# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

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

For	the	fiscal	year	ended	December	31,	2017

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

# 	PHILIP	MORRIS	INTERNATIONAL	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Virginia

(State	or	other	jurisdiction	of incorporation	or	organization)

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

(I.R.S.	Employer Identification	No.)

(Registrant's	telephone	number,	including	area	code)

	Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Name	of	each	exchange	on	which	registered New	York	Stock	Exchange New	York	Stock	Exchange New	York	Stock	Exchange

New	York	Stock	Exchange

New	York	Stock	Exchange New	York	Stock	Exchange New	York	Stock	Exchange New	York	Stock	Exchange New	York	Stock	Exchange New	York	Stock	Exchange

# Title	of	each	class

# Name	of	each	exchange	on	which	registered

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.		Yes		þ		No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.		Yes		¨		No		þ

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

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

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10- K.							þ

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

Large	accelerated	filer		þ

Non-accelerated	filer	¨

	(Do	not	check	if	a	smaller	reporting	company)

Accelerated	filer	¨

Smaller	reporting	company	¨

Emerging	growth	company	¨

If	an	emerging	growth	company,	indicate	by	check	mark	if	the	registrant	has	elected	not	to	use	the	extended	transition	period	for	complying	with	any	new	or	revised financial	accounting	standards	provided	pursuant	to	Section	13(a)	of	the	Exchange	Act.							¨

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

As	of	June	30,	2017,	the	aggregate	market	value	of	the	registrant's	common	stock	held	by	non-affiliates	of	the	registrant	was	approximately	$182	billion	based	on	the closing	sale	price	of	the	common	stock	as	reported	on	the	New	York	Stock	Exchange.

# Common	Stock,

# no	par	value

# DOCUMENTS	INCORPORATED	BY	REFERENCE

# Document Parts	Into	Which	Incorporated

Portions	of	the	registrant's	definitive	proxy	statement	for	use	in	connection	with	its	annual	meeting	of	shareholders	to	be held	on	May	9,	2018,	to	be	filed	with	the	Securities	and	Exchange	Commission	("SEC")	on	or	about	March	29,	2018.

Part	III

# TABLE	OF	CONTENTS

# PART	I

| PART	I |  |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 1 |
| Item\t1A. | Risk\tFactors | 6 |
| Item\t1B. | \t Unresolved\tStaff\tComments | 11 |
| Item\t2. | Properties | 11 |
| Item\t3. | Legal\tProceedings | 12 |
| Item\t4. | \t Mine\tSafety\tDisclosures | 12 |
| PART\tII\nItem\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity |  |
|  | Securities | 12 |
| Item\t6. | Selected\tFinancial\tData | 15 |
| Item\t7. | \t Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 16 |
| Item\t7A. | \t Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 68 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 69 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 122 |
| Item\t9A. | Controls\tand\tProcedures | 122 |
| Item\t9B. | \t Other\tInformation | 122 |
| PART\tIII |  |  |
| Item\t10. | \t Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 123 |
| Item\t11. | Executive\tCompensation | 123 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 124 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 124 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 124 |
| PART\tIV\nItem\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 124 |
| Signatures |  | 130 |

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

# Item	1. Business.

# (a)	General	Development	of	Business

# General

Philip	Morris	International	Inc.	is	a	Virginia	holding	company	incorporated	in	1987.	Our	subsidiaries	and	affiliates	and	their	licensees	are	engaged	in	the	manufacture and	sale	of	cigarettes	and	other	nicotine-containing	products	in	markets	outside	of	the	United	States	of	America.	We	are	building	our	future	on	smoke-free	products	that are	a	much	better	consumer	choice	than	continuing	to	smoke	cigarettes.		Through	multidisciplinary	capabilities	in	product	development,	state-of-the-art	facilities	and scientific	substantiation,	we	aim	to	ensure	that	our	smoke-free	products	meet	adult	consumer	preferences	and	rigorous	regulatory	requirements.	Our	vision	is	that	these products	ultimately	replace	cigarettes	to	the	benefit	of	adult	smokers,	society,	our	company	and	our	shareholders.

Our	cigarettes	are	sold	in	more	than	180	markets,	and	in	many	of	these	markets	they	hold	the	number	one	or	number	two	market	share	position.	We	have	a	wide	range	of premium,	mid-price	and	low-price	brands.	Our	portfolio	comprises	both	international	and	local	brands	and	is	led	by	Marlboro,	the	world's	best-selling	international cigarette,	 which	 accounted	 for	 approximately	35%	 of	 our	 total	2017	 cigarette	 shipment	 volume.	Marlboro	 is	 complemented	 in	 the	 premium-price	 category	 by Parliament.	Our	other	leading	international	cigarette	brands	are	Bond	Street,	Chesterfield,	L&M,	 Lark	and	Philip	 Morris.	These	seven	international	cigarette	brands contributed	approximately	75%	of	our	cigarette	shipment	volume	in	2017.	We	also	own	a	number	of	important	local	cigarette	brands,	such	as	Dji	Sam	Soe,	Sampoerna	A and	Sampoerna	U	in	Indonesia;	Fortune	and	Jackpot	in	the	Philippines;	Belmont	and	Canadian	Classics	in	Canada;	and	Delicados	in	Mexico.	While	there	are	a	number of	markets	where	local	brands	remain	important,	international	brands	are	expanding	their	share	in	numerous	markets.

In	addition	to	our	leading	cigarette	brand	portfolio,	we	are	engaged	in	the	development	and	commercialization	of	smoke-free	alternatives	to	cigarettes.	Reduced-risk products	("RRPs")	is	the	term	we	use	to	refer	to	products	that	present,	are	likely	to	present,	or	have	the	potential	to	present	less	risk	of	harm	to	smokers	who	switch	to these	products	versus	continued	smoking.		We	have	a	range	of	RRPs	in	various	stages	of	development,	scientific	assessment	and	commercialization.		Because	our	RRPs do	not	burn	tobacco,	they	produce	an	aerosol	that	contains	far	lower	quantities	of	harmful	and	potentially	harmful	constituents	than	found	in	cigarette	smoke.

Our	leading	RRP	brand,	IQOS,	is	a	precisely	controlled	device	into	which	a	specially	designed	heated	tobacco	unit	is	inserted	and	heated	to	generate	an	aerosol.	We market	our	heated	tobacco	units	under	the	brand	names	HEETS,	HEETS	Marlboro	and	HEETS	FROM	MARLBORO,	defined	collectively	as	HEETS,	as	well	as	Marlboro HeatSticks	and	Parliament	HeatSticks.	IQOS	was	first introduced	 in	Nagoya,	Japan	 in	2014.	To	 date,	IQOS	is	available	for	sale	in	key	cities	in	37	markets	and nationwide	in	Japan.

# Source	of	Funds	—	Dividends

We	are	a	legal	entity	separate	and	distinct	from	our	direct	and	indirect	subsidiaries.	Accordingly,	our	right,	and	thus	the	right	of	our	creditors	and	stockholders,	to participate	in	any	distribution	of	the	assets	or	earnings	of	any	subsidiary	is	subject	to	the	prior	rights	of	creditors	of	such	subsidiary,	except	to	the	extent	that	claims	of our	company	itself	as	a	creditor	may	be	recognized.	As	a	holding	company,	our	principal	sources	of	funds,	including	funds	to	make	payment	on	our	debt	securities,	are from	the	receipt	of	dividends	and	repayment	of	debt	from	our	subsidiaries.	Our	principal	wholly-owned	and	majority-owned	subsidiaries	currently	are	not	limited	by long-term	debt	or	other	agreements	in	their	ability	to	pay	cash	dividends	or	to	make	other	distributions	with	respect	to	their	common	stock.

# (b)	Financial	Information	About	Segments

For	all	periods	presented	in	this	report,	we	divided	our	markets	into	four	geographic	regions,	which	constitute	our	segments	for	financial	reporting	purposes:

•The	European	Union	("EU")	Region	is	headquartered	in	Lausanne,	Switzerland,	and	covers	all	the	EU	countries	and	also	comprises	Switzerland,	Norway	and Iceland,	which	are	linked	to	the	EU	through	trade	agreements;

•The	Eastern	Europe,	Middle	East	&	Africa	("EEMA")	Region	is	also	headquartered	in	Lausanne	and	includes	Eastern	Europe,	certain	Balkan	countries,	Turkey, the	Middle	East	and	Africa	and	our	international	duty	free	business;

•The	Asia	Region	is	headquartered	in	Hong	Kong	and	covers	all	other	Asian	markets	as	well	as	Australia,	New	Zealand	and	the	Pacific	Islands;

•The	Latin	America	&	Canada	Region	is	headquartered	in	New	York	and	covers	the	South	American	continent,	Central	America,	Mexico,	the	Caribbean	and Canada.

Net	revenues	and	operating	companies	income*	(together	with	a	reconciliation	to	operating	income)	attributable	to	each	segment	for	each	of	the	last	three	years	are	set forth in	Item	8.	Financial	Statements	and	Supplementary	Data	of	this	Annual	Report	on	Form	10-K	("Item	8")	in	Note	12.	Segment	Reporting	to	the	consolidated financial	statements.	See	Item	7	of	this	Annual	Report	on	Form	10-K	for	a	discussion	of	our	operating	results	by	business	segment.

The	relative	percentages	of	operating	companies	income	attributable	to	each	reportable	segment	were	as	follows:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| European\tUnion | 32.0% | 35.8% | 32.6% |
| Eastern\tEurope,\tMiddle\tEast\t&\tAfrica | 24.4 | 27.1 | 31.2 |
| Asia | 35.1 | 28.7 | 26.3 |
| Latin\tAmerica\t&\tCanada | 8.5 | 8.4 | 9.9 |
|  | 100.0% | 100.0% | 100.0% |

* For	all	periods	presented	in	this	report,	our	management	evaluated	segment	performance	and	allocated	resources	based	on	operating	companies	income,	which we	define	as	operating	income,	excluding	general	corporate	expenses	and	amortization	of	intangibles,	plus	equity	(income)/loss	in	unconsolidated	subsidiaries, net.	The	accounting	policies	of	the	segments	are	the	same	as	those	described	in	Note	2.	Summary	of	Significant	Accounting	Policies to the	consolidated financial	statements	in	Item	8.

We	use	the	term	net	revenues	to	refer	to	our	operating	revenues	from	the	sale	of	our	products,	net	of	sales	and	promotion	incentives.	Our	net	revenues	and	operating income	are	affected	by	various	factors,	including	the	volume	of	products	we	sell,	the	price	of	our	products,	changes	in	currency	exchange	rates	and	the	mix	of	products we	sell.	Mix	is	a	term	used	to	refer	to	the	proportionate	value	of	premium-price	brands	to	mid-price	or	low-price	brands	in	any	given	market	(product	mix).	Mix	can	also refer	to	the	proportion	of	shipment	volume	in	more	profitable	markets	versus	shipment	volume	in	less	profitable	markets	(geographic	mix).	We	often	collect	excise	taxes from	our	customers	and	then	remit	them	to	local	governments,	and,	in	those	circumstances,	we	include	excise	taxes	in	our	net	revenues	and	excise	taxes	on	products. Our	cost	of	sales	consists	principally	of	tobacco	leaf,	non-tobacco	raw	materials,	labor	and	manufacturing	costs,	as	well	as	the	cost	of	the	IQOS	devices	produced	by third-party	electronics	manufacturing	service	providers.

Our	marketing,	administration	and	research	costs	include	the	costs	of	marketing	and	selling	our	products,	other	costs	generally	not	related	to	the	manufacture	of	our products	(including	general	corporate	expenses),	and	costs	incurred	to	develop	new	products.	The	most	significant	components	of	our	marketing,	administration	and research	costs	are	marketing	and	sales	expenses	and	general	and	administrative	expenses.

To	provide	a	greater	focus	on	both	parts	of	our	business	--	combustible	and	reduced-risk	products	--	and	to	support	our	transformation	toward	a	smoke-free	future, effective	January	1,	2018,	we	began	managing	our	business	in	six	reportable	segments	as	follows:

•The	European	Union	Region	is	headquartered	in	Lausanne,	Switzerland	and	covers	all	the	European	Union	countries	and	also	Switzerland,	Norway	and Iceland,	which	are	linked	to	the	European	Union	through	trade	agreements;

•The	Eastern	Europe	Region	is	also	headquartered	in	Lausanne	and	includes	Southeast	Europe,	Central	Asia,	Ukraine,	Israel	and Russia;

•The	Middle	East	&	Africa	Region	is	also	headquartered	in	Lausanne	and	covers	the	African	continent,	the	Middle	East,	Turkey	and	our	international	duty	free business;

•The	South	&	Southeast	Asia	Region	is	headquartered	in	Hong	Kong	and	includes	Indonesia,	the	Philippines	and	other	markets	in	this region;

•The	East	Asia	&	Australia	Region	is	also	headquartered	in	Hong	Kong	and	includes	Australia,	Japan,	South	Korea,	the	People's	Republic	of	China	and	other markets	in	this	region,	as	well	as	Malaysia	and	Singapore;	and

# (c)	Narrative	Description	of	Business

Our	total	shipments,	including	cigarettes	and	heated	tobacco	units,	decreased	by	2.7%	in	2017	to	798.2	billion	units.	We	estimate	that	international	industry	volumes, including	cigarettes	and	heated	tobacco	units,	were	approximately	5.2	trillion	units	 in	2017,	 a	1.3%	decrease	 over	2016.	Excluding	the	People's	Republic	of	China ("PRC"),	we	estimate	that	the	international	cigarette	and	heated	tobacco	unit	volume	was	2.8	trillion	units	in	2017,	a	2.8%	decrease	over	2016.	We	estimate	that	our reported	share	of	the	international	market	(which	is	defined	as	worldwide	cigarette	and	heated	tobacco	unit	volume,	excluding	the	United	States	of	America)	was approximately	15.2%	in	2017,	15.5%	in	2016	and	15.6%	in	2015.	Excluding	the	PRC,	we	estimate	that	our	reported	share	of	the	international	market	was	approximately 28.0%,	28.1%,	and	28.6%	in	2017,	2016	and	2015,	respectively.

Shipments	of	our	principal	cigarette	brand,	Marlboro,	decreased	by	4.0%	in	2017	and	represented	approximately	9.7%	of	the	international	cigarette	market,	excluding the	PRC,	in	2017,	9.6%	in	2016	and	9.6%	in	2015.

We	have	a	market	share	of	at	least	15%	and,	in	a	number	of	instances,	substantially	more	than	15%,	in	approximately	100	markets,	including	Algeria,	Argentina, Australia,	Austria,	Belgium,	Brazil,	Canada,	the	Czech	Republic,	Egypt,	France,	Germany,	Hong	Kong,	Indonesia,	Israel,	Italy,	Japan,	Korea,	Kuwait,	Mexico,	the Netherlands,	Norway,	the	Philippines,	Poland,	Portugal,	Russia,	Saudi	Arabia,	Spain,	Singapore,	Switzerland,	Turkey	and	Ukraine.

Heated	tobacco	units	is	the	term	we	use	to	refer	to	heated	tobacco	consumables,	which	include	our	HEETS,	HEETS	Marlboro	and	HEETS	FROM	MARLBORO,	defined collectively	as	HEETS,	as	well	as	Marlboro	HeatSticks	and	Parliament	HeatSticks.	Total	shipment	volume	of	heated	tobacco	units	reached	36.2	billion	units	in	2017,	up from	7.4	billion	units	in	2016.

References	to	total	international	market,	defined	as	worldwide	cigarette	and	heated	tobacco	unit	volume	excluding	the	United	States,	total	industry,	total	market	and market	shares	in	this	Form	10-K	are	our	estimates	for	tax-paid	products	based	on	the	latest	available	data	from	a	number	of	internal	and	external	sources.

# Distribution	&	Sales

Our	main	types	of	distribution	are	tailored	to	the	characteristics	of	each	market	and	are	often	used	simultaneously:

•Direct	sales	and	distribution,	where	we	have	set	up	our	own	distribution	selling	directly to the	retailers	(including	gas	stations	and	other	key accounts);

•Distribution	through	independent	distributors	that	often	distribute	other	fast-moving	consumer	goods	and	are	responsible	for	distribution	in	a	particular market;

•Exclusive	zonified	distribution,	where	the	distributors	are	dedicated	to	us	in	tobacco	products	distribution	and	assigned	to	exclusive	territories	within	a market;

•Distribution	through	national	or	regional	wholesalers	that	then	supply	the	retail	trade;

•Our	 own brand retail and e-commerce infrastructures for our RRP products and accessories.

# Competition

We	are	subject	to	highly	competitive	conditions	in	all	aspects	of	our	business.	We	compete	primarily	on	the	basis	of	product	quality,	brand	recognition,	brand	loyalty, taste,	R&D,	innovation,	packaging,	customer	service,	marketing,	advertising	and	retail	price	and,	increasingly,	adult	smoker	willingness	to	convert	to	our	RRPs.	Our competitors	 include	 three	 large	 international	 tobacco	 companies	 and	 several	 regional	 and	 local	 tobacco	 companies	 and,	 in	 some	 instances,	 state-owned	 tobacco enterprises,	principally	in	Algeria,	Egypt,	the	PRC,	Taiwan,	Thailand	and	Vietnam.	Industry	consolidation	and	privatizations	of	state-owned	enterprises	have	led	to	an overall	increase	in	competitive	pressures.	Some	competitors	have	different	profit	and	volume	objectives,	and	some	international	competitors	are	susceptible	to	changes in	currency	exchange	rates.	In	the	combustible	product	category,	we	predominantly	sell	American	blend	cigarette	brands,	such	as	Marlboro,	L&M,	Parliament,	Philip Morris	and	Chesterfield,	which	are	the	most	popular	across	many	of	our	markets.	In	the	RRP	product	category,	we	predominantly	sell	IQOS	devices	and	heated	tobacco units.	We	seek	to	compete	in	all	profitable	retail	price	categories,	although	our	brand	portfolio	is	weighted	towards	the	premium-price	category.

# 	Procurement	and	Raw	Materials

We	purchase	tobacco	leaf	of	various	types,	grades	and	styles	throughout	the	world,	mostly	through	independent	tobacco	suppliers.	We	also	contract	directly	with farmers	in	several	countries,	including	Argentina,	Brazil,	Colombia,	Ecuador,	Italy,	Kazakhstan,	Pakistan,	the	Philippines	and	Poland.	In	2017,	direct	sourcing	from farmers	represented	approximately	22%	of	PMI's	global	leaf	requirements.	The	largest	supplies	of	tobacco	leaf	are	sourced	from	Argentina,	Brazil,	China,	India, Indonesia	(mostly	for	domestic	use	in	kretek	products),	Malawi,	Mozambique,	Philippines,	Turkey	and	the	United	States.

We	believe	that	there	is	an	adequate	supply	of	tobacco	leaf	in	the	world	markets	to	satisfy	our	current	and	anticipated	production	requirements.

In	addition	to	tobacco	leaf,	we	purchase	a	wide	variety	of	direct	materials	from	a	total	of	approximately	450	suppliers.	In	2017,	our	top	ten	suppliers	of	direct	materials combined	represented	approximately	50%	of	our	total	direct	materials	purchases.	The	three	most	significant	direct	materials	that	we	purchase	are	printed	paper	board used	in	packaging,	acetate	tow	used	in	filter	making	and	fine	paper	used	in	the	manufacturing	of	cigarettes	and	heated	tobacco	units.	In	addition,	the	adequate	supply	and procurement	of	cloves	are	of	particular	importance	to	our	Indonesian	business.

The	adequate	supply	chain	for	our	RRP	portfolio,	including	the	supply	of	electronic	devices,	is	important	to	our	business.	We	work	with	two	electronics	manufacturing service	providers	for	the	supply	of	our	IQOS	devices	and	a	small	number	of	other	providers	for	other	products	in	our	RRP	portfolio	and	related	accessories.	Although	we work	closely	with	these	service	providers	on	monitoring	their	production	capability	and	financial	health,	the	commercialization	of	our	RRPs	could	be	adversely	affected if	they	are	unable	to	meet	their	commitments.	The	production	of	our	RRP	portfolio	requires	various	metals,	and	we	believe	that	there	is	an	adequate	supply	of	such metals	in	the	world	markets	to	satisfy	our	current	and	anticipated	production	requirements.	However,	some	components	and	materials	necessary	for	the	production	of our	RRPs	are	obtained	from	single	or	limited	sources,	and	can	be	subject	to	industry-wide	shortages	and	price	fluctuations.	Our	inability	to	secure	an	adequate	supply	of such	components	and	materials	could	negatively	impact	the	commercialization	of	our	RRPs.

Our	IQOS	devices	are	subject	to	product	warranties,	which	are	described	in	more	detail	in	Item	8.	Note	5.	Product	Warranty	to	our	consolidated	financial	statements.	We discuss	our	RRP	products	in	more	detail	in	Item	7.	Business	Environment—Reduced	Risk	Products.

# 	Business	Environment

Information	called	for	by	this	Item	is	hereby	incorporated	by	reference	to	the	paragraphs	in	Item	7,	Business	Environment.

# Other	Matters

# Customers

None	of	our	business	segments	is	dependent	upon	a	single	customer	or	a	few	customers,	the	loss	of	which	would	have	a	material	adverse	effect	on	our	consolidated results	of	operations.

# Employees

At	December	31,	2017,	we	employed	approximately	80,600	people	worldwide,	including	full	time,	temporary	and	part-time	staff.	Our	businesses	are	subject	to	a	number of	laws	and	regulations	relating	to	our	relationship	with	our	employees.	Generally,	these	laws	and	regulations	are	specific	to	the	location	of	each	business.	In	addition,	in accordance	with	European	Union	requirements,	we	have	established	a	European	Works	Council	composed	of	management	and	elected	members	of	our	workforce.	We believe	that	our	relations	with	our	employees	and	their	representative	organizations	are	excellent.

# Executive	Officers	of	the	Registrant

The	disclosure	regarding	executive	officers	is	set	forth	under	the	heading	"Executive	Officers	as	of	February	9,	2018"	in	Item	10.	Directors,	Executive	Officers	and Corporate	Governance	of	this	Annual	Report	on	Form	10-K	("Item	10").

# Research	and	Development

Our	product	development	is	based	on	the	elimination	of	combustion	via	tobacco	heating	and	other	innovative	systems	for	aerosol	generation,	which	we	believe	is	the most	promising	path	to	providing	a	better	consumer	choice	for	those	who	would	otherwise	continue	to	smoke.	We	recognize	that	no	single	product	will	appeal	to	all adult	smokers.	Therefore,	we	are	developing	a	portfolio	of	products	intended	to	appeal	to	a	variety	of	distinct	preferences.	Four	RRP	platforms	are	in	various	stages	of development	and	commercialization	readiness.	We	describe	each	of	them	in	more	detail	in	Item	7,	Business	Environment—Reduced-Risk	Products.

The	research	and	development	expense	for	our	RRP	portfolio	accounted	for	74%,	72%	 and	70%	of	our	total	research	and	development	expense	for	the	years	ended December	31,	2017,	2016	and	2015,	respectively.

The	 research	 and	 development	 expense for the	 years	 ended	December	31,	2017,	2016 and	2015, is set forth in Item	 8,	 Note	 14.	Additional Information to the consolidated	financial	statements.

# Intellectual	Property

Our	trademarks	are	valuable	assets,	and	their	protection	and	reputation	are	essential	to	us.	We	own	the	trademark	rights	to	all	of	our	principal	brands,	including Marlboro,	or	have	the	right	to	use	them	in	all	countries	where	we	use	them.

In	addition,	we	have	more	than	7,800	granted	patents	worldwide	and	approximately	7,700	pending	patent	applications.	Our	patent	portfolio,	as	a	whole,	is	material	to our	business.	However,	no	one	patent,	or	group	of	related	patents,	is	material	to	us.	We	also	have	registered	industrial	designs,	as	well	as	unregistered	proprietary	trade secrets,	technology,	know-how,	processes	and	other	unregistered	intellectual	property	rights.

Effective	January	1,	2008,	PMI	entered	into	an	Intellectual	Property	Agreement	with	Philip	Morris	USA	Inc.	("PM	USA").	The	Intellectual	Property	Agreement	governs the	ownership	of	intellectual	property	between	PMI	and	PM	USA.	Ownership	of	the	jointly	funded	intellectual	property	has	been	allocated	as	follows:

•PMI	owns	all	rights	to	the	jointly	funded	intellectual	property	outside	the	United	States,	its	territories	and	possessions;

•PM	 USA	 owns all rights to the jointly funded intellectual	 property in the	 United	 States, its territories and possessions.

Ownership	of	intellectual	property	related	to	patent	applications	and	resulting	patents	based	solely	on	the	jointly	funded	intellectual	property,	regardless	of	when	filed	or issued,	will	be	exclusive	to	PM	USA	in	the	United	States,	its	territories	and	possessions	and	exclusive	to	PMI	everywhere	else.

The	Intellectual	Property	Agreement	contains	provisions	concerning	intellectual	property	that	is	independently	developed	by	us	or	PM	USA	following	March	28,	2008, the	date	of	the	spin-off	from	Altria	Group,	Inc.	For	ten	years	following	that	date,	independently	developed	intellectual	property	may	be	subject	to	rights	under	certain circumstances	that	would	allow	either	us	or	PM	USA	a	priority	position	to	obtain	the	rights	to	the	new	intellectual	property	from	the	other	party,	with	the	price	and	other commercial	terms	to	be	negotiated.

In	the	event	of	a	dispute	between	us	and	PM	USA	under	the	Intellectual	Property	Agreement,	we	have	agreed	with	PM	USA	to	submit	the	dispute	first	to	negotiation between	our	and	PM	USA's	senior	executives	and	then	to	binding	arbitration.

# Seasonality

Our	business	segments	are	not	significantly	affected	by	seasonality,	although	in	certain	markets	cigarette	consumption	trends	rise	during	the	summer	months	due	to longer	daylight	time	and	tourism.

# Environmental	Regulation

We	are	subject	to	international,	national	and	local	environmental	laws	and	regulations	in	the	countries	in	which	we	do	business.	We	have	specific	programs	across	our business	 units	 designed	 to	 meet	 applicable	 environmental	 compliance	 requirements	 and	 reduce	 our	 carbon	 footprint	 and	 wastage	 as	 well	 as	 water	 and	 energy consumption.	We	report	externally	about	our	climate	change	mitigation	strategy,	together	with	associated	targets	and	results	in	reducing	our	carbon	footprint,	through CDP	(formerly,	the	Carbon	Disclosure	Project),	the	leading	international	non-governmental	organization	assessing	the	work	of	thousands	of	companies	worldwide	in	the area	of	climate	change.	We	have	developed	and	implemented	a	consistent	environmental	and	occupational	health,	safety	and	security	management	system	("EHSS"), which	involves	policies,	standard	practices	and	procedures	at	all	our	manufacturing	centers.	We	also	conduct	regular	safety	assessments	at	our	offices,	warehouses	and car	fleet	organizations.	Furthermore,	we	have	engaged	an	external	certification	body	to	validate	the	effectiveness	of	our	EHSS	management	system	at	our	manufacturing centers	around	the	world,	in	accordance	with	internationally	recognized	standards	for	safety	and	environmental	management.	The	environmental	performance	data	we report	externally	is	also	verified	by	a	qualified	third	party.	Our	subsidiaries	expect	to	continue	to	make	investments	in	order	to	drive	improved	performance	and	maintain compliance	with	environmental	laws	and	regulations.	We	assess	and	report	the	compliance	status	of	all	our	legal	entities	on	a	regular	basis.	Based	on	the	management and	controls	we	have	in	place	and	our	review	of	climate	change	risks	(both	physical	and	regulatory),	environmental	expenditures	have	not	had,	and	are	not	expected	to have,	a	material	adverse	effect	on	our	consolidated	results	of	operations,	capital	expenditures,	financial	position,	earnings	or	competitive	position.

# (d)	Financial	Information	About	Geographic	Areas

The	amounts	of	net	revenues	and	long-lived	assets	attributable	to	each	of	our	geographic	segments	for	each	of	the	last	three	fiscal	years	are	set	forth	in	Item	8,	Note	12. Segment	Reporting	to	the	consolidated	financial	statements.

# (e)	Available	Information

We	are	required	to	file	with	the	SEC	annual,	quarterly	and	current	reports,	proxy	statements	and	other	information	required	by	the	Securities	Exchange	Act	of	1934,	as amended	(the	"Exchange	Act").	Investors	may	read	and	copy	any	document	that	we	file,	including	this	Annual	Report	on	Form	10-K,	at	the	SEC's	Public	Reference Room	at	100	F	Street,	NE,	Washington,	D.C.	20549.	Investors	may	obtain	information	on	the	operation	of	the	Public	Reference	Room	by	calling	the	SEC	at	1-800-SEC- 0330.	In	addition,	the	SEC	maintains	an	Internet	website	at	http://www.sec.gov	that	contains	reports,	proxy	and	information	statements,	and	other	information	regarding issuers	that	file	electronically	with	the	SEC,	from	which	investors	can	electronically	access	our	SEC	filings.

We	make	available	free	of	charge	on,	or	through,	our	website	at	www.pmi.com	our	Annual	Report	on	Form	10-K,	Quarterly	Reports	on	Form	10-Q,	Current	Reports	on Form	8-K	and	amendments	to	those	reports	filed	or	furnished	pursuant	to	Section	13(a)	or	15(d)	of	the	Exchange	Act	as	soon	as	reasonably	practicable	after	we electronically	file	such	material	with,	or	furnish	it	to,	the	SEC.	Investors	can	access	our	filings	with	the	SEC	by	visiting	www.pmi.com.

The	information	on	our	website	is	not,	and	shall	not	be	deemed	to	be,	a	part	of	this	report	or	incorporated	into	any	other	filings	we	make	with	the	SEC.

The	following	risk	factors	should	be	read	carefully	in	connection	with	evaluating	our	business	and	the	forward-looking	statements	contained	in	this	Annual	Report	on Form	10-K.	Any	of	the	following	risks	could	materially	adversely	affect	our	business,	our	operating	results,	our	financial	condition	and	the	actual	outcome	of	matters	as to	which	forward-looking	statements	are	made	in	this	Annual	Report	on	Form	10-K.

# Forward-Looking	and	Cautionary	Statements

We	may	from	time	to	time	make	written	or	oral	forward-looking	statements,	including	statements	contained	in	this	Annual	Report	on	Form	10-K	and	other	filings	with the	SEC,	in	reports	to	stockholders	and	in	press	releases	and	investor	webcasts.	You	can	identify	these	forward-looking	statements	by	use	of	words	such	as	"strategy," "expects,"	"continues,"	"plans,"	"anticipates,"	"believes,"	"will,"	"estimates,"	"intends,"	"projects,"	"goals,"	"targets"	and	other	words	of	similar	meaning.	You	can	also identify	them	by	the	fact	that	they	do	not	relate	strictly	to	historical	or	current	facts.

We	cannot	guarantee	that	any	forward-looking	statement	will	be	realized,	although	we	believe	we	have	been	prudent	in	our	plans	and	assumptions.	Achievement	of future	 results	 is	 subject	 to	 risks,	 uncertainties	 and	 inaccurate	 assumptions.	 Should	 known	 or	 unknown	 risks	 or	 uncertainties	 materialize,	 or	 should	 underlying assumptions	prove	inaccurate,	actual	results	could	vary	materially	from	those	anticipated,

estimated	or	projected.	Investors	should	bear	this	in	mind	as	they	consider	forward-looking	statements	and	whether	to	invest	in	or	remain	invested	in	our	securities.	In connection	with	the	"safe	harbor"	provisions	of	the	Private	Securities	Litigation	Reform	Act	of	1995,	we	are	identifying	important	factors	that,	individually	or	in	the aggregate,	could	cause	actual	results	and	outcomes	to	differ	materially	from	those	contained	in	any	forward-looking	statements	made	by	us;	any	such	statement	is qualified	by	reference	to	the	following	cautionary	statements.	We	elaborate	on	these	and	other	risks	we	face	throughout	this	document,	particularly	in	Item	7,	Business Environment.	You	should	understand	that	it	is	not	possible	to	predict	or	identify	all	risk	factors.	Consequently,	you	should	not	consider	the	following	to	be	a	complete discussion	of	all	potential	risks	or	uncertainties.	We	do	not	undertake	to	update	any	forward-looking	statement	that	we	may	make	from	time	to	time,	except	in	the	normal course	of	our	public	disclosure	obligations.

# Risks	Related	to	Our	Business	and	Industry

# •Consumption of tax-paid cigarettes continues to decline in	 many of our markets.

This	decline	is	due	to	multiple	factors,	including	increased	taxes	and	pricing,	governmental	actions,	the	diminishing	social	acceptance	of	smoking,	continuing	economic and	geopolitical	uncertainty,	and	the	continuing	prevalence	of	illicit	products.	These	factors	and	their	potential	consequences	are	discussed	more	fully	below	and	in	Item 7,	Business	Environment.

•Cigarettes	are	subject	to	substantial	taxes.	Significant	increases	in	cigarette-related	taxes	have	been	proposed	or	enacted	and	are	likely	to	continue	to	be proposed	or	enacted	in	numerous	jurisdictions.	These	tax	increases	may	disproportionately	affect	our	profitability	and	make	us	less	competitive	versus certain	of	our	competitors.

Tax	regimes,	including	excise	taxes,	sales	taxes	and	import	duties,	can	disproportionately	affect	the	retail	price	of	cigarettes	versus	other	combustible	tobacco	products, or	disproportionately	affect	the	relative	retail	price	of	our	cigarette	brands	versus	cigarette	brands	manufactured	by	certain	of	our	competitors.	Because	our	portfolio	is weighted	toward	the	premium-price	cigarette	category,	tax	regimes	based	on	sales	price	can	place	us	at	a	competitive	disadvantage	in	certain	markets.	As	a	result,	our volume	and	profitability	may	be	adversely	affected	in	these	markets.

Increases	in	cigarette	taxes	are	expected	to	continue	to	have	an	adverse	impact	on	our	sales	of	cigarettes,	due	to	resulting	lower	consumption	levels,	a	shift	in	sales	from manufactured	cigarettes	to	other	combustible	tobacco	products	and	from	the	premium-price	to	the	mid-price	or	low-price	cigarette	categories,	where	we	may	be	under- represented,	from	local	sales	to	legal	cross-border	purchases	of	lower	price	products,	or	to	illicit	products	such	as	contraband,	counterfeit	and	"illicit	whites."

# •Our	business	faces	significant	governmental	action	aimed	at	increasing	regulatory	requirements	with	the	goal	of	reducing	or	preventing	the	use	of	tobacco products.

Governmental	actions,	combined	with	the	diminishing	social	acceptance	of	smoking	and	private	actions	to	restrict	smoking,	have	resulted	in	reduced	industry	volume	in many	of	our	markets,	and	we	expect	that	such	factors	will	continue	to	reduce	consumption	levels	and	will	increase	down-trading	and	the	risk	of	counterfeiting, contraband,	"illicit	whites"	and	legal	cross-border	purchases.	Significant	regulatory	developments	will	take	place	over	the	next	few	years	in	most	of	our	markets,	driven principally	by	the	World	Health	Organization's	Framework	Convention	on	Tobacco	Control	("FCTC").	The	FCTC	is	the	first	international	public	health	treaty	on tobacco,	and	its	objective	is	to	establish	a	global	agenda	for	tobacco	regulation.	The	FCTC	has	led	to	increased	efforts	by	tobacco	control	advocates	and	public	health organizations	to	promote	increasingly	restrictive	regulatory	measures	on	the	marketing	and	sale	of	tobacco	products	to	adult	smokers.	Regulatory	initiatives	that	have been	proposed,	introduced	or	enacted	include:

•restrictions on or licensing of outlets permitted to sell cigarettes;

•the	 levying of substantial and increasing tax and duty charges;

•restrictions	or	bans	on	advertising,	marketing	and	sponsorship;

•the	 display of larger health warnings, graphic health warnings and other labeling requirements;

•restrictions on packaging design, including the use of colors, and plain packaging;

•restrictions on packaging and cigarette formats and dimensions;

•restrictions	or	bans	on the	display	of tobacco	product	packaging	at the	point	of	sale	and	restrictions	or	bans	on	cigarette	vending machines;

•requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon	 monoxide and other smoke constituents;

•disclosure, restrictions, or bans of tobacco product ingredients;

•increased restrictions	 on	 smoking in	 public	 and	 work	 places	 and, in	 some instances, in	 private	 places	 and outdoors;

•restrictions on the sale of novel tobacco or nicotine-containing products;

•elimination	of	duty	free	sales	and	duty	free	allowances	for	travelers; and

•encouraging litigation against tobacco companies.

