Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other nicotine-containing products, including reduced-risk products, in markets outside of the United States of America. In addition, PMI ships a version of its Platform 1 device and its consumables authorized by the U.S. Food and Drug Administration ("FDA") to Altria Group, Inc., for sale in the United States under license. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.
Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continuing smoking. PMI has a range of RRPs in various stages of development, scientific assessment and commercialization.
"Platform 1" is the term PMI uses to refer to PMI’s reduced-risk product that uses a precisely controlled heating device incorporating our IQOS HeatControl technology, into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.
Basis of Presentation
The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and such principles are applied on a consistent basis. It is the opinion of PMI’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings attributable to PMI for any interim period are not necessarily indicative of results that may be expected for the entire year.
PMI has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of March 31, 2020. PMI has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets, long-lived assets or its hedge accounting activities. Additionally, PMI believes that the modification of certain customer payment terms has not changed its assessment of collectability and therefore, there has been no material impact on PMI’s revenue recognition.
As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's financial statements. For further details, see Note 19. Deconsolidation of RBH.
These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report on Form 10-K for the year ended December 31, 2019.
Note 2. Stock Plans:
In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). Under the 2017 Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2017 Plan. At March 31, 2020, shares available for grant under the 2017 Plan were 17,384,530.
In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 Non-Employee Directors Plan”). A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors Plan. At March 31, 2020, shares available for grant under the plan were 954,084.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Restricted share unit (RSU) awards
During the three months ended March 31, 2020 and 2019, shares granted to eligible employees, the weighted-average grant date fair value per share related to RSU awards and the recorded compensation expense related to RSU awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Granted
|
|
Weighted-Average Grant Date Fair Value Per RSU Award Granted
|
|
Compensation Expense Related to RSU Awards (in millions)
|
|
2020
|
1,599,380
|
|
|
$ 86.62
|
|
|
$
|
39
|
|
|
2019
|
1,621,070
|
|
|
|
$ 77.13
|
|
|
$
|
36
|
|
As of March 31, 2020, PMI had $218 million of total unrecognized compensation cost related to non-vested RSU awards. The cost is recognized over the original restriction period of the awards, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58.
During the three months ended March 31, 2020, 1,011,318 RSU awards vested. The grant date fair value of all the vested awards was approximately $99 million. The total fair value of RSU awards that vested during the three months ended March 31, 2020 was approximately $88 million.
Performance share unit (PSU) awards
During the three months ended March 31, 2020 and 2019, PMI granted PSU awards to certain executives. The PSU awards require the achievement of certain performance factors, which are predetermined at the time of grant, typically over a three-year performance cycle. The performance metrics for such PSU's granted during the three months ended March 31, 2020 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 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 performance metrics for such PSUs granted during the three months ended March 31, 2019 consisted of PMI’s TSR relative to a predetermined peer group and on an absolute basis (50% weight), PMI’s currency-neutral compound annual adjusted operating income growth rate, excluding acquisitions (30% weight), and PMI’s performance against specific measures of PMI’s transformation (20% weight).
The aggregate of the weighted performance factors for the three metrics 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.
During the three months ended March 31, 2020 and 2019, shares granted to eligible employees, the grant date fair value per share and the recorded compensation expense related to PSU awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Granted
|
PSU Grant Date Fair Value Subject to Other Performance Factors Per Share
|
PSU Grant Date Fair Value Subject to TSR Performance Factor Per Share
|
Compensation Expense Related to PSU Awards (in millions)
|
|
2020
|
643,640
|
|
$ 86.69
|
|
$ 79.76
|
|
$
|
23
|
|
|
2019
|
625,200
|
|
|
$ 77.20
|
|
|
$ 83.59
|
|
$
|
18
|
|
The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market price of PMI’s stock at the date of the grant. The grant date fair value of the PSU market based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation model. The following assumptions were used to determine the grant date fair value of the PSU awards subject to the TSR performance factor:
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Risk-free interest rate (a)
|
1.4
|
%
|
|
2.4
|
%
|
|
Expected volatility (b)
|
23.5
|
%
|
|
21.4
|
%
|
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
As of March 31, 2020, PMI had $60 million of total unrecognized compensation cost related to non-vested PSU awards. The cost is recognized over the performance cycle of the awards, or upon death, disability or reaching the age of 58.
During the three months ended March 31, 2020, 343,806 PSU awards vested. The grant date fair value of all the vested awards was approximately $35 million. The total fair value of PSU awards that vested during the three months ended March 31, 2020 was approximately $30 million.
Note 3. Benefit Plans:
Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.
Pension and other employee benefit costs per the condensed consolidated statements of earnings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Net pension costs (income)
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
|
Net postemployment costs
|
25
|
|
|
24
|
|
|
Net postretirement costs
|
2
|
|
|
2
|
|
|
Total pension and other employee benefit costs
|
$
|
23
|
|
|
$
|
21
|
|
Pension Plans
Components of Net Periodic Benefit Cost
Net periodic pension cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension (1)
|
|
|
For the Three Months Ended March 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Service cost
|
$
|
65
|
|
|
$
|
54
|
|
|
Interest cost
|
17
|
|
|
29
|
|
|
Expected return on plan assets
|
(86
|
)
|
|
(79
|
)
|
|
Amortization:
|
|
|
|
|
Net loss
|
65
|
|
|
45
|
|
|
Prior service cost
|
—
|
|
|
—
|
|
|
Net periodic pension cost
|
$
|
61
|
|
|
$
|
49
|
|
(1) Primarily non-U.S. based defined benefit retirement plans.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded pension plans. Employer contributions of $23 million were made to the pension plans during the three months ended March 31, 2020. Currently, PMI anticipates making additional contributions during the remainder of 2020 of approximately $62 million to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.
Note 4. Goodwill and Other Intangible Assets, net:
The movements in goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
European Union
|
Eastern Europe
|
Middle East & Africa
|
South & Southeast Asia
|
East Asia & Australia
|
Latin America & Canada
|
Total
|
|
Balances, December 31, 2019
|
$
|
1,338
|
|
$
|
300
|
|
$
|
89
|
|
$
|
2,898
|
|
$
|
551
|
|
$
|
682
|
|
$
|
5,858
|
|
|
Changes due to:
|
|
|
|
|
|
|
|
|
Currency
|
(53
|
)
|
(13
|
)
|
(19
|
)
|
(327
|
)
|
(47
|
)
|
(115
|
)
|
(574
|
)
|
|
Balances, March 31, 2020
|
$
|
1,285
|
|
$
|
287
|
|
$
|
70
|
|
$
|
2,571
|
|
$
|
504
|
|
$
|
567
|
|
$
|
5,284
|
|
At March 31, 2020, goodwill primarily reflects PMI’s acquisitions in Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the business combination in the Philippines.
