Notes to Consolidated Financial Statements
Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A. (also referred to herein as the U.S., the United States or the United States of America), whose subsidiaries and affiliates and their licensees are primarily engaged in the manufacture and sale of cigarettes and smoke-free products including heat-not-burn, vapor, and oral nicotine products. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.
Smoke-free products ("SFPs") is the term PMI primarily uses to refer to all of its products that are not combustible tobacco products, such as heat-not-burn, e-vapor, and oral nicotine. In addition, SFPs include wellness and healthcare products, as well as consumer accessories such as lighters and matches.
Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continuing smoking. PMI has a range of RRPs in various stages of development, scientific assessment and commercialization. PMI's RRPs are smoke-free products that contain and/or generate far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.
"Platform 1" is the term PMI uses to refer to PMI’s reduced-risk product that uses a precisely controlled heating device into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.
Basis of presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things: pension and benefit plan assumptions; useful lives and valuation assumptions of goodwill and other intangible assets; valuation assumptions for non-marketable equity securities; marketing programs, and income taxes. Actual results could differ from those estimates.
The consolidated financial statements include PMI, as well as its wholly owned and majority-owned subsidiaries. Investments in which PMI exercises significant influence (generally 20%-50% ownership interest) are accounted for under the equity method of accounting. Investments not accounted for under the equity method of accounting are measured at fair value, if it is readily determinable, with changes in fair value recognized in net income. Investments without readily determinable fair values, non-marketable equity securities, are measured and recorded using a measurement alternative that values the security at cost minus any impairment. All intercompany transactions and balances have been eliminated.
In the fourth quarter of 2022, PMI acquired a controlling interest of the total issued shares in Swedish Match AB (“Swedish Match”). The operating results of Swedish Match are included in a separate segment. In the third quarter of 2021, PMI acquired Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. On March 31, 2022, PMI launched a new Wellness and Healthcare business consolidating these entities, Vectura Fertin Pharma. The operating results of this business are reported in the Wellness and Healthcare segment. For further details on these acquisitions, see Note 3. Acquisitions and Note 13. Segment Reporting.
Certain prior years' amounts have been reclassified to conform with the current year's presentation. Following the Swedish Match acquisition and a review of PMI and Swedish Match’s combined product portfolio, PMI reclassified certain of its own products previously reported under its combustible tobacco product category to the newly created smoke-free product category to better reflect the characteristics of these products. This reclassification did not impact PMI’s segment reporting, consolidated financial position, results of operations or cash flows in any of the periods presented. For further details, see Note 13. Segment Reporting. During the first quarter of 2022, one of Fertin Pharma's product lines was moved from the Wellness and Healthcare segment to the European Union segment. For further details, see Note 5. Goodwill and Other Intangible Assets, net. The change did not have a material impact on PMI's consolidated financial position, results of operations or cash flows in any of the periods presented.
Summary of Significant Accounting Policies:
Acquisitions
PMI uses the acquisition method of accounting for acquired businesses. Under the acquisition method, PMI’s consolidated financial statements reflect the operations of an acquired business starting from the closing date of the acquisition. PMI allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. Any residual purchase price is recorded as goodwill. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration are recognized in marketing, administration and research costs in the consolidated statement of earnings. Transaction costs are expensed as incurred.
If PMI determines that assets acquired do not meet the definition of a business, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired in-process research and development ("IPR&D") with no alternative future use is charged to expense.
Cash and cash equivalents
Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less.
Depreciation
Property, plant and equipment are stated at historical cost and depreciated primarily using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated primarily over periods ranging from 3 to 15 years, and buildings and building improvements primarily over periods up to 40 years.
Employee benefit plans
PMI provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). PMI records annual amounts relating to these plans based on calculations specified under U.S. GAAP. PMI recognizes the funded status of its defined pension and postretirement plans on the consolidated balance sheets. The funded status is measured as the difference between the fair value of the plans assets and the benefit obligation. PMI measures the plan assets and liabilities at the end of the fiscal year. For defined benefit pension plans, the benefit obligation is the projected benefit obligation. For the postretirement health care plans, the benefit obligation is the accumulated postretirement benefit obligation. Any plan with an overfunded status is recognized as an asset, and any plan with an underfunded status is recognized as a liability. Any gains or losses and prior service costs or credits that have not been recognized as a component of net periodic benefit costs are recorded as a component of other comprehensive earnings (losses), net of deferred taxes. PMI elects to recognize actuarial gains/(losses) using the corridor approach.
Fair value measurements
PMI follows ASC 820, Fair Value Measurements and Disclosures with respect to assets and liabilities that are measured at fair value. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of input that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Foreign currency translation
PMI translates the results of operations of its subsidiaries and affiliates using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Currency translation adjustments are recorded as a component of stockholders’ (deficit) equity. In addition, some of PMI’s subsidiaries have assets and liabilities denominated in currencies other than their functional currencies, and to the extent those are not designated as net investment hedges, these assets and liabilities generate transaction gains and losses when translated into their respective functional currencies.
Goodwill and non-amortizable intangible assets valuation
PMI tests goodwill and non-amortizable intangible assets for impairment annually or more frequently if events occur that would warrant such review. PMI performs its annual impairment analysis in the second quarter of each year. The impairment analysis involves comparing the fair value of each reporting unit or non-amortizable intangible asset to the carrying value. If the carrying value exceeds the fair value, goodwill or a non-amortizable intangible asset is considered impaired.
Hedging instruments
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated other comprehensive losses on the consolidated balance sheet or in earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are reclassified to the consolidated statements of earnings, into the same line item as the impact of the underlying transaction, in the periods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified in the same manner as the affected hedged item in the consolidated statements of cash flows.
Impairment of long-lived assets
PMI reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. PMI performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, PMI groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the lower of carrying value or estimated proceeds to be received less costs of disposal.
Impairment of investment in non-marketable equity securities
Non-marketable equity securities are subject to periodic impairment reviews during which PMI considers both qualitative and quantitative factors that may have a significant impact on the investees' fair value. Upon determining that an impairment may exist, the security’s fair value is calculated and compared to its carrying value, and an impairment is recognized immediately if the carrying value exceeds the fair value.
Impairment of equity method investments
Equity method investments are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. An impairment loss would be recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. PMI determines whether a loss is other than temporary by considering the length of time and extent to which the fair value of the equity investment has been less than the carrying amount, the financial condition of the equity investment, and the intent to retain the investment for a period of time is sufficient to allow for any anticipated recovery in market value.
Income taxes
Income taxes are provided on all earnings for jurisdictions outside the United States. These provisions, as well as state and local income tax provisions, are determined on a separate company basis, and the related assets and liabilities are recorded in PMI’s consolidated balance sheets. Significant judgment is required in determining income tax provisions and in evaluating tax positions. PMI recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on the consolidated statements of earnings. PMI recognizes income taxes associated with Global Intangible Low-Taxed Income ("GILTI") taxes as current period expense rather than including these amounts in the measurement of deferred taxes.
Inventories
Inventories are stated at the lower of cost or market. The first-in, first-out and average cost methods are used to cost substantially all inventories. It is a generally recognized industry practice to classify leaf tobacco inventory as a current asset, although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year.
Leases
PMI determines that a contract contains a lease if the contract conveys a right to control the use of the identified asset for a period of time in exchange for consideration. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is amortized based on production activity or the lease term. Lease expense is recorded in cost of sales or marketing, administration and research costs depending on the nature of the leased item. At lease commencement, PMI recognizes lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately all of its leases. The recognition of the right-of-use asset and lease liability includes renewal options when it is reasonably certain that they will be exercised. Certain of PMI’s leases include payments that are based on changes to an index or on actual usage. These lease payments are adjusted periodically and are included within variable lease costs. PMI accounts for lease and nonlease components as a single-lease component with the exception of its vehicle leases, of which PMI accounts for the lease components separately from the nonlease components. Additionally, leases with an initial term of 12 months or less are not included in the right-of-use asset or lease liability on the consolidated statement of financial position.
Marketing costs
PMI supports its products with advertising, adult consumer engagement and trade promotions. Such programs include, but are not limited to, discounts, rebates, in-store display incentives, e-commerce, mobile and other digital platforms, adult consumer activation and promotion activities, as well as costs associated with adult consumer experience outlets and other adult consumer touchpoints and volume-based incentives. Advertising, as well as certain consumer engagement and trade activities costs, are expensed as incurred. Trade promotions are recorded as a reduction of revenues based on amounts estimated as being due to customers at the end of a period, based principally on historical utilization. For interim reporting purposes, advertising and certain consumer engagement expenses are charged to earnings based on estimated sales and related expenses for the full year.
Revenue recognition
PMI recognizes revenue primarily through the manufacture and sale of cigarettes and smoke-free products, including heat-not-burn, vapor and oral nicotine products. The majority of PMI revenues are generated by sales through direct and indirect distribution networks with short-term payment conditions and where control is typically transferred to the customer either upon shipment or delivery of goods. PMI evaluates the transfer of control through evidence of the customer’s receipt and acceptance, transfer of title, PMI’s right to payment for those products and the customer’s ability to direct the use of those products upon receipt. Typically, PMI’s performance obligations are satisfied and revenue is recognized either upon shipment or delivery of goods.
In certain instances, PMI facilitates shipping and handling activities after control has transferred to the customer. PMI has elected to record all shipping and handling activities as costs to fulfill a contract. The shipping and handling costs that have not been incurred at the time revenue is recognized are accrued. The transaction price is typically based on the amount billed to the customer and includes estimated variable consideration, where applicable. Such variable consideration is typically not constrained and is estimated based on the most likely amount that PMI expects to be entitled to under the terms of the contracts with customers, historical experience of discount or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs, which may change from time to time as the business and product categories evolve. PMI has elected to exclude excise taxes collected from customers from the measurement of the transaction price, thereby presenting revenues net of excise taxes. Estimated costs associated with warranty programs are generally provided for in cost of sales in the period the related revenues are recognized.
Research and Development and Acquired In-Process Research and Development ("IPR&D")
Research and development costs are expensed as incurred.
In a business combination, the fair value of IPR&D acquired is initially capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the projects. Upon completion, a determination as to the useful life is performed and the intangible asset is accounted for as a definite-lived intangible asset. Both the indefinite and definite-lived intangible assets are subject to impairment testing annually or more frequently if indicators exist. In an asset acquisition, the initial cost to acquire the IPR&D is expensed in the consolidated statements of earnings when the project has no alternative future use. PMI records these costs within marketing, administration and research costs in its consolidated statements of earnings.
Stock-based compensation
PMI measures compensation cost for all stock-based awards at fair value on date of grant and recognizes the compensation costs over the service periods for awards expected to vest. PMI’s accounting policy is to estimate the number of awards expected to be forfeited and adjust the expense when it is no longer probable that the employee will fulfill the service condition. For further details, see Note 10. Stock Plans.
Acquisitions:
Transactions With Noncontrolling Interests
Turkey – In the first quarter of 2022, PMI acquired the remaining 25% stake of its holding in Philip Morris Tütün Mamulleri Sanayi ve Ticaret A.Ş. ("PMTM") (formerly Philsa Philip Morris Sabancı Sigara ve Tütüncülük Sanayi ve Ticaret A.Ş.) and 24.75% stake in Philip Morris Pazarlama ve Satış A.Ş. ("PMPS") (formerly Philip Morris SA, Philip Morris Sabancı Pazarlama ve Satış A.Ş.) from its Turkish partners, Sabanci Holding for a total acquisition price including transaction costs and remaining dividend entitlements of approximately $223 million. As a result of this acquisition, PMI owned 100% of these Turkish subsidiaries as of December 31, 2022. The purchase of the remaining stakes in these holdings resulted in a decrease to PMI's additional paid-in capital of $30 million and an increase to accumulated other comprehensive losses of $171 million primarily following the reclassification of accumulated currency translation losses from noncontrolling interests to PMI’s accumulated other comprehensive losses during the first quarter of 2022.
In January 2023, PMI sold the acquired stakes of its holdings in PMTM and PMPS to Pioneers Tutun Yatirim Anonim Sirketi (“Pioneers”) for a consideration of approximately $205 million plus remaining dividend entitlements. The transaction will be reflected in PMI's financial statements in 2023.
Business Combinations
Swedish Match AB – On November 11, 2022 (the acquisition date), Philip Morris Holland Holdings B.V. (“PMHH”), a wholly owned subsidiary of PMI, acquired a controlling interest of 85.87% of the total issued shares in Swedish Match AB (“Swedish Match”) and has acquired 94.81% of its outstanding shares as of December 31, 2022. The shares were acquired through acceptances of the tender offer and a series of open market and over-the-counter purchases. PMI funded the acquisition through cash on-hand and debt proceeds, as described in Note 8. Indebtedness. The aggregate cash paid as of the acquisition date was $14,460 million (or $13,976 million net of cash acquired), which was included in investing activities in the consolidated statements of cash flows. The cash paid in connection with the additional purchases of the noncontrolling interests after the acquisition date amounted to $1,495 million and was included in financing activities in the consolidated statements of cash flows.
Swedish Match is a market leader in oral nicotine delivery with a significant presence in the United States market. The acquisition will accelerate PMI’s transformation to become a smoke-free company with a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn, and the fastest growing category of oral nicotine, with the potential for accelerated international expansion.
Due to the timing of the acquisition, and limited access to detailed and disaggregated financial information of Swedish Match, the purchase price allocation is preliminary and it is likely subject to change, including the valuation of property, plant and equipment, intangible assets, income taxes and legal contingencies among other items. The following table summarizes the preliminary purchase price allocation for the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| (in millions) | |
| Cash and cash equivalents | $ | 484 | |
| Trade receivables | 135 | |
| Other receivables | 53 | |
| Inventories | 444 | |
| Other current assets | 524 | |
| Property, plant and equipment | 627 | |
| Other intangible assets | 4,512 | |
| Other non-current assets | 214 | |
| Current portion of long-term debt | 224 | |
| Accounts payable | 120 | |
| Other current liabilities | 531 | |
| Income taxes | 14 | |
| Long-term debt | 1,126 | |
| Deferred income taxes | 1,253 | |
| Other non-current liabilities | 187 | |
| Identifiable net assets acquired | 3,538 | |
| Noncontrolling interest | 2,379 | |
| Goodwill | 13,301 | |
| Total consideration transferred | $ | 14,460 | |
The total fair value step-up adjustment for inventories was $146 million, of which $125 million was recognized in cost of sales in the fourth quarter of 2022, with the remaining balance expected to be recognized in the first quarter of 2023.
The fair value of long-term debt was determined using readily available market prices as of the acquisition date and the total purchase price adjustment of $(102) million is being amortized as an increase to interest expense, net over the lives of the related debt.
Goodwill is primarily attributable to future growth opportunities, anticipated synergies in the U.S. and intangible assets that did not qualify for separate recognition. The goodwill is not deductible for income tax purposes.
Identifiable intangible assets of Swedish Match consist of:
| | | | | | | | | | | |
| Type | Useful Life | Estimated Fair Value (in millions) |
| Trademarks | Non-amortizable | | $ | 2,077 | |
| Trademarks | Amortizable | 20 years | 904 | |
| Developed technology, including patents | | 10 years | 367 | |
| Customer relationships | | 10 years | 1,164 | |
| | | |
| Total identifiable intangible assets | | | $ | 4,512 | |
The significant assumptions used in determining the preliminary fair values of the identifiable intangible assets included royalty rates, revenue growth rates, profit margins, customer attrition rate and discount rates.
Trademarks primarily relate to $2,077 million for the ZYN trademark, which has been determined to have an indefinite life due to the fast growth and the leading position of the brand in the market. All other trademarks have been preliminarily determined to have a 20 years useful life. The preliminary fair values of the trademarks have been determined using the relief from royalty method supported by revenue growth rates assumptions and royalty rates benchmarking analysis at product category level (smoke-free brands, including
ZYN, cigar brands and lights). In 2023, during the measurement period, the useful life, revenue growth rate and the royalty rate of each individual trademark will be reassessed to determine its final purchase price.
Developed technology, including patents, relates to the nicotine pouch technology of $367 million. The patent has been assigned a useful life of 10 years, which is in line with the patent's protection. The preliminary fair value of the patent has been determined using the relief from royalty method.
Customer relationships have been valued separately by geographic locations, namely for the US market, Scandinavia, and other markets using the multiple periods excess earnings method, preliminarily reflecting a general market attrition rate for retail and revenue allocation and profit margin assumptions by customer type, which will be further assessed during the measurement period.
PMI consolidated statements of earnings for the year ended December 31, 2022, include $316 million of net revenues and $(26) million of net losses associated with the results of operations of Swedish Match from the acquisition date to December 31, 2022. The operating results of Swedish Match are included in a separate segment.
Acquisition related transaction costs, which were comprised primarily of regulatory, financial advisory and legal fees, totaled $59 million for the year ended December 31, 2022, and were included in marketing, administration and research costs in the consolidated statements of earnings. Bridge and term loan credit agreement related fees associated with the issuance of debt amounted to $54 million, of which $37 million were capitalized at the acquisition date. The fair value of the noncontrolling interest was based on the tender offer as of the acquisition date.
PMI’s approval of the acquisition by the European Commission, under the EU Merger Regulation, was subject to PMHH’s divestiture of Swedish Match’s subsidiary, SMD Logistics AB, following the completion of the offer to tender all shares in Swedish Match to PMHH. As a result, these assets have been accounted for as assets held for sale and included within other current assets and other accrued liabilities in PMI’s consolidated balance sheets at December 31, 2022.
The unaudited pro forma combined financial information was prepared using the acquisition method of accounting and was based on the historical financial information of PMI and Swedish Match. In order to reflect the occurrence of the acquisition on January 1, 2021, as required, the unaudited pro forma financial information includes adjustments to reflect the following:
•incremental amortization expense to be incurred based on the current preliminary fair values of the identifiable intangible assets acquired;
•incremental cost of products sold related to the fair value adjustments associated with acquisition date inventory;
•additional interest expense associated with the issuance of debt to finance the acquisition, including the effects of the related derivative financial instruments designated to hedge interest rate risks as well as economic hedges;
•reclassification of non-recurring acquisition-related costs incurred during the year ended December 31, 2022, to the year ended December 31, 2021;
•impact of a deferred tax cost of $430 million in 2022 and $321 million in 2021 related to the theoretical unrealized foreign currency gains on intercompany loans related to the acquisition financing. These theoretical unrealized pre-tax foreign currency movements were fully offset in the consolidated statements of earnings and were reflected as currency translation adjustments in PMI's consolidated statements of stockholders' (deficit) equity, while the corresponding deferred tax impacts were reflected in PMI's consolidated statements of earnings; and
•other immaterial items (i.e., the alignment of accounting policies from IFRS to US GAAP.)
The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2021. In addition, the unaudited pro forma financial information is not a projection of future results of operations of the combined company, nor does it reflect the expected realization of any synergies or cost savings associated with the acquisition.
