net	(38		)				—					(38		)
Earnings before income taxes	181						—					181
Provision for income taxes	(23		)				2					(21		)
Net earnings attributable to PMI	$	158					$	2				$	160
Other Comprehensive Earnings/(Losses):
Gains transferred to earnings	$	(181	)						$	23		$	(158	)
Recognized gains	181								(23		)	158
Net impact on equity	$	—							$	—		$	—
Currency translation adjustments				$	(28	)			$	9		$	(19	)

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Notes to Condensed Consolidated Financial Statements

(Unaudited)



(in millions)	For the Three Months Ended September 30, 2014
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges		Other Derivatives			Income Taxes			Total
Statement of Earnings:
Net revenues	$	27				$	—					$	27
Cost of sales	—					—						—
Marketing, administration and research costs	(17		)			—						(17		)
Operating income	10					—						10
Interest expense, net	(11		)			(3		)				(14		)
Earnings before income taxes	(1		)			(3		)				(4		)
Provision for income taxes	(2		)			1						(1		)
Net earnings attributable to PMI	$	(3	)			$	(2	)				$	(5	)
Other Comprehensive Earnings/(Losses):
Losses transferred to earnings	$	1							$	2		$	3
Recognized gains	62								(6		)	56
Net impact on equity	$	63							$	(4	)	$	59
Currency translation adjustments				$	123				$	(45	)	$	78



(in millions)	For the Three Months Ended September 30, 2013
Gain (Loss)	Cash Flow Hedges			Net Investment Hedges			Other Derivatives			Income Taxes		Total
Statement of Earnings:
Net revenues	$	88					$	—				$	88
Cost of sales	—						—					—
Marketing, administration and research costs	—						—					—
Operating income	88						—					88
Interest expense, net	(16		)				(2		)			(18		)
Earnings before income taxes	72						(2		)			70
Provision for income taxes	(9		)				1					(8		)
Net earnings attributable to PMI	$	63					$	(1	)			$	62
Other Comprehensive Earnings/(Losses):
Gains transferred to earnings	$	(72	)							$	9	$	(63	)
Recognized gains	2									—		2
Net impact on equity	$	(70	)							$	9	$	(61	)
Currency translation adjustments				$	(44	)				$	10	$	(34	)

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

Cash Flow Hedges

PMI has entered into foreign exchange contracts to hedge foreign currency exchange risk related to certain forecasted transactions. The effective portion of gains and losses associated with qualifying cash flow hedge contracts is deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s condensed consolidated statements of earnings. During the nine months and three months ended September 30, 2014 and 2013, ineffectiveness related to cash flow hedges was not material. As of September 30, 2014, substantially all of PMI's hedged forecasted transactions are for

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

periods not exceeding the next fifteen months with the exception of one foreign exchange 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.

For the nine months and three months ended September 30, 2014 and 2013, foreign exchange contracts that were designated as cash flow hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:




(pre-tax, in millions)	For the Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings						Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
		2014			2013			2014		2013
Foreign exchange contracts								$	22	$	181
	Net revenues	$	59		$	213
	Cost of sales	—			6
	Marketing, administration and research costs	(18		)	—
	Interest expense, net	(27		)	(38		)
Total		$	14		$	181		$	22	$	181



(pre-tax, in millions)	For the Three Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings						Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
		2014			2013			2014		2013
Foreign exchange contracts								$	62	$	2
	Net revenues	$	27		$	88
	Marketing, administration and research costs	(17		)	—
	Interest expense, net	(11		)	(16		)
Total		$	(1	)	$	72		$	62	$	2

Hedges of Net Investments in Foreign Operations

PMI designates certain foreign currency denominated debt and foreign exchange contracts as net investment hedges of its foreign operations. For the nine months ended September 30, 2014 and 2013, these hedges of net investments resulted in gains (losses), net of income taxes of $624 million and $(163) million, respectively. For the three months ended September 30, 2014 and 2013, these hedges of net investments resulted in gains (losses), net of income taxes, of $531 million and $(199) million, respectively. These gains (losses) were reported as a component of accumulated other comprehensive losses within currency translation adjustments. For the nine months and three months ended September 30, 2014 and 2013, ineffectiveness related to net investment hedges was not material. Other investing cash flows on PMI’s condensed consolidated statements of cash flows include the premiums paid for, and settlements of, net investment hedges.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the nine months and three months ended September 30, 2014 and 2013, foreign exchange contracts that were designated as net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:




(pre-tax, in millions)	For the Nine Months Ended September 30,
Derivatives in Net Investment Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings				Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
		2014		2013		2014		2013
Foreign exchange contracts						$	159	$	(28	)
	Interest expense, net	$	—	$	—



(pre-tax, in millions)	For the Three Months Ended September 30,
Derivatives in Net Investment Hedging Relationship	Statement of Earnings Classification of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings				Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
		2014		2013		2014		2013
Foreign exchange contracts						$	123	$	(44	)
	Interest expense, net	$	—	$	—

Other Derivatives

PMI has entered into foreign exchange contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s condensed consolidated statements of earnings. For the nine months ended September 30, 2014 and 2013, the gains (losses) from contracts for which PMI did not apply hedge accounting were $(113) million and $67 million, respectively. For the three months ended September 30, 2014 and 2013, the gains/(losses) from contracts for which PMI did not apply hedge accounting were $(207) million and $87 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 nine months and three months ended September 30, 2014 and 2013, these items impacted the condensed consolidated statements of earnings as follows:



(pre-tax, in millions)	For the Three Months Ended September 30,
Derivatives not Designated as Hedging Instruments	Statement of Earnings Classification of Gain/(Loss)	Amount of Gain/(Loss) Recognized in Earnings
		For the Nine Months Ended September 30,					For the Three Months Ended September 30,
		2014			2013		2014			2013
Foreign exchange contracts
	Interest expense, net	$	(2	)	$	—	$	(3	)	$	(2	)

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Qualifying Hedging Activities Reported in Accumulated Other Comprehensive Losses

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



(in millions)	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2014			2013			2014		2013
Gain at beginning of period	$	63		$	92		$	15	$	153
Derivative (gains)/losses transferred to earnings	(10		)	(158		)	3		(63		)
Change in fair value	21			158			56		2
Gain as of September 30,	$	74		$	92		$	74	$	92

At September 30, 2014, PMI expects $50 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the condensed consolidated statement of earnings within the next twelve months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.

Contingent Features

PMI’s derivative instruments do not contain contingent features.

Credit Exposure and Credit Risk

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

Fair Value

See Note 13. Fair Value Measurements and Note 15. Balance Sheet Offsetting for additional discussion of derivative financial instruments.

Note 7. Redeemable Noncontrolling Interest:

Philippines Business Combination:<