Details of other intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(in millions)
|
Weighted-Average Remaining Useful Life
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
|
|
Non-amortizable intangible assets
|
|
$
|
1,112
|
|
|
$
|
1,112
|
|
|
$
|
1,319
|
|
|
$
|
1,319
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Trademarks
|
14 years
|
1,160
|
|
$
|
518
|
|
642
|
|
|
1,217
|
|
$
|
526
|
|
691
|
|
|
Distribution networks
|
8 years
|
103
|
|
67
|
|
36
|
|
|
113
|
|
72
|
|
41
|
|
|
Other*
|
9 years
|
104
|
|
44
|
|
60
|
|
|
106
|
|
44
|
|
62
|
|
|
Total other intangible assets
|
|
$
|
2,479
|
|
$
|
629
|
|
$
|
1,850
|
|
|
$
|
2,755
|
|
$
|
642
|
|
$
|
2,113
|
|
* Primarily intellectual property rights
Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico. The decrease since December 31, 2019 was due to currency movements of ($207 million).
The decrease in the gross carrying amount of amortizable intangible assets from December 31, 2019, was mainly due to currency movements of ($69 million).
The change in the accumulated amortization from December 31, 2019, was mainly due to currency movements of ($31 million), partially offset by the 2020 amortization of $18 million.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for each of the next five years is estimated to be $75 million or less, assuming no additional transactions occur that require the amortization of intangible assets.
Note 5. Financial Instruments:
Overview
PMI operates in markets outside of the United States of America, with manufacturing and sales facilities in various locations around the world. PMI utilizes certain financial instruments to manage foreign currency and interest rate exposure. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Both foreign exchange contracts and interest rate contracts are collectively referred to as derivative contracts ("derivative contracts"). The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble and Swiss franc. At March 31, 2020, PMI had contracts with aggregate notional amounts of $24.0 billion of which $6.5 billion related to cash flow hedges, $8.4 billion related to hedges of net investments in foreign operations and $9.1 billion related to other derivatives that primarily offset currency exposures on intercompany financing.
The fair value of PMI’s derivative contracts included in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
(in millions)
|
|
Balance Sheet Classification
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Balance Sheet Classification
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Derivative contracts designated as hedging instruments
|
|
Other current assets
|
|
$
|
239
|
|
|
$
|
319
|
|
|
Other accrued liabilities
|
|
$
|
35
|
|
|
$
|
23
|
|
|
|
|
Other assets
|
|
161
|
|
|
21
|
|
|
Income taxes and other liabilities
|
|
89
|
|
|
301
|
|
|
Derivative contracts not designated as hedging instruments
|
|
Other current assets
|
|
92
|
|
|
50
|
|
|
Other accrued liabilities
|
|
100
|
|
|
70
|
|
|
|
|
Other assets
|
|
—
|
|
|
—
|
|
|
Income taxes and other liabilities
|
|
25
|
|
|
25
|
|
|
Total derivatives
|
|
|
|
$
|
492
|
|
|
$
|
390
|
|
|
|
|
$
|
249
|
|
|
$
|
419
|
|
For the three months ended March 31, 2020 and 2019, PMI's cash flow and net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pre-tax, in millions)
|
For the Three Months Ended March 31,
|
|
|
Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
|
|
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive
Earnings/(Losses) into
Earnings
|
|
Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
Derivatives in Cash Flow Hedging Relationship
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
31
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3
|
|
|
$
|
10
|
|
|
|
|
|
|
|
Cost of sales
|
|
4
|
|
|
—
|
|
|
|
|
|
|
|
Marketing, administration and research costs
|
|
5
|
|
|
(3
|
)
|
|
|
|
|
|
|
Interest expense, net
|
|
(2
|
)
|
|
(2
|
)
|
|
Derivatives in Net Investment Hedging Relationship
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
407
|
|
|
211
|
|
|
|
|
|
|
|
|
Total
|
$
|
438
|
|
|
$
|
209
|
|
|
|
|
$
|
10
|
|
|
$
|
5
|
|
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 condensed consolidated statements of earnings. As of March 31, 2020, PMI has hedged forecasted transactions for periods not exceeding the next twenty-one months with the exception of one derivative contract that expires in May 2024. The impact of these hedges is primarily included in operating cash flows on PMI’s condensed consolidated statements of cash flows.
Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and derivative contracts as net investment hedges, primarily of its Euro net assets. For the three months ended March 31, 2020 and 2019, these hedges of net investments resulted in gains (losses), net of income taxes, of $314 million and $291 million, respectively, principally related to changes in the exchange rates between the Euro and U.S. dollar. These gains (losses) were reported as a component of accumulated other comprehensive losses within currency translation adjustments, and were substantially offset by the losses and gains generated on the underlying assets. For the three months ended March 31, 2020 and 2019, the gains for amounts excluded from the effectiveness testing recognized in earnings were $56 million and $56 million, respectively. These gains were accounted for in interest expense, net, on the condensed consolidated statement of earnings. The premiums paid for, and settlements of, net investment hedges are included in investing cash flows on PMI’s condensed consolidated statements of cash flows.
Other Derivatives
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in marketing, administration and research costs in PMI’s condensed consolidated statements of earnings. For the three months ended March 31, 2020 and 2019, the gains (losses) from contracts for which PMI did not apply hedge accounting were $56 million and $(7) million, respectively. The gains (losses) from these contracts substantially offset the losses and gains generated by the underlying intercompany and third-party loans being hedged.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the three months ended March 31, 2020 and 2019, these items impacted the condensed consolidated statement of earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pre-tax, in millions)
|
|
For the Three Months Ended March 31,
|
|
Derivatives not Designated
as Hedging Instruments
|
|
Statement of Earnings
Classification of Gain/(Loss)
|
|
Amount of Gain/(Loss)
Recognized in Earnings
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
Derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
34
|
|
|
$
|
17
|
|
|
Total
|
|
|
|
$
|
34
|
|
|
$
|
17
|
|
Qualifying Hedging Activities Reported in Accumulated Other Comprehensive Losses
Derivative gains or losses reported in accumulated other comprehensive losses are a result of qualifying hedging activity. Transfers of these gains or losses to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated other comprehensive losses, net of income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Three Months Ended March 31,
|
|
|
2020
|
2019
|
|
Gain/(loss) as of January 1,
|
$
|
3
|
|
$
|
35
|
|
|
Derivative (gains)/losses transferred to earnings
|
(9
|
)
|
(4
|
)
|
|
Change in fair value
|
26
|
|
(1
|
)
|
|
Gain/(loss) as of March 31,
|
$
|
20
|
|
$
|
30
|
|
At March 31, 2020, PMI expects $36 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the condensed consolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Credit Exposure and Credit Risk
PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limit and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.