Our	operating	income	could	be	significantly	affected	by	regulatory	initiatives	resulting	in	a	significant	decrease	in	demand	for	our	brands,	in	particular	requirements	that lead	to	a	commoditization	of	tobacco	products,	as	well	as	any	significant	increase	in	the	cost	of	complying	with	new	regulatory	requirements.

# •Litigation	related	to	tobacco	use	and	exposure	to	environmental	tobacco	smoke	could	substantially	reduce	our	profitability	and	could	severely	impair	our liquidity.

There	is	litigation	related	to	tobacco	products	pending	in	certain	jurisdictions.	Damages	claimed	in	some	tobacco-related	litigation	are	significant	and,	in	certain	cases	in Brazil,	Canada	and	Nigeria,	range	into	the	billions	of	U.S.	dollars.	We	anticipate	that	new	cases	will	continue	to	be	filed.	The	FCTC	encourages	litigation	against tobacco	product	manufacturers.	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.	See	Item	8,	Note	18.	Contingencies	("Note	 18.	Contingencies")	for	a discussion	of	pending	litigation.

# •We	 face intense	 competition,	 and	 our failure to	 compete	 effectively	 could	 have	 a	 material	 adverse	 effect	 on	 our	 profitability	 and	 results	 of operations.

We	compete	primarily	on	the	basis	of	product	quality,	brand	recognition,	brand	loyalty,	taste,	R&D,	innovation,	packaging,	customer	service,	marketing,	advertising	and retail	price	and,	increasingly,	adult	smoker	willingness	to	convert	to	our	RRPs.	We	are	subject	to	highly	competitive	conditions	in	all	aspects	of	our	business.	The competitive	environment	and	our	competitive	position	can	be	significantly	influenced	by	weak	economic	conditions,	erosion	of	consumer	confidence,	competitors' introduction	of	lower-price	products	or	innovative	products,	higher	tobacco	product	taxes,	higher	absolute	prices	and	larger	gaps	between	retail	price	categories,	and product	regulation	that	diminishes	the	ability	to	differentiate	tobacco	products.	Competitors	include	three	large	international	tobacco	companies	and	several	regional	and local	tobacco	companies	and,	in	some	instances,	state-owned	tobacco	enterprises,	principally	in	Algeria,	Egypt,	the	PRC,	Taiwan,	Thailand	and	Vietnam.	Industry consolidation	and	privatizations	of	state-owned	enterprises	have	led	to	an	overall	increase	in	competitive	pressures.	Some	competitors	have	different	profit	and	volume objectives,	and	some	international	competitors	are	susceptible	to	changes	in	different	currency	exchange	rates.

# •Because	we	have	operations	in	numerous	countries,	our	results	may	be	influenced	by	economic,	regulatory	and	political	developments,	natural	disasters	or conflicts.

Some	of	the	countries	in	which	we	operate	face	the	threat	of	civil	unrest	and	can	be	subject	to	regime	changes.	In	others,	nationalization,	terrorism,	conflict	and	the	threat of	war	may	have	a	significant	impact	on	the	business	environment.	Economic,	political,	regulatory	or	other	developments	or	natural	disasters	could	disrupt	our	supply chain,	manufacturing	capabilities	or	distribution	capabilities.	In	addition,	such	developments	could	lead	to	loss	of	property	or	equipment	that	are	critical	to	our	business in	certain	markets	and	difficulty	in	staffing	and	managing	our	operations,	which	could	reduce	our	volumes,	revenues	and	net	earnings.

In	certain	markets,	we	are	dependent	on	governmental	approvals	of	various	actions	such	as	price	changes,	and	failure	to	obtain	such	approvals	could	impair	growth	of our	profitability.

In	addition,	despite	our	high	ethical	standards	and	rigorous	control	and	compliance	procedures	aimed	at	preventing	and	detecting	unlawful	conduct,	given	the	breadth and	scope	of	our	international	operations,	we	may	not	be	able	to	detect	all	potential	improper	or	unlawful	conduct	by	our	employees	and	partners.

# •We	 may	 be	 unable to	 anticipate	 changes in	 consumer	 preferences	 or to	 respond to	 consumer	 behavior influenced	 by	 economic downturns.

Our	business	is	subject	to	changes	in	adult	consumer	preferences,	which	may	be	influenced	by	local	economic	conditions.	To	be	successful,	we	must:

•promote brand equity successfully;

•anticipate and respond to new adult consumer trends;

•develop	new	products	and	markets	and	broaden	brand	portfolios;

•improve	productivity;

•convince adult smokers to convert to our RRPs;

•ensure	adequate	production	capacity	to	meet	demand	for	our	products; and

•be	 able to protect or enhance margins through price increases.

In	periods	of	economic	uncertainty,	adult	consumers	may	tend	to	purchase	lower-price	brands,	and	the	volume	of	our	premium-price	and	mid-price	brands	and	our profitability	could	suffer	accordingly.	Such	down-trading	trends	may	be	reinforced	by	regulation	that	limits	branding,	communication	and	product	differentiation.

# •We	 lose	 revenues	 as	 a result	 of counterfeiting, contraband, cross-border	 purchases,	 "illicit	 whites"	 and	 non-tax-paid	 volume	 produced	 by local manufacturers.

Large	quantities	of	counterfeit	cigarettes	are	sold	in	the	international	market.	We	believe	that	Marlboro	is	the	most	heavily	counterfeited	international	cigarette	brand, although	we	cannot	quantify	the	revenues	we	lose	as	a	result	of	this	activity.	In	addition,	our	revenues	are	reduced	by	contraband,	legal	cross-border	purchases,	"illicit whites"	and	non-tax-paid	volume	produced	by	local	manufacturers.

# •From	time	to	time,	we	are	subject	to	governmental	investigations	on	a	range	of	matters.

Investigations	include	allegations	of	contraband	shipments	of	cigarettes,	allegations	of	unlawful	pricing	activities	within	certain	markets,	allegations	of	underpayment	of customs	duties	and/or	excise	taxes,	allegations	of	false	and	misleading	usage	of	descriptors	and	allegations	of	unlawful	advertising.	We	cannot	predict	the	outcome	of those	investigations	or	whether	additional	investigations	may	be	commenced,	and	it	is	possible	that	our	business	could	be	materially	affected	by	an	unfavorable	outcome of	pending	or	future	investigations.	See	Note	18.	Contingencies—Other	Litigation	and	Item	7,	Business	Environment-Governmental	Investigations	for	a	description	of certain	governmental	investigations	to	which	we	are	subject.

# •We	may	be	unsuccessful	in	our	attempts	to	introduce	reduced-risk	products,	and	regulators	may	not	permit	the	commercialization	of	these	products	or the	communication	of	scientifically	substantiated	risk-reduction	claims.

Our	key	strategic	priorities	are:	to	develop	and	commercialize	products	that	present	less	risk	of	harm	to	adult	smokers	who	switch	to	those	products	versus	continued smoking;	and	to	convince	current	adult	smokers	who	would	otherwise	continue	to	smoke	to	switch	to	those	RRPs.	For	our	efforts	to	be	successful,	we	must:	develop RRPs	that	such	adult	smokers	find	acceptable	alternatives	to	smoking;	conduct	rigorous	scientific	studies	to	substantiate	that	they	reduce	exposure	to	harmful	and potentially	harmful	constituents	in	smoke	and,	ultimately,	that	these	products	present,	are	likely	to	present,	or	have	the	potential	to	present	less	risk	of	harm	to	adult smokers	who	switch	to	them	versus	continued	smoking;	and	effectively	advocate	for	the	development	of	science-based	regulatory	frameworks	for	the	development	and commercialization	of	RRPs,	including	communication	of	scientifically	substantiated	information	to	enable	adult	smokers	to	make	better	consumer	choices.	We	might	not succeed	in	our	efforts.	If	we	do	not	succeed,	but	others	do,	we	may	be	at	a	competitive	disadvantage.	Furthermore,	we	cannot	predict	whether	regulators	will	permit	the sale	and/or	marketing	of	RRPs	with	scientifically	substantiated	risk-reduction	claims.	Such	restrictions	could	limit	the	success	of	our	RRPs.

# •We	 may	 be	 unsuccessful in	 our	 efforts to	 differentiate	 reduced-risk	 products	 and	 cigarettes	 with	 respect to taxation.

To	date,	we	have	been	largely	successful	in	demonstrating	to	regulators	that	our	RRPs	are	not	cigarettes,	and	as	such	they	are	generally	taxed	either	as	a	separate category	or	as	other	tobacco	products,	which	typically	yields	more	favorable	tax	rates	than	cigarettes.	If	we	cease	to	be	successful	in	these	efforts,	RRP	unit	margins	may be	adversely	affected.

# •Our	 reported results could be adversely affected by unfavorable currency exchange rates, and currency devaluations could impair our competitiveness.

We	conduct	our	business	primarily	in	local	currency	and,	for	purposes	of	financial	reporting,	the	local	currency	results	are	translated	into	U.S.	dollars	based	on	average exchange	rates	prevailing	during	a	reporting	period.	During	times	of	a	strengthening	U.S.	dollar,	our	reported	net	revenues	and	operating	income	will	be	reduced	because the	local	currency	translates	into	fewer	U.S.	dollars.	During	periods	of	local	economic	crises,	foreign	currencies	may	be	devalued	significantly	against	the	U.S.	dollar, reducing	our	margins.	Actions	to	recover	margins	may	result	in	lower	volume	and	a	weaker	competitive	position.

•Changes	in	the	earnings	mix	and	changes	in	tax	laws	may	result	in	significant	variability	in	our	effective	tax	rates.	Our	ability	to	receive	payments	from foreign	subsidiaries	or	to	repatriate	royalties	and	dividends	could	be	restricted	by	local	country	currency	exchange	controls.

The	Tax	Cuts	and	Jobs	Act	that	was	signed	into	law	in	December	2017	constitutes	a	major	change	to	the	U.S.	tax	system.	Our	estimated	impact	of	the	Tax	Cuts	and	Jobs Act	is	based	on	management's	current	interpretations,	and	our	analysis	is	ongoing.		Our	final	tax	liability	may	be	materially	different	from	current	estimates	due	to developments	such	as	implementing	regulations	and	clarifications.	In	future	periods,	our	effective	tax	rate	and	our	ability	to	recover	deferred	tax	assets	could	be	subject to	additional	uncertainty	as	a	result	of	such	developments.	Furthermore,	changes	in	the	earnings	mix	or	applicable	foreign	tax	laws	may	result	in	significant	variability	in our	effective	tax	rates.	Because	we	are	a	U.S.	holding	company,	our	most	significant	source	of	funds	is	distributions	from	our	non-U.S.	subsidiaries.	Certain	countries	in which	we	operate	have	adopted	or	could	institute	currency	exchange	controls	that	limit	or	prohibit	our	local	subsidiaries'	ability	to	convert	local	currency	into	U.S. dollars	or	to	make	payments	outside	the	country.	This	could	subject	us	to	the	risks	of	local	currency	devaluation	and	business	disruption.

•Our	ability	to	grow	profitability	may	be	limited	by	our	inability	to	introduce	new	products,	enter	new	markets	or	improve	our	margins	through	higher pricing	and	improvements	in	our	brand	and	geographic	mix.

Our	profit	growth	may	suffer	if	we	are	unable	to	introduce	new	products	or	enter	new	markets	successfully,	to	raise	prices	or	to	improve	the	proportion	of	our	sales	of higher	margin	products	and	in	higher	margin	geographies.

# •We	 may	 be	 unable to expand our	 brand	 portfolio through successful acquisitions or the	 development of strategic	 business relationships.

One	element	of	our	growth	strategy	is	to	strengthen	our	brand	portfolio	and	market	positions	through	selective	acquisitions	and	the	development	of	strategic	business relationships.	Acquisition	and	strategic	business	development	opportunities	are	limited	and	present	risks	of	failing	to	achieve	efficient	and	effective	integration,	strategic objectives	and	anticipated	revenue	improvements	and	cost	savings.	There	is	no	assurance	that	we	will	be	able	to	acquire	attractive	businesses	on	favorable	terms,	or	that future	acquisitions	or	strategic	business	developments	will	be	accretive	to	earnings.

# •Government	mandated	prices,	production	control	programs,	shifts	in	crops	driven	by	economic	conditions	and	the	impact	of	climate	change	may	increase the	cost	or	reduce	the	quality	of	the	tobacco	and	other	agricultural	products	used	to	manufacture	our	products.

As	with	other	agricultural	commodities,	the	price	of	tobacco	leaf	and	cloves	can	be	influenced	by	imbalances	in	supply	and	demand,	and	crop	quality	can	be	influenced by	variations	in	weather	patterns,	including	those	caused	by	climate	change.	Tobacco	production	in	certain	countries	is	subject	to	a	variety	of	controls,	including government	mandated	prices	and	production	control	programs.	Changes	in	the	patterns	of	demand	for	agricultural	products	could	cause	farmers	to	produce	less	tobacco or	cloves.	Any	significant	change	in	tobacco	leaf	and	clove	prices,	quality	and	quantity	could	affect	our	profitability	and	our	business.

# •Our	ability	to	implement	our	strategy	of	attracting	and	retaining	the	best	global	talent	may	be	impaired	by	the	decreasing	social	acceptance	of	cigarette smoking.

The	tobacco	industry	competes	for	talent	with	consumer	products	and	other	companies	that	enjoy	greater	societal	acceptance.	As	a	result,	we	may	be	unable	to	attract and	retain	the	best	global	talent.

# •The	failure	of	our	information	systems	to	function	as	intended	or	their	penetration	by	outside	parties	with	the	intent	to	corrupt	them	or	our	failure	to comply	with	privacy	laws	and	regulations	could	result	in	business	disruption,	litigation	and	regulatory	action,	and	loss	of	revenue,	assets	or	personal	or other	confidential	data.

We	use	information	systems	to	help	manage	business	processes,	collect	and	interpret	business	data	and	communicate	internally	and	externally	with	employees,	suppliers, customers	and	others.	Some	of	these	information	systems	are	managed	by	third-party	service	providers.	We	have	backup	systems	and	business	continuity	plans	in	place, and	we	take	care	to	protect	our	systems	and	data	from	unauthorized	access.	Nevertheless,	failure	of	our	systems	to	function	as	intended,	or	penetration	of	our	systems	by outside	parties	intent	on	extracting	or	corrupting	information	or	otherwise	disrupting	business	processes,	could	place	us	at	a	competitive	disadvantage,	result	in	a	loss	of revenue,	assets	or	personal	or	other	sensitive	data,	litigation	and	regulatory	action,	cause	damage	to	our	reputation	and	that	of	our	brands	and	result	in	significant remediation	and	other	costs.	Failure	to	protect	personal	data	and	respect	the	rights	of	data	subjects	could	subject	us	to	substantial	fines	under	regulations	such	as	the	EU General	Data	Protection	Regulation.

# •We	 may	 be required to replace third-party contract	 manufacturers	 or service	 providers	 with	 our	 own resources.

In	certain	instances,	we	contract	with	third	parties	to	manufacture	some	of	our	products	or	product	parts	or	to	provide	other	services.	We	may	be	unable	to	renew	these agreements	on	satisfactory	terms	for	numerous	reasons,	including	government	regulations.	Accordingly,	our	costs	may	increase	significantly	if	we	must	replace	such third	parties	with	our	own	resources.

# Item	1B. Unresolved	Staff	Comments.

None.

# Item	2.	Properties.

At	December	31,	2017,	we	operated	and	owned	46	manufacturing	facilities	and	maintained	contract	manufacturing	relationships	with	25	third-party	manufacturers across	23	markets.	In	addition,	we	work	with	38	third-party	operators	in	Indonesia	who	manufacture	our	hand-rolled	cigarettes.

|  | EU	(1) | EEMA | Asia | Latin<br>America<br>&amp;<br>Canada | TOTAL |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Fully\tintegrated | 7 | 8 | 9 | 7 | 31 |
| Make-pack | 3 | — | 1 | 2 | 6 |
| Other | 3 | 1 | 3 | 2 | 9 |
| Total | 13 | 9 | 13 | 11 | 46 |

(1) 	Includes	facilities	that	produced	heated	tobacco	units	in	2017.

In	2017,	23	of	our	facilities	each	manufactured	over	10	billion	cigarettes,	of	which	eight	facilities	each	produced	over	30	billion	units.	Our	largest	factories	are	in Karawang	and	Sukorejo	(Indonesia),	Izmir	(Turkey),	Krakow	(Poland),	St.	Petersburg	and	Krasnodar	(Russia),	Batangas	and	Marikina	(Philippines),	Berlin	(Germany), Kharkiv	(Ukraine),	and	Kutna	Hora	(Czech	Republic).	Our	smallest	factories	are	mostly	in	Latin	America	and	Asia,	where	due	to	tariff	and	other	constraints	we	have established	small	manufacturing	units	in	individual	markets.	We	will	continue	to	optimize	our	manufacturing	base,	taking	into	consideration	the	evolution	of	trade blocks.

The	plants	and	properties	owned	or	leased	and	operated	by	our	subsidiaries	are	maintained	in	good	condition	and	are	believed	to	be	suitable	and	adequate	for	our	present needs.

We	are	integrating	the	production	of	heated	tobacco	units	into	a	number	of	our	existing	manufacturing	facilities	and	progressing	with	our	plans	to	build	manufacturing capacity	for	our	other	RRP	platforms.

# Item	3. Legal	Proceedings.

The	information	called	for	by	this	Item	is	incorporated	herein	by	reference	to	Item	8.	Note	18.	Contingencies.

# Item	4. Mine	Safety	Disclosures.

Not	applicable.

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities.

The	principal	stock	exchange	on	which	our	common	stock	(no	par	value)	is	listed	is	the	New	York	Stock	Exchange.	At	January	31,	2018,	there	were	approximately 57,300	holders	of	record	of	our	common	stock.

# Performance	Graph

The	graph	below	compares	the	cumulative	total	shareholder	return	on	PMI's	common	stock	with	the	cumulative	total	return	for	the	same	period	of	PMI's	Peer	Group	and the	S&P	500	Index.	The	graph	assumes	the	investment	of	$100	as	of	December	31,	2012,	in	PMI	common	stock	(at	prices	quoted	on	the	New	York	Stock	Exchange) and	each	of	the	indices	as	of	the	market	close	and	reinvestment	of	dividends	on	a	quarterly	basis.

| Date | PMI | PMI	Peer	Group	(1) | S&amp;P	500	Index |
| :--- | :--- | :--- | :--- |
| December\t31,\t2012 | $100.00 | $100.00 | $100.00 |
| December\t31,\t2013 | $108.50 | $122.80 | $132.40 |
| December\t31,\t2014 | $106.20 | $132.50 | $150.50 |
| December\t31,\t2015 | $120.40 | $143.50 | $152.60 |
| December\t31,\t2016 | $130.80 | $145.60 | $170.80 |
| December\t31,\t2017 | $156.80 | $172.70 | $208.10 |

(1)	The	PMI	Peer	Group	presented	in	this	graph	is	the	same	as	that	used	in	the	prior	year,	except	Reynolds	American	Inc.	was	removed	following	the	completion	of	its	acquisition	by British	American	Tobacco	p.l.c.	on	July	25,	2017.	The	PMI	Peer	Group	was	established	based	on	a	review	of	four	characteristics:	global	presence;	a	focus	on	consumer	products;	and net	revenues	and	a	market	capitalization	of	a	similar	size	to	those	of	PMI.	The	review	also	considered	the	primary	international	tobacco	companies.	As	a	result	of	this	review,	the following	 companies	 constitute	 the	 PMI	 Peer	 Group:	Altria	Group,	Inc.,	Anheuser-Busch	InBev	SA/NV,	British	American	Tobacco	p.l.c.,	The	Coca-Cola	Company,	Colgate- Palmolive	Co.,	Diageo	plc,	Heineken	N.V.,	Imperial	Brands	PLC,	Japan	Tobacco	Inc.,	Johnson	&	Johnson,	Kimberly-Clark	Corporation,	The	Kraft-Heinz	Company,	McDonald's Corp.,	Mondelēz	International,	Inc.,	Nestlé	S.A.,	PepsiCo,	Inc.,	The	Procter	&	Gamble	Company,	Roche	Holding	AG,	and	Unilever	NV	and	PLC.

Note:	Figures	are	rounded	to	the	nearest	$0.10.

# Issuer	Purchases	of	Equity	Securities	During	the	Quarter	Ended	December	31,	2017

Our	share	repurchase	activity	for	each	of	the	three	months	in	the	quarter	ended	December	31,	2017,	was	as	follows:

| Period | Total<br>Number	of<br>Shares<br>Repurchased | Average<br>Price	Paid<br>per	Share | Total	Number<br>of	Shares<br>Purchased	as<br>Part	of	Publicly<br>Announced<br>Plans	or<br>Programs | Approximate<br>Dollar	Value<br>of	Shares	that<br>May	Yet	be<br>Purchased<br>Under	the	Plans<br>or	Programs |
| :--- | :--- | :--- | :--- | :--- |
| October\t1,\t2017\t–\nOctober\t31,\t2017\t(1) | — | \t $— | — | \t $— |
| November\t1,\t2017\t–\nNovember\t30,\t2017\t(1) | — | \t $— | — | \t $— |
| December\t1,\t2017\t–\nDecember\t31,\t2017\t(1) | — | \t $— | — | \t $— |
| Pursuant\tto\tPublicly\tAnnounced\nPlans\tor\tPrograms | — | \t $— |  |  |
| October\t1,\t2017\t–\nOctober\t31,\t2017\t(2) | 672 | \t $112.68 |  |  |
| November\t1,\t2017\t–\nNovember\t30,\t2017\t(2) | 271 | \t $104.73 |  |  |
| December\t1,\t2017\t–\nDecember\t31,\t2017\t(2) | 497 | \t $102.99 |  |  |
| For\tthe\tQuarter\tEnded\nDecember\t31,\t2017 | 1,440 | \t $107.84 |  |  |

(1) During this reporting period,	 we did not have an authorized share repurchase program.

(2) Shares	repurchased	represent	shares	tendered	to	us	by	employees	who	vested	in	restricted	share	unit	awards	and	used	shares	to	pay	all,	or	a	portion	of,	the	related taxes.

The	other	information	called	for	by	this	Item	is	included	in	Item	8,	Note	22.	Quarterly	Financial	Data	(Unaudited)	to	the	consolidated	financial	statements.

# Item	6.					Selected	Financial	Data

(in	millions	of	dollars,	except	per	share	data)

| 2017 | 2016 | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- | :--- |
| $78,098 | $74,953 | $73,908 | $80,106 | $80,029 |
| 10,432 | 9,391 | 9,365 | 10,436 | 10,410 |
| 49,350 | 48,268 | 47,114 | 50,339 | 48,812 |
| 18,316 | 17,294 | 17,429 | 19,331 | 20,807 |
| 11,503 | 10,815 | 10,623 | 11,702 | 13,515 |
| 914 | 891 | 1,008 | 1,052 | 973 |
| 10,589 | 9,924 | 9,615 | 10,650 | 12,542 |
| 13.6% | 13.2% | 13.0% | 13.3% | 15.7% |
| 4,307 | 2,768 | 2,688 | 3,097 | 3,670 |
| 6,341 | 7,250 | 7,032 | 7,658 | 8,850 |
| 306 | 283 | 159 | 165 | 274 |
| 6,035 | 6,967 | 6,873 | 7,493 | 8,576 |
| 3.88 | 4.48 | 4.42 | 4.76 | 5.26 |
| 3.88 | 4.48 | 4.42 | 4.76 | 5.26 |
| 4.22 | 4.12 | 4.04 | 3.88 | 3.58 |
| 1,548 | 1,172 | 960 | 1,153 | 1,200 |
| 875 | 743 | 754 | 889 | 882 |
| 7,271 | 6,064 | 5,721 | 6,071 | 6,755 |
| 8,806 | 9,017 | 8,473 | 8,592 | 9,846 |
| 42,968 | 36,851 | 33,956 | 35,187 | 38,168 |
| 31,334 | 25,851 | 25,250 | 26,929 | 24,023 |
| 34,339 | 29,067 | 28,480 | 29,455 | 27,678 |
| (10,230) | (10,900) | (11,476) | (11,203) | (6,274) |
| 108.8% | 92.0% | 91.4% | 81.5% | 68.1% |
| 123.55-89.97 | 104.20-84.46 | 90.27-75.27 | 91.63-75.28 | 96.73-82.86 |
| 105.65 | 91.49 | 87.91 | 81.45 | 87.13 |
| 27 | 20 | 20 | 17 | 17 |
| 1,553 | 1,551 | 1,549 | 1,547 | 1,589 |
| 80,600 | 79,500 | 80,200 | 82,500 | 91,100 |

This	Selected	Financial	Data	should	be	read	in	conjunction	with	Item	7	and	Item	8.

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.

The	following	discussion	should	be	read	in	conjunction	with	the	other	sections	of	this	Annual	Report	on	Form	10-K,	including	the	consolidated	financial	statements	and related	notes	contained	in	Item	8,	and	the	discussion	of	risks	and	cautionary	factors	that	may	affect	future	results	in	Item	1A.	Risk	Factors.

# Description	of	Our	Company

We	are	a	leading	international	tobacco	company	engaged	in	the	manufacture	and	sale	of	cigarettes	and	other	nicotine-containing	products	in	markets	outside	the	United States	 of	 America.	We	 are	 building	 our	 future	 on	 smoke-free	 products	 that	 are	 a	 much	 better	 consumer	 choice	 than	 continuing	 to	 smoke	 cigarettes.	 	Through multidisciplinary	capabilities	in	product	development,	state-of-the-art	facilities	and	scientific	substantiation,	we	aim	to	ensure	that	our	smoke-free	products	meet	adult consumer	preferences	and	rigorous	regulatory	requirements.	Our	vision	is	that	these	products	ultimately	replace	cigarettes	to	the	benefit	of	adult	smokers,	society,	our company	and	our	shareholders.

Our	cigarettes	are	sold	in	more	than	180	markets,	and	in	many	of	these	markets	they	hold	the	number	one	or	number	two	market	share	position.	We	have	a	wide	range	of premium,	mid-price	and	low-price	brands.	Our	portfolio	comprises	both	international	and	local	brands.	In	addition	to	the	manufacture	and	sale	of	cigarettes,	we	are engaged	in	the	development	and	commercialization	of	reduced-risk	products	("RRPs").	RRPs	is	the	term	we	use	to	refer	to	products	that	present,	are	likely	to	present,	or have	the	potential	to	present	less	risk	of	harm	to	smokers	who	switch	to	these	products	versus	continued	smoking.		We	have	a	range	of	RRPs	in	various	stages	of development,	scientific	assessment	and	commercialization.		Because	our	RRPs	do	not	burn	tobacco,	they	produce	an	aerosol	that	contains	far	lower	quantities	of harmful	and	potentially	harmful	constituents	than	found	in	cigarette	smoke.

For	all	periods	presented	in	this	report,	we	managed	our	business	in	four	segments:

•European	Union;

•Eastern Europe, Middle East & Africa ("EEMA");

•Asia;	and

•Latin	America	&	Canada.

To	provide	a	greater	focus	on	both	parts	of	our	business	--	combustible	and	reduced-risk	products	--	and	to	support	our	transformation	toward	a	smoke-free	future, effective	January	1,	2018,	we	are	managing	our	business	in	six	reportable	segments	as	follows:

•European	Union	-	Covers	all	the	European	Union	countries	and	also	Switzerland,	Norway	and	Iceland,	which	are	linked	to	the	European	Union	through	trade agreements;

•Eastern	 Europe - Includes	 Southeast	 Europe,	 Central	 Asia,	 Ukraine, Israel and Russia;

•Middle	East	&	Africa	-	Covers	the	African	continent,	the	Middle	East,	Turkey	and	PMI	Duty Free;

•South	 &	 Southeast	Asia - Includes Indonesia, the	 Philippines	 and	 other	 markets in this region;

•East	Asia	&	Australia	-	Includes	Australia,	Japan,	South	Korea,	the	People's	Republic	of	China	and	other	markets	in	this	region,	as	well	as	Malaysia	and Singapore;	and

•Latin	America	 &	 Canada	 -	 Covers the	 South	American	 continent,	 Central	America,	 Mexico, the	 Caribbean	 and Canada.

We	use	the	term	net	revenues	to	refer	to	our	operating	revenues	from	the	sale	of	our	products,	net	of	sales	and	promotion	incentives.	Our	net	revenues	and	operating income	are	affected	by	various	factors,	including	the	volume	of	products	we	sell,	the	price	of	our	products,	changes	in	currency	exchange	rates	and	the	mix	of	products we	sell.	Mix	is	a	term	used	to	refer	to	the	proportionate	value	of	premium-price	brands	to	mid-price	or	low-price	brands	in	any	given	market	(product	mix).	Mix	can	also refer	to	the	proportion	of	shipment	volume	in	more	profitable	markets	versus	shipment	volume	in	less	profitable	markets	(geographic	mix).	We	often	collect	excise	taxes from	our	customers	and	then	remit	them	to	governments,	and,	in	those	circumstances,	we	include	the	excise	taxes	in	our	net	revenues	and	in	excise	taxes	on	products. Our	cost	of	sales	consists	principally	of	tobacco	leaf,	non-tobacco	raw	materials,	labor	and	manufacturing	costs,	as	well	as	the	cost	of	the	IQOS	devices	produced	by third-party	electronics	manufacturing	service	providers.

Our	marketing,	administration	and	research	costs	include	the	costs	of	marketing	and	selling	our	products,	other	costs	generally	not	related	to	the	manufacture	of	our products	(including	general	corporate	expenses),	and	costs	incurred	to	develop	new	products.	The	most

significant	components	of	our	marketing,	administration	and	research	costs	are	marketing	and	sales	expenses	and	general	and	administrative	expenses.

Philip	Morris	International	Inc.	is	a	legal	entity	separate	and	distinct	from	its	direct	and	indirect	subsidiaries.	Accordingly,	our	right,	and	thus	the	right	of	our	creditors and	stockholders,	to	participate	in	any	distribution	of	the	assets	or	earnings	of	any	subsidiary	is	subject	to	the	prior	rights	of	creditors	of	such	subsidiary,	except	to	the extent	that	claims	of	our	company	itself	as	a	creditor	may	be	recognized.	As	a	holding	company,	our	principal	sources	of	funds,	including	funds	to	make	payment	on	our debt	securities,	are	from	the	receipt	of	dividends	and	repayment	of	debt	from	our	subsidiaries.	Our	principal	wholly-owned	and	majority-owned	subsidiaries	currently are	not	limited	by	long-term	debt	or	other	agreements	in	their	ability	to	pay	cash	dividends	or	to	make	other	distributions	with	respect	to	their	common	stock.

# Executive	Summary

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

# Consolidated	Operating	Results

•Net	Revenues	and	Net	Revenues,	Excluding	Excise	Taxes	on	Products	–	The	changes	in	our	net	revenues,	and	net	revenues,	excluding	excise	taxes,	for	the	year ended	December	31,	2017,	from	the	comparable	2016	amounts,	were	as	follows:

|  | For	the	Years	Ended<br>December	31, | For	the	Years	Ended<br>December	31, | Variance |  |  | Variance	due	to |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  | Currency | Volume/Mix | Pricing |
| Net\trevenues | $78,098 | $74,953 | $3,145 | 4.2\t% | $(2,355) | $(439) | $5,939 |
| Excise\ttaxes\ton\tproducts | (49,350) | (48,268) | (1,082) | (2.2)% | 1,918 | 1,553 | (4,553) |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\nproducts | $28,748 | $26,685 | $2,063 | 7.7\t% | $(437) | $1,114 | $1,386 |

Net	revenues	include	$3.8	billion	in	2017	and	$739	million	in	2016	related	to	the	sale	of	RRPs,	mainly	driven	by	Japan.	These	net	revenue	amounts	include	excise taxes	billed	to	customers,	where	we	collect	and	remit	the	excise	tax.	Excluding	excise	taxes,	net	revenues	for	RRPs	were	$3.6	billion	in	2017	and	$733	million	in 2016.	In	some	jurisdictions,	including	Japan,	we	are	not	responsible	for	collecting	excise	taxes.

•Diluted	Earnings	Per	Share	–	The	changes	in	our	reported	diluted	earnings	per	share	("diluted	EPS")	for	the	year	ended	December	31,	2017,	from	the	comparable 2016	amounts,	were	as	follows:

|  | Diluted	EPS | %	Growth |
| :--- | :--- | :--- |
| For\tthe\tyear\tended\tDecember\t31,\t2016 | $4.48 |  |
| 2016\tAsset\timpairment\tand\texit\tcosts | — |  |
| 2016\tTax\titems | — |  |
| \t\t\t\t\t\t\tSubtotal\tof\t2016\titems | — |  |
| 2017\tAsset\timpairment\tand\texit\tcosts | — |  |
| 2017\tTax\titems | (0.84) |  |
| \t\t\t\t\t\t\tSubtotal\tof\t2017\titems | (0.84) |  |
| Currency | (0.21) |  |
| Interest | 0.01 |  |
| Change\tin\ttax\trate | (0.03) |  |
| Operations | 0.47 |  |
| For\tthe\tyear\tended\tDecember\t31,\t2017 | $3.88 | (13.4)% |

Income	Taxes	–	Our	effective	income	tax	rate	for	2017	increased	by	12.8	percentage	points	to	40.7%.	The	2017	tax	items	that	decreased	our	diluted	EPS	by	$0.84 per	share	in	the	table	above	were	primarily	due	to	the	impact	of	the	Tax	Cuts	and	Jobs	Act,	which	was	signed	into	law	in	December	2017.

The	principal	elements	of	the	Tax	Cuts	and	Jobs	Act	relevant	to	our	consolidated	financial	statements	for	the	year	ended	December	31,	2017,	were:

•A	reduction	of	the	U.S.	federal	corporate	tax	rate	from	35%	to	21%;	and

•The	requirement	to	pay	a	one-time	transition	tax	on	accumulated	foreign	earnings,	including	2017	earnings	("transition

In	connection	with	these	elements	of	the	Tax	Cuts	and	Jobs	Act,	we	recognized	a	provisional	expense	of	$1.6	billion,	which	was	included	as	a	component	of	income tax	expense	as	follows:

•A	provisional	charge	of	$1.4	billion,	which	represents	the	transition	tax	of	$2.2	billion,	net	of	a	reversal	of	$0.7	billion	of	previously	recorded	deferred	tax liabilities	on	part	of	the	accumulated	foreign	earnings,	and	other	items	of	$0.1	billion.

•Re-measurement	of	U.S.	deferred	tax	assets	and	liabilities	using	a	rate	of	21%,	which,	under	the	Tax	Cuts	and	Jobs	Act,	is	expected	to	be	in	place	when	such deferred	assets	and	liabilities	reverse	in	the	future.	In	connection	with	this	re-measurement,	we	recorded	a	provisional	charge	of	$0.2	billion.