The unaudited pro forma financial information is as follows:
| | | | | | | | |
| For the Years Ended December 31, |
| (in millions) | 2022 | 2021 |
| Net revenues | $ | 33,690 | | $ | 33,577 | |
| Net earnings attributable to PMI | $ | 8,875 | | $ | 8,610 | |
AG Snus - On May 6, 2021, PMI acquired 100% of AG Snus Aktieselskab ("AG Snus"), a company based in Denmark, and its Swedish subsidiary Tobacco House of Sweden AB fully owned by AG Snus, which operates in the oral tobacco (i.e. snus) and modern oral (i.e. nicotine pouches) product categories. The purchase price was $28 million in cash, net of cash acquired, with additional contingent payments of up to $10 million, primarily relating to product development and performance targets over a less than two-year period. In the fourth quarter of 2022, the additional contingent payment was settled for $9 million. The operating results of AG Snus are included in the European Union segment, and were not material.
Fertin Pharma – On September 15, 2021, PMI acquired 100% of Fertin Pharma A/S (“Fertin Pharma”), a company based in Denmark. Fertin Pharma is a developer and manufacturer of pharmaceutical and well-being products based on oral and intra-oral delivery systems. The acquisition was funded with existing cash. The total consideration of $821 million (DKK 5.2 billion) included cash of $580 million and the payment of $241 million related to the settlement of Fertin Pharma’s indebtedness. The purchase price of $821 million was allocated to cash ($24 million), current assets including receivables and inventories ($69 million), non-current assets including property, plant and equipment ($228 million), goodwill ($378 million), and other intangible assets ($245 million, which primarily consisted of customer relationships, developed technology, and in-process research and development ("IPR&D")), partially offset by current liabilities ($44 million, which primarily consisted of accrued liabilities and accounts payable) and non-current liabilities ($79 million, primarily deferred income tax). Goodwill is primarily attributable to future growth opportunities provided by acquired R&D capabilities and any intangibles that did not qualify for separate recognition. The goodwill is not deductible for income tax purposes. The amortizable intangible assets are being amortized over their estimated useful lives of 8 to 19 years. During 2022, PMI did not record any measurement period adjustments to the purchase price allocation. The final purchase price allocation was reflected in the consolidated balance sheets as of December 31, 2022.
Vectura – During the third quarter and up to September 15, 2021, PMI acquired a controlling interest of 74.77% of the total issued shares in Vectura Group plc (“Vectura”), an inhaled therapeutics company based in the United Kingdom. The shares were acquired through a series of open market purchases and acceptances of the tender offer at a price of 165 pence per share. As a result of additional acceptances of the offer and the exercise of the right to acquire compulsorily the Vectura shares, in accordance with the applicable English law, PMI completed the acquisition of 100% of Vectura in the fourth quarter of 2021. The acquisition was funded with existing cash from a designated account operated solely for the purpose of funding this acquisition.
The total purchase price of $1,384 million (GBP 1.0 billion) for 100% of the Vectura shares was allocated to cash ($136 million), current assets including receivables and inventories ($89 million), non-current assets including property, plant and equipment ($67 million), goodwill ($780 million), and other intangible assets ($486 million, which primarily consisted of developed technology, and IPR&D), partially offset by current liabilities ($100 million, primarily accrued liabilities), and non-current liabilities ($74 million, primarily deferred income tax). Goodwill is primarily attributable to future growth opportunities provided by acquired R&D capabilities and any intangibles that did not qualify for separate recognition. The goodwill is not deductible for income tax purposes. The amortizable intangible assets are being amortized over their estimated useful lives of 3 to 13 years. During 2022, PMI made certain measurement period adjustments to the purchase price allocation to reflect facts and circumstances in existence as of the acquisition date, which resulted in an increase to goodwill of $190 million. The increase was primarily due to a decrease in other intangible assets ($233 million), and a decrease in deferred income tax liabilities ($43 million). The final purchase price allocation was reflected in the consolidated balance sheets as of December 31, 2022.
Pro forma results of operations for AG Snus, Fertin Pharma and Vectura have not been presented as the aggregate impact is not material to PMI's consolidated statements of earnings.
Altria Group, Inc. Agreement
On October 20, 2022, PMI announced that it had reached an agreement with Altria Group, Inc. to end the companies' relationship regarding the IQOS commercialization rights in the U.S. as of April 30, 2024. As a result of PMI reacquiring these rights, effective May 1, 2024, PMI will have the full rights to commercialize IQOS in the U.S. As part of the agreement, PMI agreed to pay a total cash consideration of $2.7 billion, with $1.0 billion paid at the inception of the agreement and the remaining $1.7 billion (plus interest, at a per annum rate equal to six percent (6%)), to be paid by July 2023 at the latest. The cash consideration paid at the inception of the agreement of $1.0 billion has been accounted for within other assets in PMI’s consolidated balance sheets as of December 31, 2022. As of May 2024, when PMI can exercise its ability to commercialize IQOS in the U.S., PMI will finalize the accounting for this transaction by assigning the consideration to the respective assets.
Asset Acquisition
On August 9, 2021, PMI acquired 100% of OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. The transaction price was $38 million in cash, plus transaction costs, with additional contingent payment of $13 million, primarily related to certain key milestones that PMI deemed probable. Additionally, PMI may owe up to $25 million in future additional contingent payments dependent upon the achievement of certain milestones. PMI accounted for this transaction as an asset acquisition since the IPR&D of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, PMI determined that the acquired IPR&D had no alternative future use. As a result, PMI recorded a charge of $51 million to research and development costs within marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2021.
As previously discussed in Note 1. Background and Basis of Presentation on March 31, 2022, PMI launched a new Wellness and Healthcare business, Vectura Fertin Pharma, which consolidates Fertin Pharma, Vectura and OtiTopic, Inc. into one operating segment.
War in Ukraine:
Since the onset of the war in Ukraine in February 2022, PMI's main priority has been the safety and security of its more than 1,300 employees and their families in the country.
Ukraine
PMI temporarily suspended its commercial and manufacturing operations in Ukraine, including the closing of its factory in Kharkiv at the end of February 2022, in order to preserve the safety of its employees. PMI subsequently resumed some retail activities where safety allowed, in order to provide product availability and service to adult consumers, and began to supply the market from production centers outside Ukraine, as well as through a contract manufacturing arrangement. Production at the factory in Kharkiv remains suspended. While the effects of the war are unpredictable and could trigger impairment reviews for long-lived assets, as of December 31, 2022, PMI is unable to estimate the information required to perform impairment analyses (i.e., forecast of revenues, manufacturing and commercial plans). PMI is not aware of any major damage to its production facilities, inventories or other assets in Ukraine. As a result, PMI has not recorded an impairment of long-lived assets. As of December 31, 2022, PMI’s Ukrainian operations had approximately $414 million in total assets, excluding intercompany balances. These total assets included $69 million, $279 million and $31 million in receivables, inventories and property, plant and equipment, respectively.
Russia
PMI has suspended its planned investments in the Russian Federation including all new product launches and commercial, innovation, and manufacturing investments. PMI has also taken steps to scale down its manufacturing operations in Russia amid ongoing supply chain disruptions and the evolving regulatory environment. PMI is continuously assessing the evolving situation in Russia, including: recent regulatory constraints in the market that entail very complex terms and conditions that must be met for any divestment transaction to be granted approval by the authorities; and restrictions resulting from international regulations. As a result of PMI continuing operations within Russia as of December 31, 2022, it has not recorded an impairment of long-lived and other assets. However, PMI recorded specific asset write downs as referred to in the table below. PMI’s Russian operations as of December 31, 2022 had approximately $2.5 billion in total assets, excluding intercompany balances. These total assets included $578 million, $541 million, $786 million, $334 million and $161 million in cash (primarily held in local currency), receivables, inventories, property, plant and equipment and goodwill, respectively. In addition, there was approximately $806 million of cumulative foreign currency translation losses reflected in accumulated other comprehensive losses in the consolidated statement of stockholders’ equity as of December 31, 2022.
As of December 31, 2022, PMI recorded in its consolidated statements of earnings pre-tax charges related to circumstances driven by the war as follows:
| | | | | | | | | | | | | | | |
| (in millions) | For the Year Ended December 31, 2022 | | |
| Cost of sales | Marketing, administration and research costs | Total | | | | |
Ukraine 1 | $ | 42 | | $ | 36 | | $ | 78 | | | | | |
Russia 2 | 20 | | 53 | | 73 | | | | | |
| Total | $ | 62 | | $ | 89 | | $ | 151 | | | | | |
1 The charges were primarily due to an inventory write down, additional allowance for receivables and the cost of PMI’s humanitarian efforts, which includes salary continuation for its employees.
2 The charges were primarily due to machinery and inventory write downs related to the commercial decisions noted above.
PMI will continue to monitor the situation as it evolves and will determine if further charges are needed.
Goodwill and Other Intangible Assets, net:
The movements in goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | European Union | Eastern Europe | Middle East & Africa | South & Southeast Asia | East Asia & Australia | Americas | Swedish Match | Wellness & Healthcare | Total |
| Balances at January 1, 2021 | $ | 1,434 | | $ | 317 | | $ | 86 | | $ | 2,915 | | $ | 559 | | $ | 653 | | $ | — | | $ | — | | $ | 5,964 | |
| Changes due to: | | | | | | | | | |
| Acquisitions | 54 | | — | | — | | — | | — | | — | | — | | 944 | | 998 | |
| Currency | (91) | | (22) | | (7) | | (87) | | (20) | | (42) | | — | | (13) | | (282) | |
| | | | | | | | | |
| Balances, December 31, 2021 | 1,397 | | 295 | | 79 | | 2,828 | | 539 | | 611 | | — | | 931 | | 6,680 | |
| Changes due to: | | | | | | | | | |
| Acquisitions | — | | — | | — | | — | | — | | — | | 13,301 | | — | | 13,301 | |
| Currency | (82) | | (17) | | (5) | | (256) | | (46) | | 4 | | (5) | | (109) | | (516) | |
| Other | — | | — | | — | | — | | — | | — | | — | | 190 | | 190 | |
| Balances, December 31, 2022 | $ | 1,315 | | $ | 278 | | $ | 74 | | $ | 2,572 | | $ | 493 | | $ | 615 | | $ | 13,296 | | $ | 1,012 | | $ | 19,655 | |
The increase in goodwill in 2022 was due primarily to the final purchase price allocation associated with Vectura Group plc acquisition in 2021 (reflected in "changes due to other" in Wellness and Healthcare segment) and the preliminary purchase price allocation associated with the Swedish Match AB acquisition in the fourth quarter of 2022, partially offset by currency movements. For further details on these business combinations, see Note 3. Acquisitions.
At December 31, 2022, goodwill primarily reflects PMI’s business combinations in Greece, Indonesia, Mexico, the Philippines and Serbia, as well as the final purchase price allocation of Fertin Pharma A/S and Vectura Group plc., which were acquired in September 2021, and the preliminary purchase price allocation of Swedish Match AB, which was acquired in the fourth quarter of 2022.
As discussed in Note 1. Background and Basis of Presentation, during the first quarter of 2022, one of Fertin Pharma's product lines was moved from the Wellness and Healthcare segment to the European Union segment. As a result, the December 31, 2021 goodwill balance in the table above included a reclassification of $24 million from the Wellness and Healthcare segment to the European Union segment (reflected in changes due to acquisitions in 2021).
Details of other intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(in millions) | Weighted-Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net | | Gross Carrying Amount | Accumulated Amortization | Net |
| Non-amortizable intangible assets | | $ | 3,346 | | | $ | 3,346 | | | $ | 1,312 | | | $ | 1,312 | |
| Amortizable intangible assets: | | | | | | | | |
| Trademarks | 15 years | 2,050 | | $ | 674 | | 1,376 | | | 1,201 | | $ | 639 | | 562 | |
| | | | | | | | |
| Developed technology, including patents | 8 years | 975 | | 243 | | 732 | | | 859 | | 63 | | 796 | |
| Customer relationships and other | 10 years | 1,390 | | 112 | | 1,278 | | | 238 | | 90 | | 148 | |
| Total other intangible assets | | $ | 7,761 | | $ | 1,029 | | $ | 6,732 | | | $ | 3,610 | | $ | 792 | | $ | 2,818 | |
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico, as well as the preliminary purchase price allocation associated with the Swedish Match acquisition in 2022, and PMI's business combinations in 2021 (primarily in-process research and development). The increase since December 31, 2021 was due to the preliminary purchase price allocation associated with the Swedish Match acquisition in 2022 of $2,077 million, partially offset by the final purchase price allocation associated with Vectura Group plc acquisition in 2021 in the amount of $(3) million and currency movements of $(40) million.
The increase in the gross carrying amount of amortizable intangible assets from December 31, 2021, was due to the preliminary purchase price allocation associated with the Swedish Match acquisition in 2022 of $2,435 million, partially offset by final purchase price allocation associated with PMI's business combinations in 2021 and other movements in the amount of $(225) million, and currency movements of $(93) million. For further details on these business combinations, see Note 3. Acquisitions.
The change in the accumulated amortization from December 31, 2021, was mainly due to the 2022 amortization of $159 million and impairment charge of $112 million, partially offset by currency movements of $34 million. The amortization of intangibles for the year ended December 31, 2022 was recorded in cost of sales ($58 million) and in marketing, administration and research costs ($101 million) on PMI's consolidated statements of earnings.
Amortization expense for each of the next five years is estimated to be $310 million or less, assuming no additional transactions occur that require the amortization of intangible assets. This estimate is subject to change based on the finalization of the preliminary purchase price allocation of the Swedish Match acquisition.
During the second quarter of 2022, 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. However, there are still risks related to PMI’s Russian reporting unit’s assets as the fair value of these assets is difficult to predict due to the volatility in foreign currency and commodity markets, supply chain, and current economic, political and social conditions. For more information see Note 4. War in Ukraine. Each of PMI’s reporting units had fair values substantially in excess of its carrying value with the exception of the Wellness and Healthcare reporting unit, which had less than 20% excess of fair value over its carrying value in the period of the latest review of goodwill for potential impairment. The Wellness and Healthcare reporting unit's fair value was determined using the discounted cash flow model. PMI will continue to monitor this reporting unit as any changes in assumptions, estimates or market factors could result in a future impairment.
PMI recorded a pre-tax impairment charge of $112 million in the third quarter of 2022, reflecting the impact of general economic and market conditions resulting in a reduction in future estimated cash flows on certain products within the Wellness and Healthcare segment. The impairment reduces the carrying values of developed technology definite-lived intangible assets in the Wellness and Healthcare segment to $325 million. The fair value of these intangible assets was primarily determined using the multi-period excess earnings method. This impairment charge was recorded within cost of sales in the consolidated statements of earnings for the year ended December 31, 2022.
Related Parties - Equity Investments and Other:
Equity Method Investments:
At December 31, 2022 and 2021, PMI had total equity method investments of $1,000 million and $879 million, respectively. Equity method investments are initially recorded at cost. Under the equity method of accounting, the investment is adjusted for PMI's proportionate share of earnings or losses, dividends, capital contributions, changes in ownership interests and movements in currency translation adjustments. The carrying value of our equity method investments at December 31, 2022 and 2021, exceeded our share of the investees' book value by $750 million and $764 million, respectively. The difference between the investment carrying value and the amount of underlying equity in net assets, excluding $715 million and $728 million attributable to goodwill as of December 31, 2022 and 2021, respectively, which consists primarily of definite-lived intangible assets is being amortized on a straight-line basis. At December 31, 2022 and 2021, PMI received year-to-date dividends from equity method investees of $9 million and $176 million, respectively.
PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in Russia (Eastern Europe segment), which as of December 31, 2022 had a carrying value of $458 million. While as of December 31, 2022, there have been no impairment indicators based on the business’ performance, there are still risks related to this investment as the fair value of these assets is difficult to predict due to the volatility in foreign currency and commodity markets, supply chain, and current economic, political and social conditions. For more information, see Note 4. War in Ukraine. Additionally, there was approximately $469 million of cumulative foreign currency translation losses associated with Megapolis Distribution BV reflected in accumulated other comprehensive losses in the consolidated statement of stockholders’ equity as of December 31, 2022.
PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25% economic interest in Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by the Algerian state-owned enterprise Management et Développement des Actifs et des Ressources Holding ("MADAR Holding"), which manufactures and distributes under license some of PMI’s brands (Middle East & Africa segment).
The initial investments in Megapolis Distribution BV and EITA were recorded at cost and are included in equity investments on the consolidated balance sheets.
Equity securities:
Following the deconsolidation of RBH on March 22, 2019, PMI recorded the continuing investment in RBH, PMI's wholly owned subsidiary in Canada, at fair value of $3,280 million at the date of deconsolidation, within equity investments. Transactions between PMI and RBH are considered to be related-party transactions from the date of deconsolidation and are included in the tables below.
The fair value of PMI’s other equity securities, which have been classified within Level 1, was $326 million and $283 million for the years ended December 31, 2022 and 2021, respectively. Unrealized pre-tax gains (losses) of $43 million and $19 million ($33 million and $15 million net of tax) on these equity securities were recorded in equity investments and securities (income)/loss, net on the consolidated statements of earnings for the years ended December 31, 2022 and 2021, respectively. For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.
Other related parties:
United Arab Emirates-based Trans-Emirates Trading and Investments (FZC) ("TTI") holds a 33% non-controlling interest in Philip Morris Misr LLC ("PMM"), an entity incorporated in Egypt which is consolidated in PMI’s financial statements in the Middle East & Africa segment. PMM sells, under license, PMI brands in Egypt through an exclusive distribution agreement with a local entity that is also controlled by TTI. Additionally, as of December 31, 2022, TTI holds a 32.9% non-controlling interest in United Tobacco Company (“UTC”), an entity incorporated in Egypt which manufactures products for PMM under license.
Godfrey Phillips India Ltd ("GPI") is one of the non-controlling interest holders in IPM India, which is a 56.3% owned PMI consolidated subsidiary in the South & Southeast Asia segment. GPI also acts as contract manufacturer and distributor for IPM India.
Financial activity with the above related parties:
PMI’s net revenues and expenses with the above related parties were as follows:
| | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| (in millions) | | 2022 | 2021 | 2020 |
| Net revenues: | | | | |
| Megapolis Group | | $ | 2,485 | | $ | 2,207 | | $ | 2,174 | |
| Other | | 1,173 | | 1,123 | | 1,059 | |
Net revenues (a) | | $ | 3,658 | | $ | 3,330 | | $ | 3,233 | |
| | | | |
| Expenses: | | | | |
| Other | | $ | 119 | | $ | 69 | | $ | 51 | |
| Expenses | | $ | 119 | | $ | 69 | | $ | 51 | |
(a) Net revenues exclude excise taxes and VAT billed to customers.