Fair Value
See Note 11. Fair Value Measurements and Note 13. Balance Sheet Offsetting for additional discussion of derivative financial instruments.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6. Earnings Per Share:
Basic and diluted earnings per share (“EPS”) were calculated using the following:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Three Months Ended March 31,
|
|
|
2020
|
2019
|
|
Net earnings attributable to PMI
|
$
|
1,826
|
|
$
|
1,354
|
|
|
Less distributed and undistributed earnings attributable to share-based payment awards
|
5
|
|
4
|
|
|
Net earnings for basic and diluted EPS
|
$
|
1,821
|
|
$
|
1,350
|
|
|
Weighted-average shares for basic EPS
|
1,557
|
|
1,555
|
|
|
Plus contingently issuable performance stock units (PSUs)
|
1
|
|
1
|
|
|
Weighted-average shares for diluted EPS
|
1,558
|
|
1,556
|
|
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.
For the 2020 and 2019 computations, there were no antidilutive stock awards.
Note 7. Segment Reporting:
PMI’s subsidiaries and affiliates are engaged in the manufacture and sale of cigarettes and other nicotine-containing products, including RRPs, in markets outside of the United States of America. In addition, PMI ships a version of its Platform 1 device and its consumables authorized by the FDA to Altria Group, Inc. for sale in the United States under license. Operating segments for PMI are organized by geographic region and managed by segment managers who are responsible for the operating and financial results of the regions inclusive of all product categories sold in the region. PMI’s operating segments are the European Union; Eastern Europe; Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Latin America & Canada. PMI records net revenues and operating income to its segments based upon the geographic area in which the customer resides. Revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc. for sale under license in the United States are included in Net Revenues of the Latin America & Canada segment.
PMI’s chief operating decision maker evaluates segment performance and allocates resources based on regional operating income, which includes results from all product categories sold in each region.
PMI disaggregates its net revenue from contracts with customers by both geographic location and product category for each of PMI's six operating segments, as PMI believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Segment data were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Three Months Ended March 31,
|
|
|
2020
|
2019
|
|
Net revenues:
|
|
|
|
European Union
|
$
|
2,535
|
|
$
|
2,159
|
|
|
Eastern Europe
|
788
|
|
579
|
|
|
Middle East & Africa
|
876
|
|
927
|
|
|
South & Southeast Asia
|
1,251
|
|
1,113
|
|
|
East Asia & Australia
|
1,255
|
|
1,321
|
|
|
Latin America & Canada (1)
|
448
|
|
652
|
|
|
Net revenues
|
$
|
7,153
|
|
$
|
6,751
|
|
|
Operating income (loss):
|
|
|
|
European Union
|
$
|
1,158
|
|
$
|
896
|
|
|
Eastern Europe
|
99
|
|
129
|
|
|
Middle East & Africa
|
321
|
|
344
|
|
|
South & Southeast Asia
|
599
|
|
440
|
|
|
East Asia & Australia
|
486
|
|
427
|
|
|
Latin America & Canada (1)
|
126
|
|
(186
|
)
|
|
Operating income
|
$
|
2,789
|
|
$
|
2,050
|
|
(1) As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's financial statements. For further details, see Note 19. Deconsolidation of RBH.
Items affecting the comparability of results from operations were as follows:
|
|
|
|
•
|
Canadian tobacco litigation-related expense - See Note 8. Contingencies and Note 19. Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Latin America & Canada segment for the three months ended March 31, 2019.
|
|
|
|
|
•
|
Loss on deconsolidation of RBH - See Note 19. Deconsolidation of RBH for details of the $239 million loss included in the Latin America & Canada segment for the three months ended March 31, 2019.
|
|
|
|
|
•
|
Asset impairment and exit costs - See Note 18. Asset Impairment and Exit Costs for details of the $20 million pre-tax charge included in the South & Southeast Asia segment for the three months ended March 31, 2019.
|
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PMI's net revenues by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Three Months Ended March 31,
|
|
|
2020
|
2019
|
|
Net revenues:
|
|
|
|
Combustible products:
|
|
|
|
European Union
|
$
|
1,911
|
|
$
|
1,812
|
|
|
Eastern Europe
|
523
|
|
471
|
|
|
Middle East & Africa
|
832
|
|
829
|
|
|
South & Southeast Asia
|
1,251
|
|
1,113
|
|
|
East Asia & Australia
|
642
|
|
638
|
|
|
Latin America & Canada
|
440
|
|
646
|
|
|
Total combustible products
|
$
|
5,598
|
|
$
|
5,508
|
|
|
Reduced-risk products:
|
|
|
|
European Union
|
$
|
624
|
|
$
|
347
|
|
|
Eastern Europe
|
265
|
|
108
|
|
|
Middle East & Africa
|
44
|
|
98
|
|
|
South & Southeast Asia
|
—
|
|
—
|
|
|
East Asia & Australia
|
613
|
|
683
|
|
|
Latin America & Canada
|
8
|
|
6
|
|
|
Total reduced-risk products
|
$
|
1,555
|
|
$
|
1,243
|
|
|
|
|
|
|
Total PMI net revenues
|
$
|
7,153
|
|
$
|
6,751
|
|
Note: Sum of product categories or Regions might not foot to total PMI due to roundings.
Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's cigarettes and other tobacco products combined. Other tobacco products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include reduced-risk products.
Net revenues related to reduced-risk products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's heated tobacco units, IQOS devices and related accessories, and other nicotine-containing products, which primarily include PMI's e-vapor products.
PMI recognizes revenue, when control is transferred to the customer, typically either upon shipment or delivery of goods.
Note 8. Contingencies:
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. Our indemnitees include distributors, licensees, and others that have been named as parties in certain cases and that we have agreed to defend, as well as to pay costs and some or all of judgments, if any, that may be entered against them. Pursuant to the terms of the Distribution Agreement between Altria Group, Inc. (“Altria”) and PMI, PMI will indemnify Altria and Philip Morris USA Inc. (“PM USA”), a U.S. tobacco subsidiary of Altria, for tobacco product claims based in substantial part on products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for tobacco product claims based in substantial part on products manufactured by PM USA, excluding tobacco products contract manufactured for PMI.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation.
Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Canada and Nigeria, range into the billions of U.S. dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. However, as discussed below, we have to date been largely successful in defending tobacco-related litigation.
We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, except as stated otherwise in this Note 8. Contingencies, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.
It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.
CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary, Rothmans, Benson & Hedges Inc. (“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited, sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, March 8, and March 12, 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. As further described in Note 19. Deconsolidation of RBH, RBH is now deconsolidated from our consolidated financial statements. As part of the CCAA proceedings, there is currently a comprehensive stay up to and including September 30, 2020 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.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stayed Litigation — Canada
Smoking and Health Litigation — Canada
In the first class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, RBH and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are defendants. The plaintiffs, an anti-smoking organization and an individual smoker, sought compensatory and punitive damages for each member of the class who allegedly suffers from certain smoking-related diseases. The class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $11 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 $2.2 billion)). In addition, the trial court awarded CAD 90,000 (approximately $63,760) in punitive damages, allocating CAD 30,000 (approximately $21,250) 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 $160.1 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 $537 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 $9.6 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 $1.91 billion)). The Court of Appeal upheld the trial court’s findings that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking and by conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either need not prove, or had adequately proven, that these faults were a cause of the class members’ injuries. In accordance with the judgment, defendants are required to deposit their respective portions of the damages awarded in both the Létourneau case described below and the Blais case, approximately CAD 1.1 billion (approximately $779 million), into trust accounts within 60 days. RBH’s share of the deposit is approximately CAD 257 million (approximately $194.1 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 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 $93 million) in punitive damages, allocating CAD 46 million (approximately $32.6 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 $40.4 million) to RBH. See the Blais description above and Note 19. Deconsolidation of RBH below for further detail concerning the security order pertaining to both Létourneau and Blais cases and the impact of the decision on PMI’s financial statements.
RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention of applicable law on several grounds including the following: (i) defendants had no obligation to warn class members who knew, or should have known, of the risks of smoking; (ii) defendants cannot be liable to class members who would have smoked regardless of what warnings were given; and (iii) defendants cannot be liable to all class members given the individual differences between class members.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Saskatchewan, Canada, filed July 10, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer, as well as restitution of profits.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al., The Supreme Court (trial court), Nova Scotia, Canada, filed June 18, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with the complaint.
In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.
In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.
In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice, filed June 20, 2012, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution of profits.
Health Care Cost Recovery Litigation — Canada
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related wrong.”
In the second health care cost recovery case filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen's Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario Superior Court of Justice, Toronto, Canada, filed September 29, 2009, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Ontario based on legislation enacted in the province. This legislation is similar to the laws introduced in British Columbia and New Brunswick that authorize the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of Newfoundland and Labrador, St. Johns, Canada, filed February 8, 2011, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Newfoundland and Labrador based on legislation enacted in the province that is similar to the laws introduced in British Columbia, New Brunswick and Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fifth health care cost recovery case filed in Canada, Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court of Quebec, Canada, filed June 8, 2012, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The claim was filed by the government of the province of Quebec based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the sixth health care cost recovery case filed in Canada, Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court of Queen's Bench Alberta, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Alberta based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans, Benson & Hedges, Inc., et al., The Queen's Bench, Winnipeg Judicial Centre, Canada, filed May 31, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Manitoba based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the eighth health care cost recovery case filed in Canada, The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et al., Queen's Bench, Judicial Centre of Saskatchewan, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Saskatchewan based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Prince Edward Island based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
__________
The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our subsidiaries or indemnitees as of April 24, 2020, April 23, 2019 and April 24, 2018:¹
|
|
|
|
|
|
|
|
|
|
|
Type of Case
|
|
Number of Cases Pending as of April 24, 2020
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|
Number of Cases Pending as of April 23, 2019
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Number of Cases Pending as of April 24, 2018
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Individual Smoking and Health Cases
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|
48
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|
53
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|
62
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|
Smoking and Health Class Actions
|
|
10
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|
10
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|
11
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|
Health Care Cost Recovery Actions
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|
17
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16
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|
16
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Label-Related Class Actions
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|
—
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|
1
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|
1
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|
Individual Label-Related Cases
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|
4
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|
7
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|
1
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|
Public Civil Actions
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|
2
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|
2
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|
2
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Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 503 Smoking and Health, Label-Related, Health Care Cost Recovery, and Public Civil Actions in which we and/or one of our subsidiaries and/or indemnitees were a defendant have been terminated in our favor. Thirteen cases have had decisions in favor of plaintiffs. Nine of these cases have subsequently reached final resolution in our favor and four remain on appeal.
The table below lists the verdict and significant post-trial developments in the four pending cases where a verdict was returned in favor of the plaintiff:
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Date
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|
Location of
Court/Name of
Plaintiff
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|
Type of
Case
|
|
Verdict
|
|
Post-Trial
Developments
|
|
February 2004
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Brazil/The Smoker Health Defense Association
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Class Action
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The Civil Court of São Paulo found defendants liable without hearing evidence. In April 2004, the court awarded “moral damages” of R$1,000 (approximately $183) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not assess actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling.
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Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November 2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In May 2011, the trial court dismissed the claim. In March 2017, plaintiff filed an en banc appeal to the Superior Court of Justice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the lawsuit. Both appeals are still pending.
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______
¹ Includes cases pending in Canada.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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Date
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|
Location of
Court/Name of
Plaintiff
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|
Type of
Case
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|
Verdict
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|
Post-Trial
Developments
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|
May 27, 2015
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Canada/Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais
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Class Action
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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 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 $2.2 billion)). The trial court awarded CAD 90,000 (approximately $63,760) in punitive damages, allocating CAD 30,000 (approximately $21,250) to our subsidiary. The trial court ordered defendants to pay CAD 1 billion (approximately $708.5 million) of the compensatory damage award, CAD 200 million (approximately $141.7 million) of which is our subsidiary’s portion, into a trust within 60 days.
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In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.)
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Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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Date
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|
Location of
Court/Name of
Plaintiff
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Type of
Case
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|
Verdict
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|
Post-Trial
Developments
|
|
May 27, 2015
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Canada/Cecilia Létourneau
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|
Class Action
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|
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 $92.8 million) in punitive damages, allocating CAD 46 million (approximately $32.6 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.
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In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.)
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Date
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|
Location of
Court/Name of
Plaintiff
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|
Type of
Case
|
|
Verdict
|
|
Post-Trial
Developments
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|
August 5, 2016
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Argentina/Hugo Lespada
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Individual Action
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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 $1,661), 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.
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On August 23, 2016, our subsidiary filed its notice of appeal. On October 31, 2017, the Civil and Commercial Court of Appeals of Mar del Plata ruled that plaintiff's claim was barred by the statute of limitations and it reversed the trial court's decision. On November 28, 2017, plaintiff filed an extraordinary appeal of the reversal of the trial court's decision to the Supreme Court of the Province of Buenos Aires.
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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.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of April 24, 2020, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:
|
|
|
|
•
|
48 cases brought by individual plaintiffs in Argentina (31), Brazil (5), Canada (2), Chile (4), Costa Rica (1), Italy (1), the Philippines (1), Poland (1), Turkey (1) and Scotland (1), compared with 53 such cases on April 23, 2019, and 62 cases on April 24, 2018; and
|
|
|
|
|
•
|
10 cases brought on behalf of classes of individual plaintiffs in Brazil (1) and Canada (9), compared with 10 such cases on April 23, 2019 and 11 such cases on April 24, 2018.
|
The class actions pending in Canada are described above under the caption “Smoking and Health Litigation — Canada.”