While	the	impacts	of	the	Tax	Cuts	and	Jobs	Act	reduced	net	earnings	by	$1.6	billion,	there	was	no	net	impact	on	operating	cash	flows	for	the	year,	as	the	changes	in deferred	taxes	and	income	taxes	payable	offset	the	net	earnings	impact.	At	December	31,	2017,	we	recorded	an	income	tax	payable	of	$1.7	billion	representing	the transition	tax	of	$2.2	billion,	partially	offset	by	foreign	tax	credits	related	to	foreign	withholding	taxes	previously	paid	of	$0.5	billion.	The	income	tax	payable	is due	over	an	8-year	period	beginning	in	2018.	For	further	details,	see	Item	8,	Note	11.	Income	Taxes	to	our	consolidated	financial	statements.

The	change	in	the	effective	tax	rate	that	decreased	our	diluted	EPS	by	$0.03	per	share	in	the	table	above	was	primarily	due	to	earnings	mix	by	taxing	jurisdiction.

Currency	–	The	unfavorable	currency	impact	during	2017	results	from	the	fluctuations	of	the	U.S.	dollar,	especially	against	the	Brazilian	real,	Egyptian	pound, Euro,	Japanese	yen	and	Turkish	lira,	partially	offset	by	the	Russian	ruble.	This	unfavorable	currency	movement	has	impacted	our	profitability	across	our	primary revenue	markets	and	local	currency	cost	bases.

Interest	–	The	favorable	impact	of	interest	was	due	primarily	to	higher	interest	income,	partly	offset	by	higher	average	debt	levels.

Operations	–	The	increase	in	diluted	EPS	of	$0.47	from	our	operations	in	the	table	above	was	due	primarily	to	the	following	segments:

•Asia:	Favorable	volume/mix,	higher	pricing	and	lower	manufacturing	costs,	partially	offset	by	higher	marketing,	administration	and	research	costs; and

•Latin	 America & Canada: Higher pricing, partially offset by unfavorable

volume/mix;

partially	offset	by

•EEMA:	Unfavorable	volume/mix	and	higher	marketing,	administration	and	research	costs,	partially	offset	by	higher	pricing;

•European	 Union:	 Unfavorable	 volume/mix	 and	 higher	 marketing,	 administration	 and research	 costs,	 partially	 offset	 by	 higher pricing.

For	further	details,	see	the	Consolidated	Operating	Results	and	Operating	Results	by	Business	Segment	sections	of	the	following	Discussion	and	Analysis.

2018	Forecasted	Results	–	On	February	8,	2018,	we	announced	our	forecast	for	2018	full-year	reported	diluted	EPS	to	be	in	a	range	of	$5.20	to	$5.35,	representing	a projected	increase	of	approximately	34%	to	38%	at	prevailing	exchange	rates,	versus	$3.88	in	2017.	Excluding	a	favorable	currency	impact,	at	then-prevailing	exchange rates,	of	approximately	$0.16	per	share	for	the	full-year	2018,	the	forecast	range	represents	a	projected	increase	of	approximately	7%	to	10%	versus	adjusted	diluted earnings	per	share	of	$4.72	in	2017.

# This	forecast	assumes:

•Net	 revenue growth, excluding excise taxes, of over 8.0%, excluding currency;

•Operating	cash	flow	of	over	$9.0	billion;

•Capital expenditures of approximately $1.7 billion; and

•No share

repurchases.

Following	the	enactment	of	the	Tax	Cuts	and	Jobs	Act,	our	2018	full-year	diluted	earnings	per	share	forecast	--	based	on	the	current	interpretation	of	the	legislation	-- assumes	a	full-year	effective	tax	rate	of	approximately	28%,	subject	to	future	regulatory	developments	and	earnings	mix	by	taxing	jurisdiction.	The	difference	between the	21%	statutory	rate	under	the	new	law	and	our	effective	rate	reflects	the	fact	that	we	operate	in	markets	outside	the	United	States	and	is	driven	by	three	main	factors: foreign	tax	rate	differences,	non-deductibility	of	interest	expense	and	a	partial	disallowance	of	foreign	tax	credits	related	to	the	application	of	the	rules	for	global intangible	low-taxed	income.

We	calculated	2017	adjusted	diluted	EPS	as	reported	diluted	EPS	of	$3.88,	plus	the	$0.84	per	share	charge	related	to	tax	items.	During	2017,	we	did	not	have	an	EPS impact	related	to	asset	impairment	and	exit	costs.

Adjusted	diluted	EPS	is	not	a	measure	under	accounting	principles	generally	accepted	in	the	United	States	of	America	("U.S.	GAAP").	We	define	adjusted	diluted	EPS as	reported	diluted	EPS	adjusted	for	asset	impairment	and	exit	costs,	tax	items	and	unusual	items.	We	believe	it	is	appropriate	to	disclose	this	measure	as	it	represents core	earnings,	improves	comparability	and	helps	investors	analyze	business	performance	and	trends.	Adjusted	diluted	EPS	should	be	considered	neither	in	isolation	nor as	a	substitute	for	reported	diluted	EPS	prepared	in	accordance	with	U.S.	GAAP.

This	2018	guidance	excludes	the	impact	of	any	future	acquisitions,	unanticipated	asset	impairment	and	exit	cost	charges,	future	changes	in	currency	exchange	rates, further	developments	related	to	the	Tax	Cuts	and	Jobs	Act,	and	any	unusual	events.	The	factors	described	in	Item	1A.	 Risk	Factors	represent	continuing	risks	to	these projections.

# Discussion	and	Analysis

# Critical	Accounting	Estimates

Item	8,	Note	2.	Summary	of	Significant	Accounting	Policies	to	our	consolidated	financial	statements	includes	a	summary	of	the	significant	accounting	policies	and methods	used	in	the	preparation	of	our	consolidated	financial	statements.	In	most	instances,	we	must	use	a	particular	accounting	policy	or	method	because	it	is	the	only one	that	is	permitted	under	U.S.	GAAP.

The	preparation	of	financial	statements	requires	that	we	use	estimates	and	assumptions	that	affect	the	reported	amounts	of	our	assets,	liabilities,	net	revenues	and expenses,	as	well	as	our	disclosure	of	contingencies.	If	actual	amounts	differ	from	previous	estimates,	we	include	the	revisions	in	our	consolidated	results	of	operations in	the	period	during	which	we	know	the	actual	amounts.	Historically,	aggregate	differences,	if	any,	between	our	estimates	and	actual	amounts	in	any	year	have	not	had	a significant	impact	on	our	consolidated	financial	statements.

The	selection	and	disclosure	of	our	critical	accounting	estimates	have	been	discussed	with	our	Audit	Committee.	The	following	is	a	discussion	of	the	more	significant assumptions,	estimates,	accounting	policies	and	methods	used	in	the	preparation	of	our	consolidated	financial	statements:

Revenue	Recognition	-	We	recognize	revenue	when	persuasive	evidence	of	an	arrangement	exists,	delivery	of	product	has	occurred,	 the	sales	price	 is	fixed	or determinable	and	collectability	is	reasonably	assured.	For	our	company,	this	means	that	revenue	is	recognized	when	title	and	risk	of	loss	is	transferred	to	our	customers. Title	transfers	to	our	customers	upon	shipment	or	upon	receipt	at	the	customer's	location	as	determined	by	the	sales	terms	for	each	transaction.	The	company	estimates the	cost	of	sales	returns	based	on	historical	experience,	and	these	estimates	are	immaterial.	Estimated	costs	associated	with	warranty	programs	for	IQOS	devices	are generally	provided	for	in	cost	of	sales	in	the	period	the	related	revenues	are	recognized,	based	on	a	number	of	factors	including	historical	experience,	product	failure rates	and	warranty	policies.

Goodwill	and	Non-Amortizable	Intangible	Assets	Valuation	-	We	test	goodwill	and	non-amortizable	intangible	assets	for	impairment	annually	or	more	frequently	if events	occur	that	would	warrant	such	review.	During	the	second	quarter	of	2016,	we	changed	the	date	of

our	annual	goodwill	impairment	test	from	the	first	quarter	to	the	second	quarter.		The	change	was	made	to	more	closely	align	the	impairment	testing	date	with	our	long- range	planning	and	forecasting	process.	We	had	determined	that	this	change	in	accounting	principle	was	preferable	under	the	circumstances	and	believe	that	the	change in	the	annual	impairment	testing	date	did	not	delay,	accelerate,	or	avoid	an	impairment	charge.	While	the	company	has	the	option	to	perform	a	qualitative	assessment	for both	goodwill	and	non-amortizable	intangible	assets	to	determine	if	it	is	more	likely	than	not	that	an	impairment	exists,	the	company	elects	to	perform	the	quantitative assessment	for	our	annual	impairment	analysis.	The	impairment	analysis	involves	comparing	the	fair	value	of	each	reporting	unit	or	non-amortizable	intangible	asset	to the	carrying	value.	If	the	carrying	value	exceeds	the	fair	value,	goodwill	or	a	non-amortizable	intangible	asset	is	considered	impaired.	To	determine	the	fair	value	of goodwill,	we	primarily	use	a	discounted	cash	flow	model,	supported	by	the	market	approach	using	earnings	multiples	of	comparable	global	and	local	companies	within the	tobacco	industry.	At	December	31,	2017,	the	carrying	value	of	our	goodwill	was	$7.7	billion,	which	is	related	to	ten	reporting	units,	each	of	which	consists	of	a group	of	markets	with	similar	economic	characteristics.	The	estimated	fair	value	of	each	of	our	ten	reporting	units	exceeded	the	carrying	value	as	of	December	31,	2017. To	determine	the	fair	value	of	non-amortizable	intangible	assets,	we	primarily	use	a	discounted	cash	flow	model	applying	the	relief-from-royalty	method.	We	concluded that	the	fair	value	of	our	non-amortizable	intangible	assets	exceeded	the	carrying	value.	These	discounted	cash	flow	models	include	management	assumptions	relevant for	forecasting	operating	cash	flows,	which	are	subject	to	changes	in	business	conditions,	such	as	volumes	and	prices,	costs	to	produce,	discount	rates	and	estimated capital	needs.	Management	considers	historical	experience	and	all	available	information	at	the	time	the	fair	values	are	estimated,	and	we	believe	these	assumptions	are consistent	with	the	assumptions	a	hypothetical	marketplace	participant	would	use.	Since	the	March	28,	2008,	spin-off	from	Altria	Group,	Inc.,	we	have	not	recorded	a charge	to	earnings	for	an	impairment	of	goodwill	or	non-amortizable	intangible	assets.

Marketing	and	Advertising	Costs	-	We	incur	certain	costs	to	support	our	products	through	programs	that	include	advertising,	marketing,	consumer	engagement	and trade	promotions.	The	costs	of	our	advertising	and	marketing	programs	are	expensed	in	accordance	with	U.S.	GAAP.	Recognition	of	the	cost	related	to	our	consumer engagement	and	trade	promotion	programs	contain	uncertainties	due	to	the	judgment	required	in	estimating	the	potential	performance	and	compliance	for	each	program. For	volume-based	 incentives	provided	 to	customers,	management	continually	assesses	and	estimates,	by	customer,	 the	 likelihood	of	 the	customer's	achieving	 the specified	targets,	and	records	the	reduction	of	revenue	as	the	sales	are	made.	For	other	trade	promotions,	management	relies	on	estimated	utilization	rates	that	have	been developed	from	historical	experience.	Changes	in	the	assumptions	used	in	estimating	the	cost	of	any	individual	marketing	program	would	not	result	in	a	material	change in	our	financial	position,	results	of	operations	or	operating	cash	flows.

Employee	Benefit	Plans	-	As	discussed	in	Item	8,	Note	13.	Benefit	Plans	to	our	consolidated	financial	statements,	we	provide	a	range	of	benefits	to	our	employees	and retired	employees,	including	pensions,	postretirement	health	care	and	postemployment	benefits	(primarily	severance).	We	record	annual	amounts	relating	to	these	plans based	on	calculations	specified	by	U.S.	GAAP.	These	calculations	include	various	actuarial	assumptions,	such	as	discount	rates,	assumed	rates	of	return	on	plan	assets, compensation	increases,	mortality,	turnover	rates	and	health	care	cost	trend	rates.	We	review	actuarial	assumptions	on	an	annual	basis	and	make	modifications	to	the assumptions	based	on	current	rates	and	trends	when	it	is	deemed	appropriate	to	do	so.	As	permitted	by	U.S.	GAAP,	any	effect	of	the	modifications	is	generally amortized	over	future	periods.	We	believe	that	the	assumptions	utilized	in	calculating	our	obligations	under	these	plans	are	reasonable	based	upon	our	historical experience	and	advice	from	our	actuaries.

Weighted-average	discount	rate	assumptions	for	pensions	and	postretirement	plans	are	as	follows:

We	anticipate	that	assumption	changes	will	decrease	2018	pre-tax	pension	and	postretirement	expense	to	approximately	$164	million	as	compared	with	approximately $199	million	in	2017,	excluding	amounts	related	to	early	retirement	programs.	The	anticipated	decrease	is	primarily	due	to	higher	expected	return	on	assets	of	$21 million,	coupled	with	lower	amortization	out	of	other	comprehensive	earnings	for	prior	service	cost	of	$12	million	and	unrecognized	actuarial	gains/losses	of	$10 million,	partially	offset	by	other	movements	of	$8	million.

Weighted-average	expected	rate	of	return	and	discount	rate	assumptions	have	a	significant	effect	on	the	amount	of	expense	reported	for	the	employee	benefit	plans.		A fifty-basis-point	decrease	in	our	discount	rate	would	increase	our	2018	pension	and	postretirement	expense	by	approximately	$38	million,	and	a	fifty-basis-point increase	 in	our	discount	rate	would	decrease	our	2018	pension	and	postretirement	expense	by	approximately	$54	million.	Similarly,	a	fifty-basis-point	decrease (increase)	in	the	expected	return	on	plan	assets	would	increase	(decrease)	our	2018	pension	expense	by	approximately	$45	million.	See	Item	8,	Note	13.	Benefit	Plans	to our	consolidated	financial	statements	for	a	sensitivity	discussion	of	the	assumed	health	care	cost	trend	rates.

Income	Taxes	-	Income	tax	provisions	for	jurisdictions	outside	the	United	States,	as	well	as	state	and	local	income	tax	provisions,	are	determined	on	a	separate company	basis,	and	the	related	assets	and	liabilities	are	recorded	in	our	consolidated	balance	sheets.

The	extent	of	our	operations	involves	dealing	with	uncertainties	and	judgments	in	the	application	of	complex	tax	regulations	in	a	multitude	of	jurisdictions.	The	final taxes	paid	are	dependent	upon	many	factors,	including	negotiations	with	taxing	authorities	in	various	jurisdictions	and	resolution	of	disputes	arising	from	federal,	state, and	international	tax	audits.	In	accordance	with	the	authoritative	guidance	for	income	taxes,	we	evaluate	potential	tax	exposures	and	record	tax	liabilities	for	anticipated tax	audit	issues	based	on	our	estimate	of	whether,	and	the	extent	to	which,	additional	taxes	will	be	due.	We	adjust	these	reserves	in	light	of	changing	facts	and circumstances;	however,	due	to	the	complexity	of	some	of	these	uncertainties,	the	ultimate	resolution	may	result	in	a	payment	that	is	materially	different	from	our current	estimate	of	the	tax	liabilities.	If	our	estimate	of	tax	liabilities	proves	to	be	less	than	the	ultimate	assessment,	an	additional	charge	to	expense	would	result.	If payment	of	these	amounts	ultimately	proves	to	be	less	than	the	recorded	amounts,	the	reversal	of	the	liabilities	would	result	in	tax	benefits	being	recognized	in	the	period when	we	determine	the	liabilities	are	no	longer	necessary.

The	effective	tax	rates	used	for	interim	reporting	are	based	on	our	full-year	geographic	earnings	mix	projections.	Changes	in	currency	exchange	rates	or	earnings	mix	by taxing	jurisdiction	could	have	an	impact	on	the	effective	tax	rates.	Significant	judgment	is	required	in	determining	income	tax	provisions	and	in	evaluating	tax	positions.

For	further	details,	see	Item	8,	Note	11.	Income	Taxes	to	our	consolidated	financial	statements.

Hedging	-	As	discussed	below	in	"Market	Risk,"	we	use	derivative	financial	instruments	principally	to	reduce	exposures	to	market	risks	resulting	from	fluctuations	in foreign	currency	exchange	and	interest	rates	by	creating	offsetting	exposures.	For	derivatives	to	which	we	have	elected	to	apply	hedge	accounting,	gains	and	losses	on these	derivatives	are	initially	deferred	in	accumulated	other	comprehensive	losses	on	the	consolidated	balance	sheet	and	recognized	in	the	consolidated	statement	of earnings	in	the	periods	when	the	related	hedged	transactions	are	also	recognized	in	operating	results.	If	we	had	elected	not	to	use	the	hedge	accounting	provisions,	gains (losses)	deferred	in	stockholders'	(deficit)	equity	would	have	been	recorded	in	our	net	earnings	for	these	derivatives.

Contingencies -	As	discussed	 in	Item	8,	Note	18.	Contingencies	to	our	consolidated	financial	statements,	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.	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.	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	pending	tobacco-related	litigation	is	in	its	early	stages,	and	litigation	is	subject	to uncertainty.	At	the	present	time,	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.

Our	net	revenues,	excise	taxes	on	products	and	operating	companies	income	by	segment	were	as	follows:

As	 discussed	 in	 Item	 8,	 Note	 12.	Segment	Reporting	 to	our	consolidated	financial	statements,	we	evaluate	segment	performance	and	allocate	resources	based	on operating	companies	income,	which	we	define	as	operating	income,	excluding	general	corporate	expenses	and	amortization	of	intangibles,	plus	equity	(income)/loss	in unconsolidated	subsidiaries,	net.	We	believe	it	is	appropriate	to	disclose	this	measure	to	help	investors	analyze	the	business	performance	and	trends	of	our	various business	segments.

Our	shipment	volume	by	segment	for	cigarettes	and	heated	tobacco	units	was	as	follows:

# PMI	Shipment	Volume	(Million	Units)

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Cigarettes |  |  |  |
| European\tUnion | 187,293 | 193,586 | 194,589 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica | 256,157 | 271,393 | 279,411 |
| Asia | 234,253 | 260,029 | 281,350 |
| Latin\tAmerica\t&amp;\tCanada | 84,223 | 87,938 | 91,920 |
| Total\tCigarettes | 761,926 | 812,946 | 847,270 |
| Heated\tTobacco\tUnits |  |  |  |
| European\tUnion | 1,889 | 224 | 24 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica | 1,581 | 100 | 2 |
| Asia | 32,729 | 7,070 | 370 |
| Latin\tAmerica\t&amp;\tCanada | 27 | — | — |
| Total\tHeated\tTobacco\tUnits | 36,226 | 7,394 | 396 |
| Cigarettes\tand\tHeated\tTobacco\tUnits |  |  |  |
| European\tUnion | 189,182 | 193,810 | 194,613 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica | 257,738 | 271,493 | 279,413 |
| Asia | 266,982 | 267,099 | 281,720 |
| Latin\tAmerica\t&amp;\tCanada | 84,250 | 87,938 | 91,920 |
| Total\tCigarettes\tand\tHeated\tTobacco\tUnits | 798,152 | 820,340 | 847,666 |

Heated	tobacco	units	is	the	term	we	use	to	refer	to	heated	tobacco	consumables,	which	include	our	HEETS,	HEETS	Marlboro	and	HEETS	FROM	MARLBORO,	defined collectively	as	HEETS,	as	well	as	Marlboro	HeatSticks	and	Parliament	HeatSticks.

Our	net	revenues	by	product	category,	which	include	excise	taxes	billed	to	customers,	were	as	follows:

# PMI	Net	Revenues	by	Product	Category

| (in	millions) | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Combustible\tProducts |  |  |  |
| European\tUnion | $27,261 | $27,067 | $26,533 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica | 17,886 | 18,276 | 18,328 |
| Asia | 19,325 | 19,865 | 19,434 |
| Latin\tAmerica\t&amp;\tCanada | 9,833 | 9,006 | 9,547 |
| Total\tCombustible\tProducts | $74,305 | $74,214 | $73,842 |
| Reduced-Risk\tProducts |  |  |  |
| European\tUnion | $320 | $62 | $30 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica | 158 | 9 | — |
| Asia | 3,310 | 666 | 35 |
| Latin\tAmerica\t&amp;\tCanada | 5 | 2 | 1 |
| Total\tReduced-Risk\tProducts | $3,793 | $739 | $66 |
| Total\tPMI\tNet\tRevenues | $78,098 | $74,953 | $73,908 |

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

Net	revenues	related	to	combustible	products	refer	to	the	operating	revenues	generated	from	the	sale	of	these	products,	net	of	sales	and	promotion	incentives.	These	net revenue	amounts	consist	of	the	sale	of	our	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,	net	of	sales	and	promotion	incentives.	These	net revenue	amounts	consist	of	the	sale	of	our	heated	tobacco	units,	IQOS	devices	and	related	accessories,	and	other	nicotine-containing	products,	which	primarily	include our	e-vapor	products.

References	to	total	international	market,	defined	as	worldwide	cigarette	and	heated	tobacco	unit	volume	excluding	the	United	States,	total	industry,	total	market	and market	shares	throughout	this	"Discussion	and	Analysis"	are	our	estimates	for	tax-paid	products	based	on	the	latest	available	data	from	a	number	of	internal	and	external sources.

The	following	discussion	compares	our	consolidated	operating	results	for	the	year	ended	December	31,	2017,	with	the	year	ended	December	31,	2016.

Estimated	international	cigarette	and	heated	tobacco	unit	volume,	excluding	China	and	the	United	States,	of	2.8	trillion	was	down	by	2.8%.

Our	total	shipment	volume	decreased	by	2.7%,	principally	due	to:

•European	Union,	notably	reflecting	lower	cigarette	shipment	volume	in	Greece,	Italy	and	Spain,	partly	offset	by	higher	heated	tobacco	unit	shipment volume;

•EEMA,	notably	reflecting	lower	cigarette	shipment	volume	in	Russia,	Saudi	Arabia	-	where	our	cigarette	shipment	volume	declined	by	35.8%,	impacted	by	the new	excise	tax	implemented	in	June	2017	that	resulted	in	the	doubling	of	retail	prices	-	and	Ukraine;	partly	offset	by	higher	cigarette	shipment	volume	in	North Africa,	notably	Algeria,	and	higher	heated	tobacco	unit	shipment	volume;

•Asia,	notably	reflecting	lower	cigarette	shipment	volume	in	Indonesia,	Japan,	Korea,	Pakistan	-	impacted	by	excise	tax-driven	price	increases	and	an	increase	in the	prevalence	of	illicit	trade	-	and	the	Philippines;	fully	offset	by	higher	heated	tobacco	unit	shipment	volume,	mainly	in	Japan	and	Korea;	and

•Latin	America	 &	 Canada,	 notably reflecting lower	 cigarette	 shipment	 volume in	Argentina,	 Brazil,	 Canada,	 Colombia	 and Mexico.

Excluding	the	favorable	net	impact	of	estimated	cigarette	and	heated	tobacco	unit	inventory	movements	of	approximately	3.3	billion	units,	our	total	shipment	volume decreased	by	3.1%.	The	favorable	inventory	movements	were	driven	primarily	by	approximately	8.5	billion	units	net	in	Japan	reflecting:	the	increasing	demand	for HeatSticks,	anticipated	to	further	increase	in	the	first	quarter	of	2018	following	a	planned	lifting	of	the	restriction	on	IQOS	device	sales;	the	establishment	of	appropriate distributor	inventory	levels	of	heated	tobacco	units,	given	the	current	high	dependence	on	a	single	manufacturing	center;	and	the	transition	from	air	freight	to	sea	freight of	heated	tobacco	units,	largely	completed	in	the	fourth	quarter	of	2017.	These	favorable	inventory	movements	were	partly	offset	by	a	reduction	of	combustible	product inventory	levels,	mainly	in:	the	European	Union,	notably	Italy	and	Spain;	EEMA,	notably	North	Africa,	Russia	and	Saudi	Arabia.

Our	cigarette	shipment	volume	by	brand	and	heated	tobacco	unit	shipment	volume	are	shown	in	the	table	below:

# PMI	Shipment	Volume	by	Brand	(Million	Units)

|  | 2017 | 2016 | Change |
| :--- | :--- | :--- | :--- |
| Cigarettes |  |  |  |
| Marlboro | 270,366 | 281,720 | (4.0)% |
| L&amp;M | 90,817 | 96,770 | (6.2)% |
| Chesterfield | 55,075 | 46,291 | 19.0\t% |
| Philip\tMorris | 48,522 | 35,914 | 35.1\t% |
| Parliament | 43,965 | 45,671 | (3.7)% |
| Bond\tStreet | 37,987 | 44,567 | (14.8)% |
| Lark | 24,373 | 27,571 | (11.6)% |
| Others | 190,821 | 234,442 | (18.6)% |
| Total\tCigarettes | 761,926 | 812,946 | (6.3)% |
| Heated\tTobacco\tUnits | 36,226 | 7,394 | +100.0% |
| Total\tCigarettes\tand\tHeated\tTobacco\tUnits | 798,152 | 820,340 | (2.7)% |

Cigarette	shipment	volume	of	Marlboro	decreased	in:	the	European	Union,	mainly	due	to	Greece,	Italy	and	Spain;	EEMA,	predominantly	due	to	Saudi	Arabia,	reflecting the	impact	of	the	new	excise	tax	implemented	in	June	2017	that	resulted	in	the	doubling	of	the	retail	price	of	Marlboro	from	SAR	12	to	SAR	24	per	pack,	partly	offset by	North	Africa,	notably	Algeria	and	Egypt,	and	Turkey;	Asia,	mainly	due	to	Japan	and	Korea,	principally	reflecting	out-switching	to	heated	tobacco	products,	partly offset	by	Indonesia	and	the	Philippines;	and	Latin	America	&	Canada,	mainly	due	to	Argentina	and	Brazil.

Cigarette	shipment	volume	of	the	following	brands	decreased:	L&M,	mainly	due	to	Russia,	Saudi	Arabia	and	Turkey,	partly	offset	by	Algeria,	Argentina,	Colombia	and Kazakhstan;	Parliament,	mainly	due	to	Japan,	Russia	and	Saudi	Arabia,	partly	offset	by	Kazakhstan;	Bond	Street,	mainly	due	to	Kazakhstan,	Russia	and	Ukraine;	Lark, principally	due	to	Japan;	and	"Others,"	mainly	due	to	low-price	brands	in	Indonesia,	Pakistan,	the	Philippines,	Russia	and	Ukraine.

Cigarette	shipment	volume	of	the	following	brands	increased:	Chesterfield,	notably	driven	by	Argentina,	Brazil,	Colombia,	Saudi	Arabia,	Turkey	and	Venezuela,	partly offset	by	Italy	and	Russia;	and	Philip	Morris,	mainly	driven	by	Russia	and	Ukraine,	notably	reflecting	successful	portfolio	consolidation	of	local,	low-price	brands	in "Others,"	partly	offset	by	Argentina	and	Italy.

Our	net	revenues	and	excise	taxes	on	products	were	as	follows:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Net\trevenues | \t $78,098 | \t $74,953 | \t $3,145 | 4.2% |
| Excise\ttaxes\ton\tproducts | 49,350 | 48,268 | 1,082 | 2.2% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | \t $28,748 | \t $26,685 | \t $2,063 | 7.7% |

Net	revenues,	which	include	excise	taxes	billed	to	customers,	increased	by	$3.1	billion.	Excluding	excise	taxes,	net	revenues	increased	by	$2.1	billion,	due	to:

The	unfavorable	currency	was	due	primarily	to	the	Argentine	peso,	Egyptian	pound,	Japanese	yen,	Philippine	peso	and	Turkish	lira,	partially	offset	by	the	Russian	ruble.

Net	revenues	include	$3.8	billion	in	2017	and	$739	million	in	2016	related	to	the	sale	of	RRPs,	mainly	driven	by	Japan.	These	net	revenue	amounts	include	excise	taxes billed	to	customers.	Excluding	excise	taxes,	net	revenues	for	RRPs	were	$3.6	billion	in	2017	and	$733	million	in	2016.	In	some	jurisdictions,	including	Japan,	we	are	not responsible	for	collecting	excise	taxes.	In	2017,	approximately	$0.9	billion	of	our	$3.6	billion	in	RRP	net	revenues,	excluding	excise	taxes,	were	from	IQOS	devices	and accessories.

Excise	taxes	on	products	increased	by	$1.1	billion,	due	to:

•higher	excise	taxes	resulting	from	changes	in	retail	prices	and	tax	rates	($4.6	billion),	partially	offset by

•favorable currency ($1.9 billion) and

•lower excise taxes resulting from volume/mix ($1.6

billion).

Our	cost	of	sales;	marketing,	administration	and	research	costs;	and	operating	income	were	as	follows:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Cost\tof\tsales | \t $10,432 | \t $9,391 | \t $1,041 | 11.1% |
| Marketing,\tadministration\tand\tresearch\tcosts | 6,725 | 6,405 | 320 | 5.0% |
| Operating\tincome | 11,503 | 10,815 | 688 | 6.4% |

Cost	of	sales	increased	by	$1.0	billion,	due	to:

•lower	 manufacturing costs ($36	 million) and

•favorable currency ($30 million).

Marketing,	administration	and	research	costs	increased	by	$320	million,	due	to:

•higher	expenses	($570	million,	largely	reflecting	increased	investment	behind	reduced-risk	products,	predominately	in	the	European	Union	and	Asia),	partly offset	by

Operating	income	increased	by	$688	million,	due	primarily	to:

•price increases ($1.4	 billion),	 partly	 offset by

•higher	 marketing,	 administration	 and research	 costs ($570	 million) and

•unfavorable currency ($157 million).

Interest	expense,	net,	of	$914	million	increased	by	$23	million,	due	primarily	to	unfavorably	currency	and	higher	average	debt	levels,	partly	offset	by	higher	interest income.

Our	effective	tax	rate	increased	by	12.8	percentage	points	to	40.7%.	The	2017	effective	tax	rate	was	unfavorably	impacted	by	$1.6	billion	due	to	the	Tax	Cuts	and	Jobs Act.	For	further	details,	see	Item	8,	Note	11.	Income	Taxes	to	our	consolidated	financial	statements.	We	are	continuing	to	evaluate	the	impact	that	the	Tax	Cuts	and	Jobs Act	will	have	on	our	tax	liability.	Based	upon	our	current	interpretation	of	the	Tax	Cuts	and	Jobs	Act,	we	estimate	that	our	2018	effective	tax	rate	will	be	approximately 28%,	subject	to	future	regulatory	developments	and	earnings	mix	by	taxing	jurisdiction.

We	are	regularly	examined	by	tax	authorities	around	the	world,	and	we	are	currently	under	examination	in	a	number	of	jurisdictions.	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.

Net	earnings	attributable	to	PMI	of	$6.0	billion	decreased	by	$932	million	(13.4%).	This	decrease	was	due	primarily	to	a	higher	effective	tax	rate	as	discussed	above, partly	offset	by	higher	operating	income.	Diluted	and	basic	EPS	of	$3.88	decreased	by	13.4%.	Excluding

an	unfavorable	tax	impact	of	$0.84	primarily	related	to	the	implementation	of	the	Tax	Cuts	and	Jobs	Act	and	an	unfavorable	currency	impact	of	$0.21,	diluted	EPS increased	by	10.0%.

Our	cigarette	shipment	volume	decreased	by	4.1%,	or	by	4.7%	excluding	net	estimated	inventory	movements,	due	to:

•European	Union,	principally	Italy,	Germany	and	Greece,	partly	offset	by	Poland	and

Spain;

•EEMA,	mainly	North	Africa,	primarily	Algeria,	and	Russia,	partly	offset	by	Saudi	Arabia	and

Ukraine;

•Asia,	principally	Indonesia,	Pakistan,	the	Philippines	and	Thailand,	partly	offset	by	Korea;

•Latin	America	&	Canada,	predominantly	Argentina,	partly	offset	by

Mexico.

Our	cigarette	market	share	increased	in	a	number	of	markets,	including	Brazil,	Canada,	Colombia,	the	Czech	Republic,	France,	Mexico,	the	Netherlands,	Norway, Poland,	Saudi	Arabia,	Spain,	Switzerland,	Turkey	and	the	United	Arab	Emirates.

Our	cigarette	shipment	volume	by	brand	is	shown	in	the	table	below:

# PMI	Cigarette	Shipment	Volume	by	Brand	(Million	Units)

|  | 2016 | 2015 | Change |
| :--- | :--- | :--- | :--- |
| Marlboro | 281,720 | 285,583 | (1.4)% |
| L&amp;M | 96,770 | 97,884 | (1.1)% |
| Chesterfield | 46,291 | 41,397 | 11.8\t% |
| Parliament | 45,671 | 44,879 | 1.8\t% |
| Bond\tStreet | 44,567 | 43,608 | 2.2\t% |
| Philip\tMorris | 35,914 | 35,815 | 0.3\t% |
| Lark | 27,571 | 28,828 | (4.4)% |
| Others | 234,442 | 269,276 | (12.9)% |
| Total\tPMI | 812,946 | 847,270 | (4.1)% |

Cigarette	shipment	volume	of	Marlboro	decreased,	driven	by	Algeria,	Argentina,	Egypt	and	Vietnam,	as	well	as	in-switching	to	heated	tobacco	units,	partly	offset	by Korea,	Mexico,	the	Philippines,	Saudi	Arabia	and	Spain.

Cigarette	shipment	volume	of	L&M	decreased,	notably	in	Russia,	Thailand	and	Turkey,	partly	offset	by	Algeria,	Kazakhstan	and	Ukraine.	Cigarette	shipment	volume	of Chesterfield	increased,	mainly	driven	by	Argentina,	the	Czech	Republic,	reflecting	the	morphing	of	Red	&	White,	Turkey	and	the	United	Kingdom,	partly	offset	by Russia.	Cigarette	shipment	volume	of	Parliament	increased,	mainly	driven	by	Korea,	Turkey	and	Ukraine,	partly	offset	by	Japan	and	Russia.	Cigarette	shipment	volume of	Bond	Street	increased,	mainly	driven	by	Ukraine,	partly	offset	by	Kazakhstan.	Cigarette	shipment	volume	of	Philip	Morris	increased,	driven	mainly	by	Italy	and Russia,	 partly	 offset	 by	Argentina.	Cigarette	 shipment	 volume	 of	Lark	 decreased,	 principally	 due	 to	 Japan	 and	 Turkey.	Cigarette	 shipment	 volume	 of	 "Others" decreased,	mainly	due	to	local,	largely	low-margin	brands	in	Pakistan,	the	Philippines,	Russia	and	Ukraine.

Total	shipment	volume	of	heated	tobacco	units	reached	7.4	billion	units,	up	from	396	million	units	in	2015.

| 2016 | 2015 | $% |  |
| :--- | :--- | :--- | :--- |
| \t $74,953 | \t $73,908 | \t $1,045 | 1.4\t% |
| 48,268 | 47,114 | 1,154 | 2.4\t% |
| \t $26,685 | \t $26,794 | \t $(109) | (0.4)% |

Net	revenues,	which	include	excise	taxes	billed	to	customers,	increased	by	$1.0	billion.	Excluding	excise	taxes,	net	revenues	decreased	by	$109	million,	due	to:

•unfavorable currency ($1.3 billion) and

•unfavorable	 volume/mix ($450	 million),	 partly	 offset by

•price	increases	($1.6	billion).