PMI’s balance sheet activity with the above related parties was as follows:
| | | | | | | | | | | |
| | At December 31, |
| (in millions) | | 2022 | 2021 |
| Receivables: | | | |
| Megapolis Group | | $ | 478 | | $ | 319 | |
| Other | | 210 | | 199 | |
| Receivables | | $ | 688 | | $ | 518 | |
| | | |
| Payables: | | | |
| Other | | $ | 31 | | $ | 25 | |
| Payables | | $ | 31 | | $ | 25 | |
| | | |
| | | |
The activities with the above related parties are in the ordinary course of business, and are primarily for distribution, service fees, contract manufacturing and license agreements. PMI eliminated its respective share of all significant intercompany transactions with the equity method investees.
Product Warranty:
PMI's heat-not-burn devices and e-vapor products are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law. PMI generally provides in cost of sales for the estimated cost of warranty in the period the related revenue is recognized. PMI assesses the adequacy of its accrued product warranties and adjusts the amounts as necessary based on actual experience and changes in future estimates. Factors that affect product warranties may vary across markets but typically include device version mix, product failure rates, logistics and service delivery costs, and warranty policies. PMI accounts for its product warranties within other accrued liabilities. At December 31, 2022 and December 31, 2021, these amounts were as follows:
| | | | | | | | |
| At December 31, |
| (in millions) | 2022 | 2021 |
| Balance at beginning of period | $ | 113 | | $ | 137 | |
| Changes due to: | | |
| Warranties issued | 107 | | 154 | |
| Settlements | (114) | | (177) | |
| Currency/Other | (2) | | (1) | |
| Balance at end of period | $ | 104 | | $ | 113 | |
Indebtedness:
Short-Term Borrowings
At December 31, 2022 and 2021, PMI’s short-term borrowings and related average interest rates consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (in millions) | Amount Outstanding | | Average Year-End Rate | | Amount Outstanding | | Average Year-End Rate |
Commercial paper | $ | 912 | | | 4.4 | % | | $ | — | | | — | % |
Bank loans | 295 | | | 7.5 | | | 225 | | | 12.0 | |
| U.S. dollar credit facility borrowings related to Swedish Match AB acquisition | 4,430 | | | 4.9 | | | — | | | — | |
| $ | 5,637 | | | | | $ | 225 | | | |
Given the mix of subsidiaries and their respective local economic environments, the average interest rate for bank loans above can vary significantly from day to day and country to country.
The fair values of PMI’s short-term borrowings at December 31, 2022 and 2021, based upon current market interest rates, approximate the amounts disclosed above.
Long-Term Debt
At December 31, 2022 and 2021, PMI’s long-term debt consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2022 | | 2021 |
U.S. dollar notes, 0.875% to 6.375% (average interest rate 3.896%), due through 2044 | $ | 22,596 | | | $ | 19,397 | |
| Foreign currency obligations: | | | |
Euro notes, 0.125% to 3.125% (average interest rate 1.877%), due through 2039 | 8,116 | | | 7,687 | |
Swiss franc notes, 1.625% to 2.125% (average interest rate 1.768%), due through 2024 | 378 | | | 273 | |
Euro credit facility borrowings related to Swedish Match AB acquisition, (average interest rate 2.234%), due through 2027 | 5,850 | | | — | |
Swedish krona notes, 1.395% to 3.654% (average interest rate 2.110%), due through 2029 | 343 | | | — | |
Other (average interest rate 3.346%), due through 2029 (a) | 203 | | | 224 | |
| Carrying value of long-term debt | 37,486 | | | 27,581 | |
Less current portion of long-term debt | 2,611 | | | 2,798 | |
| $ | 34,875 | | | $ | 24,783 | |
(a) Includes mortgage debt in Switzerland as well as $54 million and $71 million in finance leases at December 31, 2022 and 2021, respectively.
The fair value of PMI’s outstanding long-term debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest rates currently available to PMI for issuances of debt with similar terms and remaining maturities. At December 31, 2022 and 2021 the fair value of PMI's outstanding long-term debt, excluding the aforementioned finance leases, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
(in millions) | 2022 | | 2021 |
| Level 1 | $ | 28,919 | | | $ | 29,597 | |
| Level 2 | 6,142 | | | 165 | |
For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.
Financing of the Swedish Match Acquisition
In connection with PMI’s all-cash recommended public offer to the shareholders of Swedish Match AB ("Swedish Match"), a public limited liability company organized under the laws of Sweden, for all the outstanding shares of Swedish Match, on May 11, 2022, PMI entered into a credit agreement relating to a 364-day senior unsecured bridge facility. The facility provided for borrowings up to an aggregate principal amount of $17 billion, expiring 364 days after the occurrence of certain events unless extended. On June 23, 2022, PMI entered into a new €5.5 billion (approximately $5.8 billion at the date of signing) senior unsecured term loan credit agreement consisting of a €3.0 billion (approximately $3.2 billion at the date of signing) tranche expiring three years after the occurrence of certain events and a €2.5 billion (approximately $2.6 billion at the date of signing) tranche expiring on June 23, 2027. In connection with the term loan facility, the aggregate principal amount of commitments under the 364-day senior unsecured bridge facility was reduced from $17 billion to $11 billion. On November 11, 2022, PMI acquired a controlling interest of 85.87% of the total issued shares in Swedish Match and has acquired 94.81% of its outstanding shares as of December 31, 2022.
PMI borrowed $8.4 billion under the bridge facility by delivering notices of borrowing for advances of $7.9 billion and $0.5 billion on November 7, 2022 and November 10, 2022, respectively. All amounts borrowed under the bridge facility will become due on November 8, 2023 unless prepaid or such maturity date is extended pursuant to the terms of the bridge facility. On November 7, 2022, PMI also delivered notices of borrowing for advances totaling €5.5 billion under the term loan facility, of which €3.0 billion will become due on November 9, 2025 and €2.5 billion will become due on June 23, 2027 unless prepaid pursuant to the terms of the credit agreement. On November 21, 2022, PMI repaid $4.0 billion under the bridge facility. As of December 31, 2022, outstanding borrowings under the bridge facility amounted to $4.4 billion and $1.1 billion commitments remained available for drawing. As of December 31, 2022, the €5.5 billion (approximately $5.9 billion) term loan facility was fully drawn and remained outstanding. The proceeds under the bridge facility and the term loan facility were used, directly or indirectly, to finance the acquisition, including, the payment of related fees and expenses. For further details on this acquisition, see Note 3. Acquisitions.
Notes Outstanding:
PMI’s notes outstanding at December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | |
Type | | Face Value | | Interest
Rate | | Issuance | | Maturity |
U.S. dollar notes | | $600 | | 2.625% | | March 2013 | | March 2023 |
U.S. dollar notes | | $500 | | 2.125% | | May 2016 | | May 2023 |
U.S. dollar notes | | $750 | | 1.125% | | May 2020 | | May 2023 |
U.S. dollar notes | | $500 | | 3.600% | | November 2013 | | November 2023 |
U.S. dollar notes | | $900 | | 2.875% | | May 2019 | | May 2024 |
U.S. dollar notes | | $750 | | 3.250% | | November 2014 | | November 2024 |
U.S. dollar notes | | $1,000 | | 5.125% | | November 2022 | | November 2024 |
U.S. dollar notes | | $750 | | 1.500% | | May 2020 | | May 2025 |
U.S. dollar notes | | $750 | | 3.375% | | August 2015 | | August 2025 |
U.S. dollar notes | | $750 | | 5.000% | | November 2022 | | November 2025 |
U.S. dollar notes | | $750 | | 2.750% | | February 2016 | | February 2026 |
U.S. dollar notes | | $750 | | 0.875% | | November 2020 | | May 2026 |
U.S. dollar notes | | $500 | | 3.125% | | August 2017 | | August 2027 |
U.S. dollar notes | | $1,500 | | 5.125% | | November 2022 | | November 2027 |
U.S. dollar notes | | $500 | | 3.125% | | November 2017 | | March 2028 |
U.S. dollar notes | (a) | $50 | | 4.000% | | May 2013 | | May 2028 |
U.S. dollar notes | | $750 | | 3.375% | | May 2019 | | August 2029 |
U.S. dollar notes | | $1,250 | | 5.625% | | November 2022 | | November 2029 |
U.S. dollar notes | | $750 | | 2.100% | | May 2020 | | May 2030 |
U.S. dollar notes | | $750 | | 1.750% | | November 2020 | | November 2030 |
U.S. dollar notes | | $1,500 | | 5.750% | | November 2022 | | November 2032 |
U.S. dollar notes | | $1,500 | | 6.375% | | May 2008 | | May 2038 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | |
Type | | Face Value | | Interest
Rate | | Issuance | | Maturity |
U.S. dollar notes | | $750 | | 4.375% | | November 2011 | | November 2041 |
U.S. dollar notes | | $700 | | 4.500% | | March 2012 | | March 2042 |
U.S. dollar notes | | $750 | | 3.875% | | August 2012 | | August 2042 |
U.S. dollar notes | | $850 | | 4.125% | | March 2013 | | March 2043 |
U.S. dollar notes | | $750 | | 4.875% | | November 2013 | | November 2043 |
U.S. dollar notes | | $750 | | 4.250% | | November 2014 | | November 2044 |
U.S. dollar notes | (b) | $500 | | 4.250% | | May 2016 | | November 2044 |
EURO notes | (c) | €600 (approximately $761) | | 2.875% | | May 2012 | | May 2024 |
EURO notes | (a) | €300 (approximately $308) | | 0.875% | | September 2016 | | September 2024 |
EURO notes | (c) | €500 (approximately $582) | | 0.625% | | November 2017 | | November 2024 |
EURO notes | (c) | €750 (approximately $972) | | 2.750% | | March 2013 | | March 2025 |
EURO notes | (a) | €200 (approximately $205) | | 1.200% | | November 2017 | | November 2025 |
EURO notes | (a) | €50 (approximately $51) | | 1.200% | | December 2020 | | November 2025 |
EURO notes | (a) | €50 (approximately $51) | | 1.200% | | June 2021 | | November 2025 |
EURO notes | (c) | €1,000 (approximately $1,372) | | 2.875% | | March 2014 | | March 2026 |
EURO notes | (c) | €500 (approximately $557) | | 0.125% | | August 2019 | | August 2026 |
EURO notes | (a) | €300 (approximately $308) | | 0.875% | | February 2020 | | February 2027 |
EURO notes | (c) | €500 (approximately $697) | | 2.875% | | May 2014 | | May 2029 |
EURO notes | (c) | €750 (approximately $835) | | 0.800% | | August 2019 | | August 2031 |
EURO notes | (c) | €500 (approximately $648) | | 3.125% | | June 2013 | | June 2033 |
EURO notes | (c) | €500 (approximately $578) | | 2.000% | | May 2016 | | May 2036 |
EURO notes | (c) | €500 (approximately $582) | | 1.875% | | November 2017 | | November 2037 |
EURO notes | (c) | €750 (approximately $835) | | 1.450% | | August 2019 | | August 2039 |
Swiss franc notes | (a) | CHF100 (approximately $104) | | 2.125% | | June 2013 | | June 2023 |
Swiss franc notes | (c) | CHF250 (approximately $283) | | 1.625% | | May 2014 | | May 2024 |
| Swedish krona notes | (a) | SEK800 (approximately $76) | | 1.600% | | February 2018 | | February 2023 |
| Swedish krona notes | (a) | SEK200 (approximately $19) | | floating | | February 2018 | | February 2023 |
| Swedish krona notes | (a) | SEK250 (approximately $24) | | floating | | October 2017 | | October 2023 |
| Swedish krona notes | (a) | SEK1,000 (approximately $95) | | 2.710% | | January 2019 | | January 2026 |
| Swedish krona notes | (a) | SEK700 (approximately $67) | | 1.395% | | February 2021 | | February 2026 |
| Swedish krona notes | (a) | SEK100 (approximately $10) | | 1.395% | | March 2021 | | February 2026 |
| Swedish krona notes | (a) | SEK200 (approximately $19) | | 1.395% | | September 2021 | | February 2026 |
| Swedish krona notes | (a) | SEK200 (approximately $19) | | 1.395% | | January 2022 | | February 2026 |
| Swedish krona notes | (a) | SEK300 (approximately $29) | | 2.190% | | April 2021 | | April 2029 |
(a) Notes issued by Swedish Match AB. USD equivalents for foreign currency notes were calculated based on exchange rates on the date of acquisition.
(b) These notes are a further issuance of the 4.250% notes issued by PMI in November 2014.
(c) USD equivalents for foreign currency notes were calculated based on exchange rates on the date of issuance.
The net proceeds from the sale of the securities listed in the table above were primarily used for general corporate purposes, including working capital requirements and repurchase of PMI's common stock.
Aggregate maturities:
Aggregate maturities of long-term debt are as follows:
| | | | | |
(in millions) | |
| 2023 | $ | 2,613 | |
| 2024 | 4,572 | |
| 2025 | 6,560 | |
| 2026 | 3,307 | |
| 2027 | 4,979 | |
| 2028-2032 | 6,909 | |
| 2033-2037 | 1,595 | |
| Thereafter | 7,348 | |
| 37,883 | |
| Debt discounts and fair value adjustments | (397) | |
| Total long-term debt | $ | 37,486 | |
Revolving Credit Facilities
At December 31, 2022, PMI’s total committed revolving credit facilities were as follows:
| | | | | | | | | |
Type
(in billions) | Committed Revolving Credit Facilities | | |
364-day revolving credit, expiring January 31, 2023 (1) | $ | 1.8 | | | |
Multi-year revolving credit, expiring February 10, 2026 (2) | 2.0 | | | |
Multi-year revolving credit, expiring September 29, 2026 (3) (4) | 2.5 | | | |
Total facilities | $ | 6.3 | | | |
| | | |
(1) On January 25, 2023, PMI entered into an agreement to amend and extend the term of its $1.8 billion 364-day committed revolving credit facility from January 31, 2023, to January 30, 2024.
(2) On January 28, 2022, PMI entered into an agreement, effective February 10, 2022, to amend and extend the term of its $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2026 to February 10, 2027, in the amount of $1.9 billion.
(3) Includes pricing adjustments that may result in the reduction or increase in both the interest rate and commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets.
(4) On September 20, 2022, PMI entered into an agreement, effective September 29, 2022, to amend and extend the term of its $2.5 billion multi-year revolving credit facility, for an additional year covering the period September 30, 2026 to September 29, 2027, in the amount of $2.3 billion.
At December 31, 2022, there were no borrowings under these committed revolving credit facilities, and the entire committed amounts were available for borrowing.
These committed revolving credit facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require PMI to post collateral.
In addition to the committed revolving credit facilities discussed above, certain subsidiaries maintain short-term credit arrangements to meet their respective working capital needs. These credit arrangements, which amounted to approximately $1.9 billion at December 31, 2022, and approximately $2.3 billion at December 31, 2021, are for the sole use of the subsidiaries. Borrowings under these arrangements and other bank loans amounted to $295 million at December 31, 2022, and $225 million at December 31, 2021.
Capital Stock:
Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares were as follows:
| | | | | | | | | | | | | | | | | |
| Shares Issued | | Shares
Repurchased | | Shares
Outstanding |
| Balances, January 1, 2020 | 2,109,316,331 | | | (553,421,668) | | | 1,555,894,663 | |
| | | | | |
| Issuance of stock awards | | | 1,479,068 | | | 1,479,068 | |
| Balances, December 31, 2020 | 2,109,316,331 | | | (551,942,600) | | | 1,557,373,731 | |
| Repurchase of shares | | | (8,514,629) | | | (8,514,629) | |
| Issuance of stock awards | | | 1,310,891 | | | 1,310,891 | |
| Balances, December 31, 2021 | 2,109,316,331 | | | (559,146,338) | | | 1,550,169,993 | |
| Repurchase of shares | | | (1,966,730) | | | (1,966,730) | |
| Issuance of stock awards | | | 2,014,448 | | | 2,014,448 | |
| Balances, December 31, 2022 | 2,109,316,331 | | | (559,098,620) | | | 1,550,217,711 | |
On June 11, 2021, PMI's Board of Directors authorized a new share repurchase program of up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period. On July 22, 2021, PMI began repurchasing shares under this new share repurchase program. From July 22, 2021 through March 31, 2022, PMI repurchased 10.5 million shares of its common stock at a cost of approximately $1.0 billion. During the first three months of 2022, PMI repurchased 2.0 million shares of its common stock at a cost of $199 million. On May 11, 2022, PMI announced the suspension of its three-year share repurchase program following the recommended public offer to acquire the outstanding shares of Swedish Match from its shareholders. For further details, see Note 3. Acquisitions. Prior to the suspension of the program, PMI made no share repurchases during the second quarter of 2022.
At December 31, 2022, 33,284,616 shares of common stock were reserved for stock awards under PMI’s stock plans, and 250 million shares of preferred stock, without par value, were authorized but unissued. PMI currently has no plans to issue any shares of preferred stock.
Stock Plans:
In May 2022, PMI’s shareholders approved the Philip Morris International Inc. 2022 Performance Incentive Plan (the “2022 Plan”). The 2022 Plan replaced the 2017 Performance Incentive Plan, and there will be no additional grants under the replaced plan. Under the 2022 Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2022 Plan. At December 31, 2022, shares available for grant under the 2022 Plan were 24,856,420.
In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 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 2017 Non-Employee Directors Plan. At December 31, 2022, shares available for grant under the plan were 894,346.
Restricted share unit (RSU) awards
PMI may grant RSU awards to eligible employees; recipients may not sell, assign, pledge or otherwise encumber such awards. Such awards are subject to forfeiture if certain employment conditions are not met. RSU awards generally vest on the third anniversary of the grant date. RSU awards do not carry voting rights, although they do earn dividend equivalents.