In the class action pending in Brazil, The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for all addicted smokers and former smokers, and injunctive relief. In 2004, the trial court found defendants liable without hearing evidence and awarded “moral damages” of R$1,000 (approximately $183) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class was not estimated. Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November 2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In May 2011, the trial court dismissed the claim. In February 2015, the appellate court unanimously dismissed plaintiff's appeal. In September 2015, plaintiff appealed to the Superior Court of Justice. In February 2017, the Chief Justice of the Superior Court of Justice denied plaintiff's appeal. In March 2017, plaintiff filed an en banc appeal to the Superior Court of Justice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the lawsuit. Both appeals are still pending.
Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.
As of April 24, 2020, 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 16 such cases on April 23, 2019 and 16 such cases on April 24, 2018.
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 for the past five years, payment of anticipated costs of treating future alleged smoking-related diseases, and moral damages. Defendants' answers to the complaint are due in May 2020. A challenge to the service of PMI as improper remains pending.
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.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 third health care cost recovery case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2011, the court ruled that the plaintiff had not complied with the procedural steps necessary to serve us. As a result of this ruling, plaintiff must re-serve its claim. We have not yet been re-served.
In the fourth health care cost recovery case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, we and other members of the industry are defendants. Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We challenged service as improper. In June 2010, the court ruled that plaintiffs did not have leave to serve the writ of summons on the defendants and that they must re-serve the writ. We have not yet been re-served.
In the fifth health care cost recovery case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In May 2010, the trial court rejected our service objections. We have appealed.
In the health care cost recovery case in Korea, the National Health Insurance Service v. KT&G, et. al., filed April 14, 2014, our subsidiary and other Korean manufacturers are defendants. Plaintiff alleges that defendants concealed the health hazards of smoking, marketed to youth, added ingredients to make their products more harmful and addictive, and misled consumers into believing that Lights cigarettes are safer than regular cigarettes. The National Health Insurance Service seeks to recover damages allegedly incurred in treating 3,484 patients with small cell lung cancer, squamous cell lung cancer, and squamous cell laryngeal cancer from 2003 to 2012. The case is now in the evidentiary phase.
Label-Related Cases: These cases, 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 April 24, 2020, there were 4 label-related cases brought by individual plaintiffs in Italy (1) and Chile (3) pending against our subsidiaries, compared with 7 such cases on April 23, 2019, and 1 such case on April 24, 2018.
Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.
As of April 24, 2020, there were 2 public civil actions pending against our subsidiaries in Argentina (1) and Venezuela (1), compared with 2 such cases on April 23, 2019, and 2 such cases on April 24, 2018.
In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Argentina, filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer association, seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly caused by smoking. Our subsidiary filed its answer in September 2007. In March 2010, the case file was transferred to the Federal Court on Administrative Matters after the Civil Court granted plaintiff's request to add the national government as a co-plaintiff in the case. The case is currently awaiting a court decision on the merits.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In the public civil action in Venezuela, Federation of Consumers and Users Associations (“FEVACU”), et al. v. National Assembly of Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court, filed April 29, 2008, we were not named as a defendant, but the plaintiffs published a notice pursuant to court order, notifying all interested parties to appear in the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to health of the citizens of Venezuela and claim that the government failed to protect adequately its citizens' right to health. The claim asks the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and BAT's subsidiary as interested third parties. In February 2013, our subsidiary answered the complaint.
Reduced-Risk Products
In 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 a 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). The amended complaint has not yet been served on our subsidiaries.
Other Litigation
The Department of Special Investigations of the government of Thailand ("DSI") conducted an investigation into alleged underpayment by our subsidiary, Philip Morris (Thailand) Limited ("PM Thailand"), of customs duties and excise taxes relating to imports from the Philippines covering the period 2003-2007. On January 18, 2016, the Public Prosecutor filed charges against our subsidiary and seven former and current employees in the Bangkok Criminal Court alleging that PM Thailand and the individual defendants jointly and with the intention to defraud the Thai government, under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries of cigarettes from the Philippines during the period of July 2003 to June 2006. The government is seeking a fine of approximately THB 80.8 billion (approximately $2.5 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 $37.1 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 condensed consolidated balance sheets and negatively impacted net cash provided by operating activities in the condensed consolidated statements of cash flows in the period of payment. Our subsidiary will appeal the trial court's decision. If our subsidiary ultimately prevails on appeal, then Thailand will be required to return this payment to our subsidiary.
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
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
of approximately THB 19.8 billion (approximately $612 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 $4 million). The trial court dismissed all charges against the individual defendant. In April 2020, as required by Thai law, our subsidiary paid the fine. Our subsidiary will appeal the trial court's decision. If our subsidiary ultimately prevails on appeal, then Thailand will be required to return this payment to our subsidiary.
The South Korean Board of Audit and Inspection (“BAI”) conducted an audit of certain Korean government agencies and the tobacco industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies, including Philip Morris Korea Inc. ("PM Korea"), our South Korean affiliate, were in compliance with South Korean tax laws. In November 2016, the tax authorities completed their audit and assessed allegedly underpaid taxes and penalties. In order to avoid nonpayment financial costs, PM Korea paid approximately KRW 272 billion (approximately $221 million), of which KRW 100 billion (approximately $81.1 million) was paid in 2016 and KRW 172 billion (approximately $139.5 million) was paid in the first quarter of 2017. These paid amounts are included in other assets in the condensed consolidated balance sheets and negatively impacted net cash provided by operating activities in the condensed 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 the approximately KRW 218 billion (approximately $177 million) in taxes that were subject to its jurisdiction. The tax authorities appealed this decision. If the tax authorities ultimately lose, then they would be required to return the paid amounts to PM Korea. The hearing for this case is scheduled in May 2020. The hearing for PM Korea's appeal of approximately KRW 54 billion of alleged underpayments (approximately $43.8 million) was held in April 2020, and a decision is scheduled for June 2020.