The	unfavorable	currency	was	due	primarily	to	the	Argentine	peso,	Canadian	dollar,	Egyptian	pound,	Euro,	Kazakh	tenge,	Mexican	peso,	Philippine	peso,	Russian	ruble and	Turkish	lira,	partially	offset	by	the	Japanese	yen.

Net	revenues	include	$739	million	in	2016	related	to	sale	of	RRPs,	mainly	driven	by	Japan.	This	amount	includes	excise	taxes	billed	to	customers.	Excluding	excise taxes,	net	revenues	for	RRPs	were	$733	million	in	2016.	In	some	jurisdictions,	including	Japan,	we	are	not	responsible	for	collecting	excise	taxes.	Approximately	22%	of our	$733	million	in	2016	RRP	net	revenues,	excluding	excise	taxes,	were	from	IQOS	devices.

•higher	excise	taxes	resulting	from	changes	in	retail	prices	and	tax	rates	($5.3	billion),	partly	offset by

•lower excise taxes resulting from volume/mix ($236 million).

Marketing,	administration	and	research	costs	decreased	by	$251	million,	due	to:

•lower	expenses	($210	million,	driven	by	a	favorable	comparison	to	2015,	notably	related	to	cigarette	brand	building	and	business	optimization	initiatives, partly	offset	by	increased	support	behind	Reduced-Risk	Products)	and

•favorable currency ($41 million).

•lower	 marketing,	 administration	 and research	 costs ($210	 million) and

•the	non-recurrence	of	the	2015	pre-tax	charges	for	asset	impairment	and	exit	costs	($68	million),	partly	offset by

•unfavorable currency ($1.0 billion) and

•unfavorable volume/mix ($692 million).

Interest	expense,	net,	of	$891	million	decreased	by	$117	million,	due	primarily	to	lower	effective	interest	rates	on	debt	and	higher	interest	income.

Our	effective	tax	rate	decreased	by	0.1	percentage	point	to	27.9%.	The	2015	effective	tax	rate	was	unfavorably	impacted	by	changes	to	repatriation	assertions	on	certain foreign	subsidiary	historical	earnings	($58	million),	partially	offset	by	a	reduction	in	unrecognized	tax	benefits	of	$41	million	following	the	conclusion	of	the	IRS examinations	of	Altria	Group,	Inc.'s	consolidated	tax	returns	for	the	years	2007	and	2008	and	PMI's	consolidated	tax	returns	for	the	years	2009	through	2011.	Prior	to March	28,	2008,	PMI	was	a	wholly-owned	subsidiary	of	Altria	Group,	Inc.

Net	earnings	attributable	to	PMI	of	$7.0	billion	increased	by	$94	million	(1.4%).	This	increase	was	due	primarily	to	higher	operating	income	as	discussed	above,	and lower	interest	expense,	net.	Diluted	and	basic	EPS	of	$4.48	increased	by	1.4%.	Excluding	an	unfavorable	currency	impact	of	$0.46,	diluted	EPS	increased	by	11.8%.

# Operating	Results	by	Business	Segment

# Taxes,	Legislation,	Regulation	and	Other	Matters	Regarding	the	Manufacture,	Marketing,	Sale	and	Use	of	Tobacco	Products

The	tobacco	industry	and	our	business	face	a	number	of	challenges	that	may	adversely	affect	our	business,	volume,	results	of	operations,	cash	flows	and	financial position.	These	challenges,	which	are	discussed	below	and	in	"Cautionary	Factors	That	May	Affect	Future	Results,"	include:

•regulatory	restrictions	on	our	products,	including	restrictions	on	the	packaging,	marketing,	and	sale	of	tobacco	or	other	nicotine-containing	products	that	could reduce	our	competitiveness,	eliminate	our	ability	to	communicate	with	adult	consumers,	or	even	ban	certain	of	our	products;

•fiscal challenges, such as excessive excise tax increases and discriminatory tax structures;

•illicit trade	 in cigarettes and other tobacco products, including counterfeit, contraband and so-called "illicit 				whites";

•intense	 competition, including from non-tax paid volume by certain local manufacturers;

•pending	and	threatened	litigation	as	discussed	in	Item	8,	Note	18.	Contingencies;

•governmental

investigations.

Regulatory	Restrictions:	The	tobacco	industry	operates	in	a	highly	regulated	environment.	The	well-known	risks	of	smoking	have	led	regulators	to	impose	significant restrictions	and	high	excise	taxes	on	cigarettes.

We	support	a	comprehensive	regulatory	framework	for	tobacco	products	based	on	the	principle	of	harm	reduction,	including	mandated	health	warnings,	minimum	age laws,	restrictions	on	advertising,	and	public	place	smoking	restrictions.	We	also	support	regulatory	measures	that	help	reduce	illicit	trade.

Much	of	the	regulation	that	shapes	the	business	environment	in	which	we	operate	is	driven	by	the	World	Health	Organization's	("WHO")	Framework	Convention	on Tobacco	Control	("FCTC"),	which	entered	into	force	in	2005.	The	FCTC	is	the	first	international	public	health	treaty	and	has	as	its	main	objective	to	establish	a	global agenda	for	tobacco	regulation,	with	the	purpose	of	reducing	tobacco	use.	To	date,	180	countries	and	the	European	Union	are	Parties	to	the	FCTC.	The	treaty	requires Parties	to	have	in	place	various	tobacco	control	measures	and	recommends	others.	The	FCTC	governing	body,	the	Conference	of	the	Parties	("CoP"),	has	also	adopted non-binding	guidelines	and	policy	recommendations	related	to	certain	articles	of	the	FCTC	that	go	beyond	the	text	of	the	treaty.

We	have	opposed	certain	measures	and	continue	to	engage	in	a	dialogue	with	regulators	with	respect	to	those	measures	that	we	do	not	believe	would	protect	public health	and,	if	implemented,	could	disrupt	competition,	severely	limit	our	ability	to	market	and	sell	our	products	to	adult	smokers,	or	increase	illicit	trade.	Certain measures	are	discussed	in	more	detail	below.	It	is	not	possible	to	predict	whether	or	to	what	extent	measures	recommended	in	the	FCTC	guidelines	will	be	implemented.

Fiscal	Challenges:	Excessive	and	disruptive	excise,	sales	and	other	tax	increases	and	discriminatory	tax	structures	are	expected	to	continue	to	have	an	adverse	impact	on our	profitability,	due	to	lower	consumption	and	consumer	down-trading	to	non-premium,	discount,	other	low-price	or	low-taxed	combustible	tobacco	products	such	as fine	cut	tobacco	and	illicit	cigarettes.	In	addition,	in	certain	jurisdictions,	some	of	our	combustible	products	are	subject	to	tax	structures	that	discriminate	against premium-price	products	and	manufactured	cigarettes.	We	believe	that	such	tax	policies	undermine	public	health	by	encouraging	consumers	to	turn	to	illicit	trade,	and ultimately	undercut	government	revenue	objectives,	disrupt	the	competitive	environment,	and	encourage	criminal	activity.	Other	jurisdictions	have	imposed,	or	are seeking	to	impose,	levies	or	other	taxes	specifically	on	tobacco	companies,	such	as	taxes	on	revenues	and/or	profits.

EU	Tobacco	Products	Directive:	In	April	2014,	the	EU	adopted	the	text	of	a	significantly	revised	EU	Tobacco	Products	Directive	(TPD),	which	entered	into	force	in May	2016.	All	28	Member	States	and	Norway	have	adopted	laws	transposing	the	TPD.		The	TPD	sets	forth	a	comprehensive	set	of	regulatory	requirements	for	tobacco products,	including:

•health	warnings	covering	65%	of	the	front	and	back	panels	of	cigarette	packs,	with	an	option	for	Member	States	to	further	standardize	tobacco	packaging, including	the	introduction	of	plain	packaging;

•a	ban	on	characterizing	flavors	in	some	tobacco	products,	with	a	transition	period	for	menthol	expiring	in	May 2020;

•security	features	and	tracking	and	tracing	measures	that	will	become	effective	on	May	20,	2019,	and	will	increase	operational	expenses;

•a	framework	for	the	regulation	of	novel	tobacco	products	and	e-cigarettes,	including	requirements	for	health	warnings	and	information	leaflets,	a	prohibition	on product	 packaging	 text	 related	 to	 reduced	 risk,	 and	 the	 introduction	 of	 notification	 requirements	 or	 authorization	 procedures	 in	 advance	 of commercialization.

Plain	Packaging	and	Other	Packaging	Restrictions:	Plain	packaging	legislation	bans	the	use	of	branding,	logos	and	colors	on	packaging	other	than	the	brand	name	and variant	that	may	be	printed	only	in	specified	locations	and	in	a	uniform	font.	To	date,	Australia,	France,	Georgia,	Hungary,	Ireland,	New	Zealand,	Norway,	Slovenia	and the	U.K.	have	adopted	plain	packaging	laws,	which	are	in	various	degrees	of	implementation.

Several	countries	have	initiated	World	Trade	Organization	("WTO")	dispute	settlement	proceedings	against	Australia	related	to	Australia's	plain	packaging	legislation. The	matter	is	still	pending	before	the	WTO	panel.

Other	countries	are	also	considering	adopting	plain	packaging	legislation,	including,	but	not	limited	to,	Canada,	Singapore,	South	Africa	and	Turkey.

Some	countries	have	adopted,	or	are	considering	adopting,	packaging	restrictions	that	could	have	an	impact	similar	to	plain	packaging.	Examples	of	such	restrictions include	standardizing	the	shape	and	size	of	packages,	prohibiting	certain	colors	or	the	use	of	certain	descriptive	phrases	on	packaging,	and	requiring	very	large	graphic health	warnings	that	leave	little	space	for	branding.

Restrictions	and	Bans	on	the	Use	of	Ingredients:	The	WHO	and	others	in	the	public	health	community	have	recommended	restrictions	or	total	bans	on	the	use	of	some	or all	ingredients	in	tobacco	products,	including	menthol.	Broad	restrictions	and	ingredient	bans	would	require	us	to	reformulate	our	American	blend	tobacco	products	and could	reduce	our	ability	to	differentiate	these	products	in	the	market	in	the	long	term.	Menthol	bans	would	eliminate	the	entire	category	of	mentholated	tobacco	products. The	European	Union	has	banned	flavored	tobacco	products,	subject	to	an	exemption	until	May	2020	for	menthol.	Other	countries	may	follow	the	EU's	approach.	For instance,	Turkey	has	banned	menthol	as	of	May	2020.	Broader	ingredient	bans	have	been	adopted	by	Canada	and	Brazil.	While	the	Canadian	ingredient	ban	initially exempted	menthol,	amendments	to	the	federal	Tobacco	Act	banned	menthol	in	cigarettes	as	of	October	2017.	In	addition,	the	Canadian	parliament	is	considering	further amendments	to	the	Act	that	would	extend	the	menthol	ban	to	all	tobacco	products.	The	majority	of	Canadian	provinces	have	also	adopted	or	are	in	the	process	of adopting	menthol	bans.	The	Brazil	ingredients

ban,	which	would	prohibit	the	use	of	virtually	all	ingredients	with	flavoring	or	aromatic	properties,	is	not	in	force	due	to	a	legal	challenge	by	a	tobacco	industry	union,	of which	our	Brazilian	subsidiary	is	a	member.	Other	lawsuits	are	also	pending	against	the	Brazil	ingredients	ban.	It	is	not	possible	to	predict	the	outcome	of	these	legal proceedings.

Bans	on	Display	of	 Tobacco	 Products	 at	 Retail:	 In	 a	 number	 of	 our	 markets, including,	 but	 not	 limited	 to,	Australia,	 Canada,	 Norway,	 Russia,	 and	 Singapore, governments	have	banned	the	display	of	tobacco	products	at	the	point	of	sale.	Other	countries	are	also	considering	similar	bans.

Bans	and	Restrictions	on	Advertising,	Marketing,	Promotions	and	Sponsorships:	For	many	years,	the	FCTC	has	called	for,	and	countries	have	imposed,	partial	or	total bans	on	tobacco	advertising,	marketing,	promotions	and	sponsorships,	including	bans	and	restrictions	on	advertising	on	radio	and	television,	in	print	and	on	the	Internet. The	FCTC's	non-binding	guidelines	recommend	that	governments	prohibit	all	forms	of	communication	with	adult	smokers.

Restrictions	on	Product	Design:	Some	members	of	the	public	health	community	are	calling	for	the	further	standardization	of	tobacco	products	by	requiring,	for	example, that	cigarettes	have	a	certain	minimum	diameter,	which	would	amount	to	a	ban	on	slim	cigarettes,	or	requiring	the	use	of	standardized	filter	and	cigarette	paper	designs. In	addition,	at	its	meeting	in	November	2016,	the	CoP	adopted	non-binding	guidelines	recommending	that	countries	regulate	product	design	features	that	increase	the attractiveness	of	tobacco	products,	such	as	the	diameter	of	cigarettes	and	the	use	of	flavor	capsules.

Restrictions	on	Public	Smoking:	The	pace	and	scope	of	public	smoking	restrictions	have	increased	significantly	in	most	of	our	markets.	Many	countries	around	the	world have	adopted,	or	are	likely	to	adopt,	regulations	that	restrict	or	ban	smoking	in	public	and/or	work	places,	restaurants,	bars	and	nightclubs.	Some	public	health	groups have	called	for,	and	some	countries,	regional	governments	and	municipalities	have	adopted	or	proposed,	bans	on	smoking	in	outdoor	places,	as	well	as	bans	on	smoking in	cars	(typically,	when	minors	are	present)	and	private	homes.

Other	Regulatory	Issues:	Some	regulators	are	considering,	or	in	some	cases	have	adopted,	regulatory	measures	designed	to	reduce	the	supply	of	tobacco	products.	These include	regulations	intended	to	reduce	the	number	of	retailers	selling	tobacco	products	by,	for	example,	reducing	the	overall	number	of	tobacco	retail	licenses	available or	banning	the	sale	of	tobacco	products	within	arbitrary	distances	of	certain	public	facilities.

In	a	limited	number	of	markets,	most	notably	Japan,	we	are	dependent	on	governmental	approvals	that	may	limit	our	pricing	flexibility.

Illicit	Trade:	The	illicit	tobacco	trade	creates	a	cheap	and	unregulated	supply	of	tobacco	products,	undermines	efforts	to	reduce	smoking	prevalence,	especially	among youth,	damages	legitimate	businesses,	stimulates	organized	crime,	increases	corruption	and	reduces	government	tax	revenue.	Illicit	trade	may	account	for	as	much	as 10%	of	global	cigarette	consumption;	this	includes	counterfeit,	contraband	and	the	growing	problem	of	"illicit	whites,"	which	are	cigarettes	legally	produced	in	one jurisdiction	for	the	sole	purpose	of	being	exported	and	illegally	sold	in	another	jurisdiction	where	they	have	no	legitimate	market.	We	estimate	that	illicit	trade	in	the European	Union	accounted	for	slightly	less	than	10%	of	total	cigarette	consumption	in	2016.

A	number	of	jurisdictions	are	considering	actions	to	prevent	illicit	trade.	In	November	2012,	the	FCTC	adopted	the	Protocol	to	Eliminate	Illicit	Trade	in	Tobacco Products	(the	"Protocol"),	which	includes	supply	chain	control	measures,	such	as	licensing	of	manufacturers	and	distributors,	enforcement	in	free	trade	zones,	controls on	duty	free	and	Internet	sales	and	the	implementation	of	tracking	and	tracing	technologies.	To	date,	54	Parties	have	signed	the	Protocol,	and	35	Parties,	including	the European	Union,	have	ratified	it.	The	Protocol	will	come	into	force	once	the	fortieth	Party	ratifies	it,	after	which	countries	must	implement	its	measures	via	national legislation.	We	expect,	and	welcome,	that	other	Parties	will	ratify	the	Protocol.

As	discussed	 in	 the	EU	Tobacco	Products	Directive	section	above,	the	EU	regulations	that	mandate	tracking	and	tracing	of	cigarettes	and	roll-your-own	products manufactured	or	destined	for	the	EU	will	become	effective	on	May	20,	2019.	The	effective	date	for	other	tobacco-containing	products,	including	some	of	our	RRPs	such as	the	heated	tobacco	units	used	with	IQOS,	is	May	20,	2024.

In	2009,	our	Colombian	subsidiaries	entered	into	an	Investment	and	Cooperation	Agreement	with	the	national	and	regional	governments	of	Colombia	to	promote investment	in,	and	cooperation	on,	anti-contraband	and	anti-counterfeit	efforts.	The	agreement	provides	$200	million	in	funding	over	a	20-year	period	to	address	issues such	as	combating	the	illegal	cigarette	trade	and	increasing	the	quality	and	quantity	of	locally-grown	tobacco.

In	May	2016,	PMI	launched	PMI	IMPACT,	a	global	initiative	that	supports	third-party	projects	dedicated	to	fighting	illegal	trade	and	related	crimes	such	as	corruption, organized	criminal	networks	and	money	laundering.	The	centerpiece	of	PMI	IMPACT	is	a	council	of	external	independent	experts	with	impeccable	credentials	in	the fields	of	law,	anti-corruption	and	law	enforcement.	The	experts	are

responsible	for	evaluating	and	approving	funding	proposals	for	PMI	IMPACT	grants.	PMI	has	pledged	$100	million	to	fund	projects	within	PMI	IMPACT	over	three funding	rounds.	Substantially	all	grants	under	the	first	funding	round	were	awarded	in	2017.	The	second	funding	round	began	in	September	2017.

In	November	2016,	PMI	signed	a	joint	Declaration	of	Intent	to	Prevent	the	Maritime	Transportation	of	Counterfeit	Goods	together	with	eight	other	global	brand	owners and	five	of	the	world's	largest	shipping	companies.	This	commitment	was	a	result	of	a	dialogue	with	the	International	Chamber	of	Commerce's	Business	Action	to	Stop Counterfeiting	and	Piracy.	The	signatories	aim	to	tackle	the	infiltration	of	shipping	services	by	criminal	networks	that	exploit	vessels	to	transport	counterfeit	goods, including	"illicit	whites,"	across	the	oceans.

# Reduced-Risk	Products	(RRPs)

Our	Approach	to	RRPs:	We	recognize	that	smoking	cigarettes	causes	serious	diseases	and	that	the	best	way	to	avoid	the	harms	of	smoking	is	never	to	start	or	to	quit. Nevertheless,	it	is	predicted	that	over	the	next	decade	the	number	of	smokers	will	remain	largely	unchanged	from	the	current	estimate	of	1.1	billion,	despite	the considerable	efforts	to	discourage	smoking.

Cigarettes	burn	tobacco,	which	produces	smoke.	As	a	result	of	the	combustion	process,	the	smoker	inhales	various	toxic	substances.	In	contrast,	RRPs	do	not	burn tobacco	and	produce	an	aerosol	that	contains	significantly	lower	levels	of	harmful	and	potentially	harmful	constituents	("HPHCs")	than	found	in	cigarette	smoke.

For	smokers	who	would	otherwise	continue	to	smoke,	we	believe	that	RRPs	offer	a	much	better	consumer	choice.	Accordingly,	our	key	strategic	priorities	are:	to develop	and	commercialize	products	that	present	less	risk	of	harm	to	adult	smokers	who	switch	to	those	products	versus	continued	smoking;	and	to	convince	current adult	smokers	who	would	otherwise	continue	to	smoke	to	switch	to	those	products.

We	recognize	that	this	transformation	from	cigarettes	to	RRPs	will	take	time	and	that	the	speed	of	transformation	will	depend	in	part	upon	factors	beyond	our	control, such	as	the	willingness	of	governments,	regulators	and	other	policy	groups	to	embrace	RRPs	as	a	desired	alternative	to	continued	cigarette	smoking.	We	also	recognize that	our	part	in	this	transformation	must	be	funded	from	our	existing	cigarette	business.	For	as	long	as	a	significant	number	of	adult	smokers	continues	to	smoke,	it	is critical	that	the	industry	be	led	by	responsible	and	ethical	manufacturers.	Therefore,	during	the	transformation,	we	intend	to	remain	a	leading	international	cigarette manufacturer.

We	have	a	range	of	RRPs	in	various	stages	of	development,	scientific	assessment	and	commercialization.	We	conduct	rigorous	scientific	assessments	of	our	RRP platforms	to	substantiate	that	they	reduce	exposure	to	HPHCs	and,	ultimately,	that	these	products	present,	are	likely	to	present,	or	have	the	potential	to	present	less	risk of	harm	to	adult	smokers	who	switch	to	them	versus	continued	smoking.	We	draw	upon	a	team	of	expert	scientists	and	engineers	from	a	broad	spectrum	of	scientific disciplines	and	our	extensive	learnings	of	adult	consumer	preferences	to	develop	and	assess	our	RRPs.	Our	efforts	are	guided	by	the	following	key	objectives:

•to	 develop	 RRPs that	 adult	 smokers	 who	 would	 otherwise	 continue to	 smoke	 find to	 be	 satisfying	 alternatives to smoking;

•for	those	adult	smokers,	our	goal	is	to	offer	RRPs	with	a	scientifically	substantiated	risk-reduction	profile	that	approaches	as	closely	as	possible	that	associated with	smoking	cessation;

•to	substantiate	the	reduction	of	risk	for	the	individual	adult	smoker	and	the	reduction	of	harm	to	the	population	as	a	whole,	based	on	scientific	evidence	of	the highest	standard	that	is	made	available	for	scrutiny	and	review	by	external	independent	scientists	and	relevant	regulatory	bodies;	and

•to	advocate	for	the	development	of	science-based	regulatory	frameworks	for	the	development	and	commercialization	of	RRPs,	including	the	communication	of scientifically	substantiated	information	to	enable	adult	smokers	to	make	better	consumer	choices.

Our	RRP	Platforms:	Our	product	development	is	based	on	the	elimination	of	combustion	via	tobacco	heating	and	other	innovative	systems	for	aerosol	generation,	which we	believe	is	the	most	promising	path	to	providing	a	better	consumer	choice	for	those	who	would	otherwise	continue	to	smoke.	We	recognize	that	no	single	product	will appeal	to	all	adult	smokers.	Therefore,	we	are	developing	a	portfolio	of	products	intended	to	appeal	to	a	variety	of	distinct	adult	consumer	preferences.

# Four	RRP	platforms	are	in	various	stages	of	development	and	commercialization	readiness:

Platform	1	uses	a	precisely	controlled	heating	device	that	we	are	commercializing	under	the	IQOS	brand	name,	into	which	a	specially	designed	and	proprietary tobacco	unit	is	inserted	and	heated	to	generate	an	aerosol.	We	have	conducted	a	series	of	clinical	studies	for	this	platform,	the	results	of	which	were	included	in	our submission	to	the	U.S.	Food	and	Drug	Administration	("FDA")	described	below.	As	anticipated,	the	results	of	the	first	six-month	term	of	the	6+6	month	exposure response	study	were	received	at	the

end	of	2017,	and	the	related	report	is	under	preparation.	We	expect	to	submit	the	final	report	for	these	results	to	the	FDA	in	May	of	2018.	We	expect	to	receive	the results	of	the	second	six-month	term	of	the	study	for	analysis	in	the	second	quarter	of	2018.

				Platform	2	uses	a	pressed	carbon	heat	source	which,	when	ignited,	generates	an	aerosol	by	heating	tobacco.	The	results	of	our	pharmacokinetic	study	(that	measured the	nicotine	pharmacokinetic	profile	and	subjective	effects)	 and	 of	 our	 five-day	 reduced	 exposure	 study	 with	Platform	2	 indicate	 that	 this	 platform	 could	 be	 an acceptable	substitute	for	adult	smokers	who	seek	an	alternative	to	cigarettes.	Furthermore,	the	reduced	exposure	study	showed	a	substantial	reduction	in	relevant biomarkers	of	exposure	to	HPHCs	in	those	who	switched	to	Platform	2	compared	to	those	who	continued	to	smoke	cigarettes	over	a	five-day	period.	The	sustainability of	this	reduction	as	well	as	changes	in	clinical	risk	markers	were	assessed	in	a	3-month	reduced	exposure	study.	As	anticipated,	the	results	of	this	study	were	received	at the	end	of	2017,	and	the	related	report	is	under	preparation.	We	expect	the	report	to	be	finalized	in	the	second	quarter	of	2018.	Subsequently,	in	accordance	with standard	scientific	practices,	we	intend	to	share	the	conclusions	in	scientific	forums	and	to	submit	them	for	inclusion	in	peer-reviewed	publications.

				Platform	3	provides	an	aerosol	of	nicotine	salt	formed	by	the	chemical	reaction	of	nicotine	with	a	weak	organic	acid.	We	have	explored	two	routes	for	this	platform, one	with	electronics	and	one	without,	and	have	initiated	a	new	nicotine	pharmacokinetic	study.	We	expect	to	receive	the	results	for	analysis	in	the	second	quarter	of 2018.

				 Platform	4	covers	e-vapor	products,	which	are	battery-powered	devices	that	produce	an	aerosol	by	vaporizing	a	nicotine-containing	liquid	solution.	Our	e-vapor products	comprise	devices	using	current	generation	 technology,	and	we	are	well	advanced	 in	 the	development	and	commercialization	of	our	new	e-vapor	mesh technology	that	addresses	certain	challenges	presented	by	some	e-vapor	products	currently	on	the	market.	Our	MESH	products	are	designed	to	ensure	the	consistency and	quality	of	the	generated	aerosol.	We	have	initiated	a	nicotine	pharmacokinetic	study	for	which	we	expect	to	receive	the	results	for	analysis	in	the	second	quarter	of 2018;	the	results	of	this	study	are	expected	to	contribute	to	further	developments	of	Platform	4	products.

Commercialization	of	RRPs:	We	are	building	a	new	product	category	and	tailor	our	commercialization	strategy	to	the	characteristics	of	each	specific	market.	We	focus our	commercialization	efforts	on	retail	experience,	guided	consumer	trials	and	customer	care,	as	well	as	digital	communication	programs.	 	In	order	to	accelerate switching	 to	IQOS,	 our	 initial	 market	 introductions	 typically	 entail	 one-on-one	 consumer	 engagement	 and	 introductory	 device	 discounts. These	 initial commercialization	efforts	require	substantial	investment.

In	2014,	we	introduced	the	IQOS	system	in	pilot	city	launches	in	Nagoya,	Japan,	and	in	Milan,	Italy.	Since	then,	we	have	expanded	our	commercialization	activities	to include	all	of	Japan,	as	well	as	multiple	cities	in	Italy.	To	date,	IQOS	is	available	for	sale	in	key	cities	in	37	markets	and	nationwide	in	Japan.

On	the	basis	of	our	experience	in	Japan	and	Italy,	we	estimate	that	only	a	very	small	percentage	of	adult	smokers	who	convert	to	IQOS	switch	back	to	cigarettes.

In	the	first	quarter	of	2016,	we	started	the	large	scale	commercial	production	of	heated	tobacco	units.	During	2017,	we	experienced	supply	shortages	resulting	from stronger-than-anticipated	demand,	primarily	in	Japan.	Currently,	we	are	no	longer	experiencing	capacity	limitations.	We	are	integrating	the	production	of	our	heated tobacco	units	into	a	number	of	our	existing	manufacturing	facilities	and	progressing	with	our	plans	to	build	manufacturing	capacity	for	our	other	RRP	platforms.

In	2017,	we	secured	a	second	supplier	of	IQOS	devices.	We	are	no	longer	experiencing	supply	constraints	on	the	IQOS	devices	and,	based	on	demand	forecasts,	we expect	to	be	able	to	fully	supply	our	current	and	planned	launch	markets	with	such	devices.

The	adequate	supply	chain	for	our	RRP	portfolio,	including	the	supply	of	electronic	devices,	is	important	to	our	business.	We	work	with	two	electronics	manufacturing service	providers	for	the	supply	of	our	IQOS	devices	and	a	small	number	of	other	providers	for	other	products	in	our	RRP	portfolio	and	related	accessories.	Although	we work	closely	with	these	service	providers	on	monitoring	their	production	capability	and	financial	health,	the	commercialization	of	our	RRPs	could	be	adversely	affected if	they	are	unable	to	meet	their	commitments.	The	production	of	our	RRP	portfolio	requires	various	metals,	and	we	believe	that	there	is	an	adequate	supply	of	such metals	in	the	world	markets	to	satisfy	our	current	and	anticipated	production	requirements.	However,	some	components	and	materials	necessary	for	the	production	of our	RRPs,	including	those	for	the	electronic	devices,	are	obtained	from	single	or	limited	sources,	and	can	be	subject	to	industry-wide	shortages	and	price	fluctuations. Our	inability	to	secure	an	adequate	supply	of	such	components	and	materials	could	negatively	impact	the	commercialization	of	our	RRPs.

Our	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.	We discuss	product	warranties	in	more	detail	in	Note	5.	Product	Warranty.	The	significance	of	warranty	claims	is	dependent	on	a	number	of	factors	including	warranty policies	and	product	failure	rates	and	may	increase	with	the	number	of	devices	sold.

To	 further	 improve the	 consumer	 experience,	 we introduced	 a	 new	 version	 of the	IQOS	 device in the first	 quarter	 of	 2017	 and	 continue to	 develop	 product improvements.

We	are	also	progressing	with	our	commercialization	efforts	for	the	other	platforms:

•We	currently	market	our	e-vapor	products	in	several	markets,	including	Ireland,	Israel,	Spain	and	the	U.K.	A	city	test	of	MESH,	one	of	our	Platform	4	products, is	ongoing	in	Birmingham,	U.K.,	and	we	expect	to	initiate	a	pilot	launch	of	a	next-generation	version	of	this	product	in	2018.

•In	 December	 2017,	 we initiated	 a	 small-scale	 city test	 of	TEEPS,	 our	 Platform	 2	 product, in	 Santo	 Domingo, the	 Dominican Republic.

RRP	Regulation	and	Taxation:	RRPs	contain	nicotine	and	are	not	risk-free.	We	therefore	support	science-based	regulation	and	taxation	of	RRPs.	Regulation	and taxation	should	differentiate	between	cigarettes	and	products	that	present,	are	likely	to	present,	or	have	the	potential	to	present	less	risk	of	harm	to	adult	smokers	who switch	to	these	products	versus	continued	smoking.	Regulation	should	provide	minimum	standards	for	RRPs	and	specific	rules	for	product	assessment	methodologies, ingredients,	labelling	and	consumer	communication,	and	should	ensure	that	the	public	is	informed	about	the	health	risks	of	all	combustible	and	non-combustible	tobacco and	nicotine-containing	products.	Regulation,	as	well	as	tobacco	industry	activities,	should	reflect	the	fact	that	youth	should	not	consume	nicotine	in	any	form.

Some	governments	have	banned	or	are	seeking	to	ban	or	severely	restrict	emerging	tobacco	and	nicotine-containing	products	such	as	our	RRPs.	These	regulations	might foreclose	or	unreasonably	restrict	adult	consumer	access	even	to	products	that	might	be	shown	to	be	a	better	consumer	choice	than	continuing	to	smoke.	We	oppose	such blanket	bans	and	unreasonable	restrictions	of	products	that	have	the	potential	to	present	less	risk	of	harm	compared	to	continued	smoking.	By	contrast,	we	support regulation	that	sets	clear	standards	and	propels	innovation	to	benefit	adult	smokers	who	would	otherwise	continue	to	smoke.

In	the	United	States,	an	established	regulatory	framework	for	assessing	"Modified	Risk	Tobacco	Products"	and	"New	Tobacco	Products"	exists	under	the	jurisdiction	of the	 FDA.	We	submitted	to	the	FDA	a	Modified	Risk	Tobacco	Product	Application	("MRTPA")	for	 IQOS	in	December	2016,	and	a	Premarket	Tobacco	Product Application	("PMTA")	for	IQOS	in	March	2017.	In	May	2017,	the	FDA	formally	accepted	and	filed	our	MRTPA	for	substantive	scientific	review	and,	in	June	2017,	the FDA	opened	the	period	for	the	public	to	provide	comments	on	our	application.	In	August	2017,	the	FDA	completed	a	preliminary	review	of	our	PMTA	and	accepted	our application	for	substantive	review.	The	FDA	referred	our	MRTPA	to	the	Tobacco	Product	Scientific	Advisory	Committee	("TPSAC").	 TPSAC	held	a	meeting	on January	24	and	January	25,	2018	on	our	MRTPA.	The	recommendations	and	votes	of	TPSAC	are	not	binding	on	the	FDA.	 By	regulation,	the	FDA's	decision	on	our MRTPA	will	take	into	account,	in	addition	to	the	views	of	TPSAC,	scientific	evidence	as	well	as	comments,	data	and	information	submitted	by	interested	persons.

Separately,	on	July	28,	2017,	the	FDA	issued	a	policy	announcement	aiming	to	explore	the	potential	of	nicotine	reduction	in	cigarettes	in	conjunction	with	less	harmful products	that	deliver	nicotine	for	adults	who	choose	to	use	such	products.

Future	FDA	actions	may	influence	the	regulatory	approach	of	other	governments.

In	the	EU,	all	EU	Member	States	and	Norway	have	transposed	the	EU	Tobacco	Products	Directive,	including	the	provisions	on	novel	tobacco	products,	such	as	heated tobacco	units,	and	e-cigarettes.	Most	of	the	EU	Member	States	require	a	notification	submitted	six	months	before	the	intended	placing	on	the	market	of	a	novel	tobacco product,	while	some	require	pre-market	authorizations	for	the	introduction	of	such	products.	To	date,	we	have	filed	a	comprehensive	dossier	summarizing	our	scientific assessment	of	IQOS	in	22	Member	States.

On	December	12,	2017,	at	the	request	of	the	U.K.	Department	of	Health	and	Public	Health	England,	the	U.K.	Committee	on	Toxicity	published	its	assessment	of	the risk	of	heated	tobacco	products	relative	to	cigarette	smoking.	This	assessment	included	analysis	of	scientific	data	for	two	heated	tobacco	products,	one	of	which	was IQOS.	The	assessment	concluded	that,	while	still	harmful	to	health,	compared	with	the	known	risks	from	cigarettes,	heated	tobacco	products	are	probably	less	harmful. Subsequently,	 on	 February	 6,	 2018,	 Public	 Health	 England	 published	 a	 report	 stating	 that	 the	 available	 evidence	 suggests	 that	 heated	 tobacco	 products	 may	 be considerably	less	harmful	than	cigarettes	and	more	harmful	than	e-cigarettes.

We	make	our	scientific	findings	publicly	available	for	scrutiny	and	peer	review	through	several	channels,	including	our	websites.	From	time	to	time,	adult	consumers, competitors,	members	of	the	scientific	community,	and	others	inquire	into	our	scientific	methodologies,	challenge	our	scientific	conclusions	or	request	further	study	of certain	aspects	of	our	RRPs	and	their	health	effects.	We	are	committed	to	a	robust	and	open	scientific	debate	but	believe	that	such	debate	should	be	based	on	accurate and	reliable	scientific	information.	We	seek	to	provide	accurate	and	reliable	scientific	information	about	our	RRPs;	nonetheless,	we	may	not	be	able	to	prevent	third- party	dissemination	of	false,	misleading	or	unsubstantiated	information	about	these	products.

To	date,	we	have	been	largely	successful	in	demonstrating	to	regulators	that	our	RRPs	are	not	cigarettes,	and	as	such	they	are	generally	taxed	either	as	a	separate category	or	as	other	tobacco	products,	which	typically	yields	more	favorable	tax	rates	than	cigarettes.	Although	we	believe	that	this	is	sensible	from	the	public	health perspective,	we	cannot	guarantee	that	regulators	will	continue	this	approach.