During 2022, the activity for RSU awards was as follows:
| | | | | | | | |
| Number of
Shares | Weighted-
Average Grant
Date Fair Value
Per Share |
| Balance at January 1, 2022 | 4,640,764 | | $ | 81.96 | |
| Granted | 1,657,460 | | 104.75 | |
| Vested | (1,603,571) | | 78.49 | |
| Forfeited | (175,183) | | 89.37 | |
| Balance at December 31, 2022 | 4,519,470 | | $ | 91.26 | |
During the years ended December 31, 2022, 2021 and 2020, the grant date fair value of the RSU awards granted to PMI employees and the recorded compensation expense related to RSU awards were as follows:
| | | | | | | | | | | | | | |
| (in millions, except per RSU award granted) | Total Grant Date Fair Value of RSU Awards Granted | | Weighted-Average Grant Date Fair Value Per RSU Award Granted | Compensation Expense related to RSU Awards |
| 2022 | $ | 174 | | | $ | 104.75 | | $ | 135 | |
| 2021 | $ | 166 | | | $ | 82.17 | | $ | 139 | |
| 2020 | $ | 148 | | | $ | 85.79 | | $ | 129 | |
The fair value of the RSU awards at the date of grant is amortized to expense over the restriction period, typically three years after the date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2022, PMI had $158 million of total unrecognized compensation costs related to non-vested RSU awards. These costs are expected to be recognized over a weighted-average period of approximately seventeen months, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2022, 2021 and 2020, share and fair value information for PMI RSU awards that vested were as follows:
| | | | | | | | | | | | | | |
| (dollars in millions) | Shares of RSU Awards that Vested | | Grant Date Fair Value of Vested Shares of RSU Awards | Total Fair Value of RSU Awards that Vested |
| 2022 | 1,603,571 | | | $ | 126 | | $ | 174 | |
| 2021 | 1,256,441 | | | $ | 121 | | $ | 111 | |
| 2020 | 1,206,871 | | | $ | 117 | | $ | 102 | |
Performance share unit (PSU) awards
PMI may grant PSU awards to certain executives; recipients may not sell, assign, pledge or otherwise encumber such awards. The PSU awards require the achievement of certain performance metrics, which are predetermined at the time of grant, typically over a three-year performance cycle. The performance metrics for such PSU's granted during 2022 consisted of PMI's Total Shareholder Return ("TSR") relative to a predetermined peer group and on an absolute basis (40% weight), PMI’s currency-neutral compound annual adjusted diluted earnings per share growth rate (30% weight), and a Sustainability Index, which consists of two drivers:
•Product Sustainability (20% weight) measuring progress on PMI's efforts to maximize the benefits of smoke-free products, purposefully phase out cigarettes, seek net positive impact in wellness and healthcare, and reduce post-consumer waste; and
•Operational Sustainability (10% weight) measuring progress on PMI's efforts to tackle climate change, preserve nature, improve the quality of life of people in its supply chain, and foster an empowered, and inclusive workplace.
The performance metrics for such PSU's granted during 2021 and 2020 consisted of PMI's TSR relative to a predetermined peer group and on an absolute basis (40% weight), PMI’s currency-neutral compound annual adjusted diluted earnings per share growth rate (30% weight), and PMI’s performance against specific measures of PMI’s transformation, defined as net revenues from PMI's RRPs and any other non-combustible products as a percentage of PMI's total net revenues in the last year of the performance cycle (30% weight).
The aggregate of the weighted performance factors for the three metrics in each such PSU award determines the percentage of PSUs that will vest at the end of the three-year performance cycle. The minimum percentage of such PSUs that can vest is zero, with a target percentage of 100 and a maximum percentage of 200. Each such vested PSU entitles the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 will result in the targeted number of PSUs being vested. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned. PSU awards do not carry voting rights.
During 2022, the activity for PSU awards was as follows:
| | | | | | | | | | | | | | |
| Number of
Shares | | Weighted-
Average Grant Date
Fair Value Subject to Other Performance Metrics | Weighted-
Average Grant Date
Fair Value Subject to TSR Performance Metric |
| | (Per Share) | (Per Share) |
| Balance at January 1, 2022 | 1,537,020 | | | $ | 82.14 | | $ | 96.25 | |
| Granted | 472,840 | | | 104.92 | | 143.89 | |
| Vested | (669,960) | | | 77.26 | | 83.59 | |
| Adjustments for performance achievement | 223,320 | | | 77.26 | | 83.59 | |
| Forfeited | (56,030) | | | 87.23 | | 107.46 | |
| Balance at December 31, 2022 | 1,507,190 | | | $ | 90.31 | | $ | 115.45 | |
During the years ended December 31, 2022, 2021 and 2020, the grant date fair value of the PSU awards granted to PMI employees and the recorded compensation expense related to PSU awards were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per PSU award granted) | Weighted-
Average PSU Grant Date Fair Value Subject to Other Performance Factors | | Weighted-
Average PSU Grant Date Fair Value Subject to TSR Performance Factor | | Compensation Expense related to PSU Awards |
| Total | Per PSU Award | | Total | Per PSU Award | | Total |
| 2022 | $ | 30 | | $ | 104.92 | | | $ | 27 | | $ | 143.89 | | | $ | 48 | |
| 2021 | $ | 28 | | $ | 81.86 | | | $ | 25 | | $ | 106.93 | | | $ | 71 | |
| 2020 | $ | 28 | | $ | 86.04 | | | $ | 28 | | $ | 80.36 | | | $ | 38 | |
The grant date fair value of the PSU awards subject to the other performance factors was determined by using the market price of PMI’s stock on the date of the grant. The grant date fair value of the PSU market-based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation model. The following assumptions were used to determine the grant date fair value of the PSU awards subject to the TSR performance factor for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Average risk-free interest rate (a) | 1.7 | % | | 0.2 | % | | 1.4 | % |
Average expected volatility (b) | 28.3 | % | | 31.7 | % | | 23.5 | % |
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
The fair value of the PSU award at the date of grant is amortized to expense over the performance period, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2022, PMI had $42 million of total unrecognized compensation cost related to non-vested PSU awards. This cost is recognized over a weighted-average performance cycle period of approximately seventeen months, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2022, 2021 and 2020, share and fair value information for PMI PSU awards that vested were as follows:
| | | | | | | | | | | | | | |
| (dollars in millions) | Shares of PSU Awards that Vested | | Grant Date Fair Value of Vested Shares of PSU Awards | Total Fair Value of PSU Awards that Vested |
| 2022 | 669,960 | | | $ | 54 | | $ | 74 | |
| 2021 | 189,839 | | | $ | 21 | | $ | 16 | |
| 2020 | 343,806 | | | $ | 35 | | $ | 30 | |
Earnings per Share:
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and therefore are included in PMI’s earnings per share calculation pursuant to the two-class method.
Basic and diluted earnings per share (“EPS”) were calculated using the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
| Net earnings attributable to PMI | $ | 9,048 | | | $ | 9,109 | | | $ | 8,056 | |
| Less distributed and undistributed earnings attributable to share-based payment awards | 24 | | | 26 | | | 20 | |
| Net earnings for basic and diluted EPS | $ | 9,024 | | | $ | 9,083 | | | $ | 8,036 | |
| Weighted-average shares for basic EPS | 1,550 | | | 1,558 | | | 1,557 | |
| Plus contingently issuable performance stock units (PSUs) | 2 | | | 1 | | | 1 | |
| Weighted-average shares for diluted EPS | 1,552 | | | 1,559 | | | 1,558 | |
For the 2022, 2021 and 2020 computations, there were no antidilutive stock awards.
Income Taxes:
Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in millions) | 2022 | | 2021 | | 2020 |
Earnings before income taxes | $ | 11,634 | | | $ | 12,232 | | | $ | 10,953 | |
Provision for income taxes: | | | | | |
United States federal and state: | | | | | |
Current | $ | (75) | | | $ | 73 | | | $ | (80) | |
Deferred | (139) | | | 27 | | | 53 | |
Total United States | (214) | | | 100 | | | (27) | |
Outside United States: | | | | | |
Current | 2,553 | | | 2,616 | | | 2,600 | |
Deferred | (95) | | | (45) | | | (196) | |
Total outside United States | 2,458 | | | 2,571 | | | 2,404 | |
Total provision for income taxes | $ | 2,244 | | | $ | 2,671 | | | $ | 2,377 | |
On August 16, 2022, the Inflation Reduction Act ("the Act") was signed into law in the U.S. The Act includes a new corporate alternative minimum tax and an excise tax on stock buybacks effective after December 31, 2022. As of December 31, 2022, PMI has determined that the Act had no significant tax impacts on its consolidated financial statements.
On March 11, 2021, the American Rescue Plan Act of 2021 ("the ARP Act") was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. PMI has determined that the ARP Act had no significant impact on PMI's effective tax rate.
On July 20, 2020, the U.S. Department of the Treasury and the Internal Revenue Service released final and proposed regulations under the Global Intangible Low-Taxed Income (“GILTI”) and other provisions of the Internal Revenue Code. PMI has analyzed these elective regulations and recorded the impact in its consolidated financial statements, as described below.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act and, on December 27, 2020, the Consolidated Appropriations Act, 2021 (“U.S. COVID-19 Acts”) were signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. PMI has determined that neither the U.S. COVID-19 Acts nor changes to income tax laws or regulations in other jurisdictions had a significant impact on PMI’s effective tax rate, with the exception of the 2020 corporate income tax rate reduction in Indonesia.
At December 31, 2017, PMI recorded a one-time transition tax liability on its accumulated foreign earnings, which is payable over an eight-year period beginning in 2018. At December 31, 2022 and December 31, 2021, $0.7 billion and $0.9 billion of PMI's remaining long-term portion of transition tax liability, respectively, was recorded in "income taxes and other liabilities" on PMI's consolidated balance sheets.
At December 31, 2022 and 2021, U.S. federal and foreign deferred income taxes have been provided on all accumulated earnings of PMI's foreign subsidiaries.
PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S. federal statute of limitations remains open for the years 2019 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (2018 onward), Indonesia (2014 onward), Russia (2022 onward) and Switzerland (2017 onward).
In October 2021, a subsidiary of PMI in Indonesia, PT Hanjaya Mandala Sampoerna Tbk ("HMS"), received a tax assessment in the amount of 3.8 trillion Indonesian rupiah (approximately $260 million in the period of payment) primarily relating to corporate income taxes on domestic and other intercompany transactions for the years 2017 to 2019. HMS paid the assessment in the fourth quarter of 2021 in order to avoid potential penalties and filed an objection letter with the tax office in January 2022. The amount paid was
included in other assets in PMI’s consolidated balance sheets at December 31, 2022 and 2021, and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment.
It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
| | | | | | | | | | | | | | | | | |
(in millions) | 2022 | | 2021 | | 2020 |
| Balance at January 1, | $ | 89 | | | $ | 72 | | | $ | 63 | |
Additions based on tax positions related to the current year | 12 | | | 12 | | | 11 | |
Additions for tax positions of previous years | 2 | | | 15 | | | 1 | |
Reductions for tax positions of prior years | (18) | | | (1) | | | (4) | |
Reductions due to lapse of statute of limitations | (6) | | | (3) | | | (1) | |
Settlements | (4) | | | — | | | — | |
Other | (3) | | | (6) | | | 2 | |
| Balance at December 31, | $ | 72 | | | $ | 89 | | | $ | 72 | |
Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:
| | | | | | | | | | | | | | | | | |
(in millions) | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Unrecognized tax benefits | $ | 72 | | | $ | 89 | | | $ | 72 | |
Accrued interest and penalties | 13 | | | 18 | | | 17 | |
Tax credits and other indirect benefits | (3) | | | (7) | | | (9) | |
Liability for tax contingencies | $ | 82 | | | $ | 100 | | | $ | 80 | |
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $69 million at December 31, 2022. The remainder, if recognized, would principally affect deferred taxes.
For the years ended December 31, 2022, 2021 and 2020, PMI recognized income (expense) in its consolidated statements of earnings of $2 million, $(3) million and $(1) million, respectively, related to interest and penalties associated with uncertain tax positions.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| U.S. federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Increase (decrease) resulting from: | | | | | |
| Foreign rate differences | (0.5) | | | (0.3) | | | 0.6 | |
| Dividend repatriation cost | 0.7 | | | 0.6 | | | 0.4 | |
| | | | | |
| Global intangible low-taxed income | 1.0 | | | 0.8 | | | 0.1 | |
| U.S. state taxes | 0.1 | | | 0.2 | | | 0.2 | |
| Foreign derived intangible income | (0.8) | | | (0.7) | | | (0.6) | |
| Foreign exchange | (1.7) | | | — | | | — | |
| Other | (0.5) | | | 0.2 | | | — | |
| Effective tax rate | 19.3 | % | | 21.8 | % | | 21.7 | % |
The 2022 effective tax rate decreased 2.5 percentage point to 19.3%. The change in the effective tax rate for 2022, as compared to 2021, was favorably impacted by changes in income tax reserves, a deferred tax benefit for unrealized foreign currency losses on intercompany loans related to the Swedish Match acquisition financing reflected in the consolidated statements of earnings ($203 million), while the underlying pre-tax foreign currency movements fully offset in the consolidated statements of earnings and were reflected as currency translation adjustments in its consolidated statements of stockholders' (deficit) equity, and by a reduction in
deferred tax liabilities related to pension plan assets ($40 million), partially offset by an increase in deferred tax liabilities related to the fair value adjustment of equity securities held by PMI ($10 million). For further details, see Note 6. Related Parties - Equity Investments and Other.
The 2021 effective tax rate increased 0.1 percentage point to 21.8%. The change in the effective tax rate for 2021, as compared to 2020, was unfavorably impacted by repatriation cost differences and foreign tax credit limitations related to GILTI, partially offset by the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021) and changes in earnings mix by taxing jurisdiction.
The 2020 effective tax rate was favorably impacted by the above-mentioned reduction of estimated U.S. income tax liabilities for years 2018 and 2019 due to the GILTI regulations and the corporate income tax rate reduction in Indonesia.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
| | | | | | | | | | | |
| At December 31, |
(in millions) | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Accrued postretirement and postemployment benefits | $ | 217 | | | $ | 234 | |
| Accrued pension costs | 277 | | | 392 | |
Inventory(1) | 22 | | | 177 | |
| Accrued liabilities | 158 | | | 168 | |
| Net operating loss carryforwards and tax credits | 384 | | | 408 | |
| | | |
| Other | — | | | 112 | |
| Total deferred income tax assets | 1,058 | | | 1,491 | |
| Less: valuation allowance | (378) | | | (239) | |
| Deferred income tax assets, net of valuation allowance | 680 | | | 1,252 | |
| Deferred income tax liabilities: | | | |
| Intangible assets | (1,485) | | | (591) | |
| Property, plant and equipment | (200) | | | (140) | |
| Unremitted earnings | (141) | | | (206) | |
| Foreign exchange | (175) | | | (146) | |
| Other | (32) | | | — | |
Total deferred income tax liabilities | (2,033) | | | (1,083) | |
| Net deferred income tax assets (liabilities) | $ | (1,353) | | | $ | 169 | |
(1) Includes deferred tax charges of $153 million in 2021 related to intercompany transactions.
At December 31, 2022, PMI recorded deferred tax assets for net operating loss carryforwards and tax credits of $384 million, with varying dates of expiration, primarily after 2027, including $173 million with an unlimited carryforward period. At December 31, 2022, PMI has recorded a valuation allowance of $378 million against deferred tax assets that do not meet the more-likely-than not recognition threshold.
At December 31, 2021, PMI recorded deferred tax assets for net operating loss carryforwards of $408 million, with varying dates of expiration, primarily after 2026, including $183 million with an unlimited carryforward period. At December 31, 2021, PMI has recorded a valuation allowance of $239 million against deferred tax assets that do not meet the more-likely-than-not recognition threshold.
Segment Reporting:
PMI’s subsidiaries and affiliates are primarily engaged in the manufacture and sale of cigarettes and smoke-free products, including heat-not-burn, vapor, and oral nicotine products. Excluding the Wellness and Healthcare segment and the 2022 acquisition of Swedish Match, PMI's segments are generally organized by geographic region and managed by segment managers who are responsible for the
operating and financial results of the regions inclusive of combustible tobacco and smoke-free product categories sold in the region. PMI currently has six geographical segments: the European Union; Eastern Europe; Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Americas; as well as the Swedish Match segment and the Wellness and Healthcare segment. The Swedish Match segment represents the fourth quarter 2022 acquisition of the company. The Wellness and Healthcare segment reflects the operating results of PMI's new business, Vectura Fertin Pharma. For further details on these acquisitions, see Note 3. Acquisitions. PMI records net revenues and operating income to its geographical segments based upon the geographic area in which the customer resides.
PMI’s chief operating decision maker evaluates geographical segment performance and allocates resources based on regional operating income, which includes results from substantially all product categories sold in each region. Business operations in the Wellness and Healthcare segment and the Swedish Match segment are managed and evaluated separately. Interest expense, net, and provision for income taxes are centrally managed and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by management. Information about total assets by segment is not disclosed because such information is not reported to or used by PMI’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 5. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.
PMI disaggregates its net revenues from contracts with customers by product category for each of PMI's six geographical segments and for the Swedish Match segment. For the Wellness and Healthcare business, Vectura Fertin Pharma discussed above, net revenues from contracts with customers are included in the Wellness and Healthcare segment. PMI believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
Net revenues by segment were as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| (in millions) | 2022 | | 2021 | | 2020 |
| Net revenues: | | | | | |
| European Union | $ | 12,119 | | | $ | 12,275 | | | $ | 10,702 | |
| Eastern Europe | 3,725 | | | 3,544 | | | 3,378 | |
| Middle East & Africa | 3,901 | | | 3,293 | | | 3,088 | |
| South & Southeast Asia | 4,395 | | | 4,396 | | | 4,396 | |
| East Asia & Australia | 5,132 | | | 5,953 | | | 5,429 | |
| Americas | 1,903 | | | 1,843 | | | 1,701 | |
| Swedish Match | 316 | | | — | | | — | |
| Wellness and Healthcare | 271 | | | 101 | | | — | |
| Net revenues | $ | 31,762 | | | $ | 31,405 | | | $ | 28,694 | |
Total net revenues attributable to customers located in Japan, PMI's largest market in terms of net revenues, were $3.9 billion, $4.6 billion and $4.1 billion in 2022, 2021 and 2020, respectively. PMI had one customer in the East Asia & Australia segment that accounted for 12%, 15% and 14% of PMI’s consolidated net revenues, and one customer in the European Union segment that accounted for 13%, 13% and 11% of PMI’s consolidated net revenues in 2022, 2021 and 2020, respectively.
PMI's net revenues by product category were as follows: | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| (in millions) | 2022 | | 2021 | | 2020 |
| Combustible tobacco products: | | | | | |
| European Union | $ | 7,212 | | | $ | 8,211 | | | $ | 8,052 | |
| Eastern Europe | 2,410 | | | 2,240 | | | 2,250 | |
| Middle East & Africa | 3,567 | | | 3,110 | | | 3,005 | |
| South & Southeast Asia | 4,372 | | | 4,385 | | | 4,395 | |
| East Asia & Australia | 2,138 | | | 2,414 | | | 2,468 | |
| Americas | 1,804 | | | 1,706 | | | 1,577 | |
| Swedish Match | 70 | | | — | | | — | |
| Total combustible tobacco products | 21,572 | | | 22,067 | | | 21,747 | |
| Smoke-free products: | | | | | |
| Smoke-free products excluding Wellness and Healthcare: | | | | | |
| European Union | 4,907 | | | 4,064 | | | 2,650 | |
| Eastern Europe | 1,315 | | | 1,304 | | | 1,128 | |
| Middle East & Africa | 334 | | | 183 | | | 83 | |
| South & Southeast Asia | 23 | | | 11 | | | 1 | |
| East Asia & Australia | 2,994 | | | 3,539 | | | 2,961 | |
| Americas | 99 | | | 137 | | | 124 | |
| Swedish Match | 246 | | | — | | | — | |
| Total smoke-free products excluding Wellness and Healthcare | 9,919 | | | 9,237 | | | 6,947 | |
| Wellness and Healthcare | 271 | | | 101 | | | — | |
| Total smoke-free products | 10,190 | | | 9,338 | | | 6,947 | |
| | | | | |
| Total PMI net revenues | $ | 31,762 | | | $ | 31,405 | | | $ | 28,694 | |
Note: Sum of product categories or Regions might not foot to total PMI due to roundings.