The Moscow Tax Inspectorate for Major Taxpayers (“MTI”) conducted an audit of AO Philip Morris Izhora (“PM Izhora”), our Russian affiliate, for the 2015-2017 financial years. On July 26, 2019, MTI issued its initial assessment, claiming that intercompany sales of cigarettes between PM Izhora and another Russian affiliate prior to excise tax increases and submission by PM Izhora of the maximum retail sales price notifications for cigarettes to the tax authorities were improper under Russian tax laws and resulted in underpayment of excise taxes and VAT. In August 2019, PM Izhora submitted its objections disagreeing with MTI’s allegations set forth in the initial assessment and MTI’s methodology for calculating the alleged underpayments. MTI accepted some of PM Izhora’s arguments and in September 2019, issued the final tax assessment claiming an underpayment of RUB 24.3 billion (approximately $374 million), including penalties and interest. In accordance with Russian tax laws, PM Izhora paid the entire amount of MTI’s final assessment. This amount was neither imposed on, nor concurrent with, the specific revenue-producing transaction, nor was it collected from customers of our Russian affiliates. PMI believes that the loss of $374 million in this matter is probable and estimable. Consequently, in the third quarter of 2019, PMI recorded a pre-tax charge of $374 million, in marketing, administration and research costs in the condensed consolidated statements of earnings, representing $315 million net of income tax. Under the Russian law, PM Izhora has until mid-September 2020 to challenge the final tax assessment to the Federal Tax Service and is considering whether to pursue such challenge.
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. The court extended the time for plaintiffs to replead the claim relating to four
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
non-clinical studies mentioned above within 30 days after the court's decision on the motion. 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. Philip Morris International Inc., et al., in the federal court in the Eastern District of Virginia, where PMI and its subsidiary, as well as Altria Group, Inc. and its subsidiaries, are defendants. Plaintiffs seek damages and injunctive relief against further commercialization of the Platform 1 products in the United States. In April 2020, BAT affiliates filed a complaint against the same PMI and Altria Group, Inc. parties before the International Trade Commission. Plaintiffs seek an order to prevent the importation of Platform 1 products into the United States.
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.
Note 9. Income Taxes:
Income tax provisions for jurisdictions outside the United States of America, as well as state and local income tax provisions, were determined on a separate company basis, and the related assets and liabilities were recorded in PMI’s condensed consolidated balance sheets.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was 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. As of March 31, 2020, PMI has determined that neither the CARES Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on PMI’s effective tax rate.
PMI’s effective tax rates for the three months ended March 31, 2020 and 2019 were 22.6% and 22.6%, respectively. The effective tax rate for the three months ended March 31, 2020 was favorably impacted by a decrease in deferred tax liabilities related to the fair value adjustment of equity securities held by PMI ($16 million). For further details, see Note 11. Fair Value Measurements. The effective tax rate for the three months ended March 31, 2019 was favorably impacted by the reversal of a deferred tax liability on the unremitted earnings of PMI's Canadian subsidiary, RBH ($49 million) and by the Tax Cuts and Jobs Act. PMI estimates that its full-year 2020 effective tax rate will be approximately 23%, excluding the discrete tax event mentioned above. Changes in currency exchange rates, earnings mix by taxing jurisdiction or future regulatory developments may have an impact on the effective tax rates, which PMI monitors each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions.
PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S. federal statute of limitations remains open for the years 2015 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years.
It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time.
Note 10. Indebtedness:
Short-term Borrowings:
PMI's short-term borrowings, consisting of commercial paper and bank loans to certain PMI subsidiaries at March 31, 2020 and bank loans to certain PMI subsidiaries at December 31, 2019, had a carrying value of $1,438 million and $338 million, respectively. The fair value of PMI’s short-term borrowings, based on current market interest rates, approximates carrying value.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-term Debt:
At March 31, 2020 and December 31, 2019, PMI’s long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2020
|
|
December 31, 2019
|
|
U.S. dollar notes, 1.875% to 6.375% (average interest rate 3.567%), due through 2044
|
|
$
|
17,489
|
|
|
$
|
19,783
|
|
|
Foreign currency obligations:
|
|
|
|
|
|
Euro notes, 0.125% to 3.125% (average interest rate 1.983%), due through 2039
|
|
8,331
|
|
|
9,822
|
|
|
Swiss franc notes, 1.000% to 2.000% (average interest rate 1.521%), due through 2024
|
|
915
|
|
|
899
|
|
|
Other (average interest rate 3.009%), due through 2025
|
|
197
|
|
|
203
|
|
|
|
|
26,932
|
|
|
30,707
|
|
|
Less current portion of long-term debt
|
|
1,933
|
|
|
4,051
|
|
|
|
|
$
|
24,999
|
|
|
$
|
26,656
|
|
Other foreign currency debt above includes mortgage debt in Switzerland and finance lease obligations at March 31, 2020 and December 31, 2019.
Credit Facilities:
On January 31, 2020, PMI entered into an agreement to amend and extend the term of its $2.0 billion 364-day revolving credit facility from February 4, 2020, to February 2, 2021.
On February 10, 2020, PMI entered into a new $2.0 billion multi-year revolving credit facility, expiring on February 10, 2025. The new credit facility replaced the $2.5 billion multi-year revolving credit facility, which was terminated effective February 10, 2020. PMI had no borrowings outstanding under the terminated facility, which was due to expire on February 28, 2021.
At March 31, 2020, PMI's total committed credit facilities were as follows:
(in billions)
|
|
|
|
|
|
|
|
|
Type
|
|
Committed
Credit
Facilities
|
|
364-day revolving credit, expiring February 2, 2021
|
|
$
|
2.0
|
|
|
Multi-year revolving credit, expiring October 1, 2022
|
|
3.5
|
|
|
Multi-year revolving credit, expiring February 10, 2025
|
|
2.0
|
|
|
Total facilities
|
|
$
|
7.5
|
|
At March 31, 2020, there were no borrowings under these committed credit facilities, and the entire committed amounts were available for borrowing.
Note 11. Fair Value Measurements:
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy, which requires an entity to maximize
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of input that may be used to measure fair value, which are as follows:
|
|
|
|
Level 1 -
|
Quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
Level 2 -
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
|
|
Level 3 -
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Equity Securities
The fair value of PMI’s equity securities, which are determined by using quoted prices in active markets, have been classified within Level 1.
Derivative Financial Instruments
PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative financial instruments have been classified within Level 2 in the table shown below. See Note 5. Financial Instruments for additional discussion of derivative financial instruments.
Debt
The fair value of PMI’s outstanding debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest rates currently available to PMI for issuances of debt with similar terms and remaining maturities. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $49 million of finance leases, was $26,883 million at March 31, 2020. The fair value of PMI’s outstanding debt, excluding the aforementioned short-term borrowings and finance leases, was classified within Level 1 and Level 2 in the table shown below.