There	can	be	no	assurance	that	we	will	succeed	in	our	efforts	to	replace	cigarettes	with	RRPs	or	that	regulation	will	allow	us	to	commercialize	RRPs	in	all	markets,	to communicate	scientifically	substantiated	risk-reduction	claims,	or	to	treat	RRPs	differently	from	cigarettes.

Our	RRP	Business	Development	Initiatives:	In	December	2013,	we	established	a	strategic	framework	with	Altria	Group,	Inc.	("Altria")	under	which	Altria	will	make available	its	e-vapor	products	exclusively	to	us	for	commercialization	outside	the	United	States,	and	we	will	make	available	two	of	our	RRPs	exclusively	to	Altria	for commercialization	in	the	United	States.	In	March	2015,	we	launched	Solaris,	a	Platform	4	e-vapor	product	licensed	from	Altria,	in	Spain.	In	December	2015,	we introduced	Solaris	in	Israel.

In	July	2015,	we	extended	the	strategic	framework	with	Altria	to	include	a	Joint	Research,	Development	and	Technology	Sharing	Agreement.	The	additional	agreement provides	the	framework	under	which	PMI	and	Altria	will	collaborate	to	develop	the	next	generation	of	e-vapor	products	for	commercialization	in	the	United	States	by Altria	and	in	markets	outside	the	United	States	by	PMI.	The	collaboration	between	PMI	and	Altria	in	this	endeavor	is	enabled	by	exclusive	technology	cross	licenses	and technical	information	sharing.	The	agreements	also	provide	for	cooperation	on	the	scientific	assessment	of,	and	for	the	sharing	of	improvements	to,	the	existing generation	of	licensed	products.

Other	Developments:	On	September	12,	2017,	we	announced	our	support	of	the	Foundation	for	a	Smoke-Free	World.	We	agreed	to	contribute	$80	million	per	year	over the	next	12	years,	as	specified	in	the	agreement.	We	made	an	initial	contribution	of	$4.5	million	in	2017	and	the	first	annual	contribution	of	$80	million	in	the	beginning of	 2018.	The	Foundation	is	an	independent	body	and	is	governed	by	its	independent	Board	of	Directors.	The	Foundation's	role,	as	set	out	in	its	corporate	charter, includes	funding	research	in	the	field	of	tobacco	harm	reduction,	encouraging	measures	that	reduce	the	harm	caused	by	smoking,	and	assessing	the	effect	of	reduced cigarette	consumption	on	the	industry	value	chain.

# Governmental	Investigations

From	time	to	time,	we	are	subject	to	governmental	investigations	on	a	range	of	matters.	We	describe	certain	matters	pending	in	Thailand	and	South	Korea	in	Item	8, Note	18.	Contingencies.

In	November	2010,	a	WTO	panel	issued	its	decision	in	a	dispute	relating	to	facts	that	arose	from	August	2006	between	the	Philippines	and	Thailand	concerning	a	series of	Thai	customs	and	tax	measures	affecting	cigarettes	imported	by	PM	Thailand	into	Thailand	(see	Item	8,	Note	18.	Contingencies	for	additional	information).	The	WTO panel	decision,	which	was	upheld	by	the	WTO	Appellate	Body,	concluded	that	Thailand	had	no	basis	to	find	that	PM	Thailand's	declared	customs	values	and	taxes	paid were	too	low,	as	alleged	by	the	DSI	in	2009.	The	decision	also	created	obligations	for	Thailand	to	revise	its	laws,	regulations,	or	practices	affecting	the	customs	valuation and	tax	treatment	of	future	cigarette	imports.	Thailand	agreed	in	September	2011	to	fully	comply	with	the	decision	by	October	2012.	The	Philippines	asserts	that	to	date Thailand	has	not	fully	complied	with	the	WTO	panel	decision.	The	Philippines	has	repeatedly	expressed	concerns	with	ongoing	investigations	by	Thailand	of	PM Thailand,	including	those	that	led	to	the	criminal	charges	described	in	Item	8,	Note	18.	Contingencies,	and	has	commenced	two	formal	proceedings	at	the	WTO	to challenge	criminal	charges	against	PM	Thailand	arguing	that	the	criminal	charges	appear	to	be	based	on	grounds	not	supported	by	WTO	customs	valuation	rules	and inconsistent	with	several	decisions	already	taken	by	Thai	Customs	and	other	Thai	governmental	agencies.

# Acquisitions	and	Other	Business	Arrangements

We	discuss	our	acquisitions	and	other	business	arrangements	in	Item	8,	Note	6.	Acquisitions	and	Other	Business	Arrangements	to	our	consolidated	financial	statements.

# Investments	in	Unconsolidated	Subsidiaries

We	discuss	our	investments	in	unconsolidated	subsidiaries	in	Item	8,	Note	4.	Investments	in	Unconsolidated	Subsidiaries	to	our	consolidated	financial	statements.

# Trade	Policy

We	are	subject	to	various	trade	restrictions	imposed	by	the	United	States	of	America	and	countries	in	which	we	do	business	("Trade	Sanctions"),	including	the	trade	and economic	sanctions	administered	by	the	U.S.	Department	of	the	Treasury's	Office	of	Foreign	Assets	Control	and	the	U.S.	Department	of	State.	It	is	our	policy	to	comply fully	with	these	Trade	Sanctions.

Tobacco	products	are	agricultural	products	under	U.S.	law	and	are	not	technological	or	strategic	in	nature.	From	time	to	time	we	make	sales	in	countries	subject	to	Trade Sanctions,	either	where	such	sanctions	do	not	apply	to	our	business	or	pursuant	to	exemptions	or	licenses.

To	our	knowledge,	none	of	our	commercial	arrangements	results	in	the	governments	of	any	country	identified	by	the	U.S.	government	as	a	state	sponsor	of	terrorism, nor	entities	controlled	by	those	governments,	receiving	cash	or	acting	as	intermediaries	in	violation	of	U.S.	laws.

We	do	not	sell	products	in	Iran,	Sudan,	North	Korea	and	Syria.	From	time	to	time,	we	explore	opportunities	to	sell	our	products	in	one	or	more	of	these	countries,	as permitted	by	law.

In	January	2018,	we	commenced	sales	of	cigarettes	in	Cuba,	as	permitted	by	law.

Certain	states	within	the	U.S.	have	enacted	legislation	permitting	state	pension	funds	to	divest	or	abstain	from	future	investment	in	stocks	of	companies	that	do	business with	certain	countries	that	are	sanctioned	by	the	U.S.	We	do	not	believe	such	legislation	has	had	a	material	effect	on	the	price	of	our	shares.

The	following	discussion	compares	operating	results	within	each	of	our	reportable	segments	for	2017	with	2016.

Unless	otherwise	stated,	references	to	total	industry,	total	market,	our	shipment	volume	and	our	market	share	performance	reflect	cigarettes	and	heated	tobacco	units.

| European	Union | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Net\trevenues | \t $27,580 | \t $27,129 | \t $451 | 1.7\t% |
| Excise\ttaxes\ton\tproducts | 19,262 | 18,967 | 295 | 1.6\t% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 8,318 | 8,162 | 156 | 1.9\t% |
| Operating\tcompanies\tincome | 3,775 | 3,994 | (219) | (5.5)% |

Net	revenues	increased	by	$451	million.	Excluding	excise	taxes,	net	revenues	increased	by	$156	million,	due	to:

•price increases ($156 million) and

•favorable	 currency ($45	 million),	 partially	 offset by

The	net	revenues	of	the	European	Union	segment	include	$320	million	in	2017	and	$62	million	in	2016	related	to	the	sale	of	RRPs.	Excluding	excise	taxes,	net	revenues for	RRPs	were	$269	million	in	2017	and	$57	million	in	2016.

Operating	companies	income	decreased	by	$219	million	during	2017.	This	decrease	was	due	primarily	to:

•higher	 marketing,	 administration	 and research	 costs ($223	 million,	 primarily related to increased investment	 behind reduced-risked products),

•unfavorable volume/mix ($119 million) and

•unfavorable	 currency ($43	 million),	 partly	 offset by

•lower manufacturing costs ($14 million).

# European	Union	-	Total	Market,	PMI	Shipment	&	Market	Share	Commentaries

The	estimated	total	market	in	the	European	Union	decreased	by	1.9%	to	492.1	billion	units.	Our	Regional	market	share	was	flat	at	38.3%,	with	gains	in	France,	Germany and	Poland	offset	by	declines	in	Italy	and	Spain.

Shipment	volume	and	market	share	performance	by	brand	for	cigarettes	and	heated	tobacco	units	are	shown	in	the	tables	below:

# European	Union	Shipment	Volume	by	Brand	(Million	Units)

|  | 2017 | Full-Year<br>2016 | Change |
| :--- | :--- | :--- | :--- |
| Cigarettes |  |  |  |
| Marlboro | 93,088 | 96,245 | (3.3)% |
| L&amp;M | 34,261 | 34,691 | (1.2)% |
| Chesterfield | 29,087 | 30,140 | (3.5)% |
| Philip\tMorris | 15,158 | 16,290 | (6.9)% |
| Others | 15,699 | 16,220 | (3.2)% |
| Total\tCigarettes | 187,293 | 193,586 | (3.3)% |
| Heated\tTobacco\tUnits | 1,889 | 224 | +100.0% |
| Total\tEuropean\tUnion | 189,182 | 193,810 | (2.4)% |

# European	Union	Market	Shares	by	Brand

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | p.p. |
| Marlboro | 18.8% | 19.0% | (0.2) |
| L&amp;M | 6.9% | 6.9% | — |
| Chesterfield | 6.0% | 5.9% | 0.1 |
| Philip\tMorris | 3.1% | 3.2% | (0.1) |
| HEETS | 0.3% | —% | 0.3 |
| Others | 3.2% | 3.3% | (0.1) |
| Total\tEuropean\tUnion | 38.3% | 38.3% | — |

Our	total	shipment	volume	decreased	by	2.4%	to	189.2	billion	units,	or	by	1.9%	excluding	estimated	net	inventory	movements,	notably	in	Italy	and	Spain.	The	decrease in	cigarette	shipment	volume	of	Marlboro	was	mainly	due	to	Greece,	Italy	and	Spain.	The	decrease	in	cigarette	shipment	volume	of	L&M	was	mainly	due	to	Germany, Romania	and	Spain,	partly	offset	by	France.	The	decrease	in	cigarette	shipment	volume	of	Chesterfield	was	mainly	due	to	Italy,	Portugal	and	Spain,	partly	offset	by Poland.	The	decrease	in	cigarette	shipment	volume	of	Philip	Morris	was	mainly	due	to	Italy.	The	decrease	in	cigarette	shipment	volume	of	"Others"	was	due	notably	to Muratti	in	Italy.

# European	Union	-	Key	Market	Commentaries

In	France,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 44.4 | 44.9 | (1.2)% |
| PMI\tShipments\t(million\tunits) | 19,264 | 19,247 | 0.1\t% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 27.1% | 26.4% | 0.7 |
| Philip\tMorris | 10.3% | 10.2% | 0.1 |
| Chesterfield | 3.0% | 3.1% | (0.1) |
| Others* | 2.8% | 2.7% | 0.1 |
| Total | 43.2% | 42.4% | 0.8 |

*Includes	heated	tobacco	units.

The	estimated	total	market	decreased	by	1.2%.	The	increase	in	our	shipment	volume	was	driven	by	higher	market	share,	notably	of	Marlboro,	reflecting	the	growth	of both	Marlboro	Red	and	Gold	in	30s	packs	launched	in	March	2017.

In	Germany,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 76.9 | 78.1 | (1.6)% |
| PMI\tShipments\t(million\tunits) | 28,575 | 28,958 | (1.3)% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 22.7% | 22.5% | 0.2 |
| L&amp;M | 11.5% | 11.6% | (0.1) |
| Chesterfield | 1.5% | 1.6% | (0.1) |
| Others* | 1.5% | 1.4% | 0.1 |
| Total | 37.2% | 37.1% | 0.1 |

The	estimated	total	market	decreased	 by	1.6%,	or	by	2.7%	excluding	the	net	impact	of	estimated	trade	inventory	movements,	mainly	reflecting	the	impact	of	price increases	in	March	2017.	The	decrease	in	our	shipment	volume	was	mainly	due	to	the	lower	total	market,	partly	offset	by	higher	market	share.

In	Italy,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 69.8 | 72.1 | (3.2)% |
| PMI\tShipments\t(million\tunits) | 36,767 | 38,744 | (5.1)% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 23.9% | 24.3% | (0.4) |
| Chesterfield | 11.3% | 11.5% | (0.2) |
| Philip\tMorris | 7.7% | 8.5% | (0.8) |
| HEETS | 0.7% | 0.1% | 0.6 |
| Others | 8.6% | 8.1% | 0.5 |
| Total | 52.2% | 52.5% | (0.3) |

The	estimated	total	market	decreased	by	3.2%,	partly	reflecting	the	implementation	of	the	Tobacco	Product	Directive's	ban	on	pack	sizes	of	ten	cigarettes	at	the	end	of 2016.	The	decline	of	our	shipments,	down	by	3.6%	excluding	the	net	impact	of	distributor	inventory	movements,	mainly	reflected	the	lower	total	market,	as	well	as lower	cigarette	market	share,	principally	due	to	Marlboro,	partly	reflecting	the	ban	on	pack	sizes	of	ten	cigarettes,	and	low-price	Philip	Morris,	impacted	by	the	growth of	the	super-low	price	segment,	partly	offset	by	HEETS	and	Merit	in	"Others."

In	Poland,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 41.7 | 41.3 | 0.9% |
| PMI\tShipments\t(million\tunits) | 17,784 | 17,485 | 1.7% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 10.7% | 11.6% | (0.9) |
| L&amp;M | 18.4% | 18.5% | (0.1) |
| Chesterfield | 10.4% | 9.1% | 1.3 |
| HEETS | 0.2% | —% | 0.2 |
| Others | 3.0% | 3.1% | (0.1) |
| Total | 42.7% | 42.3% | 0.4 |

The	estimated	total	market	increased	by	0.9%.	The	increase	in	our	shipment	volume	was	primarily	driven	by	the	higher	total	market	and	higher	market	share,	driven	by Chesterfield,	benefiting	from	brand	support,	partly	offset	by	Marlboro,	reflecting	pressure	from	competitive	brands	in	the	below	premium	segment.

In	Spain,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 45.0 | 46.7 | (3.5)% |
| PMI\tShipments\t(million\tunits) | 14,456 | 16,374 | (11.7)% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 16.5% | 18.0% | (1.5) |
| L&amp;M | 5.3% | 5.4% | (0.1) |
| Chesterfield | 8.6% | 8.6% | — |
| Others* | 1.9% | 1.9% | — |
| Total | 32.3% | 33.9% | (1.6) |

The	estimated	total	market	decreased	by	3.5%,	or	by	2.5%	excluding	the	net	impact	of	estimated	trade	inventory	movements.	The	decline	of	our	shipment	volume,	down by	8.0%	excluding	the	net	impact	of	distributor	inventory	movements,	mainly	reflected	the	lower	total	market,	and	lower	market	share,	due	to	Marlboro,	reflecting	the impact	of	price	increases,	particularly	above	the	round	€5.00	per	pack	price	point	in	the	vending	channel,	as	well	as	a	challenging	comparison	with	2016	in	which	the market	share	of	Marlboro	grew	by	1.0	point.

# Eastern	Europe,	Middle	East	&	Africa:

| Eastern	Europe,	Middle	East	&amp;	Africa | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Net\trevenues | \t $18,045 | \t $18,286 | \t $(241) | (1.3)% |
| Excise\ttaxes\ton\tproducts | 11,346 | 11,286 | 60 | 0.5\t% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 6,699 | 7,000 | (301) | (4.3)% |
| Operating\tcompanies\tincome | 2,888 | 3,016 | (128) | (4.2)% |

Net	revenues	decreased	by	$241	million.	Excluding	excise	taxes,	net	revenues	decreased	by	$301	million,	due	to:

The	net	revenues	of	the	Eastern	Europe,	Middle	East	&	Africa	segment	include	$158	million	in	2017	and	$9	million in	2016	related	to	the	sale	of	RRPs.	Excluding excise	taxes,	net	revenues	for	RRPs	were	$149	million	in	2017	and	$9	million	in	2016.

•higher	marketing,	administration	and	research	costs	($201	million),	partly	offset by

# Eastern	Europe,	Middle	East	&	Africa	-	Total	Market,	PMI	Shipment	&	Market	Share	Commentaries

# EEMA	PMI	Shipment	Volume	by	Brand	(Million	Units)

|  | 2017 | Full-Year<br>2016 | Change |
| :--- | :--- | :--- | :--- |
| Cigarettes |  |  |  |
| Marlboro | 70,122 | 73,818 | (5.0)% |
| L&amp;M | 46,923 | 52,183 | (10.1)% |
| Bond\tStreet | 36,336 | 42,553 | (14.6)% |
| Parliament | 33,299 | 33,940 | (1.9)% |
| Philip\tMorris | 19,086 | 2,058 | +100.0% |
| Others | 50,391 | 66,841 | (24.6)% |
| Total\tCigarettes | 256,157 | 271,393 | (5.6)% |
| Heated\tTobacco\tUnits | 1,581 | 100 | +100.0% |
| Total\tEEMA | 257,738 | 271,493 | (5.1)% |

The	estimated	total	market	in	EEMA	decreased	by	2.8%	to	1.0	trillion	units.	Our	Regional	market	share	decreased	by	0.3	points	to	24.9%.

Our	total	shipment	volume	decreased	by	5.1%	to	257.7	billion	units,	mainly	reflecting:	lower	cigarette	shipment	volume	in	Russia,	Saudi	Arabia	-	where	our	cigarette shipment	volume	declined	by	35.8%,	impacted	by	the	new	excise	tax	implemented	in	June	2017	that	resulted	in	the	doubling	of	retail	prices	-	and	Ukraine;	partly	offset by	higher	cigarette	shipment	volume	in	North	Africa,	notably	Algeria,	and	higher	heated	tobacco	unit	shipment	volume.	The	decrease	in	cigarette	shipment	volume	of Marlboro	was	predominantly	due	to	Saudi	Arabia,	reflecting	the	impact	of	the	excise	tax	that	resulted	in	the	doubling	of	the	brand's	retail	price	from	SAR	12	to	SAR	24 per	pack,	partly	offset	by	North	Africa,	mainly	Algeria	and	Egypt,	and	Turkey.	 The	decrease	in	cigarette	shipment	volume	of	L&M	was	mainly	due	to	Russia,	Saudi Arabia	and	Turkey,	partly	offset	by	Algeria	and	Kazakhstan.	 The	decrease	in	cigarette	shipment	volume	of	Bond	Street	was	mainly	due	to	Kazakhstan,	Russia	and Ukraine.	The	decrease	in	cigarette	shipment	volume	of	Parliament	was	mainly	due	to	Russia	and	Saudi	Arabia,	partly	offset	by	Kazakhstan.	The	increase	in	cigarette shipment	volume	of	Philip	Morris	was	driven	mainly	by	Russia	and	Ukraine,	largely	reflecting	successful	portfolio	consolidation	of	local,	low-price	brands	in	"Others."

# Eastern	Europe,	Middle	East	&	Africa	-	Key	Market	Commentaries

In	North	Africa	(defined	as	Algeria,	Egypt,	Libya,	Morocco	and	Tunisia),	estimated	cigarette	industry	size,	our	cigarette	shipment	volume	and	cigarette	market	share performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 144.9 | 142.3 | 1.9% |
| PMI\tCigarette\tShipments\t(million\tunits) | 35,085 | 34,035 | 3.1% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 9.3% | 8.3% | 1.0 |
| L&amp;M | 11.8% | 12.2% | (0.4) |
| Others | 2.9% | 2.7% | 0.2 |
| Total | 24.0% | 23.2% | 0.8 |

The	estimated	total	cigarette	market	increased	by	1.9%,	mainly	driven	by	Egypt,	partially	offset	by	Tunisia.	The	increase	in	our	cigarette	shipment	volume	was	mainly driven	by	the	higher	cigarette	market,	as	well	as	higher	cigarette	market	share,	notably	of	Marlboro	in	Algeria,	partly	offset	by	L&M	in	Egypt.

In	Russia,	estimated	industry	size	and	our	shipment	volume,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.	Our	market	share	performance, as	measured	by	Nielsen	and	shown	in	the	table	below,	reflects	that	of	cigarettes.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 260.0 | 280.0 | (7.2)% |
| PMI\tShipments\t(million\tunits) | 72,417 | 79,706 | (9.1)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 1.5% | 1.4% | 0.1 |
| Parliament | 3.5% | 3.8% | (0.3) |
| Bond\tStreet | 8.6% | 8.4% | 0.2 |
| Philip\tMorris | 4.3% | 0.2% | 4.1 |
| Others | 9.2% | 13.4% | (4.2) |
| Total | 27.1% | 27.2% | (0.1) |

The	estimated	total	market	decreased	by	7.2%,	reflecting	the	impact	of	excise	tax-driven	price	increases	and	an	increase	in	the	prevalence	of	illicit	trade.	The	decline	of our	shipment	volume	was	mainly	due	to	the	lower	total	market.	Our	market	share	decreased	by	0.1	point.	The	decline	of	"Others"	largely	reflected	the	successful portfolio	consolidation	of	local,	low-price	brands	into	Philip	Morris.

In	Turkey,	estimated	cigarette	industry	size,	our	cigarette	shipment	volume	and	cigarette	market	share	performance,	as	measured	by	Nielsen,	are	shown	in	the	table below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 106.2 | 105.5 | 0.7% |
| PMI\tCigarette\tShipments\t(million\tunits) | 49,649 | 49,624 | 0.1% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 10.2% | 10.2% | — |
| Parliament | 11.5% | 11.7% | (0.2) |
| Lark | 6.9% | 7.4% | (0.5) |
| Others | 14.7% | 15.0% | (0.3) |
| Total | 43.3% | 44.3% | (1.0) |

The	estimated	total	cigarette	market	increased	by	0.7%.	Excluding	the	net	impact	of	estimated	trade	inventory	movements,	the	estimated	total	cigarette	market	declined by	1.6%.	The	decrease	in	our	cigarette	market	share,	as	measured	by	Nielsen,	was	mainly	due	to	Lark,	and	L&M	and	Muratti	in	"Others,"	partly	offset	by	Chesterfield, principally	reflecting	competitive	pressure	from	super-low	price	alternatives.

In	Ukraine,	estimated	industry	size	and	our	shipment	volume,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.	Our	market	share	performance, as	measured	by	Nielsen	and	shown	in	the	table	below,	reflects	that	of	cigarettes.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 67.1 | 73.1 | (8.2)% |
| PMI\tShipments\t(million\tunits) | 19,356 | 22,022 | (12.1)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 3.0% | 3.1% | (0.1) |
| Parliament | 3.2% | 2.9% | 0.3 |
| Bond\tStreet | 8.4% | 10.0% | (1.6) |
| Philip\tMorris | 3.1% | —% | 3.1 |
| Others | 9.6% | 13.2% | (3.6) |
| Total | 27.3% | 29.2% | (1.9) |

The	estimated	total	market	decreased	by	8.2%,	mainly	due	to	the	impact	of	price	increases	and	an	increase	in	the	prevalence	of	illicit	trade.	The	decrease	in	our	shipment volume	was	primarily	due	to	the	lower	total	market,	as	well	as	lower	cigarette	market	share,	as	measured	by	Nielsen,	notably	of	low-price	Bond	Street,	reflecting competitive	pressure	from	lower-priced	alternatives,	partly	offset	by	Parliament	and	Philip	Morris,	following	the	successful	portfolio	consolidation	of	a	local,	low-price brand	in	"Others."

# Asia:

| Asia | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Net\trevenues | \t $22,635 | \t $20,531 | \t $2,104 | 10.2\t% |
| Excise\ttaxes\ton\tproducts | 11,845 | 11,850 | (5) | —\t% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 10,790 | 8,681 | 2,109 | 24.3\t% |
| Operating\tcompanies\tincome | 4,149 | 3,196 | 953 | 29.8\t% |

Net	revenues	increased	by	$2.1	billion.	Excluding	excise	taxes,	net	revenues	increased	by	$2.1	billion,	due	to:

•favorable volume/mix ($1.7 billion) and

•price increases ($559	 million),	 partly	 offset by

The	net	revenues	of	the	Asia	segment	include	$3.3	billion	in	2017	and	$666	million	in	2016	related	to	the	sale	of	RRPs,	mainly	driven	by	Japan	and	Korea	in	2017	and Japan	in	2016.	Excluding	excise	taxes,	net	revenues	for	RRPs	were	$3.2	billion	in	2017	and	$666	million	in	2016.	In	some	jurisdictions,	including	Japan,	we	are	not responsible	for	collecting	excise	taxes.

Operating	companies	income	increased	by	$953	million	during	2017.	This	increase	was	due	primarily	to:

•favorable volume/mix ($622 million),

•price increases ($559 million)

•lower	 manufacturing	 costs	 ($40	million),	 partly	 offset

•higher	marketing,	administration	and	research	costs	($141	million,	principally	related	to	increased	investment	behind	reduced-risk	products) and

•unfavorable currency ($123

million).

# Asia	-	Total	Market,	PMI	Shipment	&	Market	Share	Commentaries

# Asia	PMI	Shipment	Volume	by	Brand	(Million	Units)

|  | 2017 | Full-Year<br>2016 | Change |
| :--- | :--- | :--- | :--- |
| Cigarettes |  |  |  |
| Marlboro | 73,446 | 76,463 | (3.9)% |
| Lark | 14,474 | 17,600 | (17.8)% |
| Parliament | 9,224 | 10,142 | (9.1)% |
| Others | 137,109 | 155,824 | (12.0)% |
| Total\tCigarettes | 234,253 | 260,029 | (9.9)% |
| Heated\tTobacco\tUnits | 32,729 | 7,070 | +100.0% |
| Total\tAsia | 266,982 | 267,099 | —\t% |

The	estimated	total	market	in	Asia,	excluding	China,	decreased	by	3.1%	to	1.1	trillion	units.	Our	Regional	market	share,	excluding	China,	was	flat	at	23.8%.

Our	total	shipment	volume	of	267.0	billion	units	was	flat,	mainly	reflecting:	lower	cigarette	shipment	volume	in	Indonesia,	Japan,	Korea,	Pakistan	-	impacted	by	excise tax-driven	price	increases	in	2017	and	an	increase	in	the	prevalence	of	illicit	trade	-	and	the	Philippines,	fully	offset	by	higher	heated	tobacco	unit	shipment	volume, mainly	in	Japan	and	Korea.	The	decrease	in	cigarette	shipment	volume	of	Marlboro	was	mainly	due	to	Japan	and	Korea,	primarily	reflecting	out-switching	to	heated tobacco	products,	partly	offset	by	Indonesia	and	the	Philippines.	The	decrease	in	cigarette	shipment	volume	of	Lark	was	principally	due	to	Japan.	The	decrease	in cigarette	shipment

volume	 of	Parliament	was	mainly	due to	Japan	and	Korea.	The	decrease	in	cigarette	shipment	volume	of	"Others"	was	mainly	due	to	local,	low-price	brands	in Indonesia,	Pakistan	and	the	Philippines.

Our	total	shipment	volume	benefited	from	the	favorable	net	impact	of	estimated	combustible	and	heated	tobacco	unit	inventory	movements,	which	were	driven	by approximately	8.5	billion	units	net	in	Japan,	reflecting:	the	increasing	demand	for	HeatSticks,	anticipated	to	further	increase	in	the	first	quarter	of	2018	following	a planned	lifting	of	the	restriction	on	IQOS	device	sales;	the	establishment	of	appropriate	distributor	inventory	levels	of	heated	tobacco	units,	given	the	current	high dependence	on	a	single	manufacturing	center;	and	the	transition	from	air	freight	to	sea	freight	of	heated	tobacco	units,	largely	completed	in	the	fourth	quarter	of	2017. Excluding	the	impact	of	total	estimated	net	inventory	movements,	our	total	shipment	volume	decreased	by	3.1%.

# Asia	-	Key	Market	Commentaries

In	Indonesia,	estimated	cigarette	industry	size,	our	cigarette	shipment	volume,	cigarette	market	share	and	segmentation	performance	are	shown	in	the	tables	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 307.4 | 315.6 | (2.6)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 101,324 | 105,524 | (4.0)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Sampoerna\tA | 13.8% | 14.0% | (0.2) |
| Dji\tSam\tSoe | 7.4% | 6.5% | 0.9 |
| Sampoerna\tU | 4.1% | 5.2% | (1.1) |
| Others | 7.7% | 7.7% | — |
| Total | 33.0% | 33.4% | (0.4) |

|  | 2017 | 2016 | p.p. |
| :--- | :--- | :--- | :--- |
| Segment\t%\tof\tTotal\tMarket |  |  |  |
| Hand-Rolled\tKretek\t(SKT) | 17.6% | 18.2% | (0.6) |
| Machine-Made\tKretek\t(SKM) | 77.2% | 75.8% | 1.4 |
| Whites\t(SPM) | 5.2% | 6.0% | (0.8) |
| Total | 100.0% | 100.0% | — |
| PMI\t%\tShare\tof\tSegment |  |  |  |
| Hand-Rolled\tKretek\t(SKT) | 37.5% | 37.3% | 0.2 |
| Machine-Made\tKretek\t(SKM) | 29.4% | 28.9% | 0.5 |
| Whites\t(SPM) | 70.2% | 79.5% | (9.3) |

The	estimated	total	cigarette	market	decreased	by	2.6%,	reflecting	a	soft	economic	environment	and	the	impact	of	above-inflation	excise	tax-driven	price	increases.	The decrease	in	our	shipments	was	mainly	due	to	the	lower	total	market	and	lower	cigarette	market	share,	notably	due	to	a	decline	of	Sampoerna	U,	reflecting	the	impact	of price	increases,	partly	offset	by	a	growth	of	Dji	Sam	Soe,	driven	by	the	variant	Magnum	Mild.

In	Japan,	our	shipments	reflect	cigarette	and	heated	tobacco	unit	volume.		The	estimated	total	market	and	our	market	share	reflect	total	industry	cigarette	and	heated tobacco	unit	volume.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 171.5 | 179.0 | (4.2)% |
| PMI\tShipments\t(million\tunits) |  |  |  |
| Cigarettes | 34,853 | 43,915 | (20.6)% |
| Heated\tTobacco\tUnits | 31,291 | 7,069 | +100% |
| Total | 66,144 | 50,985 | 29.7\t% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 9.3% | 10.6% | (1.3) |
| HeatSticks | 10.8% | 2.9% | 7.9 |
| Parliament | 2.1% | 2.3% | (0.2) |
| Lark | 8.6% | 9.6% | (1.0) |
| Others | 1.3% | 1.7% | (0.4) |
| Total | 32.1% | 27.1% | 5.0 |

The	estimated	total	market	decreased	 by	4.2%.	Our	shipment	volume	increased	by	13.1%,	excluding	the	net	impact	of	estimated	cigarette	and	heated	tobacco	unit distributor	inventory	movements,	driven	by	higher	market	share	of	HeatSticks.

In	Korea,	our	shipments	reflect	cigarette	and	heated	tobacco	unit	volume.		The	estimated	total	market	and	our	market	share	reflect	total	industry	cigarette	and	heated tobacco	unit	volume.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 70.6 | 73.6 | (4.1)% |
| PMI\tShipments\t(million\tunits) |  |  |  |
| Cigarettes | 13,499 | 15,490 | (12.9)% |
| Heated\tTobacco\tUnits | 1,438 | — | —\t% |
| Total | 14,937 | 15,490 | (3.6)% |
| PMI\tMarket\tShare |  |  |  |
| Marlboro | 8.7% | 9.6% | (0.9) |
| Parliament | 8.0% | 7.9% | 0.1 |
| HEETS | 2.0% | —% | 2.0 |
| Virginia\tS. | 2.0% | 3.0% | (1.0) |
| Others | 0.5% | 0.5% | — |
| Total | 21.2% | 21.0% | 0.2 |

The	estimated	total	market	decreased	by	4.1%,	or	by	3.3%	excluding	the	net	impact	of	estimated	cigarette	trade	inventory	movements.	The	decrease	in	our	shipment volume	was	due	to	the	lower	total	market,	partly	offset	by	higher	market	share	driven	by	the	May	2017	launch	of	HEETS.

In	the	Philippines,	estimated	cigarette	industry	size,	our	cigarette	shipment	volume	and	cigarette	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 74.9 | 79.3 | (5.6)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 50,618 | 56,611 | (10.6)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 33.0% | 28.4% | 4.6 |
| Fortune | 18.0% | 23.4% | (5.4) |
| Jackpot | 6.1% | 7.9% | (1.8) |
| Others | 10.5% | 11.6% | (1.1) |
| Total | 67.6% | 71.3% | (3.7) |

The	decline	of	the	estimated	total	cigarette	market	of	6.7%	excluding	the	net	impact	of	estimated	trade	inventory	movements,	was	mainly	due	to	the	impact	of	excise	tax- driven	price	increases.	The	decline	in	our	cigarette	shipment	volume	was	due	to	the	lower	total	cigarette	market,	as	well	as	lower	cigarette	market	share,	particularly	of our	low	and	super-low	price	brands	as	a	result	of	the	timing	of	competitors'	price	increases,	which	initially	widened	the	price	gaps	to	our	principal	competitor's discounted	brands,	partly	offset	by	Marlboro,	which	benefited	from	in-switching	from	lower-priced	brands.

| Latin	America	&amp;	Canada | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2017 | 2016 | $% |  |
| Net\trevenues | \t $9,838 | \t $9,007 | \t $831 | 9.2% |
| Excise\ttaxes\ton\tproducts | 6,897 | 6,165 | 732 | 11.9% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 2,941 | 2,842 | 99 | 3.5% |
| Operating\tcompanies\tincome | 1,002 | 938 | 64 | 6.8% |

•price increases ($307	 million),	 partly	 offset by

The	net	revenues	of	the	Latin	America	&	Canada	segment	include	$5	million	in	2017	related	to	the	sale	of	RRPs.	Excluding	excise	taxes,	net	revenues	for	RRPs	were	$4 million	in	2017.

•unfavorable currency ($70 million) and

# Latin	America	&	Canada	-	Total	Market,	PMI	Shipment	&	Market	Share	Commentaries

# Latin	America	&	Canada	PMI	Shipment	Volume	by	Brand	(Million	Units)

| Latin	America	&amp;	Canada	PMI	Shipment	Volume	by	Brand	(Million	Units) | Latin	America	&amp;	Canada	PMI	Shipment	Volume	by	Brand	(Million	Units) | Latin	America	&amp;	Canada	PMI	Shipment	Volume	by	Brand	(Million	Units) |  |
| :--- | :--- | :--- | :--- |
|  | 2017 | Full-Year\n2016 | Change |
| Cigarettes |  |  |  |
| Marlboro | 33,711 | 35,194 | (4.2)% |
| Philip\tMorris | 13,320 | 16,463 | (19.1)% |
| Chesterfield | 9,852 | 2,626 | +100.0% |
| Others | 27,340 | 33,655 | (18.8)% |
| Total\tCigarettes | 84,223 | 87,938 | (4.2)% |
| Heated\tTobacco\tUnits | 27 | — | —\t% |
| Total\tLatin\tAmerica\t&amp;\tCanada | 84,250 | 87,938 | (4.2)% |

The	estimated	total	market	in	Latin	America	&	Canada	decreased	by	3.8%	to	213.0	billion	units.	Our	Regional	market	share	decreased	by	0.1	point	to	39.6%.