Following the Swedish Match acquisition and a review of PMI and Swedish Match’s combined product portfolio, PMI reclassified certain of its own products previously reported under its combustible tobacco product category to the newly created smoke-free product category to better reflect the characteristics of these products. This reclassification did not impact PMI’s segment reporting, consolidated financial position, results of operations or cash flows in any of the periods presented.
Net revenues related to combustible tobacco products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's cigarettes and other tobacco products that are combusted. Other tobacco products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include smoke-free products.
Net revenues related to smoke-free products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes, if applicable. These net revenue amounts consist of the sale of all of PMI's products that are not combustible tobacco products, such as heat-not-burn, e-vapor, and oral nicotine, also including wellness and healthcare products, as well as consumer accessories such as lighters and matches.
Net revenues related to wellness and healthcare products consist of operating revenues generated from the sale of products primarily associated with inhaled therapeutics, and oral and intra-oral delivery systems that are included in the operating results of PMI's new Wellness and Healthcare business, Vectura Fertin Pharma.
Operating income (loss) by segment were as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Operating income (loss): | | | | | |
| European Union | $ | 5,788 | | | $ | 6,119 | | | $ | 5,098 | |
| Eastern Europe | 1,166 | | | 1,213 | | | 871 | |
| Middle East & Africa | 1,758 | | | 1,146 | | | 1,026 | |
| South & Southeast Asia | 1,459 | | | 1,506 | | | 1,709 | |
| East Asia & Australia | 1,919 | | | 2,556 | | | 2,400 | |
| Americas | 436 | | | 487 | | | 564 | |
| Swedish Match | (22) | | | — | | | — | |
| Wellness and Healthcare | (258) | | | (52) | | | — | |
Operating income | $ | 12,246 | | | $ | 12,975 | | | $ | 11,668 | |
Items affecting the comparability of results from operations were as follows:
•Charges related to the war in Ukraine - See Note 4. War in Ukraine for details of the $151 million pre-tax charges in the Eastern Europe segment for the year ended December 31, 2022.
•Swedish Match AB acquisition accounting related item - See Note 3. Acquisitions for details of the $125 million pre-tax purchase accounting adjustments related to the sale of acquired inventories stepped up to fair value included in the Swedish Match segment for the year ended December 31, 2022.
•Impairment of intangibles - See Note 5. Goodwill and Other Intangible Assets, net for the details of the $112 million pre-tax impairment charge included in the Wellness and Healthcare segment within the operating income table above for the year ended December 31, 2022.
•Asset impairment and exit costs - See Note 20. Asset Impairment and Exit Costs for details of the $216 million and $149 million pre-tax charges for the year ended December 31, 2021 and 2020, respectively, as well as a breakdown of these costs by segment.
•Saudi Arabia customs assessments - See Note 18. Contingencies for the details of the $246 million reduction in net revenues of combustible tobacco products included in the Middle East & Africa segment for the year ended December 31, 2021.
•Asset acquisition cost - See Note 3. Acquisitions for the details of the $51 million pre-tax charge associated with the asset acquisition of OtiTopic, Inc. included in the Wellness and Healthcare segment within the operating income table above for the year ended December 31, 2021.
•Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to tax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020 and was included in the operating income of the Americas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on the outcome of a challenge by the local tax authority.
Other segment data were as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Depreciation, amortization and impairment of intangibles expense: | | | | | |
| European Union | $ | 349 | | | $ | 342 | | | $ | 300 | |
| Eastern Europe | 137 | | | 133 | | | 175 | |
| Middle East & Africa | 96 | | | 97 | | | 83 | |
| South & Southeast Asia | 151 | | | 164 | | | 154 | |
| East Asia & Australia | 151 | | | 157 | | | 191 | |
| Americas | 74 | | | 71 | | | 78 | |
| Swedish Match | 34 | | | — | | | — | |
| Wellness and Healthcare | 197 | | | 34 | | | — | |
Total depreciation, amortization and impairment of intangibles expense | $ | 1,189 | | | $ | 998 | | | $ | 981 | |
PMI’s total capital expenditures and total property, plant and equipment, net and other assets by geographic area were:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Capital expenditures: | | | | | |
| European Union | $ | 682 | | | $ | 498 | | | $ | 384 | |
| Eastern Europe | 52 | | | 71 | | | 88 | |
| Middle East & Africa | 39 | | | 37 | | | 22 | |
| South & Southeast Asia | 179 | | | 52 | | | 57 | |
| East Asia & Australia | 24 | | | 36 | | | 13 | |
| Americas | 101 | | | 54 | | | 38 | |
| | | | | |
| | | | | |
Total capital expenditures | $ | 1,077 | | | $ | 748 | | | $ | 602 | |
| | | | | | | | | | | | | | | | | |
| At December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Long-lived assets: | | | | | |
| European Union | $ | 5,077 | | | $ | 4,787 | | | $ | 4,500 | |
| Eastern Europe | 541 | | | 635 | | | 668 | |
| Middle East & Africa | 244 | | | 289 | | | 375 | |
| South & Southeast Asia | 1,365 | | | 1,390 | | | 1,348 | |
| East Asia & Australia | 674 | | | 740 | | | 807 | |
| Americas | 1,282 | | | 666 | | | 784 | |
| | | | | |
| | | | | |
| Total long-lived assets | 9,183 | | | 8,507 | | | 8,482 | |
| Altria Group, Inc. agreement | 1,002 | | | — | | | — | |
| Financial instruments | 456 | | | 210 | | | 650 | |
Total property, plant and equipment, net and Other assets | $ | 10,641 | | | $ | 8,717 | | | $ | 9,132 | |
Long-lived assets consist of non-current assets other than goodwill; other intangible assets, net; deferred tax assets, equity investments, financial instruments and payment under the agreement with Altria Group, Inc, see Note 3, Acquisitions. PMI's largest markets in terms of long-lived assets are Switzerland, Italy and Indonesia. Total long-lived assets located in Switzerland, which is reflected in the European Union segment above, were $1.4 billion, $1.3 billion and $1.3 billion at December 31, 2022, 2021 and 2020, respectively. Total long-lived assets located in Italy, which is reflected in the European Union segment above, were $0.9 billion, $0.9 billion and $1.1 billion at December 31, 2022, 2021 and 2020, respectively. Total long-lived assets located in Indonesia, which is reflected in the South & Southeast Asia segment above, were $0.9 billion, $0.9 billion and $0.7 billion at December 31, 2022, 2021 and 2020, respectively.
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 certain U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.
Pension and other employee benefit costs per the consolidated statements of earnings consisted of the following for December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2022 | | 2021 | | 2020 |
| Net pension costs (income) | $ | (93) | | | $ | (1) | | | $ | (14) | |
| Net postemployment costs | 107 | | | 108 | | | 103 | |
| Net postretirement costs | 10 | | | 8 | | | 8 | |
| Total pension and other employee benefit costs | $ | 24 | | | $ | 115 | | | $ | 97 | |
Pension and Postretirement Benefit Plans
Obligations and Funded Status
The projected benefit obligations, plan assets and funded status of PMI’s pension plans, and the accumulated benefit obligation, plan assets and net amount accrued for PMI's postretirement health care plans, at December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension(1) | | Postretirement |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Benefit obligation at January 1 | $ | 10,998 | | | $ | 12,243 | | | $ | 198 | | | $ | 198 | |
Service cost | 233 | | | 291 | | | 2 | | | 2 | |
Interest cost | 78 | | | 50 | | | 6 | | | 5 | |
Benefits paid | (429) | | | (417) | | | (9) | | | (8) | |
| Employee contributions | 141 | | | 145 | | | — | | | — | |
Settlement, curtailment and plan amendment | (17) | | | (194) | | | — | | | |
| | | | | | | |
Actuarial losses (gains) | (2,294) | | | (559) | | | (46) | | | 5 | |
Currency | (434) | | | (587) | | | (5) | | | (4) | |
| Acquisition of Swedish Match | 316 | | | | | 85 | | | — | |
Other | 14 | | | 26 | | | (2) | | | — | |
Benefit obligation at December 31, | 8,606 | | | 10,998 | | | 229 | | | 198 | |
Fair value of plan assets at January 1, | 9,337 | | | 8,746 | | | — | | | — | |
Actual return on plan assets | (1,061) | | | 1,054 | | | — | | | — | |
Employer contributions, net of refunds | (3) | | | 269 | | | 9 | | | — | |
Employee contributions | 141 | | | 145 | | | — | | | — | |
Benefits paid | (429) | | | (417) | | | (9) | | | — | |
Settlement | (14) | | | (37) | | | — | | | — | |
Currency | (333) | | | (444) | | | — | | | — | |
| Acquisition of Swedish Match | 303 | | | — | | | 3 | | | — | |
| Other | (2) | | | 21 | | | — | | | — | |
Fair value of plan assets at December 31, | 7,939 | | | 9,337 | | | 3 | | | — | |
Net pension and postretirement liability recognized at December 31, | $ | (667) | | | $ | (1,661) | | | $ | (226) | | | $ | (198) | |
(1) Primarily non-U.S. based defined benefit retirement plans.
At December 31, 2022 and 2021, actuarial losses (gains) consisted primarily of gains for assumption changes related to higher discount rates year-over-year for Swiss, German and Dutch plans.
At December 31, 2022 and 2021, the Swiss pension plan represented 64% and 65% of the benefit obligation, respectively, and approximately 60% and 60% of the fair value of plan assets at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the U.S. pension plans represented 7% and 4% of the benefit obligation, respectively, and approximately 6% and 3% of the fair value of plan assets at December 31, 2022 and 2021, respectively.
At December 31, 2022 and 2021, the amounts recognized on PMI's consolidated balance sheets for the pension and postretirement plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Other assets | $ | 410 | | | $ | 323 | | | | | |
Accrued liabilities — employment costs | (32) | | | (24) | | | $ | (11) | | | $ | (9) | |
Long-term employment costs | (1,045) | | | (1,960) | | | (215) | | | (189) | |
| $ | (667) | | | $ | (1,661) | | | $ | (226) | | | $ | (198) | |
The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8.2 billion and $10.4 billion at December 31, 2022 and 2021, respectively.
For pension plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of plan assets were $5.8 billion and $5.0 billion, respectively, as of December 31, 2022. The accumulated benefit obligation and fair value of plan assets were $7.5 billion and $5.9 billion, respectively, as of December 31, 2021.
For pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan assets were $6.4 billion and $5.4 billion, respectively, as of December 31, 2022. The projected benefit obligation and fair value of plan assets were $8.6 billion and $6.7 billion, respectively, as of December 31, 2021.
The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 3.03 | % | | 0.86 | % | | 5.89 | % | | 3.08 | % |
Rate of compensation increase | 1.98 | | | 1.77 | | | | | |
Interest crediting rate | 2.97 | | | 3.15 | | | | | |
Health care cost trend rate assumed for next year | | | | | 6.14 | | | 6.27 | |
Ultimate trend rate | | | | | 4.78 | | | 4.80 | |
Year that rate reaches the ultimate trend rate | | | | | 2046 | | 2029 |
The discount rate for the largest pension plans is based on a yield curve constructed from a portfolio of high quality corporate bonds that produces a cash flow pattern equivalent to each plan’s expected benefit payments. The discount rate for the remaining plans is developed from local bond indices that match local benefit obligations as closely as possible.
Components of Net Periodic Benefit Cost
Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement |
(in millions) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Service cost | $ | 233 | | | $ | 291 | | | $ | 268 | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
Interest cost | 78 | | | 50 | | | 68 | | | 6 | | | 5 | | | 6 | |
Expected return on plan assets | (352) | | | (371) | | | (353) | | | — | | | — | | | — | |
Amortization: | | | | | | | | | | | |
Net losses | 181 | | | 314 | | | 265 | | | 2 | | | 3 | | | 2 | |
Prior service cost (credit) | (2) | | | 1 | | | 1 | | | — | | | — | | | — | |
Net transition obligation | — | | | — | | | 1 | | | — | | | — | | | — | |
Settlement and curtailment | 2 | | | 5 | | | 4 | | | 2 | | | — | | | — | |
| Net periodic pension and postretirement costs | $ | 140 | | | $ | 290 | | | $ | 254 | | | $ | 12 | | | $ | 10 | | | $ | 10 | |
Settlement and curtailment charges were due primarily to employee severance and early retirement programs.
The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discount rate - service cost | 1.03 | % | | 0.72 | % | | 1.25 | % | | 3.08 | % | | 2.84 | % | | 3.28 | % |
Discount rate - interest cost | 0.71 | | | 0.44 | | | 0.67 | | | 3.08 | | | 2.84 | | | 3.28 | |
Expected rate of return on plan assets | 4.17 | | | 4.43 | | | 4.59 | | | | | | | |
Rate of compensation increase | 1.77 | | | 1.79 | | | 1.82 | | | | | | | |
Interest crediting rate | 3.15 | | | 3.20 | | | 3.20 | | | | | | | |
Health care cost trend rate | | | | | | | 6.27 | | | 6.21 | | | 6.21 | |
PMI’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.
PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled $82 million, $71 million and $66 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Plan Assets
PMI’s investment strategy for pension plans is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, the target allocation of PMI’s plan assets is broadly characterized as approximately 55% in equity securities and approximately 45% in debt securities and other assets. The strategy primarily utilizes indexed U.S. equity securities, international equity securities and investment-grade debt securities. PMI attempts to mitigate investment risk by rebalancing between equity and debt asset classes once a year or as PMI’s contributions and benefit payments are made.
The fair value of PMI’s pension plan assets at December 31, 2022 and 2021, by asset category was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset Category
(in millions) | At December 31, 2022 | | Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | |
Cash and cash equivalents | $ | 79 | | | $ | 79 | | | | | | |
Equity securities: | | | | | | | | |
U.S. securities | 140 | | | 140 | | | | | | |
International securities | 521 | | | 521 | | | | | | |
Investment funds(a) | 6,419 | | | 4,870 | | | $ | 1,549 | | | | |
Government bonds | 178 | | | 117 | | | 61 | | | | |
Corporate bonds | 302 | | | 302 | | | | | | |
Other | 35 | | | — | | | 3 | | | 32 | | (c) |
Total assets in the fair value hierarchy | $ | 7,674 | | | $ | 6,029 | | | $ | 1,613 | | | $ | 32 | | |
Investment funds measured at net asset value(b) | 265 | | | | | | | | |
Total assets | $ | 7,939 | | | | | | | | |
(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU, Citigroup Non-EGBI EuroBIG, SBI AAA-BBB and JP Morgan EMBI for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 57% are invested in U.S. and international equities; 15% are invested in U.S. and international government bonds; 16% are invested in corporate bonds and 12% are invested in real estate.
(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
(c) Amount relates to annuity policies of which the fair value is calculated using an actuarial model.
| | | | | | | | | | | | | | | | | | | | | | | |
Asset Category
(in millions) | At December 31, 2021 | | Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
Cash and cash equivalents | $ | 355 | | | $ | 355 | | | | | |
Equity securities: | | | | | | | |
U.S. securities | 193 | | | 193 | | | | | |
International securities | 658 | | | 658 | | | | | |
Investment funds(a) | 7,317 | | | 5,592 | | | $ | 1,725 | | | |
International government bonds | 210 | | | 139 | | | 71 | | | |
Corporate bonds | 278 | | | 278 | | | | | |
Other | 4 | | | 3 | | | 1 | | | |
Total assets in the fair value hierarchy | $ | 9,015 | | | $ | 7,218 | | | $ | 1,797 | | | $ | — | |
Investment funds measured at net asset value(b) | 322 | | | | | | | |
Total assets | $ | 9,337 | | | | | | | |
(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and JP Morgan EMBI for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 59% were invested in U.S. and international equities; 15% were invested in U.S. and international government bonds; 14% were invested in corporate bonds, and 12% were invested in real estate.
(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and meet specific funding requirements of its funded pension plans. Currently, PMI anticipates making contributions of approximately $121 million in 2023 to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.
The estimated future benefit payments from PMI pension plans at December 31, 2022, are as follows:
| | | | | |
(in millions) | |
| 2023 | $ | 439 | |
| 2024 | 378 | |
| 2025 | 372 | |
| 2026 | 384 | |
| 2027 | 396 | |
| 2028 - 2032 | 2,209 | |
PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2032.
Postemployment Benefit Plans
PMI and certain of its subsidiaries sponsor postemployment benefit plans covering certain designated salaried and hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs were $184 million, $228 million and $208 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The amounts recognized in accrued postemployment costs net of plan assets on PMI's consolidated balance sheets at December 31, 2022 and 2021, were $807 million and $925 million, respectively.