The aggregate fair values of PMI's investments in equity securities, derivative financial instruments and PMI's debt as of March 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Fair Value at March 31, 2020
|
|
Quoted Prices
in Active
Markets for
Identical
Assets/Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Equity securities (1)
|
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative contracts
|
|
492
|
|
|
—
|
|
|
492
|
|
|
—
|
|
|
Total assets
|
|
$
|
746
|
|
|
$
|
254
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
28,127
|
|
|
$
|
27,959
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
Derivative contracts
|
|
249
|
|
|
—
|
|
|
249
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
28,376
|
|
|
$
|
27,959
|
|
|
$
|
417
|
|
|
$
|
—
|
|
(1) Unrealized pre-tax loss of $78 million ($62 million net of tax) on equity securities was recorded in the condensed consolidated statement of earnings for the three months ended March 31, 2020.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12. Accumulated Other Comprehensive Losses:
PMI’s accumulated other comprehensive losses, net of taxes, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
At March 31, 2020
|
|
At December 31, 2019
|
|
At March 31, 2019
|
|
Currency translation adjustments
|
|
$
|
(7,039
|
)
|
|
$
|
(5,537
|
)
|
|
$
|
(5,711
|
)
|
|
Pension and other benefits
|
|
(3,755
|
)
|
|
(3,829
|
)
|
|
(3,556
|
)
|
|
Derivatives accounted for as hedges
|
|
20
|
|
|
3
|
|
|
30
|
|
|
Total accumulated other comprehensive losses
|
|
$
|
(10,774
|
)
|
|
$
|
(9,363
|
)
|
|
$
|
(9,237
|
)
|
Reclassifications from Other Comprehensive Earnings
The movements in accumulated other comprehensive losses and the related tax impact, for each of the components above, that are due to current period activity and reclassifications to the income statement, including those related to the deconsolidation of RBH, are shown on the condensed consolidated statements of comprehensive earnings for the three months ended March 31, 2020 and 2019. For additional information, see Note 3. Benefit Plans for disclosures related to PMI's pension and other benefits, Note 5. Financial Instruments for disclosures related to derivative financial instruments and Note 19. Deconsolidation of RBH for disclosures related to the deconsolidation of RBH.
Note 13. Balance Sheet Offsetting:
Derivative Financial Instruments
PMI uses foreign exchange contracts and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the condensed consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. See Note 5. Financial Instruments for disclosures related to PMI's derivative financial instruments.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The effects of these derivative financial instrument assets and liabilities on PMI's condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Gross Amounts Recognized
|
Gross Amount Offset in the Condensed Consolidated Balance Sheet
|
Net Amounts Presented in the Condensed Consolidated Balance Sheet
|
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
|
|
|
|
Financial Instruments
|
Cash Collateral Received/Pledged
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
492
|
|
$
|
—
|
|
$
|
492
|
|
$
|
(212
|
)
|
$
|
(253
|
)
|
$
|
27
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
249
|
|
$
|
—
|
|
$
|
249
|
|
$
|
(212
|
)
|
$
|
(1
|
)
|
$
|
36
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
390
|
|
$
|
—
|
|
$
|
390
|
|
$
|
(297
|
)
|
$
|
(91
|
)
|
$
|
2
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
419
|
|
$
|
—
|
|
$
|
419
|
|
$
|
(297
|
)
|
$
|
(59
|
)
|
$
|
63
|
|
Note 14. Related Parties - Investments in Unconsolidated Subsidiaries, Equity Securities and Other:
Investments in unconsolidated subsidiaries:
At March 31, 2020 and December 31, 2019, PMI had total investments in unconsolidated subsidiaries of $923 million and $1,053 million, respectively, which were accounted for under the equity method of accounting. Equity method investments are initially recorded at cost. Under the equity method of accounting, the investment is adjusted for PMI's proportionate share of earnings or losses, dividends, capital contributions, changes in ownership interests and movements in currency translation adjustments. The carrying value of our equity method investments at March 31, 2020 and December 31, 2019 exceeded our share of the unconsolidated subsidiaries' book value by $782 million and $901 million, respectively. The difference between the investment carrying value and the amount of underlying equity in net assets, excluding $751 million and $863 million attributable to goodwill as of March 31, 2020 and December 31, 2019, respectively, is being amortized on a straight-line basis over the underlying assets' estimated useful lives of 10 to 20 years. At March 31, 2020 and December 31, 2019, PMI received year-to-date dividends from unconsolidated subsidiaries of $23 million and $100 million, respectively.
PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in Russia (Eastern Europe segment).
PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25% economic interest in Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by the Algerian state-owned enterprise Management et Développement des Actifs et des Ressources Holding ("MADAR Holding"), which is part of the Middle East & Africa segment, manufactures and distributes under license some of PMI’s brands.
The initial investments in Megapolis Distribution BV and EITA were recorded at cost and are included in investments in unconsolidated subsidiaries and equity securities on the condensed consolidated balance sheets.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Equity securities:
Following the deconsolidation of RBH on March 22, 2019, PMI recorded the continuing investment in RBH, PMI's wholly owned subsidiary, at fair value of $3,280 million at the date of deconsolidation, within investments in unconsolidated subsidiaries and equity securities. For further details, see Note 19. Deconsolidation of RBH. Transactions between PMI and RBH are considered to be related party transactions from the date of deconsolidation and are included in the tables below.
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.
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. Amounts in the tables below include transactions between these related parties.
Financial activity with the above related parties:
PMI’s net revenues and expenses with the above related parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in millions)
|
2020
|
2019
|
|
|
|
|
|
Net revenues:
|
|
|
|
Megapolis Group
|
$
|
496
|
|
$
|
359
|
|
|
Other
|
281
|
|
213
|
|
|
Net revenues (a)
|
$
|
777
|
|
$
|
572
|
|
|
|
|
|
|
Expenses:
|
|
|
|
Other
|
$
|
19
|
|
$
|
13
|
|
|
Expenses
|
$
|
19
|
|
$
|
13
|
|
(a) Net revenues exclude excise taxes and VAT billed to customers.
PMI’s balance sheet activity with the above related parties was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
At March 31, 2020
|
At December 31, 2019
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
Megapolis Group
|
|
$
|
271
|
|
$
|
375
|
|
|
Other
|
|
242
|
|
148
|
|
|
Receivables
|
|
$
|
513
|
|
$
|
523
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
Other
|
|
$
|
10
|
|
$
|
20
|
|
|
Payables
|
|
$
|
10
|
|
$
|
20
|
|
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Note 15. Sale of Accounts Receivable:
To mitigate risk and enhance cash and liquidity management PMI sells trade receivables to unaffiliated financial institutions. These arrangements allow PMI to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from the condensed consolidated balance sheets. PMI sells trade receivables under two types of arrangements, servicing and non-servicing. For servicing arrangements, PMI continues to service the sold trade receivables on an administrative basis and does not act on behalf of the unaffiliated financial institutions. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material as of March 31, 2020 and March 31, 2019. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables have been sold to the unaffiliated financial institutions.