Our	total	shipment	volume	decreased	by	4.2%	to	84.3	billion	units,	mainly	due	to	lower	cigarette	shipment	volume	in	Argentina,	Brazil,	Canada,	Colombia	and	Mexico. The	decrease	in	cigarette	shipment	volume	of	Marlboro	was	mainly	due	to	Argentina	and	Brazil.	The	decrease	in	cigarette	shipment	volume	of	Philip	Morris	was	mainly due	to	Argentina.	The	increase	in	cigarette	shipment	volume	of	Chesterfield	was	driven	by	Argentina,	Brazil,	Colombia	and	Venezuela,	partly	offset	by	Mexico.	The decrease	 in	 cigarette	 shipment	 volume	 of	"Others"	 was	 principally	 due	 to	 mainly	 local	 brands	 in	Argentina,	 Brazil,	 Colombia	 and	Venezuela,	 largely	 reflecting successful	brand	portfolio	consolidation,	Canada	and	Mexico.

# Latin	America	&	Canada	-	Key	Market	Commentaries

In	Argentina,	estimated	cigarette	industry	size,	our	cigarette	shipment	volume	and	cigarette	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 36.2 | 36.1 | 0.2\t% |
| PMI\tCigarette\tShipments\t(million\tunits) | 27,002 | 27,512 | (1.9)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 20.0% | 22.4% | (2.4) |
| Chesterfield | 15.9% | 5.5% | 10.4 |
| Philip\tMorris | 33.0% | 41.6% | (8.6) |
| Others | 5.8% | 6.8% | (1.0) |
| Total | 74.7% | 76.3% | (1.6) |

The	estimated	total	cigarette	market	increased	by	0.2%,	reflecting	higher	tax	declarations	by	local	manufacturers,	as	well	as	a	favorable	comparison	to	the	full	year	2016, which	declined	by	11.6%	mainly	due	to	the	impact	of	tax-driven	price	increases.	The	decrease	in	our	cigarette	shipment	volume	was	mainly	due	to	lower	cigarette	market share,	reflecting	the	growth	of	the	low	price	segment,	where	local	manufacturers	are	exempt	from	paying	minimum	excise	tax,	resulting	in	widened	price	gaps	with premium	Marlboro	and	mid-price	Philip	Morris,	partly	offset	by	low-price	Chesterfield	that	benefited	from	successful	brand	portfolio	consolidation	of	a	low-price brand	in	"Others."

In	Canada,	estimated	industry	size,	our	shipment	volume	and	market	share	performance,	shown	in	the	table	below,	include	cigarettes	and	our	heated	tobacco	units.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tMarket\t(billion\tunits) | 24.6 | 26.3 | (6.3)% |
| PMI\tShipments\t(million\tunits) | 9,259 | 10,049 | (7.9)% |
| PMI\tMarket\tShare |  |  |  |
| Belmont | 4.1% | 3.7% | 0.4 |
| Canadian\tClassics | 9.5% | 10.2% | (0.7) |
| Next | 11.5% | 11.3% | 0.2 |
| Others* | 12.2% | 13.2% | (1.0) |
| Total | 37.3% | 38.4% | (1.1) |

The	estimated	total	market	decreased	by	6.3%,	mainly	due	to	the	impact	of	price	increases.	The	decrease	in	our	shipment	volume	mainly	reflected	the	lower	total	market, as	well	as	lower	cigarette	market	share,	unfavorably	impacted	by	estimated	net	trade	inventory	movements.

In	Mexico,	estimated	cigarette	industry	size,	our	cigarette	shipment	volume	and	cigarette	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 35.8 | 36.2 | (1.1)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 24,351 | 25,080 | (2.9)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 49.4% | 49.0% | 0.4 |
| Delicados | 8.3% | 9.7% | (1.4) |
| Benson\t&amp;\tHedges | 5.0% | 4.7% | 0.3 |
| Others | 5.4% | 5.9% | (0.5) |
| Total | 68.1% | 69.3% | (1.2) |

The	estimated	total	cigarette	market	decreased	by	1.1%,	or	increased	by	1.2%	excluding	the	net	impact	of	estimated	trade	inventory	movements.	The	decrease	in	our cigarette	shipment	volume	mainly	reflected	the	lower	total	cigarette	market,	as	well	as	lower	cigarette	market	share.	The	decrease	of	our	cigarette	market	share	largely reflected	the	net	impact	of	the	estimated	trade	inventory	movements,	as	well	as	lower	share	of	Delicados,	impacted	by	competitive	pressure	in	the	low	price	segment.

Unless	otherwise	stated,	references	to	total	industry,	total	market,	our	shipment	volume	and	our	market	share	performance	in	the	following	discussion	reflect	cigarettes only.

| European	Union | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2016 | 2015 | $% |  |
| Net\trevenues | \t $27,129 | \t $26,563 | \t $566 | 2.1% |
| Excise\ttaxes\ton\tproducts | 18,967 | 18,495 | 472 | 2.6% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 8,162 | 8,068 | 94 | 1.2% |
| Operating\tcompanies\tincome | 3,994 | 3,576 | 418 | 11.7% |

•price increases ($390 million),

•the	 non-recurrence	 of the	 2015	 pre-tax	 charges for	 asset impairment	 and	 exit	 costs ($68 million),

•lower	 marketing,	 administration	 and research	 costs ($47	 million) and

•favorable	 currency ($34	 million),	 partly	 offset by

# European	Union	-	Industry	Volume

The	 estimated	 total	 cigarette	 market	decreased	 by	1.4%	 to	501.6	 billion	 units.	The	 moderate	 decline	 of	 the	 estimated	 total	 cigarette	 market	 reflected	 improved macroeconomics,	a	lower	prevalence	of	illicit	trade	and,	in	certain	geographies,	the	estimated	positive	impact	of	immigration,	which	was	concentrated	in	the	first	half	of 2016.

# European	Union	-	PMI	Shipment	Volume	and	Market	Share	Commentaries

Cigarette	shipment	volume	and	market	share	performance	by	brand	are	shown	in	the	tables	below:

# European	Union	Cigarette	Shipment	Volume	by	Brand	(Million	Units)

|  | 2016 | 2015 | Change |
| :--- | :--- | :--- | :--- |
| Marlboro | 96,245 | 95,588 | 0.7\t% |
| L&amp;M | 34,691 | 35,010 | (0.9)% |
| Chesterfield | 30,140 | 28,278 | 6.6\t% |
| Philip\tMorris | 16,290 | 14,205 | 14.7\t% |
| Others | 16,220 | 21,508 | (24.6)% |
| Total\tEuropean\tUnion | 193,586 | 194,589 | (0.5)% |

# European	Union	Cigarette	Market	Shares	by	Brand

|  | 2016 | 2015 | p.p. |
| :--- | :--- | :--- | :--- |
| Marlboro | 19.0% | 18.8% | 0.2 |
| L&amp;M | 6.9% | 6.9% | — |
| Chesterfield | 5.9% | 5.6% | 0.3 |
| Philip\tMorris | 3.2% | 3.2% | — |
| Others | 3.3% | 3.8% | (0.5) |
| Total\tEuropean\tUnion | 38.3% | 38.3% | — |

Our	cigarette	shipment	volume	decreased	by	0.5%	to	193.6	billion	units,	mainly	due	to	Italy,	Germany	and	Greece,	partly	offset	by	Poland	and	Spain.	Cigarette	shipment volume	of	Marlboro	increased	by	0.7%,	mainly	driven	by	Spain,	partly	offset	by	Greece.	Our	total	cigarette	market	share	was	flat	at	38.3%,	with	gains,	notably	in	the Czech	Republic,	France,	Poland	and	Spain,	offset	by	declines,	mainly	in	Greece	and	Italy.	Cigarette	shipment	volume	of	"Others"	decreased,	mainly	due	the	morphing	of various	trademarks	in	the	Czech	Republic	and	Italy	into	international	brands.

In	France,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 44.9 | 45.5 | (1.2)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 19,243 | 18,943 | 1.6\t% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 26.4% | 25.9% | 0.5 |
| Philip\tMorris | 10.2% | 9.5% | 0.7 |
| Chesterfield | 3.1% | 3.3% | (0.2) |
| Others | 2.7% | 2.9% | (0.2) |
| Total | 42.4% | 41.6% | 0.8 |

The	estimated	total	cigarette	market	decreased	moderately	by	1.2%,	partly	reflecting	a	lower	prevalence	of	illicit	trade	and	e-vapor	products.	The	 increase in	our cigarette	shipment	volume	mainly	reflected	market	share	growth,	driven	by	Marlboro,	as	well	as	the	launch	of	certain	Philip	Morris	variants	in	January	2016.

In	Germany,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 78.1 | 80.0 | (2.4)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 28,950 | 29,778 | (2.8)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 22.5% | 22.1% | 0.4 |
| L&amp;M | 11.6% | 11.9% | (0.3) |
| Chesterfield | 1.6% | 1.5% | 0.1 |
| Others | 1.4% | 1.7% | (0.3) |
| Total | 37.1% | 37.2% | (0.1) |

The	estimated	total	cigarette	market	decreased	 by	2.4%,	primarily	reflecting	the	impact	of	price	increases.	The	decrease	in	our	cigarette	shipment	volume	primarily reflected	the	lower	total	market.

In	Italy,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 72.1 | 73.8 | (2.4)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 38,624 | 39,717 | (2.8)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 24.3% | 24.7% | (0.4) |
| Chesterfield | 11.5% | 11.0% | 0.5 |
| Philip\tMorris | 8.5% | 9.2% | (0.7) |
| Others | 8.1% | 8.8% | (0.7) |
| Total | 52.4% | 53.7% | (1.3) |

The	estimated	 total	cigarette	market	decreased	 by	2.4%,	primarily	reflecting	the	impact	of	price	increases.	The	decline	of	our	cigarette	shipments,	down	by	4.8% excluding	the	net	impact	of	distributor	inventory	movements,	reflected	the	lower	total	market,	and	lower	cigarette	market	share,	notably	due	to	Marlboro	as	a	result	of	its price	increase	in	the	second	quarter	of	2016,	and	low-price	Philip	Morris,	impacted	by	the	growth	of	the	super-low	price	segment,	partly	offset	by	super-low	price Chesterfield.

In	Poland,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 41.3 | 41.1 | 0.5% |
| PMI\tCigarette\tShipments\t(million\tunits) | 17,485 | 16,763 | 4.3% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 11.6% | 11.4% | 0.2 |
| L&amp;M | 18.5% | 18.1% | 0.4 |
| Chesterfield | 9.1% | 8.6% | 0.5 |
| Others | 3.1% | 2.7% | 0.4 |
| Total | 42.3% | 40.8% | 1.5 |

The	estimated	total	cigarette	market	increased	by	0.5%,	primarily	reflecting	a	lower	prevalence	of	non-duty	paid	products.	The	increase	in	our	cigarette	shipment	volume was	mainly	driven	by	higher	cigarette	market	share,	principally	L&M,	reflecting	the	positive	impact	of	brand	support,	Chesterfield,	benefiting	from	its	100s	and	super- slims	variants,	and	RGD	in	"Others,"	up	by	0.4	points	to	2.6%.

In	Spain,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 46.7 | 46.7 | (0.1)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 16,365 | 15,435 | 6.0\t% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 18.0% | 17.0% | 1.0 |
| Chesterfield | 8.6% | 9.1% | (0.5) |
| L&amp;M | 5.4% | 5.8% | (0.4) |
| Others | 1.9% | 1.5% | 0.4 |
| Total | 33.9% | 33.4% | 0.5 |

The	 estimated	 total	 cigarette	 market	decreased	 by	0.1%,	reflecting	an	 improved	economy	and	 the	favorable	estimated	 impact	of	 in-switching	from	other	 tobacco products.	Excluding	the	net	impact	of	distributor	inventory	movements,	our	cigarette	shipment	volume	increased	by	1.6%,	driven	by	higher	market	share	reflecting	the strong	performance	of	Marlboro,	benefiting	from	its	round	price	point	in	the	vending	channel	and	the	new	Architecture	2.0.

| Eastern	Europe,	Middle	East	&amp;	Africa | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2016 | 2015 | $% |  |
| Net\trevenues | \t $18,286 | \t $18,328 | \t $(42) | (0.2)% |
| Excise\ttaxes\ton\tproducts | 11,286 | 10,964 | 322 | 2.9\t% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 7,000 | 7,364 | (364) | (4.9)% |
| Operating\tcompanies\tincome | 3,016 | 3,425 | (409) | (11.9)% |

Net	revenues	decreased	by	$42	million.	Excluding	excise	taxes,	net	revenues	decreased	by	$364	million,	due	to:

•unfavorable currency ($600 million) and

Operating	companies	income	decreased	by	$409	million	during	2016.	This	decrease	was	due	primarily	to:

•unfavorable currency ($839 million) and

•unfavorable	 volume/mix ($333	 million),	 partly	 offset by

•lower marketing, administration and research costs ($170 million).

# Eastern	Europe,	Middle	East	&	Africa	-	PMI	Cigarette	Shipment	Volume	Commentaries

Our	cigarette	shipment	volume	decreased	by	2.9%	to	271.4	billion	units,	mainly	due	to	North	Africa,	primarily	Algeria,	and	Russia,	partially	offset	by	Saudi	Arabia	and Ukraine.	Cigarette	shipment	volume	of	Marlboro	decreased	by	8.5%	to	73.8	billion	units,	principally	due	to	Algeria	and	Egypt,	partly	offset	by	Saudi	Arabia.	Cigarette shipment	volume	of	Parliament	increased	by	1.0%	to	33.9	billion

units,	driven	by	Saudi	Arabia,	Turkey	and	Ukraine,	partly	offset	by	Russia.	Cigarette	shipment	volume	of	L&M	increased	by	1.9%	to	52.2	billion	units,	driven	notably	by Algeria,	Kazakhstan	and	Ukraine,	partly	offset	by	Russia	and	Turkey.

In	North	Africa,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 142.3 | 139.7 | 1.9\t% |
| PMI\tCigarette\tShipments\t(million\tunits) | 34,035 | 38,111 | (10.7)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 8.3% | 13.6% | (5.3) |
| L&amp;M | 12.2% | 11.8% | 0.4 |
| Others | 2.7% | 2.2% | 0.5 |
| Total | 23.2% | 27.6% | (4.4) |

The	estimated	total	cigarette	market	increased	by	1.9%,	driven	by	Egypt,	Morocco	and	Tunisia,	partly	offset	by	Algeria.	The	decrease	in	our	cigarette	shipment	volume reflected	lower	market	share,	mainly	due	to	Marlboro	in	Algeria,	principally	resulting	from	the	impact	of	excise	tax-driven	price	increases,	as	well	as	lower-than- anticipated	acceptance	of	Architecture	2.0	for	Marlboro	Round	Taste.

In	Russia,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance,	as	measured	by	Nielsen,	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 280.0 | 294.1 | (4.8)% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 79,651 | 84,422 | (5.7)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 1.4% | 1.4% | — |
| Parliament | 3.8% | 3.9% | (0.1) |
| Bond\tStreet | 8.4% | 8.4% | — |
| Others | 13.6% | 14.7% | (1.1) |
| Total | 27.2% | 28.4% | (1.2) |

The	estimated	total	cigarette	market	decreased	by	4.8%,	mainly	due	to	the	impact	of	excise	tax-driven	price	increases.	The	decrease	in	our	cigarette	shipment	volume, down	by	8.3%	excluding	the	impact	of	estimated	distributor	inventory	movements,	mainly	reflected	the	lower	total	market,	and	lower	cigarette	market	share	primarily due	to	a	decline	in	"Others"	of	mid-price	L&M	and	Chesterfield	and	super-low	Optima,	resulting	from	the	timing	of	retail	price	increases	compared	to	competition.

In	Turkey,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance,	as	measured	by	Nielsen,	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 105.5 | 103.2 | 2.2% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 49,624 | 49,014 | 1.2% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 10.2% | 9.5% | 0.7 |
| Parliament | 11.7% | 11.6% | 0.1 |
| Lark | 7.4% | 7.6% | (0.2) |
| Others | 15.0% | 15.1% | (0.1) |
| Total | 44.3% | 43.8% | 0.5 |

The	estimated	total	cigarette	market	increased	by	2.2%,	primarily	reflecting	a	lower	prevalence	of	illicit	trade.	The	increase	in	our	cigarette	shipment	volume	was	mainly driven	by	the	higher	total	market.	Our	higher	market	share,	led	by	Marlboro,	primarily	reflecting	the	growth	of	its	slimmer	Touch	variant,	and	Chesterfield,	partly	offset by	L&M	in	"Others."

In	Ukraine,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance,	as	measured	by	Nielsen,	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 73.1 | 70.6 | 3.5% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 22,014 | 19,195 | 14.7% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 3.1% | 3.8% | (0.7) |
| Parliament | 2.9% | 2.8% | 0.1 |
| Bond\tStreet | 10.0% | 8.2% | 1.8 |
| Others | 13.2% | 14.9% | (1.7) |
| Total | 29.2% | 29.7% | (0.5) |

The	estimated	total	cigarette	market	increased	by	3.5%,	mainly	driven	by	a	lower	prevalence	of	illicit	trade.	The	increase	in	our	cigarette	shipment	volume	reflected	the higher	total	cigarette	market.	The	decrease	in	our	market	share	was	primarily	due	to	Marlboro,	reflecting	the	impact	of	widened	price	gaps,	and	mid-price	Chesterfield and	super-low	President	in	"Others,"	mainly	resulting	from	competitive	price	pressure	in	the	low	price	segment,	partly	offset	by	Bond	Street	and	L&M	in	"Others."

| Asia | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2016 | 2015 | $% |  |
| Net\trevenues | \t $20,531 | \t $19,469 | \t $1,062 | 5.5% |
| Excise\ttaxes\ton\tproducts | 11,850 | 11,266 | 584 | 5.2% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 8,681 | 8,203 | 478 | 5.8% |
| Operating\tcompanies\tincome | 3,196 | 2,886 | 310 | 10.7% |

Net	revenues	increased	by	$1.1	billion.	Excluding	excise	taxes,	net	revenues	increased	by	$478	million,	due	primarily	to:

Net	revenues	include	$666	million	in	2016	related	to	sale	of	RRPs,	mainly	driven	by	Japan.	Excluding	excise	taxes,	net	revenues	for	RRPs	were	$666	million	in	2016.	In some	jurisdictions,	including	Japan,	we	are	not	responsible	for	collecting	excise	taxes.

Operating	companies	income	increased	by	$310	million	during	2016.	This	increase	was	due	primarily	to:

•favorable currency ($52 million) and

•lower	marketing,	administration	and	research	costs	($28	million),	partly	offset by

•unfavorable volume/mix ($106

# Asia	-	PMI	Cigarette	Shipment	Volume	Commentaries

Our	cigarette	shipment	volume	decreased	by	7.6%	to	260.0	billion	units,	mainly	due	to:	Indonesia;	Pakistan,	reflecting	a	lower	total	estimated	cigarette	market	resulting from	excise	tax-driven	price	increases	and	the	growth	of	illicit	trade;	the	Philippines;	and	Thailand,	primarily	reflecting	the	impact	of	excise	tax-driven	price	increases	in the	first	quarter	of	2016,	as	well	as	lower	market	share;	and	in-switching	from	our	cigarette	brands	to	heated	tobacco	units;	partly	offset	by	Korea,	reflecting	a normalization	of	the	total	estimated	cigarette	market	following	the	disruptive	excise	tax	increase	in	January	2015.

Cigarette	shipment	volume	of	Marlboro	increased	by	4.0%	to	76.5	billion	units,	mainly	driven	by	Korea	and	the	Philippines,	partly	offset	by	Vietnam,	as	well	as	in- switching	from	that	brand	to	heated	tobacco	units.	Cigarette	shipment	volume	of	Parliament	increased	by	7.5%	to	10.1	billion	units,	driven	by	Korea.	Cigarette	shipment volume	of	Lark	decreased	by	3.8%	to	17.6	billion	units,	principally	due	to	Japan.

In	Indonesia,	estimated	industry	size,	our	cigarette	shipment	volume,	market	share	and	segmentation	performance	are	shown	in	the	tables	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 315.6 | 320.0 | (1.4)% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 105,524 | 109,840 | (3.9)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Sampoerna\tA | 14.0% | 14.6% | (0.6) |
| Dji\tSam\tSoe | 6.5% | 6.9% | (0.4) |
| U\tMild | 4.2% | 4.7% | (0.5) |
| Others | 8.7% | 8.1% | 0.6 |
| Total | 33.4% | 34.3% | (0.9) |

|  | 2016 | 2015 | p.p. |
| :--- | :--- | :--- | :--- |
| Segment\t%\tof\tTotal\tMarket |  |  |  |
| Hand-Rolled\tKretek\t(SKT) | 18.2% | 19.1% | (0.9) |
| Machine-Made\tKretek\t(SKM) | 75.8% | 74.7% | 1.1 |
| Whites\t(SPM) | 6.0% | 6.2% | (0.2) |
| Total | 100.0% | 100.0% | — |
| PMI\t%\tShare\tof\tSegment |  |  |  |
| Hand-Rolled\tKretek\t(SKT) | 37.3% | 37.7% | (0.4) |
| Machine-Made\tKretek\t(SKM) | 28.9% | 29.7% | (0.8) |
| Whites\t(SPM) | 79.5% | 80.3% | (0.8) |

The	estimated	total	cigarette	market	decreased	by	1.4%,	mainly	reflecting	a	soft	economic	environment	and	the	impact	of	excise	tax-driven	price	increases.	The	decrease in	our	cigarette	shipments	was	mainly	due	to	lower	market	share,	reflecting	the	soft	performance	of	our	SKM	portfolio,	due	to	competitors'	discounted	product	offerings, and	our	SKT	portfolio,	broadly	in	line	with	industry	trends,	as	well	as	a	lower	estimated	total	market.

In	Japan,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 173.8 | 182.3 | (4.6)% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 43,915 | 45,690 | (3.9)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 10.9% | 11.3% | (0.4) |
| Parliament | 2.4% | 2.3% | 0.1 |
| Lark | 9.9% | 9.9% | — |
| Others | 1.7% | 1.8% | (0.1) |
| Total | 24.9% | 25.3% | (0.4) |

The	estimated	total	cigarette	market	decreased	by	4.6%,	reflecting	the	continued	underlying	cigarette	consumption	decline,	the	growth	of	reduced-risk	products,	and	the impact	of	the	April	price	increases	of	certain	brands	of	our	key	competitor.	Excluding	the	net	impact	of	distributor	inventory	movements,	our	cigarette	shipment	volume decreased	by	6.5%.	The	decline	was	mainly	due	to	a	lower	total	cigarette	market,	as	well	as	lower	cigarette	market	share,	reflecting	the	impact	of	competitors'	retail pricing,	competitors'	differentiated	menthol	taste	product	offerings	and	in-switching	from	our	cigarette	brands	to	heated	tobacco	units.

The	estimated	national	market	share	of	heated	tobacco	units	was	2.9%,	bringing	our	total	combined	national	market	share	to	27.1%,	up	by	1.7	points.	We	calculate national	market	share	for	heated	tobacco	units	in	Japan	as	the	total	sales	volume	for	heated	tobacco	units	as	a	percentage	of	the	total	estimated	sales	volume	for	cigarettes and	heated	tobacco	units.

In	Korea,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 73.6 | 67.3 | 9.4% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 15,490 | 14,201 | 9.1% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 9.6% | 9.6% | — |
| Parliament | 7.9% | 7.2% | 0.7 |
| Virginia\tS. | 3.0% | 3.8% | (0.8) |
| Others | 0.5% | 0.6% | (0.1) |
| Total | 21.0% | 21.2% | (0.2) |

Excluding	a	favorable	comparison	with	the	prior	year	driven	by	estimated	trade	inventory	movements,	the	estimated	total	cigarette	market	increased	by	4.3%,	reflecting the	normalization	of	the	market	following	the	disruptive	excise	tax	increase	of	120%	in	January	2015.	The	growth	in	our	cigarette	shipment	volume	primarily	reflected the	higher	estimated	total	market.

In	the	Philippines,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 79.3 | 90.2 | (12.0)% |
| PMI\tCigarette\tShipments\t(million\tunits) | 56,611 | 66,236 | (14.5)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 28.4% | 20.0% | 8.4 |
| Fortune | 23.4% | 29.2% | (5.8) |
| Jackpot | 7.9% | 12.4% | (4.5) |
| Others | 11.6% | 11.8% | (0.2) |
| Total | 71.3% | 73.4% | (2.1) |

The	estimated	total	cigarette	market	decreased	by	12.0%,	mainly	due	to	the	impact	of	excise	tax-driven	price	increases.	The	decline	in	our	cigarette	shipment	volume reflected	the	lower	total	market,	as	well	as	the	impact	of	these	price	increases	on	market	share,	particularly	on	our	low	and	super-low	price	brands,	Fortune	and	Jackpot, partly	offset	by	an	increase	in	market	share	of	Marlboro,	benefiting	from	its	narrowed	price	gap	with	lower-priced	brands	as	a	result	of	the	price	increases.

| Latin	America	&amp;	Canada | For	the	Years	Ended	December<br>31, | For	the	Years	Ended	December<br>31, | Variance |  |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions) | 2016 | 2015 | $% |  |
| Net\trevenues | \t $9,007 | \t $9,548 | \t $(541) | (5.7)% |
| Excise\ttaxes\ton\tproducts | 6,165 | 6,389 | (224) | (3.5)% |
| Net\trevenues,\texcluding\texcise\ttaxes\ton\tproducts | 2,842 | 3,159 | (317) | (10.0)% |
| Operating\tcompanies\tincome | 938 | 1,085 | (147) | (13.5)% |

Operating	companies	income	decreased	by	$147	million	during	2016.	This	decrease	was	due	to:

•higher	manufacturing	costs	($57	million)	and

•higher	marketing,	administration	and	research	costs	($35	million),	partly	offset by

# Latin	America	&	Canada	-	PMI	Cigarette	Shipment	Volume	Commentaries

Our	cigarette	shipment	volume	decreased	by	4.3%	to	87.9	billion	units,	mainly	due	to	Argentina,	partly	offset	by	Mexico.	While	cigarette	shipment	volume	of	Marlboro decreased	by	1.8%	to	35.2	billion	units,	its	market	share	increased	by	0.6	points	to	an	estimated	15.8%,

primarily	driven	by	Brazil,	up	by	0.6	points	to	10.3%,	Colombia,	up	by	0.3	points	to	9.3%,	and	Mexico,	up	by	1.2	points	to	49.0%,	partly	offset	by	Argentina,	down	by 1.9	points	to	22.4%.	Cigarette	shipment	volume	of	Philip	Morris	decreased	by	15.3%	to	16.5	billion	units,	mainly	due	to	Argentina.

In	Argentina,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 36.1 | 40.8 | (11.6)% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 27,512 | 31,910 | (13.8)% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 22.4% | 24.3% | (1.9) |
| Parliament | 1.9% | 2.1% | (0.2) |
| Philip\tMorris | 41.6% | 44.7% | (3.1) |
| Others | 10.4% | 7.1% | 3.3 |
| Total | 76.3% | 78.2% | (1.9) |

The	decline	of	the	estimated	total	cigarette	market	of	11.6%	mainly	reflected	a	soft	economic	environment	and	the	impact	of	the	May	2016	excise	tax	increase	that	drove a	more	than	50%	increase	in	average	industry	retail	prices.	The	decrease	in	our	cigarette	shipment	volume	was	principally	due	to	the	lower	total	market.	Our	lower cigarette	market	share	primarily	reflected	growth	in	competitors'	super-low	priced	products	benefiting	from	down-trading,	partly	offset	by	low-price	Chesterfield	in "Others."	The	capsule	segment	was	up	by	1.0	point	to	17.4%	of	the	total	market;	our	share	of	the	segment	increased	by	0.4	points	to	73.9%.

In	Canada,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 26.3 | 26.7 | (1.6)% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 10,049 | 9,926 | 1.2\t% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Belmont | 3.7% | 3.3% | 0.4 |
| Canadian\tClassics | 10.2% | 10.3% | (0.1) |
| Next | 11.3% | 10.6% | 0.7 |
| Others | 13.2% | 13.1% | 0.1 |
| Total | 38.4% | 37.3% | 1.1 |

The	estimated	total	cigarette	market	decreased	by	1.6%.	The	increase	in	our	cigarette	shipment	volume	was	principally	driven	by	higher	cigarette	market	share,	favorably impacted	by	estimated	trade	inventory	movements,	partly	offset	by	a	lower	total	market.

In	Mexico,	estimated	industry	size,	our	cigarette	shipment	volume	and	market	share	performance	are	shown	in	the	table	below.

|  |  |  | Change |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | %\t/\tp.p. |
| Total\tCigarette\tMarket\t(billion\tunits) | 36.2 | 33.8 | 7.0% |
| PMI\tCigarette\tShipments\t(million\tunits) |  |  |  |
|  | 25,080 | 23,246 | 7.9% |
| PMI\tCigarette\tMarket\tShare |  |  |  |
| Marlboro | 49.0% | 47.8% | 1.2 |
| Delicados | 9.7% | 10.7% | (1.0) |
| Benson\t&amp;\tHedges | 4.7% | 4.5% | 0.2 |
| Others | 5.9% | 5.8% | 0.1 |
| Total | 69.3% | 68.8% | 0.5 |

The	estimated	total	cigarette	market	increased	by	7.0%,	or	by	2.2%	excluding	the	net	impact	of	estimated	trade	inventory	movements,	primarily	reflecting	improved market	conditions	and	a	lower	prevalence	of	illicit	trade.	The	increase	in	our	cigarette	shipment	volume	reflected	the	higher	total	market.	Our	cigarette	market	share, benefiting	from	the	impact	of	estimated	inventory	movements,	was	up	 by	0.5	points,	with	growth	of	Marlboro	and	Benson	&	Hedges,	reflecting	the	impact	of	new product	launches,	partly	offset	by	low-price	Delicados.	Our	share	of	the	premium	segment,	representing	56.9%	of	the	total	market,	increased	by	1.0	point	to	93.5%.

# Financial	Review

# Ÿ	Net	Cash	Provided	by	Operating	Activities

Net	cash	provided	by	operating	activities	of	$8.9	billion	for	the	year	ended	December	31,	2017,	increased	by	$0.8	billion	from	the	comparable	2016	period.	While	the impacts	of	the	Tax	Cuts	and	Jobs	Act	reduced	net	earnings	by	$1.6	billion,	there	was	no	net	impact	on	operating	cash	flows	for	the	year,	as	the	changes	in	deferred	taxes and	income	taxes	payable	offset	the	net	earnings	impact.	Excluding	the	impact	of	the	Tax	Cuts	and	Jobs	Act	as	well	as	favorable	currency	movements	of	$0.4	billion,	the increase	in	cash	flows	provided	by	operating	activities	can	be	attributed	to	higher	net	earnings	offset	by	working	capital	and	other	movements.

At	December	31,	2017,	PMI	recorded	an	income	tax	payable	of	$1.7	billion	representing	the	transition	tax	of	$2.2	billion,	partially	offset	by	foreign	tax	credits	related	to foreign	withholding	taxes	previously	paid	of	$0.5	billion.	The	income	tax	payable	is	due	over	an	8-year	period	beginning	in	2018.	For	further	details,	see	Item	8,	Note 11.	Income	Taxes	to	our	consolidated	financial	statements.

Net	cash	provided	by	operating	activities	of	$8.1	billion	for	the	year	ended	December	31,	2016,	increased	by	$212	million	from	the	comparable	2015	period.	Excluding unfavorable	currency	movements	of	$409	million,	the	change	was	due	primarily	to	net	earnings	growth	and	lower	cash	payments	related	to	exit	costs,	partly	offset	by higher	working	capital	requirements	and	2016	installment	payments	of	security	into	a	court	trust	pertaining	to	the	Létourneau	and	Blais	cases	as	well	as	a	2016	payment to	the	South	Korean	tax	authorities	(see	Item	8,	Note	18.	Contingencies	for	additional	information).

Excluding	currency,	the	unfavorable	variance	in	working	capital	was	due	primarily	to	the	following:

•more	cash	used	for	accounts	receivable,	primarily	due	to	the	timing	of	sales	and	cash	collections	(including	unfavorable	comparisons	to	the	cash	flows	provided for	accounts	receivable	in	2015	following	the	expansion	of	arrangements	to	sell	accounts	receivable	to	unaffiliated	financial	institutions	as	disclosed	in	Item	8, Note	20.	Sale	of	Accounts	Receivable),	partly	offset	by

•more	cash	provided	by	accrued	liabilities	and	other	current	assets,	primarily	due	to	the	timing	of	payments	for	excise

taxes.

# Ÿ	Net	Cash	Used	in	Investing	Activities

Net	cash	used	in	investing	activities	of	$3.0	billion	for	the	year	ended	December	31,	2017,	increased	by	$2.0	billion	from	the	comparable	2016	period.	This	increase	in net	cash	used	of	$2.0	billion	was	due	principally	to	cash	collateral	posted	to	secure	derivatives	designated	as	net	investment	hedges	of	Euro	assets	following	the strengthening	of	the	Euro	versus	the	U.S.	dollar,	and	higher	capital	expenditures.	For	further	details	on	our	derivatives	designated	as	net	investment	hedges,	see	Item	8, Note	15.	Financial	Instruments.

Net	cash	used	in	investing	activities	of	$968	million	for	the	year	ended	December	31,	2016,	increased	by	$260	million	from	the	comparable	2015	period,	due	primarily to	higher	capital	expenditures.

Our	 capital	 expenditures	 were	$1.5	billion	 in	2017,	$1.2	billion	 in	2016	 and	$1.0	billion	 in	2015.	The	2017	 expenditures	 were	 primarily	 related	 to	 our	 ongoing investments	in	RRPs	to	support	capacity	expansion	(notably	for	heated	tobacco	units).	We	expect	total	capital	expenditures	in	2018	of	approximately	$1.7	billion (including	additional	capital	expenditures	related	to	our	ongoing	investment	in	RRPs	to	support	capacity	expansion),	to	be	funded	by	operating	cash	flows.

# Ÿ	Net	Cash	Used	in	Financing	Activities

During	2017,	net	cash	used	in	financing	activities	was	$2.8	billion,	compared	with	net	cash	used	in	financing	activities	of	$5.4	billion	during	2016	and	$4.7	billion	in 2015.

The	2017	change	was	due	primarily	to	higher	proceeds	from	long-term	debt	issuances	(primarily	the	$6.9	billion	proceeds	in	2017	from	our	U.S.	dollar	and	Euro	debt issuances	versus	the	$3.5	billion	proceeds	in	2016	from	our	U.S.	dollar	and	Euro	debt	issuances).

The	2016	change	was	due	primarily	to	lower	net	proceeds	received	from	the	sale	of	subsidiary	shares	to	noncontrolling	interests,	partially	offset	by	higher	proceeds	from long-term	 debt	 issuances.	 For	 further	 details	 on	 the	 proceeds	 from	 the	 sale	 of	 subsidiary	 shares	 in	 2015,	 see Item	 8,	 Note	 6.	Acquisitions	 and	 Other	 Business Arrangements	to	our	consolidated	financial	statements.

# Ÿ	Debt	and	Liquidity

We	define	cash	and	cash	equivalents	as	short-term,	highly	liquid	investments,	readily	convertible	to	known	amounts	of	cash	that	mature	within	a	maximum	of	three months	and	have	an	insignificant	risk	of	change	in	value	due	to	interest	rate	or	credit	risk	changes.	As	a	policy,	we	do	not	hold	any	investments	in	structured	or	equity- linked	products.	Our	cash	and	cash	equivalents	are	predominantly	held	in	demand	deposits	with	institutions	that	have	investment-grade	long-term	credit	rating.	As	part of	our	cash	management	strategy	and	in	order	to	manage	counterparty	exposure,	we	also	enter	into	reverse	repurchase	agreements.	Such	agreements	are	collateralized with	government	or	corporate	securities	held	by	a	custodial	bank	and,	at	maturity,	cash	is	paid	back	to	PMI	and	the	collateral	is	returned	to	the	bank.	While	we	entered into	these	agreements	during	the	periods	and	had	an	average	balance	during	2017	and	2016	of	$0.9	billion	and	$0.2	billion,	respectively,	we	had	a	zero	balance	both	at December	31,	2017	and	December	31,	2016.