The accrued postemployment costs were determined using a weighted-average discount rate of 5.6% and 3.1% in 2022 and 2021, respectively; an assumed ultimate annual weighted-average turnover rate of 2.9% and 2.9% in 2022 and 2021, respectively; assumed compensation cost increases of 2.8% in 2022 and 2.1% in 2021, and assumed benefits as defined in the respective plans. In accordance with local regulations, certain postemployment plans are funded. As a result, the accrued postemployment costs disclosed above are presented net of the related assets of $30 million and $46 million at December 31, 2022 and 2021, respectively. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Comprehensive Earnings (Losses)
The amounts recorded in accumulated other comprehensive losses at December 31, 2022, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Net (losses) gains | $ | (1,437) | | | $ | (14) | | | $ | (753) | | | $ | (2,204) | |
Prior service (cost) credit | 70 | | | 1 | | | (21) | | | 50 | |
Net transition (obligation) asset | (3) | | | — | | | — | | | (3) | |
Deferred income taxes | 138 | | | 14 | | | 183 | | | 335 | |
Losses to be amortized | $ | (1,232) | | | $ | 1 | | | $ | (591) | | | $ | (1,822) | |
The amounts recorded in accumulated other comprehensive losses at December 31, 2021, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Net (losses) gains | $ | (2,495) | | | $ | (64) | | | $ | (884) | | | $ | (3,443) | |
Prior service (cost) credit | 71 | | | 1 | | | (22) | | | 50 | |
Net transition (obligation) asset | (3) | | | — | | | — | | | (3) | |
Deferred income taxes | 278 | | | 24 | | | 214 | | | 516 | |
Losses to be amortized | $ | (2,149) | | | $ | (39) | | | $ | (692) | | | $ | (2,880) | |
The amounts recorded in accumulated other comprehensive losses at December 31, 2020, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Net (losses) gains | $ | (4,147) | | | $ | (64) | | | $ | (839) | | | $ | (5,050) | |
Prior service (cost) credit | 22 | | | 2 | | | (22) | | | 2 | |
Net transition (obligation) asset | (3) | | | — | | | — | | | (3) | |
Deferred income taxes | 570 | | | 24 | | | 204 | | | 798 | |
Losses to be amortized | $ | (3,558) | | | $ | (38) | | | $ | (657) | | | $ | (4,253) | |
The movements in other comprehensive earnings (losses) during the year ended December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Amounts transferred to earnings: | | | | | | | |
Amortization: | | | | | | | |
Net losses (gains) | $ | 178 | | | $ | 3 | | | $ | 85 | | | $ | 266 | |
Prior service cost (credit) | (4) | | | — | | | — | | | (4) | |
| | | | | | | |
Other income/expense: | | | | | | | |
Net losses (gains) | 2 | | | 1 | | | — | | | 3 | |
Prior service cost (credit) | — | | | — | | | 1 | | | 1 | |
Deferred income taxes | (28) | | | (1) | | | (20) | | | (49) | |
| 148 | | | 3 | | | 66 | | | 217 | |
Other movements during the year: | | | | | | | |
Net (losses) gains | 878 | | | 46 | | | 46 | | | 970 | |
Prior service (cost) credit | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
Deferred income taxes | (112) | | | (9) | | | (11) | | | (132) | |
| 769 | | | 37 | | | 35 | | | 841 | |
Total movements in other comprehensive earnings (losses) | $ | 917 | | | $ | 40 | | | $ | 101 | | | $ | 1,058 | |
The movements in other comprehensive earnings (losses) during the year ended December 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Amounts transferred to earnings: | | | | | | | |
Amortization: | | | | | | | |
Net losses (gains) | $ | 294 | | | $ | 4 | | | $ | 85 | | | $ | 383 | |
Prior service cost (credit) | 7 | | | (1) | | | — | | | 6 | |
| | | | | | | |
Other income/expense: | | | | | | | |
Net losses (gains) | 5 | | | 1 | | | — | | | 6 | |
Prior service cost (credit) | — | | | — | | | — | | | — | |
Deferred income taxes | (51) | | | (1) | | | (20) | | | (72) | |
| 255 | | | 3 | | | 65 | | | 323 | |
Other movements during the year: | | | | | | | |
Net (losses) gains | 1,353 | | | (5) | | | (130) | | | 1,218 | |
Prior service (cost) credit | 42 | | | — | | | — | | | 42 | |
| | | | | | | |
| | | | | | | |
| Deferred income taxes | (241) | | | 1 | | | 30 | | | (210) | |
| 1,154 | | | (4) | | | (100) | | | 1,050 | |
Total movements in other comprehensive earnings (losses) | $ | 1,409 | | | $ | (1) | | | $ | (35) | | | $ | 1,373 | |
The movements in other comprehensive earnings (losses) during the year ended December 31, 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Pension | | Post-
retirement | | Post-
employment | | Total |
Amounts transferred to earnings: | | | | | | | |
Amortization: | | | | | | | |
Net losses (gains) | $ | 250 | | | $ | 3 | | | $ | 78 | | | $ | 331 | |
Prior service cost (credit) | 29 | | | — | | | — | | | 29 | |
Net transition obligation (asset) | 1 | | | — | | | — | | | 1 | |
Other income/expense: | | | | | | | |
Net losses (gains) | 3 | | | — | | | — | | | 3 | |
Prior service cost (credit) | 2 | | | — | | | — | | | 2 | |
| Deferred income taxes | (49) | | | (1) | | | (17) | | | (67) | |
| 236 | | | 2 | | | 61 | | | 299 | |
Other movements during the year: | | | | | | | |
Net (losses) gains | (682) | | | (4) | | | (142) | | | (828) | |
Prior service (cost) credit | (12) | | | — | | | (22) | | | (34) | |
| | | | | | | |
| | | | | | | |
| Deferred income taxes | 99 | | | 1 | | | 39 | | | 139 | |
| (595) | | | (3) | | | (125) | | | (723) | |
Total movements in other comprehensive earnings (losses) | $ | (359) | | | $ | (1) | | | $ | (64) | | | $ | (424) | |
Additional Information:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Research and development expense | $ | 642 | | | $ | 617 | | | $ | 495 | |
Advertising expense | $ | 777 | | | $ | 807 | | | $ | 637 | |
Foreign currency net transaction (gains)/losses | $ | 199 | | | $ | 45 | | | $ | 90 | |
Interest expense | $ | 768 | | | $ | 737 | | | $ | 728 | |
Interest income | (180) | | | (109) | | | (110) | |
Interest expense, net | $ | 588 | | | $ | 628 | | | $ | 618 | |
Financial Instruments:
Overview
PMI operates in markets primarily 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 exposures. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates related to net investments in foreign operations, third-party and intercompany actual and forecasted transactions. Both foreign exchange contracts and interest rate contracts are collectively referred to as derivative contracts ("derivative contracts"). The primary currencies to which PMI is exposed include the Euro, Egyptian pound, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble and Swiss franc.
The gross notional amounts for outstanding derivatives as of December 31, 2022 and 2021, were as follows:
| | | | | | | | |
| (in millions) | 2022 | 2021 |
| Derivative contracts designated as hedging instruments: | | |
| Foreign exchange contracts | $ | 17,627 | | $ | 9,501 | |
| Interest rate contracts | 1,019 | | 900 | |
| | |
| Derivative contracts not designated as hedging instruments: | | |
| Foreign exchange contracts | 21,755 | | 10,337 | |
| Total | $ | 40,401 | | $ | 20,738 | |
The fair value of PMI’s derivative contracts included in the consolidated balance sheets as of December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| | | Fair Value | | | | Fair Value |
(in millions) | Balance Sheet Classification | | 2022 | | 2021 | | Balance Sheet Classification | | 2022 | | 2021 |
| Derivative contracts designated as hedging instruments: | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 376 | | | $ | 166 | | | Other accrued liabilities | | $ | 126 | | | $ | 31 | |
| Other assets | | 341 | | | 22 | | | Income taxes and other liabilities | | 147 | | | 187 | |
| Interest rate contracts | Other current assets | | — | | | 7 | | | Other accrued liabilities | | 27 | | | 3 | |
| Other assets | | — | | | — | | | Income taxes and other liabilities | | 56 | | | 3 | |
| Derivative contracts not designated as hedging instruments: | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | 156 | | | 37 | | | Other accrued liabilities | | 165 | | | 75 | |
| Other assets | | — | | | — | | | Income taxes and other liabilities | | 16 | | | — | |
Total gross amount derivatives contracts presented in the consolidated balance sheets | | | $ | 873 | | | $ | 232 | | | | | $ | 537 | | | $ | 299 | |
| Gross amounts not offset in the consolidated balance sheets | | | | | | | | | | | |
| Financial instruments | | | (346) | | | (126) | | | | | (346) | | | (126) | |
| Cash collateral received/pledged | | | (341) | | | (93) | | | | | (48) | | | (151) | |
| Net amount | | | $ | 186 | | | $ | 13 | | | | | $ | 143 | | | $ | 22 | |
PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts, foreign currency swaps and interest rate contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative contracts have been classified within Level 2 at December 31, 2022 and 2021.
For the years ended December 31, 2022, 2021 and 2020, PMI's derivative contracts impacted the consolidated statements of earnings and comprehensive earnings as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (pre-tax, in millions) | For the Years Ended December 31, |
| Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives | | Statement of Earnings
Classification of Gain/(Loss)
on Derivatives | | Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings | | Amount of Gain/(Loss) Recognized in Earnings | |
| 2022 | 2021 | 2020 | | | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | |
| Derivative contracts designated as hedging instruments: | | | | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | 288 | | $ | 138 | | $ | (61) | | | | | | | | | | | | |
| | | | | Net revenues | | $ | 233 | | $ | 59 | | $ | (3) | | | | | | |
| | | | | Cost of sales | | — | | — | | 7 | | | | | | |
| | | | | Marketing, administration and research costs | | 30 | | (10) | | 27 | | | | | | |
| | | | | Interest expense, net | | (7) | | (6) | | (6) | | | | | | |
| Interest rate contracts | 292 | | 6 | | (20) | | | Interest expense, net | | (2) | | (1) | | (5) | | | | | | |
| Fair value hedges: | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | Interest expense, net (a) | | | | | | $ | (83) | | $ | 1 | | $ | — | | |
Net investment hedges (b): | | | | | | | | | | | | | | |
| Foreign exchange contracts | 300 | | 484 | | (514) | | | Interest expense, net (c) | | | | | | 181 | | 150 | | 194 | | |
| Derivative contracts not designated as hedging instruments: | | | | | | | | | | | | | | |
| Foreign exchange contracts | | | | | Interest expense, net | | | | | | 112 | | 55 | | 71 | | |
| | | | | Marketing, administration and research costs (d) | | | | | | (169) | | 215 | | (368) | | |
| Total | $ | 880 | | $ | 628 | | $ | (595) | | | | | $ | 254 | | $ | 42 | | $ | 20 | | | $ | 41 | | $ | 421 | | $ | (103) | | |
(a) The gains (losses) from these contracts are offset by the changes in the fair value of the hedged item
(b) Amount of gains (losses) on hedges of net investments principally related to changes in exchange and interest rates between the Euro and U.S. dollar
(c) Represent the gains for amounts excluded from the effectiveness testing
(d) The gains (losses) from these contracts attributable to changes in foreign currency exchange rates are partially offset by the (losses) and gains generated by the underlying intercompany and third-party loans being hedged
Cash Flow Hedges
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to certain forecasted transactions. Gains and losses associated with qualifying cash flow hedge contracts are deferred as components of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s consolidated statements of earnings. As of December 31, 2022, PMI has hedged forecasted transactions with derivative contracts expiring at various dates through May 2028. The impact of these hedges is primarily included in operating cash flows on PMI’s consolidated statements of cash flows.
Fair Value Hedges
PMI has entered into fixed-to-floating interest rate contracts, designated as fair value hedges to minimize exposure to changes in the fair value of fixed rate U.S. dollar-denominated debt that results from fluctuations in benchmark interest rates. For derivative contracts that are designated and qualify as fair value hedges the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, is recognized in current earnings. The carrying amount of the debt hedged, which includes the cumulative adjustment for fair value gains/losses, as of December 31, 2022 was $913 million, and is recorded in long-
term debt in the consolidated balance sheets. The cumulative amount of fair value gains/(losses) included in the carrying amount of the debt hedged was $83 million as of December 31, 2022.
Hedges of Net Investments in Foreign Operations
PMI designates derivative contracts and certain foreign currency denominated debt instruments as net investment hedges, primarily of its Euro net assets. The amount of pre-tax gain/(loss) related to these debt instruments, that was reported as a component of accumulated other comprehensive losses within currency translation adjustments, was $521 million, $278 million and $(465) million, for the years ended December 31, 2022, 2021 and 2020, respectively. The premiums paid for, and settlements of, net investment hedges are included in investing cash flows on PMI’s consolidated statements of cash flows.
Other Derivatives
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, third-party loans and acquisition related transactions. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the gains (losses) relating to these contracts are reported in PMI’s consolidated statements of earnings. Acquisition related transactions are included in investing cash flows on PMI’s consolidated statements of cash flows.
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:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Gain/(loss) as of January 1, | $ | 4 | | | $ | (85) | | | $ | 3 | |
Derivative (gains)/losses transferred to earnings | (219) | | | (35) | | | (20) | |
Change in fair value | 481 | | | 124 | | | (68) | |
Gain/(loss) as of December 31, | $ | 266 | | | $ | 4 | | | $ | (85) | |
At December 31, 2022, PMI expects $81 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Credit Exposure and Credit Risk
PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.
Accumulated Other Comprehensive Losses:
PMI's accumulated other comprehensive losses, net of taxes, consisted of the following:
| | | | | | | | | | | | | | | | | |
| (Losses) Earnings | At December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Currency translation adjustments | $ | (8,003) | | | $ | (6,701) | | | $ | (6,843) | |
Pension and other benefits | (1,822) | | | (2,880) | | | (4,253) | |
Derivatives accounted for as hedges | 266 | | | 4 | | | (85) | |
| | | | | |
Total accumulated other comprehensive losses | $ | (9,559) | | | $ | (9,577) | | | $ | (11,181) | |
Reclassifications from Other Comprehensive Earnings
The movements in accumulated other comprehensive losses and the related tax impact, for each of the components above, that are due to current period activity and reclassifications to the income statement are shown on the consolidated statements of comprehensive earnings for the years ended December 31, 2022, 2021, and 2020. For additional information, see Note 3. Acquisitions (Transactions With Noncontrolling Interests) for disclosures related to currency translation adjustments, Note 14. Benefit Plans for disclosures related to PMI's pension and other benefits and Note 16. Financial Instruments for disclosures related to derivative financial instruments.
Contingencies:
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. Our indemnitees include distributors, licensees, and others that have been named as parties in certain cases and that we have agreed to defend, as well as to pay costs and some or all of judgments, if any, that may be entered against them. Pursuant to the terms of the Distribution Agreement between Altria Group, Inc. ("Altria") and PMI, PMI will indemnify Altria and Philip Morris USA Inc. ("PM USA"), a U.S. tobacco subsidiary of Altria, for tobacco product claims based in substantial part on products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for tobacco product claims based in substantial part on products manufactured by PM USA, excluding tobacco products contract manufactured for PMI.
It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation.
Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Canada and Nigeria, range into the billions of U.S. dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. However, as discussed below, we have to date been largely successful in defending tobacco-related litigation.
We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, except as stated otherwise in this Note 18. Contingencies, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.
It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.
CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary, Rothmans, Benson & Hedges Inc. (“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited, sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, March 8, and March 12, 2019 respectively. CCAA is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course. The initial CCAA order made by the Ontario Superior Court on March 22, 2019 authorizes RBH to pay all expenses incurred in carrying on its business in the ordinary course after the CCAA filing, including obligations to employees, vendors, and suppliers. RBH's financial results have been deconsolidated from our consolidated financial statements since March 22, 2019. As part of the CCAA proceedings, there is currently a comprehensive stay up to and including March 31, 2023 of all tobacco-related litigation pending in Canada against RBH and the other defendants, including PMI and our indemnitees (PM USA and Altria), namely, the smoking and health class actions filed in various Canadian provinces and health care cost recovery actions. These proceedings are presented below under the caption “Stayed Litigation — Canada.” Ernst & Young Inc. has been appointed as monitor of RBH in the CCAA proceedings. In accordance with the CCAA process, as the parties work towards a plan of arrangement or compromise in a confidential mediation, it is anticipated that the court will set additional hearings and further extend the stay of proceedings. On April 17, 2019, the Ontario Superior Court ruled that RBH and the other defendants will not be allowed to file an application to the Supreme Court of Canada for leave to appeal the Court of Appeal’s decision in the Létourneau and the Blais cases so long as the comprehensive stay of all tobacco-related litigation in Canada remains in effect and that the time period to file the application would be extended by the stay period. While RBH believes that the findings of liability and damages in both Létourneau and the Blais cases were incorrect, the CCAA proceedings will provide a forum for RBH to seek resolution through a plan of arrangement or compromise of all tobacco-related litigation pending in Canada. It is not possible to predict the resolution of the underlying legal proceedings or the length of the CCAA process.
Stayed Litigation — Canada
Smoking and Health Litigation — Canada
In the first class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, RBH and other Canadian cigarette manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are defendants. The plaintiffs, an anti-smoking organization and an individual smoker, sought compensatory and punitive damages for each member of the class who suffers allegedly from certain smoking-related diseases. The class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $11.5 billion). The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion, including pre-judgment interest (approximately $2.3 billion)). In addition, the trial court awarded CAD 90,000 (approximately $67,000) in punitive damages, allocating CAD 30,000 (approximately $22,000) to RBH. The trial court estimated the disease class at 99,957 members. RBH appealed to the Court of Appeal of Quebec. In October 2015, the Court of Appeal ordered RBH to furnish security totaling CAD 226 million (approximately $168 million) to cover both the Létourneau and Blais cases, which RBH has paid in installments through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD 758 million (approximately $564 million) in installments through June 2017. JTI Macdonald Corp. was not required to furnish security in accordance with plaintiffs’ motion. The Court of Appeal ordered that the security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon further order of the Court of Appeal.
On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the compensatory and punitive damages award while reducing the total amount of compensatory damages to approximately CAD 13.5 billion including interest (approximately $10.1 billion) due to the trial court’s error in the calculation of interest. The compensatory damages award is on a joint and several basis with an allocation of 20% to RBH (approximately CAD 2.7 billion, including pre-judgment interest (approximately $2.0 billion)). The Court of Appeal upheld the trial court’s findings that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking and by conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either need not prove, or had adequately proven, that these faults were a cause of the class members’ injuries.
In accordance with the judgment, defendants were required to deposit their respective portions of the damages awarded in both the Létourneau case described below and the Blais case, approximately CAD 1.1 billion (approximately $819 million), into trust accounts within 60 days. RBH’s share of the deposit was approximately CAD 257 million (approximately $194 million). PMI recorded a pre-tax charge of $194 million in its consolidated results, representing $142 million net of tax, as tobacco litigation-related expense, in the first quarter of 2019. The charge reflects PMI’s assessment of the portion of the judgment that represents probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment.
In the second class action pending in Canada, Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, RBH and other Canadian cigarette manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are defendants. The plaintiff, an individual smoker, sought compensatory and punitive damages for each member of the class who is deemed addicted to smoking. The class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and awarded a total of CAD 131 million (approximately $98 million) in punitive damages, allocating CAD 46 million (approximately $34.3 million) to RBH. The trial court estimated the size of the addiction class at 918,000 members but declined to award compensatory damages to the addiction class because the evidence did not establish the claims with sufficient accuracy. The trial court found that a claims process to allocate the awarded punitive damages to individual class members would be too expensive and difficult to administer. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the total amount of punitive damages awarded allocating CAD 57 million including interest (approximately $42 million) to RBH. See the Blais description above for further detail concerning the security order pertaining to both Létourneau and Blais cases and the impact of the decision on PMI’s financial statements.
RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention of applicable law on several grounds including the following: (i) defendants had no obligation to warn class members who knew, or should have known, of the risks of smoking; (ii) defendants cannot be liable to class members who would have smoked regardless of what warnings were given; and (iii) defendants cannot be liable to all class members given the individual differences between class members.
In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Saskatchewan, Canada, filed July 10, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer, as well as restitution of profits.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al., The Supreme Court (trial court), Nova Scotia, Canada, filed June 18, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with the complaint.
In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who
were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.
In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.
In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice, filed June 20, 2012, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution of profits.
Health Care Cost Recovery Litigation — Canada
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related wrong.”