Cumulative trade receivables sold, including excise taxes, for the three months ended March 31, 2020 and 2019, were $2.9 billion and $2.4 billion, respectively. PMI’s operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the condensed consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as of March 31, 2020 and March 31, 2019, were $1.0 billion, and $0.5 billion, respectively. The net proceeds received are included in cash provided by operating activities in the condensed consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of trade receivables within marketing, administration and research costs in the condensed consolidated statements of earnings. For the three months ended March 31, 2020 and 2019, the loss on sale of trade receivables was immaterial.
Note 16. Product Warranty:
PMI's IQOS devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law. PMI generally provides in cost of sales for the estimated cost of warranty in the period the related revenue is recognized. PMI assesses the adequacy of its accrued product warranties and adjusts the amounts as necessary based on actual experience and changes in future estimates. Factors that affect product warranties may vary across markets but typically include 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 March 31, 2020 and December 31, 2019, these amounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
At March 31, 2020
|
At December 31, 2019
|
|
Balance at beginning of period
|
$
|
140
|
|
$
|
67
|
|
|
Changes due to:
|
|
|
|
Warranties issued
|
84
|
|
303
|
|
|
Settlements
|
(66
|
)
|
(230
|
)
|
|
Currency
|
—
|
|
—
|
|
|
Balance at end of period
|
$
|
158
|
|
$
|
140
|
|
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 17. Leases:
The components of PMI’s lease cost were as follows for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Operating lease cost
|
$
|
60
|
|
|
$
|
60
|
|
|
Short-term lease cost
|
13
|
|
|
12
|
|
|
Variable lease cost
|
8
|
|
|
8
|
|
|
Total lease cost
|
$
|
81
|
|
|
$
|
80
|
|
For the three months ended March 31, 2020, lease cost of $19 million were recorded in cost of sales and $62 million were recorded in marketing, administration and research cost. For the three months ended March 31, 2019, lease costs of $19 million were recorded in cost of sales and $61 million were recorded in marketing, administration and research cost.
Note 18. Asset Impairment and Exit Costs:
For the three months ended March 31, 2020, PMI did not record any pre-tax charges for asset impairment and exit costs.
Global Manufacturing Infrastructure Optimization
In light of declining PMI cigarette volumes resulting from lower total industry volumes and the shift to smoke-free alternatives, PMI continues to optimize its global manufacturing infrastructure. During 2019, PMI recorded asset impairment and exit costs related to plant closures in Argentina, Colombia, Germany and Pakistan as part of its global manufacturing infrastructure optimization.
For the three months ended March 31, 2019, PMI recorded pre-tax asset impairment and exit costs of $20 million related to a plant closure in Pakistan. This total pre-tax charge in the first quarter of 2019 was included in marketing, administration and research costs on the condensed consolidated statements of earnings and was included in the operating income of the South & Southeast Asia segment.
Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Liability balance, January 1, 2020
|
$
|
191
|
|
|
Charges, net
|
—
|
|
|
Cash spent
|
(48
|
)
|
|
Currency/other
|
(3
|
)
|
|
Liability balance, March 31, 2020
|
$
|
140
|
|
Future cash payments for exit costs incurred to date are anticipated to be substantially paid by the end of 2021, with approximately $66 million expected to be paid in the remainder of 2020.
Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 19. Deconsolidation of RBH:
As discussed in Note 8. Contingencies, following the March 1, 2019 judgment of the Court of Appeal of Québec in two class action lawsuits against PMI's Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), PMI recorded in its consolidated results a pre-tax charge of $194 million, representing $142 million net of tax, in the first quarter of 2019. This pre-tax Canadian tobacco litigation-related expense was included in marketing, administration and research costs on PMI's condensed consolidated statement of earnings for the three months ended March 31, 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. RBH’s share of the deposit is approximately CAD 257 million.
On March 22, 2019, RBH obtained an initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act ("CCAA"), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliers and employees.
The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements of control of the business from both PMI and RBH. As a result, PMI has determined that it no longer has a controlling financial interest over RBH as defined in ASC 810 (Consolidation), and PMI deconsolidated RBH as of the date of the CCAA filing. PMI has also determined that it does not exert "significant influence" over RBH as that term is defined in ASC 323 (Investments-Equity Method and Joint Ventures). Therefore, as of March 22, 2019, PMI accounted for its continuing investment in RBH in accordance with ASC 321 (Investments-Equity Securities) as an equity security, without readily determinable fair value.
Following the deconsolidation, the carrying value of assets and liabilities of RBH was removed from the consolidated balance sheet of PMI, and the continuing investment in RBH was recorded at fair value at the date of deconsolidation. The total amount deconsolidated from PMI’s balance sheet was $3,519 million, including $1,323 million of cash, $1,463 million of goodwill, $529 million of accumulated other comprehensive earnings, primarily related to historical currency translation and $204 million of other assets and liabilities, net. While PMI is accounting for its investment in RBH as an equity security, PMI would recognize dividends as income upon receipt. However, while it remains under creditor protection, RBH does not anticipate paying dividends.
The fair value of PMI’s continuing investment in RBH of $3,280 million was determined at the date of deconsolidation, recorded within Investments in unconsolidated subsidiaries and equity securities and is assessed for impairment on an ongoing basis. The estimated fair value of the underlying business was determined based on an income approach using a discounted cash flow analysis, as well as a market approach for certain contingent liabilities. The information used in the estimate includes observable inputs, primarily a discount rate of 8%, a terminal growth rate of 2.5% and information about total tobacco market size in Canada and RBH’s share of the market, as well as unobservable inputs such as operating budgets and strategic plans, various inflation scenarios, estimated shipment volumes, and expected product pricing and projected margins.
The difference between the carrying value of the assets and liabilities of RBH that were deconsolidated, and the fair value of the continuing investment, as determined at the date of deconsolidation, was $239 million, before tax, and this loss on deconsolidation is reflected within marketing, administration and research costs on PMI’s condensed consolidated statement of earnings for the three months ended March 31, 2019. PMI also recorded a tax benefit of $49 million within the provision for income taxes for the three months ended March 31, 2019, related to the reversal of a deferred tax liability on unremitted earnings of RBH.
RBH is party to transactions with PMI and its consolidated subsidiaries entered into in the normal course of business; these transactions include royalty payments and recharge of various corporate expenses for services benefiting RBH. Up to the date of the CCAA filing, these transactions were eliminated on consolidation and had no impact on PMI’s consolidated statement of earnings. After deconsolidating RBH, these transactions are treated as third-party transactions in PMI’s financial statements. The amount of these related party transactions is included within Note 14. Related Parties - Investments in Unconsolidated Subsidiaries, Equity Securities and Other.
Developments in the CCAA process, including resolution through a plan of arrangement or compromise of all pending tobacco-related litigation currently stayed in Canada, as discussed in Note 8. Contingencies, could result in a material change in the fair value of PMI’s continuing investment in RBH.
Item 2.