We	utilize	long-term	and	short-term	debt	financing,	including	a	commercial	paper	program	that	is	regularly	used	to	finance	ongoing	liquidity	requirements,	as	part	of our	overall	cash	management	strategy.	Our	ability	to	access	the	capital	and	credit	markets	as	well	as	overall	dynamics	of	these	markets	may	impact	borrowing	costs.	We expect	that	the	combination	of	our	long-term	and	short-term	debt	financing,	the	commercial	paper	program	and	the	committed	credit	facilities,	coupled	with	our operating	cash	flows,	will	enable	us	to	meet	our	liquidity	requirements.

Credit	Ratings	–	The	cost	and	terms	of	our	financing	arrangements	as	well	as	our	access	to	commercial	paper	markets	may	be	affected	by	applicable	credit	ratings.	At February	9,	2018,	our	credit	ratings	and	outlook	by	major	credit	rating	agencies	were	as	follows:

|  | Short-term | Long-term | Outlook |
| :--- | :--- | :--- | :--- |
| Moody's | P-1 | A2 | Stable |
| Standard\t&amp;\tPoor's | A-1 | A | Negative |
| Fitch | F1 | A | Negative |

Credit	Facilities	–	On	January	29,	2018,	we	entered	into	an	agreement	to	extend	the	term	of	our	$2.0	billion	364-day	revolving	credit	facility	from	February	6,	2018,	to February	5,	2019.	On	August	29,	2017,	we	entered	into	an	agreement,	effective	October	1,	2017,	to

extend	the	term	of	our	$3.5	billion	multi-year	revolving	credit	facility,	for	an	additional	year	covering	the	period	October	1,	2021	to	October	1,	2022.

At	February	9,	2018,	our	committed	credit	facilities	were	as	follows:

# (in	billions)

At	February	9,	2018,	there	were	no	borrowings	under	the	committed	credit	facilities,	and	the	entire	committed	amounts	were	available	for	borrowing.

All	banks	participating	in	our	committed	credit	facilities	have	an	investment-grade	long-term	credit	rating	from	the	credit	rating	agencies.	We	continuously	monitor	the credit	quality	of	our	banking	group,	and	at	this	time	we	are	not	aware	of	any	potential	non-performing	credit	provider.

Each	of	these	facilities	requires	us	to	maintain	a	ratio	of	consolidated	earnings	before	interest,	taxes,	depreciation	and	amortization	("consolidated	EBITDA")	to consolidated	interest	expense	of	not	less	than	3.5	to	1.0	on	a	rolling	four-quarter	basis.	At	December	31,	2017,	our	ratio	calculated	in	accordance	with	the	agreements was	10.6	to	1.0.	These	facilities	do	not	include	any	credit	rating	triggers,	material	adverse	change	clauses	or	any	provisions	that	could	require	us	to	post	collateral.	We expect	to	continue	to	meet	our	covenants.	The	terms	"consolidated	EBITDA"	and	"consolidated	interest	expense,"	both	of	which	include	certain	adjustments,	are defined	in	the	facility	agreements	previously	filed	with	the	U.S.	Securities	and	Exchange	Commission.

In	addition	to	the	committed	credit	facilities	discussed	above,	certain	of	our	subsidiaries	maintain	short-term	credit	arrangements	to	meet	their	respective	working capital	needs.	These	credit	arrangements,	which	amounted	to	approximately	$2.8	billion	at	December	31,	2017	and	$2.9	billion	at	December	31,	2016,	are	for	the	sole use	of	our	subsidiaries.	Borrowings	under	these	arrangements	amounted	to	$499	million	at	December	31,	2017,	and	$643	million	at	December	31,	2016.

Commercial	Paper	Program	–	We	continue	to	have	access	to	liquidity	in	the	commercial	paper	market	through	programs	in	place	in	the	U.S.	and	in	Europe	having	an aggregate	issuance	capacity	of	$8.0	billion.	At	December	31,	2017	and	December	31,	2016,	we	had	no	commercial	paper	outstanding.	The	average	commercial	paper balance	outstanding	during	2017	and	2016	was	$5.2	billion	and	$4.2	billion,	respectively.

Sale	of	Accounts	Receivable	–	To	mitigate	credit	risk	and	enhance	cash	and	liquidity	management	we	sell	trade	receivables	to	unaffiliated	financial	institutions.	These arrangements	allow	us	to	sell,	on	an	ongoing	basis,	certain	trade	receivables	without	recourse.	The	trade	receivables	sold	are	generally	short-term	in	nature	and	are removed	from	the	consolidated	balance	sheets.	We	sell	trade	receivables	under	two	types	of	arrangements,	servicing	and	nonservicing.

Our	operating	cash	flows	were	positively	impacted	by	the	amount	of	the	trade	receivables	sold	and	derecognized	from	the	consolidated	balance	sheets,	which	remained outstanding	with	the	unaffiliated	financial	institutions.	The	trade	receivables	sold	that	remained	outstanding	under	these	arrangements	as	of	December	31,	2017,	2016 and	2015	 were	$1,092	million,	$729	million	 and	$888	million,	 respectively.	The	net	proceeds	received	are	included	in	cash	provided	by	operating	activities	in	the consolidated	statements	of	cash	flows.

For	further	details,	see	Item	8,	Note	20.	Sale	of	Accounts	Receivable	to	our	consolidated	financial	statements.

Debt	–	Our	total	debt	was	$34.3	billion	at	December	31,	2017,	and	$29.1	billion	at	December	31,	2016.	Our	total	debt	is	primarily	fixed	rate	in	nature.	For	further	details, see	Item	8,	Note	7.	Indebtedness.	The	weighted-average	all-in	financing	cost	of	our	total	debt	was	2.6%	in	2017,	compared	to	2.8%	in	2016.	See	Item	8,	Note	16.	Fair Value	Measurements	to	our	consolidated	financial	statements	for	a	discussion	of	our	disclosures	related	to	the	fair	value	of	debt.	The	amount	of	debt	that	we	can	issue	is subject	to	approval	by	our	Board	of	Directors.

On	February	14,	2017,	we	filed	a	shelf	registration	statement	with	the	U.S.	Securities	and	Exchange	Commission,	under	which	we	may	from	time	to	time	sell	debt securities	and/or	warrants	to	purchase	debt	securities	over	a	three-year	period.

Our	debt	issuances	in	2017	were	as	follows:

# (in	millions)

| Type |  | Face	Value | Interest<br>Rate | Issuance | Maturity |
| :--- | :--- | :--- | :--- | :--- | :--- |
| U.S.\tdollar\tnotes | (a) | $700 | 1.625% | February\t2017 | February\t2019 |
| U.S.\tdollar\tnotes | (b) | $300 | Floating | February\t2017 | February\t2020 |
| U.S.\tdollar\tnotes | (a) | $1,000 | 2.000% | February\t2017 | February\t2020 |
| U.S.\tdollar\tnotes | (a) | $500 | 2.625% | February\t2017 | February\t2022 |
| U.S.\tdollar\tnotes | (c) | $750 | 2.375% | August\t2017 | August\t2022 |
| U.S.\tdollar\tnotes | (c) | $500 | 3.125% | August\t2017 | August\t2027 |
| U.S.\tdollar\tnotes | (d) | $750 | 1.875% | November\t2017 | November\t2019 |
| U.S.\tdollar\tnotes | (d) | $750 | 2.500% | November\t2017 | November\t2022 |
| U.S.\tdollar\tnotes | (e) | $500 | 3.125% | November\t2017 | March\t2028 |
| EURO\tnotes | (f) | €500\t(approximately\t$582) | 0.625% | November\t2017 | November\t2024 |
| EURO\tnotes | (f) | €500\t(approximately\t$582) | 1.875% | November\t2017 | November\t2037 |

(a)	Interest	on	these	notes	is	payable	semi-annually	in	arrears	beginning	in	August	2017.

(b)	Interest	on	these	notes	is	payable	quarterly	in	arrears	beginning	in	May	2017.

(c)	Interest	on	these	notes	is	payable	semi-annually	in	arrears	beginning	in	February	2018.

(d)	Interest	on	these	notes	is	payable	semi-annually	in	arrears	beginning	May	2018.

(e)	Interest	on	these	notes	is	payable	semi-annually	in	arrears	beginning	March	2018.

(f)	Interest	on	these	notes	is	payable	annually	in	arrears	beginning	November	2018.

The	net	proceeds	from	the	sale	of	the	securities	listed	in	the	table	above	were	used	for	general	corporate	purposes.

The	weighted-average	time	to	maturity	of	our	long-term	debt	was	9.4	years	at	the	end	of	2017	and	10.6	years	at	the	end	of	2016.

# •Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We	have	no	off-balance	sheet	arrangements,	including	special	purpose	entities,	other	than	guarantees	and	contractual	obligations	discussed	below.

Guarantees	–	At	December	31,	2017,	we	were	contingently	liable	for	$0.9	billion	of	guarantees	of	our	own	performance,	which	were	primarily	related	to	excise	taxes	on the	shipment	of	our	products.	There	is	no	liability	in	the	consolidated	financial	statements	associated	with	these	guarantees.	At	December	31,	2017,	our	third-party guarantees	were	insignificant.

Aggregate	Contractual	Obligations	–	The	following	table	summarizes	our	contractual	obligations	at	December	31,	2017:

| Total | 2018 | 2019-2020 | 2021-2022 | 2023	and<br>Thereafter |
| :--- | :--- | :--- | :--- | :--- |
| $34,120 | $2,506 | $8,221 | $5,811 | $17,582 |
| 11,131 | 981 | 1,656 | 1,372 | 7,122 |
| 849 | 179 | 219 | 95 | 356 |
| 5,040 | 2,696 | 1,255 | 687 | 402 |
| 2,230 | 1,437 | 588 | 194 | 11 |
| 7,270 | 4,133 | 1,843 | 881 | 413 |
| 468 | 58 | 60 | 42 | 308 |
| $53,838 | $7,857 | $11,999 | $8,201 | $25,781 |

(1)	Amounts	represent	the	expected	cash	payments	of	our	long-term	debt	and	capital	lease	obligations.

(2)	Amounts	represent	the	expected	cash	payments	of	our	interest	expense	on	our	long-term	debt,	including	the	current	portion	of	long-term	debt.	Interest	on	our	fixed-rate	debt	is	presented	using	the stated	interest	rate.	Interest	on	our	variable	debt	is	estimated	using	the	rate	in	effect	at	December	31,	2017.	Amounts	exclude	the	amortization	of	debt	discounts,	the	amortization	of	loan	fees	and fees	for	lines	of	credit	that	would	be	included	in	interest	expense	in	the	consolidated	statements	of	earnings.

(3)	Amounts	represent	the	minimum	rental	commitments	under	non-cancelable	operating	leases.

(4)	 Purchase	 obligations	 for	 inventory	 and	 production	 costs	 (such	 as	 raw	 materials,	 indirect	 materials	 and	 supplies,	 packaging,	 co-manufacturing	 arrangements,	 storage	 and	 distribution)	 are commitments	for	projected	needs	to	be	utilized	in	the	normal	course	of	business.	Other	purchase	obligations	include	commitments	for	marketing,	advertising,	capital	expenditures,	information technology	and	professional	services.	Arrangements	are	considered	purchase	obligations	if	a	contract	specifies	all	significant	terms,	including	fixed	or	minimum	quantities	to	be	purchased,	a pricing	structure	and	approximate	timing	of	the	transaction.	Amounts	represent	the	minimum	commitments	under	non-cancelable	contracts.	Any	amounts	reflected	on	the	consolidated	balance sheet	as	accounts	payable	and	accrued	liabilities	are	excluded	from	the	table	above.

(5)	Other	long-term	liabilities	consist	primarily	of	postretirement	health	care	costs	and	accruals	established	for	employment	costs.	The	following	long-term	liabilities	included	on	the	consolidated balance	sheet	are	excluded	from	the	table	above:	accrued	pension	and	postemployment	costs,	tax	contingencies,	insurance	accruals	and	other	accruals.	We	are	unable	to	estimate	the	timing	of payments	(or	contributions	in	the	case	of	accrued	pension	costs)	for	these	items.	Currently,	we	anticipate	making	pension	contributions	of	approximately	$53	million	in	2018,	based	on	current	tax and	benefit	laws	(as	discussed	in	Item	8,	Note	13.	Benefit	Plans	to	our	consolidated	financial	statements).

# Ÿ	Equity	and	Dividends

We	discuss	our	stock	awards	as	of	December	31,	2017,	in	Item	8,	Note	9.	Stock	Plans	to	our	consolidated	financial	statements.

During	2017,	2016	and	2015,	we	did	not	repurchase	any	shares	under	a	share	repurchase	program	and	we	do	not	presently	intend	to	repurchase	shares	of	our	common stock	in	2018.

Dividends	paid	in	2017	were	$6.5	billion.	During	the	third	quarter	of	2017,	our	Board	of	Directors	approved	a	2.9%	increase	in	the	quarterly	dividend	to	$1.07	per common	share.	As	a	result,	the	present	annualized	dividend	rate	is	$4.28	per	common	share.

# Market	Risk

Ÿ	Counterparty	Risk	-	We	predominantly	work	with	financial	institutions	with	strong	short-	and	long-term	credit	ratings	as	assigned	by	Standard	&	Poor's	and Moody's.	These	banks	are	also	part	of	a	defined	group	of	relationship	banks.	Non-investment	grade	institutions	are	only	used	in	certain	emerging	markets	to	the	extent required	by	local	business	needs.	We	have	a	conservative	approach	when	it	comes	to	choosing	financial	counterparties	and	financial	instruments.	As	such	we	do	not invest	or	hold	investments	in	any	structured	or	equity-linked	products.	The	majority	of	our	cash	and	cash	equivalents	is	currently	invested	in	demand	deposits	maturing within	less	than	30	days.

We	continuously	monitor	and	assess	the	credit	worthiness	of	all	our	counterparties.

Ÿ	Derivative	Financial	Instruments	-	We	operate	in	markets	outside	of	the	U.S.,	with	manufacturing	and	sales	facilities	in	various	locations	throughout	the	world. Consequently,	we	use	certain	financial	instruments	to	manage	our	foreign	currency	and	interest	rate	exposure.	We	use	derivative	financial	instruments	principally	to reduce	our	exposure	to	market	risks	resulting	from	fluctuations	in	foreign

exchange	rates	by	creating	offsetting	exposures.	We	are	not	a	party	to	leveraged	derivatives	and,	by	policy,	do	not	use	derivative	financial	instruments	for	speculative purposes.

See	Item	8,	Note	15.	Financial	Instruments,	Item	8,	Note	16.	Fair	Value	Measurements	and	Item	8,	Note	19.	Balance	Sheet	Offsetting	to	our	consolidated	financial statements	for	further	details	on	our	derivative	financial	instruments	and	the	related	collateral	arrangements.

Ÿ	Value	at	Risk	-	We	use	a	value	at	risk	computation	to	estimate	the	potential	one-day	loss	in	the	fair	value	of	our	interest-rate-sensitive	financial	instruments	and	to estimate	the	potential	one-day	loss	in	pre-tax	earnings	of	our	foreign	currency	price-sensitive	derivative	financial	instruments.	This	computation	includes	our	debt,	short- term	investments,	and	foreign	currency	forwards,	swaps	and	options.	Anticipated	transactions,	foreign	currency	trade	payables	and	receivables,	and	net	investments	in foreign	subsidiaries,	which	the	foregoing	instruments	are	intended	to	hedge,	were	excluded	from	the	computation.

The	computation	estimates	were	made	assuming	normal	market	conditions,	using	a	95%	confidence	interval.	We	use	a	"variance/co-variance"	model	to	determine	the observed	interrelationships	between	movements	in	interest	rates	and	various	currencies.	These	interrelationships	were	determined	by	observing	interest	rate	and	forward currency	rate	movements	over	the	preceding	quarter	for	determining	value	at	risk	at	December	31,	2017	and	2016,	and	over	each	of	the	four	preceding	quarters	for	the calculation	of	average	value	at	risk	amounts	during	each	year.	The	values	of	foreign	currency	options	do	not	change	on	a	one-to-one	basis	with	the	underlying	currency and	were	valued	accordingly	in	the	computation.

The	estimated	potential	one-day	loss	in	fair	value	of	our	interest-rate-sensitive	instruments,	primarily	debt,	under	normal	market	conditions	and	the	estimated	potential one-day	loss	in	pre-tax	earnings	from	foreign	currency	instruments	under	normal	market	conditions,	as	calculated	in	the	value	at	risk	model,	were	as	follows:

The	value	at	risk	computation	is	a	risk	analysis	tool	designed	to	statistically	estimate	the	maximum	probable	daily	loss	from	adverse	movements	in	interest	and	foreign currency	rates	under	normal	market	conditions.	The	computation	does	not	purport	to	represent	actual	losses	in	fair	value	or	earnings	to	be	incurred	by	us,	nor	does	it consider	the	effect	of	favorable	changes	in	market	rates.	We	cannot	predict	actual	future	movements	in	such	market	rates	and	do	not	present	these	results	to	be	indicative of	future	movements	in	market	rates	or	to	be	representative	of	any	actual	impact	that	future	changes	in	market	rates	may	have	on	our	future	results	of	operations	or financial	position.

# Contingencies

See	Item	3	and	Item	8,	Note	18.	Contingencies	to	our	consolidated	financial	statements	for	a	discussion	of	contingencies.

# Cautionary	Factors	That	May	Affect	Future	Results

We	may	from	time	to	time	make	written	or	oral	forward-looking	statements,	including	statements	contained	in	filings	with	the	SEC,	in	reports	to	stockholders	and	in press	 releases	 and	 investor	 webcasts.	 You	 can	 identify	 these	 forward-looking	 statements	 by	 use	 of	 words	 such	 as	 "strategy,"	 "expects,"	 "continues,"	 "plans," "anticipates,"	"believes,"	"will,"	"estimates,"	"intends,"	"projects,"	"goals,"	"targets"	and	other	words	of	similar	meaning.	You	can	also	identify	them	by	the	fact	that	they do	not	relate	strictly	to	historical	or	current	facts.

We	cannot	guarantee	that	any	forward-looking	statement	will	be	realized,	although	we	believe	we	have	been	prudent	in	our	plans	and	assumptions.	Achievement	of future	 results	 is	 subject	 to	 risks,	 uncertainties	 and	 inaccurate	 assumptions.	 Should	 known	 or	 unknown	 risks	 or	 uncertainties	 materialize,	 or	 should	 underlying assumptions	prove	inaccurate,	actual	results	could	vary	materially	from	those	anticipated,	estimated	or	projected.	Investors	should	bear	this	in	mind	as	they	consider forward-looking	statements	and	whether	to	invest	in	or	remain	invested	in	our	securities.	In	connection	with	the	"safe	harbor"	provisions	of	the	Private	Securities Litigation	Reform	Act	of	1995,	we	are	identifying	important	factors	that,	individually	or	in	the	aggregate,	could	cause	actual	results	and	outcomes	to	differ	materially from	those	contained	in	any	forward-looking	statements	made	by	us;	any	such	statement	is	qualified	by	reference	to	the	following	cautionary	statements.	We	elaborate on	these	and	other	risks	we	face	throughout	this	document,	particularly	in	Item	1A.	Risk	Factors	and	Business	Environment	of	this	section.	You	should	understand	that	it is	 not	 possible	 to	 predict	 or	 identify	 all	 risk	 factors.	 Consequently,	 you	 should	 not	 consider	 the	 following	 to	 be	 a	 complete	 discussion	 of	 all	 potential	 risks	 or uncertainties.	We	do	not	undertake	to	update	any	forward-looking	statement	that	we	may	make	from	time	to	time,	except	in	the	normal	course	of	our	public	disclosure obligations.

# Item	7A. Quantitative	and	Qualitative	Disclosures	About	Market	Risk.

The	information	called	for	by	this	Item	is	included	in	Item	7,	Market	Risk.

# Financial	Statements	and	Supplementary	Data.

# Consolidated	Balance	Sheets

(in	millions	of	dollars,	except	share	data)

| at	December	31, | 2017 | 2016 |
| :--- | :--- | :--- |
| Liabilities |  |  |
| Short-term\tborrowings\t(Note\t7) | $499 | $643 |
| Current\tportion\tof\tlong-term\tdebt\t(Note\t7) | 2,506 | 2,573 |
| Accounts\tpayable |  |  |
|  | 2,242 | 1,666 |
| Accrued\tliabilities: |  |  |
| Marketing\tand\tselling |  |  |
|  | 708 | 575 |
| Taxes,\texcept\tincome\ttaxes |  |  |
|  | 5,324 | 6,204 |
| Employment\tcosts |  |  |
|  | 856 | 800 |
| Dividends\tpayable |  |  |
|  | 1,669 | 1,621 |
| Other |  |  |
|  | 1,346 | 1,553 |
| Income\ttaxes\t(Note\t11) | 812 | 832 |
| Total\tcurrent\tliabilities |  |  |
|  | 15,962 | 16,467 |
| Long-term\tdebt\t(Note\t7) | 31,334 | 25,851 |
| Deferred\tincome\ttaxes |  |  |
|  | 799 | 1,897 |
| Employment\tcosts |  |  |
|  | 2,271 | 2,800 |
| Income\ttaxes\tand\tother\tliabilities\t(Note\t11) | 2,832 | 736 |
| Total\tliabilities |  |  |
|  | 53,198 | 47,751 |
| Contingencies\t(Note\t18) |  |  |
| Stockholders'\t(Deficit)\tEquity |  |  |
| Common\tstock,\tno\tpar\tvalue\t(2,109,316,331\tshares\tissued\tin\t2017\tand\t2016) | — | — |
| Additional\tpaid-in\tcapital |  |  |
|  | 1,972 | 1,964 |
| Earnings\treinvested\tin\tthe\tbusiness |  |  |
|  | 29,859 | 30,397 |
| Accumulated\tother\tcomprehensive\tlosses |  |  |
|  | (8,535) | (9,559) |
|  | 23,296 | 22,802 |
| Less:\tcost\tof\trepurchased\tstock\t(556,098,569\tand\t557,930,784\tshares\tin\t2017\tand\t2016,\trespectively) | 35,382 | 35,490 |
| Total\tPMI\tstockholders'\tdeficit | (12,086) | (12,688) |
| Noncontrolling\tinterests |  |  |
|  | 1,856 | 1,788 |
| Total\tstockholders'\tdeficit | (10,230) | (10,900) |
| Total\tLiabilities\tand\tStockholders'\t(Deficit)\tEquity | $42,968 | $36,851 |

See	notes	to	consolidated	financial	statements.

# Consolidated	Statements	of	Earnings

# Consolidated	Statements	of	Comprehensive	Earnings

(in	millions	of	dollars)

| for	the	years	ended	December	31, | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Net\tearnings | $6,341 | $7,250 | $7,032 |
| Other\tcomprehensive\tearnings\t(losses),\tnet\tof\tincome\ttaxes: |  |  |  |
| Change\tin\tcurrency\ttranslation\tadjustments: |  |  |  |
| Unrealized\tgains\t(losses),\tnet\tof\tincome\ttaxes\tof\t$620\tin\t2017,\t($101)\tin\t2016\tand\t($143)\tin\t2015 | 330 | (14) | (2,248) |
| (Gains)/losses\ttransferred\tto\tearnings,\tnet\tof\tincome\ttaxes\tof\t$-\tin\t2017,\t2016\tand\t2015 | (2) | 5 | (1) |
| Change\tin\tnet\tloss\tand\tprior\tservice\tcost: |  |  |  |
| Net\tgains\t(losses)\tand\tprior\tservice\tcosts,\tnet\tof\tincome\ttaxes\tof\t($17)\tin\t2017,\t$78\tin\t2016\tand\t$17\tin\n2015 | 523 | (460) | (536) |
| Amortization\tof\tnet\tlosses,\tprior\tservice\tcosts\tand\tnet\ttransition\tcosts,\tnet\tof\tincome\ttaxes\tof\t($31)\tin\n2017,\t($43)\tin\t2016\tand\t($48)\tin\t2015 | 228 | 224 | 227 |
| Change\tin\tfair\tvalue\tof\tderivatives\taccounted\tfor\tas\thedges: |  |  |  |
| Gains\t(losses)\trecognized,\tnet\tof\tincome\ttaxes\tof\t$8\tin\t2017,\t($4)\tin\t2016\tand\t($5)\tin\t2015 | (44) | 8 | 38 |
| (Gains)\tlosses\ttransferred\tto\tearnings,\tnet\tof\tincome\ttaxes\tof\t$2\tin\t2017,\t($3)\tin\t2016\tand\t$14\tin\t2015 | (11) | 30 | (102) |
| Total\tother\tcomprehensive\tearnings\t(losses) | 1,024 | (207) | (2,622) |
| Total\tcomprehensive\tearnings | 7,365 | 7,043 | 4,410 |
| Less\tcomprehensive\tearnings\tattributable\tto: |  |  |  |
| Noncontrolling\tinterests | 306 | 233 | 113 |
| Comprehensive\tearnings\tattributable\tto\tPMI | $7,059 | $6,810 | $4,297 |

# Consolidated	Statements	of	Stockholders'	(Deficit)	Equity

|  |  |  | PMI	Stockholders'	(Deficit)	Equity | PMI	Stockholders'	(Deficit)	Equity |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Common\nStock | Additional\nPaid-in\nCapital | Earnings\nReinvested\nin\tthe\tBusiness | Accumulated\tOther\nComprehensive\nLosses | Cost\tof\nRepurchased\nStock | Noncontrolling\nInterests | Total |
| Balances,\tJanuary\t1,\t2015 | $— | $710 | $29,249 | $(6,826) | $(35,762) | $1,426 | $(11,203) |
| Net\tearnings |  |  | 6,873 |  |  | 159 | 7,032 |
| Other\tcomprehensive\tearnings\t(losses),\tnet\nof\tincome\ttaxes |  |  |  | (2,576) |  | (46) | (2,622) |
| Issuance\tof\tstock\tawards |  | (3) |  |  | 149 |  | 146 |
| Dividends\tdeclared\t($4.04\tper\tshare) |  |  | (6,280) |  |  |  | (6,280) |
| Payments\tto\tnoncontrolling\tinterests |  |  |  |  |  | (171) | (171) |
| Sale\t(purchase)\tof\tsubsidiary\tshares |  |  |  |  |  |  |  |
| to/(from)\tnoncontrolling\tinterests\t(Note |  |  |  |  |  |  |  |
| 6) |  |  |  |  |  |  |  |
|  |  | 1,222 |  |  |  | 400 | 1,622 |
| Balances,\tDecember\t31,\t2015 | — | 1,929 | 29,842 | (9,402) | (35,613) | 1,768 | (11,476) |
| Net\tearnings |  |  | 6,967 |  |  | 283 | 7,250 |
| Other\tcomprehensive\tearnings\t(losses),\tnet\nof\tincome\ttaxes |  |  |  | (157) |  | (50) | (207) |
| Issuance\tof\tstock\tawards |  | 37 |  |  | 123 |  | 160 |
| Dividends\tdeclared\t($4.12\tper\tshare) |  |  | (6,412) |  |  |  | (6,412) |
| Payments\tto\tnoncontrolling\tinterests |  |  |  |  |  | (219) | (219) |
| Other |  | (2) |  |  |  | 6 | 4 |
| Balances,\tDecember\t31,\t2016 | — | 1,964 | 30,397 | (9,559) | (35,490) | 1,788 | (10,900) |
| Net\tearnings |  |  | 6,035 |  |  | 306 | 6,341 |
| Other\tcomprehensive\tearnings\t(losses),\tnet\nof\tincome\ttaxes |  |  |  | 1,024 |  | — | 1,024 |
| Issuance\tof\tstock\tawards |  | 20 |  |  | 108 |  | 128 |
| Dividends\tdeclared\t($4.22\tper\tshare) |  |  | (6,573) |  |  |  | (6,573) |
| Payments\tto\tnoncontrolling\tinterests |  |  |  |  |  | (255) | (255) |
| Other |  | (12) |  |  |  | 17 | 5 |
| Balances,\tDecember\t31,\t2017 | $— | $1,972 | $29,859 | $(8,535) | $(35,382) | $1,856 | $(10,230) |

# Consolidated	Statements	of	Cash	Flows

| for	the	years	ended	December	31, | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| CASH\tPROVIDED\tBY\t(USED\tIN)\tFINANCING\tACTIVITIES |  |  |  |
| Short-term\tborrowing\tactivity\tby\toriginal\tmaturity: |  |  |  |
| \t\t\t\tNet\trepayments\t-\tmaturities\tof\t90\tdays\tor\tless | $(127) | $(12) | $(266) |
| \t\t\t\tIssuances\t-\tmaturities\tlonger\tthan\t90\tdays | 1,634 | — | — |
| \t\t\t\tRepayments\t-\tmaturities\tlonger\tthan\t90\tdays | (1,634) | — | — |
| Long-term\tdebt\tproceeds | 6,850 | 3,536 | 1,539 |
| Long-term\tdebt\trepaid | (2,551) | (2,393) | (1,229) |
| Repurchases\tof\tcommon\tstock | — | — | (48) |
| Dividends\tpaid | (6,520) | (6,378) | (6,250) |
| Sale\t(purchase)\tof\tsubsidiary\tshares\tto/(from)\tnoncontrolling\tinterests\t(Note\t6) | 5 | 7 | 1,622 |
| Other | (426) | (173) | (104) |
| Net\tcash\tused\tin\tfinancing\tactivities | (2,769) | (5,413) | (4,736) |
| Effect\tof\texchange\trate\tchanges\ton\tcash\tand\tcash\tequivalents | 1,079 | (874) | (686) |
| Cash\tand\tcash\tequivalents: |  |  |  |
| Increase | 4,208 | 822 | 1,735 |
| Balance\tat\tbeginning\tof\tyear | 4,239 | 3,417 | 1,682 |
| Balance\tat\tend\tof\tyear | $8,447 | $4,239 | $3,417 |
| Cash\tPaid: |  |  |  |
| \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tInterest | $1,050 | $1,052 | $1,045 |
| \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tIncome\ttaxes | $3,403 | $2,829 | $2,771 |

# Notes	to	Consolidated	Financial	Statements

# Background	and	Basis	of	Presentation:

# Background

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

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

# Basis	of	presentation

The	 preparation	 of	 financial	 statements	 in	 conformity	 with	 accounting	 principles	 generally	 accepted	 in	 the	 United	 States	 of	America	 ("U.S.	 GAAP")	 requires management	to	make	estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities,	the	disclosure	of	contingent	liabilities	at	the	dates	of	the financial	statements	and	the	reported	amounts	of	net	revenues	and	expenses	during	the	reporting	periods.	Significant	estimates	and	assumptions	include,	among	other things:	pension	and	benefit	plan	assumptions;	useful	lives	and	valuation	assumptions	of	goodwill	and	other	intangible	assets;	marketing	programs,	and	income	taxes. Actual	results	could	differ	from	those	estimates.

The	consolidated	financial	statements	include	PMI,	as	well	as	its	wholly-owned	and	majority-owned	subsidiaries.	Investments	in	which	PMI	exercises	significant influence	(generally	20%-50%	ownership	interest)	are	accounted	for	under	the	equity	method	of	accounting.	Investments	in	which	PMI	has	an	ownership	interest	of	less than	20%,	or	does	not	exercise	significant	influence,	are	accounted	for	under	the	cost	method	of	accounting.	All	intercompany	transactions	and	balances	have	been eliminated.

Certain	prior	years'	amounts	have	been	reclassified	to	conform	with	the	current	year's	presentation,	due	primarily	to	the	aggregation	of	the	U.S.	and	non-U.S.	pension plans	in	Note	13.	Benefit	Plans.

# Summary	of	Significant	Accounting	Policies:

# Cash	and	cash	equivalents

Cash	equivalents	include	demand	deposits	with	banks	and	all	highly	liquid	investments	with	original	maturities	of	three	months	or	less.

# Depreciation

Property,	plant	and	equipment	are	stated	at	historical	cost	and	depreciated	by	the	straight-line	method	over	the	estimated	useful	lives	of	the	assets.	Machinery	and equipment	are	depreciated	over	periods	ranging	from	3	to	15	years,	and	buildings	and	building	improvements	over	periods	up	to	40	years.

# Employee	benefit	plans

PMI	provides	a	range	of	benefits	to	its	employees	and	retired	employees,	including	pensions,	postretirement	health	care	and	postemployment	benefits	(primarily severance).	PMI	records	annual	amounts	relating	to	these	plans	based	on	calculations	specified	under	U.S.	GAAP.	PMI	recognizes	the	funded	status	of	its	defined pension	and	postretirement	plans	on	the	consolidated	balance	sheets.	The	funded	status	is	measured	as	the	difference	between	the	fair	value	of	the	plans	assets	and	the benefit	obligation.	PMI	measures	the	plan	assets	and	liabilities	at	the	end	of	the	fiscal	year.	For	defined	benefit	pension	plans,	the	benefit	obligation	is	the	projected benefit	obligation.	For	the	postretirement	health	care	plans,	the	benefit	obligation	is	the	accumulated	postretirement	benefit	obligation.	Any	plan	with	an	overfunded status	is	recognized	as	an	asset,	and	any	plan	with	an	underfunded	status	is	recognized	as	a	liability.	Any	gains	or	losses	and	prior	service	costs	or	credits	that	have	not been	recognized	as	a	component	of	net	periodic	benefit	costs	are	recorded	as	a	component	of	other	comprehensive	earnings	(losses),	net	of	deferred	taxes.	PMI	elects	to recognize	actuarial	gains/(losses)	using	the	corridor	approach.

# Foreign	currency	translation

PMI	translates	the	results	of	operations	of	its	subsidiaries	and	affiliates	using	average	exchange	rates	during	each	period,	whereas	balance	sheet	accounts	are	translated using	exchange	rates	at	the	end	of	each	period.	Currency	translation	adjustments	are	recorded	as	a	component	of	stockholders'	(deficit)	equity.	In	addition,	some	of PMI's	subsidiaries	have	assets	and	 liabilities	denominated	 in	currencies	other	 than	 their	functional	currencies,	and	 to	 the	extent	 those	are	not	designated	as	net investment	hedges,	these	assets	and	liabilities	generate	transaction	gains	and	losses	when	translated	into	their	respective	functional	currencies.

# Goodwill	and	non-amortizable	intangible	assets	valuation

PMI	tests	goodwill	and	non-amortizable	intangible	assets	for	impairment	annually	or	more	frequently	if	events	occur	that	would	warrant	such	review.	PMI	performs	its annual	impairment	analysis	in	the	second	quarter	of	each	year.	The	impairment	analysis	involves	comparing	the	fair	value	of	each	reporting	unit	or	non-amortizable intangible	asset	to	the	carrying	value.	If	the	carrying	value	exceeds	the	fair	value,	goodwill	or	a	non-amortizable	intangible	asset	is	considered	impaired.