In the second health care cost recovery case filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen's Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario Superior Court of Justice, Toronto, Canada, filed September 29, 2009, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Ontario based on legislation enacted in the province. This legislation is similar to the laws introduced in British Columbia and New Brunswick that authorize the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of Newfoundland and Labrador, St. Johns, Canada, filed February 8, 2011, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Newfoundland and Labrador based on legislation enacted in the province that is similar to the laws introduced in British Columbia, New Brunswick and Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fifth health care cost recovery case filed in Canada, Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court of Quebec, Canada, filed June 8, 2012, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The claim was filed by the government of the province of Quebec based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the sixth health care cost recovery case filed in Canada, Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court of Queen's Bench Alberta, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Alberta based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans, Benson & Hedges, Inc., et al., The Queen's Bench, Winnipeg Judicial Centre, Canada, filed May 31, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Manitoba based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the eighth health care cost recovery case filed in Canada, The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et al., Queen's Bench, Judicial Centre of Saskatchewan, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Saskatchewan based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Prince Edward Island based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
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The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our subsidiaries or indemnitees as of December 31, 2022, December 31, 2021 and December 31, 2020:¹
| | | | | | | | | | | | | | | | | | | | |
| Type of Case | | Number of Cases Pending as of December 31, 2022 | | Number of Cases Pending as of December 31, 2021 | | Number of Cases Pending as of December 31, 2020 |
| Individual Smoking and Health Cases | | 40 | | 40 | | 43 |
| Smoking and Health Class Actions | | 9 | | 9 | | 9 |
| Health Care Cost Recovery Actions | | 17 | | 17 | | 17 |
| Label-Related Class Actions | | — | | — | | — |
| Individual Label-Related Cases | | 6 | | 3 | | 5 |
| Public Civil Actions | | 1 | | 1 | | 2 |
Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 528 Smoking and Health, Label-Related, Health Care Cost Recovery, and Public Civil Actions in which we and/or one of our subsidiaries and/or indemnitees were a defendant have been terminated in our favor. Fourteen cases have had decisions in favor of plaintiffs. Ten of these cases have subsequently reached final resolution in our favor and four remain on appeal.
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¹ Includes cases pending in Canada.
The table below lists the verdict and significant post-trial developments in the four pending cases where a verdict was returned in favor of the plaintiff:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Location of
Court/Name of
Plaintiff | | Type of
Case | | Verdict | | Post-Trial
Developments |
| May 27, 2015 | | Canada/Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais
| | Class Action | | On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Blais class on liability and found the class members’ compensatory damages totaled approximately CAD 15.5 billion (approximately $11.5 billion), including pre-judgment interest. The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion including pre-judgment interest (approximately $2.3 billion)). The trial court awarded CAD 90,000 (approximately $67,000) in punitive damages, allocating CAD 30,000 (approximately $22,000) to our subsidiary. The trial court ordered defendants to pay CAD 1 billion (approximately $745 million) of the compensatory damage award, CAD 200 million (approximately $149 million) of which is our subsidiary’s portion, into a trust within 60 days. | | In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Location of
Court/Name of
Plaintiff | | Type of
Case | | Verdict | | Post-Trial
Developments |
| May 27, 2015 | | Canada/Cecilia Létourneau
| | Class Action | | On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Létourneau class on liability and awarded a total of CAD 131 million (approximately $98 million) in punitive damages, allocating CAD 46 million (approximately $34.3 million) to RBH. The trial court ordered defendants to pay the full punitive damage award into a trust within 60 days. The court did not order the payment of compensatory damages.
| | In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Location of
Court/Name of
Plaintiff | | Type of
Case | | Verdict | | Post-Trial
Developments |
| August 5, 2016 | | Argentina/Hugo Lespada | | Individual Action | | On August 5, 2016, the Civil Court No. 14 - Mar del Plata, issued a verdict in favor of plaintiff, an individual smoker, and awarded him ARS 110,000 (approximately $584), plus interest, in compensatory and moral damages. The trial court found that our subsidiary failed to warn plaintiff of the risk of becoming addicted to cigarettes. | | On August 23, 2016, our subsidiary filed its notice of appeal. On October 31, 2017, the Civil and Commercial Court of Appeals of Mar del Plata ruled that plaintiff's claim was barred by the statute of limitations and it reversed the trial court's decision. On May 17, 2021 plaintiff filed a federal extraordinary appeal. On November 1, 2021, the Supreme Court of the Province of Buenos Aires dismissed plaintiff's federal extraordinary appeal. On November 10, 2021, plaintiff filed a direct appeal before the Federal Supreme Court. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Location of
Court/Name of
Plaintiff | | Type of
Case | | Verdict | | Post-Trial
Developments |
| June 17, 2021 | | Argentina/Claudia Milano | | Individual Action | | On June 17, 2021, the Civil Court No. 9 - Mar del Plata, issued a verdict in favor of plaintiff, an individual smoker, and awarded her smoking cessation treatments, ARS 150,000 (approximately $796), in compensatory and moral damages, and ARS 4,000,000 (approximately $21,218) in punitive damages, plus interest and costs. The trial court found that our subsidiary failed to warn plaintiff of the risk of becoming addicted to cigarettes. | | On July 2, 2021, our subsidiary filed its notice of appeal. In addition, plaintiff filed an appeal challenging the dismissal of the claim for psychological damages. As required by local law, our subsidiary deposited the damages awarded, plus interest and costs, in total ARS 6,114,428 (approximately $32,435), into a court escrow account. Our subsidiary challenged the amount determined by the court. The Civil and Commercial Court of Appeals of Mar del Plata granted our subsidiary's challenge to the escrow amount determined by the trial court. As a result, on December 16, 2021, ARS 893,428 (approximately $4,739) was returned to our subsidiary. If our subsidiary ultimately prevails, the remaining deposited amounts will be returned to our subsidiary. On May 31, 2022, the Civil and Commercial Court of Appeals of Mar del Plata ruled that the statute of limitations barred plaintiff's claim and reversed the trial court's decision. On June 15, 2022, plaintiff filed an extraordinary appeal. |
Pending claims related to tobacco products generally fall within the following categories:
Smoking and Health Litigation: These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a class or purported class of individual plaintiffs. Plaintiffs' allegations of liability in these cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute of limitations.
As of December 31, 2022, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:
•40 cases brought by individual plaintiffs in Argentina (30), Canada (2), Chile (4), the Philippines (1), Turkey (1) and Scotland (1), as well as 1 case brought by an individual plaintiff in the United States District Court for the District of Oregon in May 2021. (See information regarding the provisions of the 2008 Share Distribution Agreement between PMI and Altria that provide for indemnities to PMI for certain liabilities concerning tobacco products under the caption "Tobacco-Related Litigation" described above), compared with 40 such cases on December 31, 2021, and 43 cases on December 31, 2020; and
•9 cases brought on behalf of classes of individual plaintiffs, compared with 9 such cases on December 31, 2021 and 9 such cases on December 31, 2020.
The class actions pending in Canada are described above under the caption “Smoking and Health Litigation — Canada.”
Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on
various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.
As of December 31, 2022, there were 17 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Brazil (1), Canada (10), Korea (1) and Nigeria (5), compared with 17 such cases on December 31, 2021 and 17 such cases on December 31, 2020.
The health care cost recovery actions pending in Canada are described above under the caption “Health Care Cost Recovery Litigation — Canada.”
In the health care cost recovery case in Brazil, The Attorney General of Brazil v. Souza Cruz Ltda., et al., Federal Trial Court, Porto Alegre, Rio Grande do Sul, Brazil, filed May 21, 2019, we, our subsidiaries, and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases in certain prior years, payment of anticipated costs of treating future alleged smoking-related diseases, and moral damages. Defendants filed answers to the complaint in May 2020.
In the first health care cost recovery case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed March 13, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.
In the second health care cost recovery case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of challenging the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.
In the third health care cost recovery case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2011, the court ruled that the plaintiff had not complied with the procedural steps necessary to serve us. As a result of this ruling, plaintiff must re-serve its claim. We have not yet been re-served.
In the fourth health care cost recovery case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, we and other members of the industry are defendants. Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We challenged service as improper. In June 2010, the court ruled that plaintiffs did not have leave to serve the writ of summons on the defendants and that they must re-serve the writ. We have not yet been re-served.
In the fifth health care cost recovery case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In May 2010, the trial court rejected our objections to the court's jurisdiction. We have appealed. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.
In the health care cost recovery case in Korea, the National Health Insurance Service v. KT&G, et. al., filed April 14, 2014, our subsidiary and other Korean manufacturers are defendants. Plaintiff alleges that defendants concealed the health hazards of smoking, marketed to youth, added ingredients to make their products more harmful and addictive, and misled consumers into believing that Lights cigarettes are safer than regular cigarettes. The National Health Insurance Service seeks to recover damages allegedly incurred in treating 3,484 patients with small cell lung cancer, squamous cell lung cancer, and squamous cell laryngeal cancer from 2003 to 2012. The trial court dismissed the case in its entirety on November 20, 2020. The Appellate court granted the Plaintiff a de novo
appeal in 2021 and determined that the appellate proceedings will take place in stages: wrongful conduct/product defect allegations first, then causation and finally issues such as standing/direct action.
Label-Related Cases: These cases, now brought only by individual plaintiffs, allege that the use of the descriptor “Lights” or other alleged misrepresentations or omissions of labeling information constitute fraudulent and misleading conduct. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution, injunctive relief, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the risk, and statute of limitations.
As of December 31, 2022, there were 6 label-related cases brought by individual plaintiffs in Italy (1) and Chile (5) pending against our subsidiaries, compared with 3 such cases on December 31, 2021, and 5 such cases on December 31, 2020.
Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.
As of December 31, 2022, there was 1 public civil action pending against our subsidiary in Venezuela (1), compared with 1 such case on December 31, 2021, and 2 such cases on December 31, 2020.
In a public civil action in Venezuela, Federation of Consumers and Users Associations (“FEVACU”), et al. v. National Assembly of Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court, filed April 29, 2008, we were not named as a defendant, but the plaintiffs published a notice pursuant to court order, notifying all interested parties to appear in the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to health of the citizens of Venezuela and claim that the government failed to protect adequately its citizens' right to health. The claim asks the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and BAT's subsidiary as interested third parties. In February 2013, our subsidiary answered the complaint.
Reduced-Risk Products
In Colombia, an individual filed a purported class action, Ana Ferrero Rebolledo v. Philip Morris Colombia S.A., et al., in April 2019 against our subsidiaries with the Civil Court of Bogota related to the marketing of our Platform 1 product. Plaintiff alleged that our subsidiaries advertise the product in contravention of law and in a manner that misleads consumers by portraying the product in a positive light, and further asserts that the Platform 1 vapor contains many toxic compounds, creates a high level of dependence, and has damaging second-hand effects. Plaintiff sought injunctive relief and damages on her behalf and on behalf of two classes (class 1 - all Platform 1 consumers in Colombia who seek damages for the purchase price of the product and personal injuries related to the alleged addiction, and class 2 - all residents of the neighborhood where the advertising allegedly took place who seek damages for exposure to the alleged illegal advertising). Our subsidiaries answered the complaint in January 2020, and in February 2020, plaintiff filed an amended complaint. The amended complaint modifies the relief sought on behalf of the named plaintiff and on behalf of a single class (all consumers of Platform 1 products in Colombia who seek damages for the product purchase price and personal injuries related to the use of an allegedly harmful product). In June 2021, our subsidiaries answered the amended complaint. The court has scheduled evidentiary hearings to take place in February 2023.
Other Litigation
The Department of Special Investigations of the government of Thailand ("DSI") conducted an investigation into alleged underpayment by our subsidiary, Philip Morris (Thailand) Limited ("PM Thailand"), of customs duties and excise taxes relating to imports from the Philippines covering the period 2003-2007. On January 18, 2016, the Public Prosecutor filed charges against our subsidiary and seven former and current employees in the Bangkok Criminal Court alleging that PM Thailand and the individual defendants jointly and with the intention to defraud the Thai government, under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries of cigarettes from the Philippines during the period of July 2003 to June 2006. The government sought a fine of approximately THB 80.8 billion (approximately $2.4 billion). In May 2017, Thailand enacted a new customs act. The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation
Agreement of the World Trade Organization and Thai law and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies. Trial in the case began in November 2017 and concluded in September 2019. In November 2019, the trial court found our subsidiary guilty of under-declaration of the prices and imposed a fine of approximately THB 1.2 billion (approximately $36 million). The trial court dismissed all charges against the individual defendants. In December 2019, as required by the Thai law, our subsidiary paid the fine. This payment is included in other assets on the consolidated balance sheets and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment. Both our subsidiary and the Public Prosecutor filed an appeal of the trial court's decision. The appellate court issued its decision on the appeals on June 1, 2022. The appellate court affirmed the findings of under-declaration of import prices of cigarettes but reduced the fine to approximately THB 122 million (approximately $3.6 million) finding the trial court erred in its calculation of the under-declaration and fine. The appellate court affirmed the acquittals of the individual defendants. Our subsidiary has appealed the decision to the Supreme Court of Thailand. The Public Prosecutor has also filed an appeal challenging the dismissal of charges against the individual defendants and the amount of the fine imposed. Thailand is required to refund any payment made by our subsidiary in excess of any fine asserted by the courts.
The DSI also conducted an investigation into alleged underpayment by PM Thailand of customs duties and excise taxes relating to imports from Indonesia covering the period 2000-2003. On January 26, 2017, the Public Prosecutor filed charges against PM Thailand and its former Thai employee in the Bangkok Criminal Court alleging that PM Thailand and its former employee jointly and with the intention to defraud the Thai government under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries during the period from January 2002 to July 2003. The government is seeking a fine of approximately THB 19.8 billion (approximately $588 million). In May 2017, Thailand enacted a new customs act. The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law, and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and a Thai court. Trial in the case began in November 2018 and concluded in December 2019. In March 2020, the trial court found our subsidiary guilty of under-declaration of the prices and imposed a fine of approximately THB 130 million (approximately $3.9 million). The trial court dismissed all charges against the individual defendant. In April 2020, as required by Thai law, our subsidiary paid the fine. This payment is included in other assets on the consolidated balance sheets and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment. Our subsidiary filed an appeal of the trial court's decision. In addition, the Public Prosecutor filed an appeal of the trial court's decision challenging the dismissal of charges against the individual defendant and the amount of the fine imposed. The appellate court issued its decision on the appeals on January 31, 2023. The appellate court affirmed the findings of under-declaration of import prices of cigarettes but reduced the fine imposed by the trial court. The appellate court directed the Public Prosecutor to coordinate with customs officials to calculate such reduced fine in accordance with the appellate court’s decision, which will occur at a later date. The appellate court affirmed the acquittal of the individual defendant. Both the Public Prosecutor and our subsidiary may appeal the decision to the Supreme Court of Thailand. Thailand is required to refund any payment made by our subsidiary in excess of any fine assessed by the courts.
The South Korean Board of Audit and Inspection (“BAI”) conducted an audit of certain Korean government agencies and the tobacco industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies, including Philip Morris Korea Inc. ("PM Korea"), our South Korean subsidiary, were in compliance with South Korean tax laws. In November 2016, the tax authorities completed their audit and assessed allegedly underpaid taxes and penalties. In order to avoid nonpayment financial costs, PM Korea paid approximately KRW 272 billion (approximately $217 million), of which KRW 100 billion (approximately $80 million) was paid in 2016 and KRW 172 billion (approximately $137 million) was paid in the first quarter of 2017. These paid amounts are included in other assets in the consolidated balance sheets and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment. PM Korea appealed the assessments. In January 2020, a trial court ruled that PM Korea did not underpay taxes in the amount of approximately KRW 218 billion (approximately $173 million). The tax authorities appealed this decision to the appellate court. In September 2020, the appellate court upheld the trial court's decision. The tax authorities have appealed to the Supreme Court of South Korea. In June 2020, another trial court ruled that PM Korea did not underpay approximately KRW 54 billion (approximately $43 million) of alleged underpayments. The government agencies appealed this decision. In January 2021, the appellate court upheld the trial court's decision. The government agencies appealed to the Supreme Court of South Korea. If the tax authorities and government agencies ultimately lose, then they would be required to return the paid amounts to PM Korea.
The Saudi Arabia Customs General Authority issued its assessments requiring our distributors to pay additional customs duties in the amount of approximately 1.5 billion Saudi Riyal, or approximately $396 million, in relation to the fees paid by these distributors under their agreements with our subsidiary for exclusive rights to distribute our products in Saudi Arabia. In order to challenge these assessments, the distributors posted bank guarantees. To enable the distributors' challenge, our subsidiary agreed with the banks to bear a portion of the amount the authority may draw on the bank guarantees. In September and October 2020, respectively, the distributors lost their challenges of the assessments. Both distributors appealed, and in June 2021, the Customs Appeal Committee in Riyadh notified the distributors of its decisions to largely reject their appeals. On the basis of the above-mentioned decisions, in June 2021, PMI recorded a pre-tax charge of $246 million in relation to the period of 2014 through 2020 in line with existing and
contemplated arrangements with the distributors. The estimated amounts for 2021 and 2022 are immaterial. In accordance with U.S. GAAP, the charge was recorded as a reduction in net revenues on the consolidated statements of earnings for the three months and six months ended June 30, 2021. Despite the unfavorable decisions, our subsidiary believes that customs duties paid in Saudi Arabia were in compliance with the applicable law and the WTO Customs Valuation Agreement.
A putative shareholder class action lawsuit, In re Philip Morris International Inc. Securities Litigation, is pending in the United States District Court for the Southern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between July 26, 2016 and April 18, 2018. The lawsuit names Philip Morris International Inc. and certain officers and employees as defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information about PMI’s business, operations, financial condition, and prospects, related to product sales of, and alleged irregularities in clinical studies of, PMI’s Platform 1 product. The lawsuit seeks various forms of relief, including damages. In November 2018, the court consolidated three putative shareholder class action lawsuits with similar allegations previously filed in the Southern District of New York (namely, City of Westland Police and Fire Retirement System v. Philip Morris International Inc., et al., Greater Pennsylvania Carpenters’ Pension Fund v. Philip Morris International Inc., et al., and Gilchrist v. Philip Morris International Inc., et al.) into these proceedings. A putative shareholder class action lawsuit, Rubenstahl v. Philip Morris International Inc., et al., that had been previously filed in December 2017 in the United States District Court for the District of New Jersey, was voluntarily dismissed by the plaintiff due to similar allegations in these proceedings. On February 4, 2020, the court granted defendants’ motion in its entirety, dismissing all but one of the plaintiffs’ claims with prejudice. The court noted that one of plaintiffs’ claims (allegations relating to four non-clinical studies of PMI’s Platform 1 product) did not state a viable claim but allowed plaintiffs to replead that claim by March 3, 2020. On February 18, 2020, the plaintiffs filed a motion for reconsideration of the court's February 4th decision; this motion was denied on September 21, 2020. On September 28, 2020, plaintiffs filed an amended complaint seeking to replead allegations relating to four non-clinical studies of PMI's Platform 1 product. On September 10, 2021, the court granted defendant's motion to dismiss plaintiffs' amended complaint in its entirety. Plaintiffs have filed an appeal with the U.S. Court of Appeal for the Second Circuit. We believe that this lawsuit is without merit and will continue to defend it vigorously.
In April 2020, affiliates of British American Tobacco plc (“BAT”) commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Altria Client Services LLC, et al., in the federal court in the Eastern District of Virginia, where PMI's subsidiary, Philip Morris Products S.A., as well as Altria Group, Inc.'s subsidiaries, are defendants. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 blade products in the United States. In April 2020, BAT affiliates filed a complaint against PMI, Philip Morris Products S.A., Altria Group, Inc., and its subsidiaries before the International Trade Commission ("ITC"). Plaintiffs seek an order to prevent the importation of Platform 1 products into the United States. The ITC evidentiary hearing closed on February 1, 2021. On May 14, 2021, the administrative law judge issued an Initial and Recommended Determination ("ID/RD") finding that the Platform 1 blade products infringe two of the three patents asserted by Plaintiffs, recommending that the ITC issue a Limited Exclusion order against infringing products, and recommending against a cease-and-desist, as well as recommending against a bond pending Presidential review of the ITC's Final Determination ("FD"). Defendants and Plaintiffs filed separate Petitions for Review with the ITC of the ID on May 28, 2021; on July 27, 2021, the ITC granted each of the petitions in part, deciding to review certain issues in the ID. Plaintiffs and Defendants also submitted brief statements of the public interest factors in issue to the ITC on June 15, 2021. On September 29, 2021, the ITC issued its FD finding a violation of section 337 of the U.S. Tariff Act and issued (a) a limited exclusion order against Philip Morris Products S.A., prohibiting, inter alia, the importation of Platform 1 product and infringing components; and (b) a cease-and-desist order against Altria Client Services, LLC and its affiliate prohibiting, inter alia, sales of imported Platform 1 products. The ITC predicated the orders on its finding that Platform 1 blade products infringe two patents owned by a BAT affiliate. The ITC also found that Platform 1 blade products do not infringe a third patent owned by a BAT affiliate. The ITC further held that there were insufficient concerns over public interest to prevent the issuance of remedial orders. Following the Presidential Review period, the orders became effective and Defendants filed a petition for review of the FD with the U.S. Court of Appeals for the Federal Circuit. Defendants also filed motions in the ITC and Federal Circuit for a stay of the orders pending disposition of the appeal; the ITC denied the motion on January 20, 2022 and the Federal Circuit denied the motion on January 25, 2022. The Federal Circuit heard oral argument on defendants' appeal of the FD on October 3, 2022 and a decision is awaited. We estimate that an adverse ruling is probable due to our inability to import the products and components impacted by the ITC's FD with immaterial financial impact. In the Eastern District of Virginia case, the defendants also counterclaimed that BAT infringed their patents relating to certain e-vapor products, seeking damages for, and injunctive relief against, the commercialization of these products by BAT. The trial of Defendant PMPSA’s counterclaims took place from June 8-14, 2022 and, on June 15, 2022, the jury returned a verdict for PMPSA awarding approximately $10.8 million in damages for infringement up to December 31, 2021 of two PMPSA patents by BAT’s affiliate and two of BAT’s e-vapor products; the jury also found BAT’s affiliate did not infringe one of the two PMPSA patents and that the BAT affiliates had failed to prove one of the two PMPSA patents was invalid. PMPSA filed a motion for an injunction or, in the alternative, an ongoing royalty on August 12, 2022 which remains pending. Upon petition of Philip Morris Products S.A., the Patent Trial and Appeal Board ("PTAB") of the United States Patent and Trademark Office has instituted review of certain claims pertaining to four of the six patents asserted by BAT affiliates in both proceedings. On January 11, 2022, PTAB issued its final decision on one of the two patents underlying the ITC's FD, invalidating all challenged claims of BAT's patent. On March 30, 2022, PTAB issued its final decision on the second of the two patents underlying the ITC's FD, finding the challenged claims patentable. The parties have filed appeals of these PTAB results to the U.S. Court of Appeals for the Federal Circuit. On July 21, 2022, PMPSA filed a Request for Rehearing of PTAB's November 2020
decision not to institute review of certain claims in the second of the two patents underlying the ITC's FD; PTAB denied the Request on October 13, 2022.
In April 2020, BAT’s affiliate commenced patent infringement proceedings, Nicoventures Trading Limited v. PM GmbH, et al., against PMI’s German subsidiary, Philip Morris GmbH, and Philip Morris Products S.A., in the Regional Court in Munich, Germany. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 blade products in Germany. In June 2021, the court stayed the proceeding in respect of one of the two patents asserted by BAT’s Affiliate. Following the December 2022 confirmation of the revocation of the other BAT patent by the European Patent Office Board of Appeal, BAT withdrew its initial claim based on that patent; the stayed action based on the second patent remains pending.
In September 2020, BAT’s affiliates commenced patent infringement and unfair competition proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Products S.A., et al., against Philip Morris Products S.A. and PMI’s Italian subsidiaries, Philip Morris Manufacturing & Technology Bologna S.p.A. and Philip Morris Italia S.r.l., in the Court of Milan, Italy. Plaintiffs seek damages, as well as injunctive relief against the manufacture in Italy of the Platform 1 blade heated tobacco units allegedly infringing the asserted patents and the commercialization of the Platform 1 blade products in Italy. As part of this proceeding, in October 2020, BAT’s affiliates filed a request based on one of the two asserted patents seeking preliminary injunctive relief against the manufacture and commercialization of the Platform 1 blade products in Italy. In July 2022, the court dismissed plaintiffs’ request for preliminary injunction in its entirety and plaintiffs did not appeal this ruling.
In October 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Japan, Limited, et al., against PMI’s Japanese subsidiary, Philip Morris Japan Limited, and a third-party distributor in the Tokyo District Court. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 blade products in Japan. On December 23, 2022, the Court dismissed BAT’s claims with respect to one of the two patents that it asserted, finding no infringement; BAT filed an appeal of this dismissal.
In November 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Romania SRL, et al., against PMI’s Romanian subsidiaries, Philip Morris Romania S.R.L. and Philip Morris Trading S.R.L., and a third-party distributor in the Court of Law of Bucharest, Civil Registry. Plaintiffs seek damages and preliminary and permanent injunctive relief against the manufacture and commercialization of the Platform 1 blade products in Romania. In February 2021, the court dismissed plaintiffs’ request for a preliminary injunction. In April 2021, the appellate court denied plaintiffs' appeal, confirming the dismissal of plaintiffs' request for preliminary injunction. Plaintiffs' proceeding requesting damages and a permanent injunction remains pending before the Court of Law of Bucharest, Civil Registry. In an October 14, 2021 hearing, the court stayed the proceeding.
In March 2021, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Korea, Co., Ltd., against PM Korea in the Seoul Central District Court. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 blade heated tobacco units in South Korea. On May 30, 2022, the Korean Patent Office issued a decision that all of the challenged claims in the patent asserted by Plaintiffs are invalid; Plaintiffs filed an appeal of this decision.
In July, 2021, Philip Morris Products, S.A. filed a claim at the High Court of Justice of England and Wales against BAT affiliates Nicoventures Trading Limited and British American Tobacco (Investments) Limited seeking revocation of the UK parts of two BAT European patents. In March, the BAT affiliates stated that they would consent to revocation of one of the patents and filed a counterclaim against Philip Morris Products S.A. and Philip Morris Limited seeking from the court a declaration that the remaining BAT affiliate patent is infringed by Platform 1 induction products, as well as damages and injunctive relief against the commercialization of the Platform 1 induction products in the U.K. The trial took place from September 21-28, 2022, and a decision is awaited.
Other patent challenges by both parties are pending in various jurisdictions.
We believe that the foregoing proceedings by the affiliates of BAT are without merit and will defend them vigorously.
We are also involved in additional litigation arising in the ordinary course of our business. While the outcomes of these proceedings are uncertain, management does not expect that the ultimate outcomes of other litigation, including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our consolidated results of operations, cash flows or financial position.
Third-Party Guarantees
Until November 1, 2022, Medicago Inc. ("Medicago") was an equity method investee of Philip Morris Investments B.V. (“PMIBV”), a PMI subsidiary. On October 17, 2020, Medicago had entered into a contribution agreement with the Canadian government (the “Contribution Agreement”) whereby the Canadian government agreed to contribute up to CAD 173 million (approximately $131 million on the date of signing) to Medicago, to support its on-going COVID-19 vaccine development and clinical trials ("First Stage"), and for the construction of its Quebec City manufacturing facility ("Second Stage", and together with the First Stage, the “Project”).
On March 31, 2022, the Contribution Agreement was amended (the “Contribution Agreement Amendment”) to reflect an additional contribution from the Canadian government up to CAD 27 million (approximately $22 million on the date of signing) to Medicago for the Second Stage. In August 2022, Medicago received the final tranche of the contribution from the Canadian government in relation to the First Stage, confirming thereby the completion of such first stage and consequently reducing by approximately CAD 123 million (approximately $93 million on the date of signing) the Repayment Obligations (as defined below).
PMIBV and Mitsubishi Tanabe Pharma Corporation (“MTPC”) are also parties to the Contribution Agreement and the Contribution Agreement Amendment as guarantors of Medicago’s obligations thereunder on a joint and several basis (“Co-Guarantors”). The Co-Guarantors agreed to repay amounts contributed by the Canadian government plus interest, if Medicago fails to do so (the "Repayment Obligations"), and could be responsible for the costs of Medicago’s other obligations (such as the achievement of specific milestones of the Project). The guarantees are in effect through March 31, 2026. It is reasonably possible that PMI will be responsible for a portion of these costs and obligations. The maximum amount of these obligations is currently non-estimable.
On November 1, 2022, PMIBV transferred all of the shares it owned in Medicago to MTPC Holdings Canada Inc., the majority shareholder of Medicago. MTPC assumed and agreed to perform all of PMIBV's obligations under the guarantees and to indemnify and save PMIBV harmless in respect of any and all claims related to the guaranteed obligations. On February 3, 2023, PMI learned through a public announcement that a decision has been taken to cease all operations at Medicago and to proceed with an orderly wind up of Medicago’s business and operations.
PMI has determined that these guarantees did not have a material impact on its consolidated financial statements for the year ended December 31, 2022.
Sale of Accounts Receivable:
To mitigate risk and enhance cash and liquidity management PMI sells trade receivables to unaffiliated financial institutions. These arrangements allow PMI to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from the consolidated balance sheets. PMI sells trade receivables under two types of arrangements, servicing and non-servicing. For servicing arrangements, PMI continues to service the sold trade receivables on an administrative basis and does not act on behalf of the unaffiliated financial institutions. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material for the years ended December 31, 2022 and 2021. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables have been sold to the unaffiliated financial institutions.
Cumulative trade receivables sold, including excise taxes, for the years ended December 31, 2022 and 2021, were $11.9 billion and $11.8 billion, respectively. PMI’s operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as of December 31, 2022, 2021 and 2020, were $1.0 billion, $0.9 billion and $1.2 billion, respectively. The net proceeds received are included in cash provided by operating activities in the consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of trade receivables within marketing, administration and research costs in the consolidated statements of earnings. For the years ended December 31, 2022, 2021 and 2020 the loss on sale of trade receivables was $26 million, $9 million and $9 million, respectively.
Asset Impairment and Exit Costs:
For the year ended December 31, 2022, PMI did not record any charges for asset impairment and exit costs related to restructuring activities. As previously discussed, PMI recorded a pre-tax impairment charge on intangibles of $112 million for the year ended December 31, 2022 within the Wellness and Healthcare segment. For further details, see Note 5. Goodwill and Other Intangible Assets, net. For the years ended December 31, 2021 and 2020, PMI recorded total pre-tax asset impairment and exit costs related to
restructuring activities of $216 million and $149 million, respectively. These pre-tax asset impairment and exit costs were included in marketing, administration and research costs on the consolidated statements of earnings.
South Korea
In 2021, PM Korea implemented a new business operating model, which required the restructuring of its current distribution agreements. As a result, PMI recorded exit costs of $57 million in the year ended December 31, 2021, related to contract terminations and restructuring with certain distributors.
Organizational Design Optimization
As part of PMI’s transformation to a smoke-free future, PMI sought to optimize its organizational design, which included the elimination, relocation and outsourcing of certain operations center and centralized activities. In January 2020, PMI commenced a multi-phase restructuring project in Switzerland. PMI initiated the employee consultation procedures, as required under Swiss law, for the impacted employees. The consultation procedures for the first two phases were completed in 2020 with the final phases initiated and completed in 2021. Additionally, since the commencement of this multi-phase restructuring project in 2020, PMI launched a voluntary separation program in Switzerland for certain eligible employees and announced the outsourcing of certain activities in Argentina, Indonesia, Poland and the United States. This multi-phase restructuring project was completed in the fourth quarter of 2021.
For the years ended December 31, 2021 and 2020, PMI recorded pre-tax charges of $159 million and $149 million, respectively, related to the organizational design optimization. Since inception of this multi-phase restructuring project in January 2020 through December 31, 2021, approximately 1,020 positions in total were impacted, resulting in cumulative pre-tax charges of $308 million related to the organizational design optimization program. Of this cumulative pre-tax amount, $300 million related to separation program charges and $8 million related to asset impairment charges.
Asset Impairment and Exit Costs by Segment
During 2021 and 2020, PMI recorded the following pre-tax asset impairment and exit costs by segment related to restructuring activities:
| | | | | | | | | | | | | |
(in millions) | | | 2021 | | 2020 |
Separation programs: (1) | | | | | |
| European Union | | | $ | 68 | | $ | 53 |
| Eastern Europe | | | 14 | | 14 |
| Middle East & Africa | | | 17 | | 18 |
| South & Southeast Asia | | | 21 | | 22 |
| East Asia & Australia | | | 31 | | 25 |
| Americas | | | 8 | | 9 |
| Total separation programs | | | 159 | | | 141 | |
| Contract termination charges: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| East Asia & Australia | | | 57 | | — |
| | | | | |
| Total contract termination charges | | | 57 | | — |
Asset impairment charges (1) | | | | | |
| European Union | | | — | | 4 |
| Eastern Europe | | | — | | 1 |
| Middle East & Africa | | | — | | 1 |
| South & Southeast Asia | | | — | | 1 |
| East Asia & Australia | | | — | | 1 |
| Americas | | | — | | — |
| Total asset impairment charges | | | — | | 8 |
| Asset impairment and exit costs | | | 216 | | 149 |
(1) Organizational design optimization pre-tax charges in 2021 and 2020 were allocated across all geographical segments.
Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the year ended December 31, 2022 was as follows:
| | | | | |
| (in millions) | |
| Liability balance, January 1, 2022 | $ | 142 | |
| Charges, net | — | |
| Cash spent | (93) | |
| Currency/other | (9) | |
| Liability balance, December 31, 2022 | $ | 40 | |
Future cash payments for exit costs incurred to date are anticipated to be substantially paid by the end of 2023.
Leases:
PMI has operating and finance leases that are principally for real estate (office space, warehouses and retail store space), machinery and equipment, and vehicles. Lease terms range from 1 year to 71 years, some of which include options to renew, which are reasonably certain to be renewed. Lease terms may also include options to terminate the lease. The exercise of a lease renewal or termination option is at PMI’s discretion.
PMI’s operating and finance leases at December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | |
| At December 31, |
| (in millions) | 2022 | 2021 |
| Operating Leases | Finance Leases | Operating Leases | Finance Leases |
| Assets: | | | | |
| Machinery and equipment | $ | — | | $ | 123 | | $ | — | | $ | 108 | |
| Other assets | 594 | | — | | 526 | | — | |
| Total lease assets | $ | 594 | | $ | 123 | | $ | 526 | | $ | 108 | |
| | | | |
| Liabilities: | | | | |
| Current | | | | |
| Current portion of long-term debt | $ | — | | $ | 34 | | $ | — | | $ | 48 | |
| Accrued liabilities - Other | 178 | | — | | 192 | | — | |
| Noncurrent | | | | |
| Long-term debt | — | | 20 | | — | | 23 | |
| Income taxes and other liabilities | 436 | | — | | 344 | | — | |
| Total lease liabilities | $ | 614 | | $ | 54 | | $ | 536 | | $ | 71 | |
The components of PMI’s lease cost were as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | |
| For the Years Ended December 31, | |
| (in millions) | 2022 | 2021 | 2020 | |
| Operating lease cost | $ | 248 | | $ | 259 | | $ | 237 | | |
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | 83 | | 54 | | 31 | | |
| Interest on lease liabilities | 1 | | 1 | | 1 | | |
| Short-term lease cost | 59 | | 55 | | 49 | | |
| Variable lease cost | 23 | | 25 | | 31 | | |
| Total lease cost | $ | 414 | | $ | 394 | | $ | 349 | | |
Maturity of PMI’s lease liabilities, on an undiscounted basis, as of December 31, 2022, were as follows:
| | | | | | | | |
| (in millions) | Operating Leases | Finance Leases |
| 2023 | $ | 202 | | $ | 34 | |
| 2024 | 138 | | 14 | |
| 2025 | 97 | | 4 | |
| 2026 | 60 | | 1 | |
| 2027 | 39 | | 1 | |
| Thereafter | 176 | | 1 | |
| Total lease payments | 712 | | 55 | |
| Less: Interest | 98 | | 1 | |
| Present value of lease liabilities | $ | 614 | | $ | 54 | |
Other information related to PMI’s leases was as follows for the year ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| December 31, |
| (in millions) | 2022 | 2021 | 2020 |
| Operating Leases | Finance Leases | Operating Leases | Finance Leases | Operating Leases | Finance Leases |
Cash paid for amounts included in the measurement of lease liabilities in operating cash flows (1) | $ | 243 | | $ | — | | $ | 259 | | $ | — | | $ | 238 | | $ | — | |
| Cash paid for amounts included in the measurement of lease liabilities in financing cash flows | $ | — | | $ | 76 | | $ | — | | $ | 26 | | $ | — | | $ | 19 | |
| Leased assets obtained in exchange for new lease liabilities | $ | 255 | | $ | 100 | | $ | 64 | | $ | 89 | | $ | 149 | | $ | 32 | |
| Weighted-average remaining lease term (years) | 10.3 | 2.1 | 8.3 | 1.7 | 10.1 | 1.6 |
Weighted-average discount rate(2) (3) | 3.4 | % | 4.4 | % | 3.6 | % | 5.3 | % | 4.3 | % | 6.7 | % |
(1) Cash paid included in the operating cash flows of finance leases is not material.
(2) PMI’s weighted-average discount rate for operating leases is based on its estimated pre-tax cost of debt adjusted for country-specific risk.
(3) PMI’s weighted-average discount rate for finance leases, excluding embedded leases, is based on its estimated pre-tax cost of debt adjusted for country-specific risk and where applicable the interest rate explicit to lease contracts.