# Hedging	instruments

Derivative	financial	instruments	are	recorded	at	fair	value	on	the	consolidated	balance	sheets	as	either	assets	or	liabilities.	Changes	in	the	fair	value	of	derivatives	are recorded	each	period	either	in	accumulated	other	comprehensive	losses	on	the	consolidated	balance	sheet,	or	in	earnings,	depending	on	whether	a	derivative	is	designated and	effective	as	part	of	a	hedge	transaction	and,	if	it	is,	the	type	of	hedge	transaction.	Gains	and	losses	on	derivative	instruments	reported	in	accumulated	other comprehensive	losses	are	reclassified	to	the	consolidated	statements	of	earnings	in	the	periods	in	which	operating	results	are	affected	by	the	hedged	item.	Cash	flows from	hedging	instruments	are	classified	in	the	same	manner	as	the	affected	hedged	item	in	the	consolidated	statements	of	cash	flows.

# Impairment	of	long-lived	assets

PMI	reviews	long-lived	assets,	including	amortizable	intangible	assets,	for	impairment	whenever	events	or	changes	in	business	circumstances	indicate	that	the	carrying amount	of	the	assets	may	not	be	fully	recoverable.	PMI	performs	undiscounted	operating	cash	flow	analyses	to	determine	if	an	impairment	exists.	For	purposes	of recognition	and	measurement	of	an	impairment	for	assets	held	for	use,	PMI	groups	assets	and	liabilities	at	the	lowest	level	for	which	cash	flows	are	separately identifiable.	If	an	impairment	is	determined	to	exist,	any	related	impairment	loss	is	calculated	based	on	fair	value.	Impairment	losses	on	assets	to	be	disposed	of,	if	any, are	based	on	the	estimated	proceeds	to	be	received,	less	costs	of	disposal.

# Impairment	of	investments	in	unconsolidated	subsidiaries

Investments	 in	 unconsolidated	 subsidiaries	 are	 evaluated	 for	 impairment	 whenever	 events	 or	 changes	 in	 circumstances	 indicate	 that	 the	 carrying	 amount	 of	 the investments	 may	 not	 be	 recoverable.	An	 impairment	 loss	would	be	recorded	whenever	a	decline	 in	value	of	an	equity	 investment	below	 its	carrying	amount	 is determined	to	be	other	than	temporary.	PMI	determines	whether	a	loss	is	other	than	temporary	by	considering	the	length	of	time	and	extent	to	which	the	fair	value	of	the equity	investment	has	been	less	than	the	carrying	amount,	the	financial	condition	of	the	equity	investment,	and	the	intent	to	retain	the	investment	for	a	period	of	time	is sufficient	to	allow	for	any	anticipated	recovery	in	market	value.

# Income	taxes

Income	taxes	are	provided	on	all	earnings	for	jurisdictions	outside	the	United	States.	These	provisions,	as	well	as	state	and	local	income	tax	provisions,	are	determined on	a	separate	company	basis,	and	the	related	assets	and	liabilities	are	recorded	in	PMI's	consolidated	balance	sheets.	Significant	judgment	is	required	in	determining income	tax	provisions	and	in	evaluating	tax	positions.	PMI	recognizes

accrued	interest	and	penalties	associated	with	uncertain	tax	positions	as	part	of	the	provision	for	income	taxes	on	the	consolidated	statements	of	earnings.

# Inventories

Inventories	are	stated	at	the	lower	of	cost	or	market.	The	first-in,	first-out	and	average	cost	methods	are	used	to	cost	substantially	all	inventories.	It	is	a	generally recognized	industry	practice	to	classify	leaf	tobacco	inventory	as	a	current	asset,	although	part	of	such	inventory,	because	of	the	duration	of	the	aging	process,	ordinarily would	not	be	utilized	within	one	year.

# Marketing	costs

PMI	supports	its	products	with	advertising,	adult	consumer	engagement	and	trade	promotions.	Such	programs	include,	but	are	not	limited	to,	discounts,	rebates,	in-store display	incentives,	e-commerce,	mobile	and	other	digital	platforms,	adult	consumer	activation	and	promotion	activities,	as	well	as	costs	associated	with	adult	consumer experience	outlets	and	other	adult	consumer	touchpoints	and	volume-based	incentives.	Advertising,	as	well	as	certain	consumer	engagement	and	trade	activities	costs, are	expensed	as	incurred.	Trade	promotions	are	recorded	as	a	reduction	of	revenues	based	on	amounts	estimated	as	being	due	to	customers	at	the	end	of	a	period,	based principally	on	historical	utilization.	For	interim	reporting	purposes,	advertising	and	certain	consumer	engagement	expenses	are	charged	to	earnings	based	on	estimated sales	and	related	expenses	for	the	full	year.

# Revenue	recognition

PMI	recognizes	revenues,	net	of	sales	incentives	and	including	shipping	and	handling	charges	billed	to	customers,	either	upon	shipment	or	delivery	of	goods	when	title and	risk	of	loss	pass	to	customers.	Excise	taxes	billed	by	PMI	to	customers	are	reported	in	net	revenues.	Shipping	and	handling	costs	are	classified	as	part	of	cost	of sales.	Estimated	costs	associated	with	warranty	programs	are	generally	provided	for	in	cost	of	sales	in	the	period	the	related	revenues	are	recognized.

On	May	28,	2014,	the	Financial	Accounting	Standards	Board	issued	Accounting	Standards	Update	ASU	2014-09,	"Revenue	from	Contracts	with	Customers."	For further	details,	see	Note	21.	New	Accounting	Standards.

# Stock-based	compensation

PMI	measures	compensation	cost	for	all	stock-based	awards	at	fair	value	on	date	of	grant	and	recognizes	the	compensation	costs	over	the	service	periods	for	awards expected	to	vest.	PMI's	accounting	policy	is	to	estimate	the	number	of	awards	expected	to	be	forfeited	and	adjust	the	expense	when	it	is	no	longer	probable	that	the employee	will	fulfill	the	service	condition.	For	further	details,	see	Note	9.	Stock	Plans.

# Goodwill	and	Other	Intangible	Assets,	net:

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

Goodwill	primarily	reflects	PMI's	acquisitions	in	Canada,	Colombia,	Greece,	Indonesia,	Mexico,	Pakistan	and	Serbia,	as	well	as	the	business	combination	in	the Philippines.

The	movements	in	goodwill	were	as	follows:

| European<br>Union | Eastern	Europe,<br>Middle	East<br>&amp;<br>Africa | Asia | Latin<br>America	&amp;<br>Canada | Total |
| :--- | :--- | :--- | :--- | :--- |
| \t $1,310 | \t $374 | \t $3,581 | \t $2,150 | \t $7,415 |
| (72) | (2) | 15 | (32) | (91) |
| 1,238 | 372 | 3,596 | 2,118 | 7,324 |
| 181 | 51 | (19) | 129 | 342 |
| \t $1,419 | \t $423 | \t $3,577 | \t $2,247 | \t $7,666 |

Additional	details	of	other	intangible	assets	were	as	follows:

| December	31,	2017<br>Gross<br>Carrying<br>Amount | Accumulated<br>Amortization | December	31,	2016<br>Gross<br>Carrying<br>Amount | Accumulated<br>Amortization |
| :--- | :--- | :--- | :--- |
| $1,323 |  | \t $1,455 |  |
| 1,798 | \t $689 | 1,598 | \t $583 |
| $3,121 | \t $689 | \t $3,053 | \t $583 |

Non-amortizable	intangible	assets	substantially	consist	of	trademarks	from	PMI's	acquisitions	in	Indonesia	in	2005	and	Mexico	in	2007.	Amortizable	intangible	assets primarily	 consist	 of	 certain	 trademarks	 and	 distribution	 networks	 associated	 with	 business	 combinations.	During	 the	 first	 quarter	 of	2017,	 PMI	 reclassified	three trademarks	with	a	gross	carrying	amount	of	$153	million	from	non-amortizable	intangible	assets	to	amortizable	intangible	assets.	The	gross	carrying	amount,	the	range of	useful	lives	as	well	as	the	weighted-average	remaining	useful	life	of	amortizable	intangible	assets	at	December	31,	2017,	were	as	follows:

Pre-tax	 amortization	 expense	 for	 intangible	 assets	 during	 the	 years	 ended	December	 31,	 2017,	2016	 and	2015,	 was	$88	 million,	$74	 million	 and	$82	 million, respectively.	Amortization	expense	for	each	of	the	next	five	years	is	estimated	to	be	$84	million	or	less,	assuming	no	additional	transactions	occur	that	require	the amortization	of	intangible	assets.

The	increase	in	the	gross	carrying	amount	of	other	intangible	assets	from	December	31,	2016,	was	primarily	due	to	currency	movements.

During	the	second	quarter	of	2017,	PMI	completed	its	annual	review	of	goodwill	and	non-amortizable	intangible	assets	for	potential	impairment,	and	no	impairment charges	were	required	as	a	result	of	this	review.	Additionally,	PMI	elected	to	early	adopt	Accounting

Standards	 Update	ASU	 2017-04	 "Intangibles-Goodwill	 and	 Other (Topic	 350)	 Simplifying the	 Test for	 Goodwill Impairment,"	 which	 had	 no impact	 on	 PMI's impairment	review	or	conclusion.

At	December	31,	2017	and	2016,	PMI	had	total	investments	in	unconsolidated	subsidiaries	of	$1,074	million	and	$1,011	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	 and	 movements	 in	 currency	 translation	 adjustments.	The	 carrying	 value	 of	 our	 equity	 method	 investments	 at December	31,	2017	and	2016	exceeded	our	share	of	the	unconsolidated	subsidiaries'	book	value	by	$927	million	and	$867	million,	respectively.	The	difference	between the	investment	carrying	value	and	the	amount	of	underlying	equity	in	net	assets,	excluding	$873	million	and	$810	million	attributable	to	goodwill	as	of	December	31, 2017	and	2016,	respectively,	is	being	amortized	on	a	straight-line	basis	over	the	underlying	assets'	estimated	useful	lives	of	10	to	20	years.	At	December	31,	2017	and 2016,	PMI	received	year-to-date	dividends	from	unconsolidated	subsidiaries	of	$120	million	and	$117	million,	respectively.

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	Société	Nationale	des Tabacs	et	Allumettes	SpA.	STAEM	manufactures	and	distributes	under	license	some	of	PMI's	brands.

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

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

PMI's	earnings	activity	from	unconsolidated	subsidiaries	was	as	follows:

The	activity	primarily	related	to	agreements	with	PMI's	unconsolidated	subsidiaries	within	the	Eastern	Europe,	Middle	East	&	Africa	segment.	These	agreements,	which are	 in	 the	 ordinary	 course	 of	 business,	 are	 primarily	 for	 distribution,	 contract	 manufacturing	 and	 licenses.	PMI	 eliminated	 its	 respective	 share	 of	 all	 significant intercompany	transactions	with	the	equity	method	investees.

# 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. Estimated	costs	associated	with	warranty	programs	are	generally	provided	for	in	cost	of	sales	in	the	period	the	related	revenue	is	recognized,	and	during	2017,	PMI recorded	$168	million	associated	with	 these	product	warranty	programs.	PMI	assesses	the	adequacy	of	its	accrued	warranty	liabilities	and	adjusts	the	amounts	as necessary	based	on	actual	experience	and	changes	in	future	estimates.	Factors	that	affect	warranty	obligations	may	vary	across	markets	but	typically	include	product failure	rates,	logistics	and	service	delivery	costs,	and	warranty	policies.	At	December	31,	2017,	$71	million	was	accrued	related	to	these	warranty	obligations	within other	accrued	liabilities.

As	announced	in	June	2015,	PMI's	subsidiary	PT	HM	Sampoerna	Tbk.	("Sampoerna"),	of	which	PMI	held	a	98.18%	interest,	was	required	to	comply	with	the	January 30,	2014,	Indonesian	Stock	Exchange	("IDX")	regulation	requiring	all	listed	public	companies	to	have	at	least	a	7.5%	public	shareholding	by	January	30,	2016.	In	order to	comply	with	this	requirement,	Sampoerna	conducted	a	rights	issue	(the	"Rights	Issue").	The	exercise	price	for	the	rights	was	set	at	Rp.	77,000	per	share,	a	1.349% premium	to	the	closing	price	on	the	IDX	as	of	September	30,	2015.	In	connection	with	the	Rights	Issue,	PT	Philip	Morris	Indonesia	("PMID"),	a	fully	consolidated subsidiary	of	PMI,	sold	264,209,711	of	the	rights	to	third-party	investors.	Delivery	of	the	rights	sold	took	place	on	October	26,	2015.	The	total	net	proceeds	from	the Rights	Issue	were	$1.5	billion	at	prevailing	exchange	rates	on	the	closing	date.	The	sale	of	the	rights	resulted	in	an	increase	to	PMI's	additional	paid-in	capital	of	$1.1 billion.

# Indebtedness:

# Short-Term	Borrowings

At	December	31,	2017	and	2016,	PMI's	short-term	borrowings	and	related	average	interest	rates	consisted	of	the	following:

| December	31,	2017<br>Amount	Outstanding | Average	Year-End<br>Rate | December	31,	2016<br>Amount	Outstanding | Average	Year-End<br>Rate |
| :--- | :--- | :--- | :--- |
| $— | —% \t $ | — | —% |
| 499 | 5.7 | 643 | 5.0 |
| $499 | \t $643 | \t $643 |  |

Given	the	mix	of	subsidiaries	and	their	respective	local	economic	environments,	the	average	interest	rate	for	bank	loans	above	can	vary	significantly	from	day	to	day	and country	to	country.

The	fair	values	of	PMI's	short-term	borrowings	at	December	31,	2017	and	2016,	based	upon	current	market	interest	rates,	approximate	the	amounts	disclosed	above.

# Long-Term	Debt

At	December	31,	2017	and	2016,	PMI's	long-term	debt	consisted	of	the	following:

# Other	debt:

Other	foreign	currency	debt	above	includes	mortgage	debt	in	Switzerland	and	capital	lease	obligations	at	December	31,	2017	 and	December	31,	2016.	Other	foreign currency	debt	above	also	includes	a	bank	loan	in	the	Philippines	at	December	31,	2016.

# Debt	Issuances	Outstanding:

PMI's	debt	issuances	outstanding	at	December	31,	2017,	were	as	follows:

(a)	These	notes	are	a	further	issuance	of	the	4.250%	notes	issued	by	PMI	in	November	2014.

(b) USD	equivalents	for	foreign	currency	notes	were	calculated	based	on	exchange	rates	on	the	date	of	issuance.

The	net	proceeds	from	the	sale	of	the	securities	listed	in	the	table	above	were	used	for	general	corporate	purposes,	including	working	capital	requirements	and	repurchase of	PMI's	common	stock	until	2015.

# Aggregate	maturities:

Aggregate	maturities	of	long-term	debt	are	as	follows:

See	Note	16.	Fair	Value	Measurements	for	additional	disclosures	related	to	the	fair	value	of	PMI's	debt.

# Credit	Facilities

On	January	27,	2017,	PMI	entered	into	an	agreement	to	extend	the	term	of	its	$2.0	billion	364-day	revolving	credit	facility	from	February	7,	2017	to	February	6,	2018. On	August	29,	2017,	PMI	entered	into	an	agreement,	effective	October	1,	2017,	to	extend	the	term	of	its	$3.5	billion	multi-year	revolving	credit	facility,	for	an additional	year	covering	the	period	October	1,	2021	to	October	1,	2022.

At	December	31,	2017,	PMI's	total	committed	credit	facilities	and	commercial	paper	outstanding	were	as	follows:

At	December	31,	2017,	there	were	no	borrowings	under	these	committed	credit	facilities,	and	the	entire	committed	amounts	were	available	for	borrowing.

On	January	29,	2018,	PMI	entered	into	an	agreement	to	extend	the	term	of	its	$2.0	billion	364-day	revolving	credit	facility	from	February	6,	2018,	to	February	5,	2019.

Each	of	these	facilities	requires	PMI	to	maintain	a	ratio	of	consolidated	earnings	before	interest,	taxes,	depreciation	and	amortization	("consolidated	EBITDA")	to consolidated	interest	expense	of	not	less	than	3.5	to	1.0	on	a	rolling	four-quarter	basis.	At	December	31,	2017,	PMI's	ratio	calculated	in	accordance	with	the	agreements was	10.6	to	1.0.	These	facilities	do	not	include	any	credit	rating	triggers,	material	adverse	change	clauses	or	any	provisions	that	could	require	PMI	to	post	collateral.	The terms	"consolidated	EBITDA"	and	"consolidated	interest	expense,"	both	of	which	include	certain	adjustments,	are	defined	in	the	facility	agreements	previously	filed with	the	Securities	and	Exchange	Commission.

In	addition	to	the	committed	credit	facilities	discussed	above,	certain	subsidiaries	maintain	short-term	credit	arrangements	to	meet	their	respective	working	capital needs.	These	credit	arrangements,	which	amounted	to	approximately	$2.8	billion	at	December	31,	2017	and	$2.9	billion	at	December	31,	2016,	are	for	the	sole	use	of	the subsidiaries.	Borrowings	under	these	arrangements	amounted	to	$499	million	at	December	31,	2017,	and	$643	million	at	December	31,	2016.

# Capital	Stock:

Shares	of	authorized	common	stock	are	6.0	billion;	issued,	repurchased	and	outstanding	shares	were	as	follows:

At	December	31,	2017,	31,246,310	shares	of	common	stock	were	reserved	for	stock	awards	under	PMI's	stock	plans,	and	250	million	shares	of	preferred	stock,	without par	value,	were	authorized	but	unissued.	PMI	currently	has	no	plans	to	issue	any	shares	of	preferred	stock.

# Stock	Plans:

In	May	2017,	PMI's	shareholders	approved	the	Philip	Morris	International	Inc.	2017	Performance	Incentive	Plan	(the	"2017	Plan").	The	2017	Plan	replaced	the	2012 Performance	Incentive	Plan,	and	there	will	be	no	additional	grants	under	the	replaced	plan.	Under	the	2017	Plan,	PMI	may	grant	to	eligible	employees	restricted	shares and	restricted	share	units,	performance-based	cash	incentive	awards	and	performance-based	equity	awards.	Up	to	25	million	shares	of	PMI's	common	stock	may	be issued	under	the	2017	Plan.	At	December	31,	2017,	shares	available	for	grant	under	the	2017	Plan	were	24,991,850.

In	May	2017,	PMI's	shareholders	also	approved	the	Philip	Morris	International	Inc.	2017	Stock	Compensation	Plan	for	Non-Employee	Directors	(the	"2017	Non- Employee	Directors	Plan").	The	2017	Non-Employee	Directors	Plan	replaced	the	2008	Stock	Compensation	Plan	for	Non-Employee	Directors,	and	there	will	be	no additional	grants	under	the	replaced	plan.	A	non-employee	director	is	defined	as	a	member	of	the	PMI	Board	of	Directors	who	is	not	a	full-time	employee	of	PMI	or	of any	corporation	in	which	PMI	owns,	directly	or	indirectly,	stock	possessing	at	least	50%	of	the	total	combined	voting	power	of	all	classes	of	stock	entitled	to	vote	in	the election	 of	 directors	 in	 such	 corporation.	Up	 to	1	million	 shares	 of	 PMI	 common	 stock	 may	 be	 awarded	 under	 the	 2017	 Non-Employee	 Directors	 Plan.	As	 of December	31,	2017,	shares	available	for	grant	under	the	plan	were	1,000,000.

# Restricted	share	unit	(RSU)	awards

PMI	may	grant	RSU	awards	to	eligible	employees;	recipients	may	not	sell,	assign,	pledge	or	otherwise	encumber	such	awards.	Such	awards	are	subject	to	forfeiture	if certain	employment	conditions	are	not	met.	RSU	awards	generally	vest	on	the	third	anniversary	of	the	grant	date.	RSU	awards	do	not	carry	voting	rights,	although	they do	earn	dividend	equivalents.

During	2017,	the	activity	for	RSU	awards	was	as	follows:

During	the	years	ended	December	31,	2017,	2016	and	2015,	the	weighted-average	grant	date	fair	value	of	the	RSU	awards	granted	to	PMI	employees	and	the	recorded compensation	expense	related	to	RSU	awards	were	as	follows:

| (in	millions,	except	per	RSU	award<br>granted) | Total	Weighted-Average<br>Grant	Date	Fair	Value	of<br>RSU	Awards	Granted | Weighted-Average<br>Grant	Date	Fair	Value<br>Per	RSU	Award<br>Granted | Compensation	Expense<br>related	to	RSU	Awards |
| :--- | :--- | :--- | :--- |
| 2017 | $119 | \t $98.59 | $111 |
| 2016 | $108 | \t $89.03 | $126 |
| 2015 | $126 | \t $82.28 | $166 |

The	fair	value	of	the	RSU	awards	at	the	date	of	grant	is	amortized	to	expense	over	the	restriction	period,	typically	three	years	after	the	date	of	the	award,	or	upon	death, disability	or	reaching	the	age	of	58.	As	of	December	31,	2017,	PMI	had	$108	million	of	total	unrecognized	compensation	costs	related	to	non-vested	RSU	awards.	These costs	are	expected	to	be	recognized	over	a	weighted-average	period	of	two	years,	or	upon	death,	disability	or	reaching	the	age	of	58.

During	the	years	ended	December	31,	2017,	2016	and	2015,	share	and	fair	value	information	for	PMI	RSU	awards	that	vested	were	as	follows:

| (dollars	in	millions) | Shares	of	RSU	Awards<br>that	Vested | Grant	Date	Fair	Value<br>of	Vested	Shares	of<br>RSU	Awards | Total	Fair	Value	of<br>RSU	Awards	that<br>Vested |
| :--- | :--- | :--- | :--- |
| 2017 | 2,022,856 | \t $158 | $208 |
| 2016 | 2,302,525 | \t $202 | $210 |
| 2015 | 2,711,974 | \t $217 | $224 |

# Performance	share	unit	(PSU)	awards

PMI	may	grant	PSU	awards	to	certain	executives;	recipients	may	not	sell,	assign,	pledge	or	otherwise	encumber	such	awards.	The	PSU	awards	require	the	achievement of	certain	performance	factors,	which	are	predetermined	at	the	time	of	grant,	over	a	three-year	performance	cycle.	PMI's	performance	metrics	consist	of	PMI's	Total Shareholder	Return	(TSR)	relative	to	a	predetermined	peer	group	and	on	an	absolute	basis,	PMI's	currency-neutral	compound	annual	adjusted	operating	companies income	growth	rate,	excluding	acquisitions,	and	PMI's	performance	against	specific	measures	of	PMI's	innovation	and	transformation.	The	aggregate	of	the	weighted performance	factors	for	the	three	metrics	determines	the	percentage	of	PSUs	that	will	vest	at	the	end	of	the	three-year	performance	cycle.	The	minimum	percentage	of PSUs	that	can	vest	is	zero,	with	a	target	percentage	of	100	and	a	maximum	percentage	of	200.	Each	vested	PSU	entitles	the	participant	to	one	share	of	common	stock. An	aggregate	weighted	PSU	performance	factor	of	100	will	result	in	the	targeted	number	of	PSUs	being	vested.	At	the	end	of	the	performance	cycle,	participants	are entitled	to	an	amount	equivalent	to	the	accumulated	dividends	paid	on	common	stock	during	the	performance	cycle	for	the	number	of	shares	earned.	PSU	awards	do	not carry	voting	rights.

During	2017,	the	activity	for	PSU	awards	was	as	follows:

| Number	of<br>Shares | Grant	Date<br>Fair	Value	Subject	to<br>TSR	Performance<br>Factor	Per	Share(a) | Grant	Date<br>Fair	Value	Subject	to<br>Other	Performance<br>Factors	Per	Share(b) |
| :--- | :--- | :--- |
| 427,570 | \t $104.60 | $89.02 |
| 393,460 | 128.72 | 98.29 |
| — | — | — |
| — | — | — |
| 821,030 | \t $116.16 | $93.46 |

(a)	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.

(b)	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	grant.

During	the	years	ended	December	31,	2017	and	2016,	the	grant	date	fair	value	of	the	PSU	awards	granted	to	PMI	employees	and	the	recorded	compensation	expense related	to	PSU	awards	were	as	follows:

| PSU	Grant	Date	Fair	Value	Subject | to	TSR	Performance	Factor(a) | PSU	Grant	Date	Fair	Value	Subject	to | Other	Performance	Factors(b) | Compensation	Expense<br>related	to	PSU	Awards |
| :--- | :--- | :--- | :--- | :--- |
| Total | Per\tPSU\tAward | Total | Per\tPSU\tAward | Total |
| $25 | $128.72 | $19 | $98.29 | $37 |
| $22 | $104.60 | $19 | $89.02 | $27 |

The	fair	value	of	the	PSU	award	at	the	date	of	grant	is	amortized	to	expense	over	the	performance	period,	which	is	typically	three	years	after	the	date	of	the	award,	or upon	death,	disability	or	reaching	the	age	of	58.	As	of	December	31,	2017,	PMI	had	$34	million	of	total	unrecognized	compensation	cost	related	to	non-vested	PSU awards.	This	cost	is	recognized	over	a	weighted-average	performance	cycle	period	of	two	years,	or	upon	death,	disability	or	reaching	the	age	of	58.

During	the	years	ended	December	31,	2017,	and	2016,	there	were	no	PSU	awards	that	vested.	PMI	did	not	grant	any	PSU	awards	during	2015.

# Earnings	per	Share:

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

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

For	the	2017,	2016	and	2015	computations,	there	were	no	antidilutive	stock	options.

Earnings	before	income	taxes	and	provision	for	income	taxes	consisted	of	the	following	for	the	years	ended	December	31,	2017,	2016	and	2015:

United	States	income	tax	is	primarily	attributable	to	repatriation	costs.

In	December	2017,	the	Tax	Cuts	and	Jobs	Act	was	signed	into	law.	 The	principal	elements	of	the	Tax	Cuts	and	Jobs	Act	relevant	to	PMI's	consolidated	financial statements	for	the	year	ended	December	31,	2017,	were:

•A	reduction	of	the	U.S.	federal	corporate	tax	rate	from	35%	to	21%;

In	connection	with	these	elements	of	the	Tax	Cuts	and	Jobs	Act,	PMI	recognized	a	provisional	expense	of	$1.6	billion,	which	was	included	as	a	component	of	income	tax expense	as	follows:

•Re-measurement	of	U.S.	deferred	tax	assets	and	liabilities	using	a	rate	of	21%,	which,	under	the	Tax	Cuts	and	Jobs	Act,	is	expected	to	be	in	place	when	such deferred	assets	and	liabilities	reverse	in	the	future.	In	connection	with	this	re-measurement,	PMI	recorded	a	provisional	charge	of	$0.2	billion.

Other	provisions	of	the	Tax	Cuts	and	Jobs	Act	did	not	have	a	significant	impact	on	PMI's	consolidated	financial	statements	for	the	year	ended	December	31,	2017,	but may	impact	the	effective	tax	rate	in	subsequent	periods.

The	Tax	Cuts	and	Jobs	Act	has	significant	complexity	and	our	final	tax	liability	may	materially	differ	from	these	estimates,	due	to,	among	other	things,	changes	in	PMI's assumptions,	guidance	that	may	be	issued	by	the	U.S.	Treasury	Department	and	the	Internal	Revenue	Service	and	related	interpretations	and	clarifications	of	tax	law.	For the	transition	tax,	further	information	is	required	to	finalize	the	estimated	amount	of	accumulated	foreign	earnings	as	well	as	to	validate	the	amount	of	earnings represented	by	the	aggregate	foreign	cash	position	as	defined	in	the	Tax	Cuts	and	Jobs	Act.	For	the	re-measurement	of	the	deferred	tax	assets	and	liabilities,	further analysis	will	be	required	to	refine	PMI's	calculations	and	related	account	balances.

PMI	will	complete	the	remaining	elements	of	its	analysis	during	2018,	and	any	adjustments	to	the	provisional	charges	will	be	included	in	income	tax	expense	or	benefit in	the	appropriate	period,	in	accordance	with	guidance	provided	by	Staff	Accounting	Bulletin	No.	118	(SAB	118).

At	December	31,	2017,	U.S.	federal	and	foreign	deferred	income	taxes	have	been	provisionally	provided	on	all	accumulated	earnings	of	PMI's	foreign	subsidiaries.

At	December	31,	2017,	PMI	recorded	an	income	tax	payable	of	$1.7	billion	attributable	to	the	Tax	Cuts	and	Jobs	Act,	of	which	$1.6	billion	was	recorded	in	"income taxes	and	other	liabilities"	on	PMI's	consolidated	balance	sheet.	The	income	tax	payable	of	$1.7	billion	represented	the	transition	tax	of	$2.2	billion,	partially	offset	by foreign	tax	credits	related	to	foreign	withholding	taxes	previously	paid	of	$0.5	billion.	The	income	tax	payable	is	due	over	an	8-year	period	beginning	in	2018.

A	reconciliation	of	the	beginning	and	ending	amount	of	unrecognized	tax	benefits	was	as	follows:

Unrecognized	tax	benefits	and	PMI's	liability	for	contingent	income	taxes,	interest	and	penalties	were	as	follows:

The	amount	of	unrecognized	tax	benefits	that,	if	recognized,	would	impact	the	effective	tax	rate	was	$110	million	at	December	31,	2017.	The	remainder,	if	recognized, would	principally	affect	deferred	taxes.

For	the	years	ended	December	31,	2017,	2016	and	2015,	PMI	recognized	income	(expense)	in	its	consolidated	statements	of	earnings	of	$(11)	million,	$13	million	and $3	million,	respectively,	related	to	interest	and	penalties.

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	2013	and	onward.	Foreign	and	U.S.	state	jurisdictions	have	statutes	of	limitations	generally	ranging	from	three	to	five	years.	Years	still	open to	examination	by	foreign	tax	authorities	in	major	jurisdictions	include	Germany	(2015	onward),	Indonesia	(2014	onward),	Russia	(2015	onward)	and	Switzerland (2017	onward).

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.

The	effective	income	tax	rate	on	pre-tax	earnings	differed	from	the	U.S.	federal	statutory	rate	for	the	following	reasons	for	the	years	ended	December	31,	2017,	2016	and 2015:

The	2017	effective	tax	rate	increased	12.8	percentage	points	to	40.7%.	The	change	in	the	effective	tax	rate	for	2017,	as	compared	to	2016,	was	primarily	due	to	the	Tax Cuts	and	Jobs	Act.	In	addition	to	the	transition	tax,	which	resulted	in	a	net	tax	charge	of	$1.4	billion,	the	Tax	Cuts	and	Jobs	Act	also	included	a	reduction	in	the	U.S. income	tax	rate	from	35%	to	21%,	as	of	January	1,	2018.	This	change	in	income	tax	rate	required	a	re-measurement	of	PMI's	U.S.	deferred	tax	assets	and	liabilities	at December	31,	2017,	resulting	in	a	tax	charge	of	$0.2	billion.

The	2016	effective	tax	rate	decreased	0.1	percentage	point	to	27.9%.	The	change	in	the	effective	tax	rate	for	2016,	as	compared	to	2015,	was	primarily	due	to	earnings mix	by	taxing	jurisdiction	and	repatriation	cost	differences.

The	2015	effective	tax	rate	decreased	1.1	percentage	points	to	28.0%.	The	effective	tax	rate	for	2015	was	unfavorably	impacted	by	changes	to	repatriation	assertions	on certain	foreign	subsidiary	historical	earnings	($58	million),	partially	offset	by	 the	recognition	of	 tax	benefits	of	$41	million	following	 the	conclusion	of	 the	IRS examinations	of	Altria's	consolidated	tax	returns	for	the	years	2007	and	2008	and	PMI's	consolidated	tax	returns	for	the	years	2009	through	2011.	Prior	to	March	28, 2008,	PMI	was	a	wholly-owned	subsidiary	of	Altria.	Excluding	the	effect	of	these	items,	the	change	in	the	effective	tax	rate	for	2015,	as	compared	to	2014,	was primarily	due	to	earnings	mix	by	taxing	jurisdiction	and	repatriation	cost	differences.

The	tax	effects	of	temporary	differences	that	gave	rise	to	deferred	income	tax	assets	and	liabilities	consisted	of	the	following:

# Segment	Reporting:

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

PMI's	chief	operating	decision	maker	evaluates	segment	performance	and	allocates	resources	based	on	regional	operating	companies	income,	which	includes	results from	all	product	categories	sold	in	each	region.	PMI	defines	operating	companies	income	as	operating	income,	excluding	general	corporate	expenses	and	amortization	of intangibles,	plus	equity	(income)/loss	in	unconsolidated	subsidiaries,	net.	General	corporate	expenses	include	amounts	relating	to	central	functions	that	provide	strategic direction	and	support	for	activities	including	new	product	and	market	launches	across	the	product	portfolio.	Interest	expense,	net,	and	provision	for	income	taxes	are centrally	managed	and,	accordingly,	such	items	are	not	presented	by	segment	since	they	are	excluded	from	the	measure	of	segment	profitability

reviewed	by	management.	Information	about	total	assets	by	segment	is	not	disclosed	because	such	information	is	not	reported	to	or	used	by	PMI's	chief	operating decision	maker.	Segment	goodwill	and	other	intangible	assets,	net,	are	disclosed	in	Note	3.	Goodwill	and	Other	Intangible	Assets,	net.	The	accounting	policies	of	the segments	are	the	same	as	those	described	in	Note	2.	Summary	of	Significant	Accounting	Policies.

Segment	data	were	as	follows:

(1)	Total	net	revenues	attributable	to	customers	located	in	Indonesia,	PMI's	largest	market	in	terms	of	net	revenues,	were	 $8.0	billion,	$7.7	billion	and	$7.1	billion	for	the	years ended	December	31,	2017,	2016	and	2015,	respectively.	Total	net	revenues	attributable	to	customers	located	in	Germany	were	$7.2	billion,	$7.1	billion	and	$7.2	billion	for	the years	ended	December	31,	2017,	2016	and	2015,	respectively.

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Long-lived\tassets: |  |  |  |
| European\tUnion |  |  |  |
|  | $4,130 | $3,282 | $3,129 |
| Eastern\tEurope,\tMiddle\tEast\t&amp;\tAfrica |  |  |  |
|  | 976 | 866 | 743 |
| Asia |  |  |  |
|  | 2,078 | 1,916 | 1,743 |
| Latin\tAmerica\t&amp;\tCanada |  |  |  |
|  | 885 | 765 | 605 |
| Total\tlong-lived\tassets | 8,069 | 6,829 | 6,220 |
| Other |  |  |  |
|  | 1,126 | 750 | 644 |
| Total\tproperty,\tplant\tand\tequipment,\tnet\tand\tOther\tassets | $9,195 | $7,579 | $6,864 |

Long-lived	assets	consist	of	non-current	assets	other	than	goodwill;	other	intangible	assets,	net;	deferred	tax	assets,	investments	in	unconsolidated	subsidiaries,	and financial	instruments.	PMI's	largest	markets	in	terms	of	long-lived	assets	are	Italy,	Switzerland	and	Indonesia.	Total	long-lived	assets	located	in	Italy,	which	is	reflected in	the	European	Union	segment	above,	were	$1.2	billion,	$0.7	billion	and	$0.4	billion	at	December	31,	2017,	2016	and	2015,	respectively.	Total	long-lived	assets	located in	Switzerland,	which	 is	reflected	 in	 the	European	Union	segment	above,	were	$0.9	billion,	$0.9	billion	 and	$0.9	billion	 at	December	31,	2017,	2016	 and	2015, respectively.	Total	long-lived	assets	located	in	Indonesia,	which	is	reflected	in	the	Asia	segment	above,	were	$0.8	billion,	$0.8	billion	and	$0.7	billion	at	December	31, 2017,	2016	and	2015,	respectively.

# Benefit	Plans:

Pension	coverage	for	employees	of	PMI's	subsidiaries	is	provided,	to	the	extent	deemed	appropriate,	through	separate	plans,	many	of	which	are	plans	outside	of	the U.S.,	which	are	governed	by	local	statutory	requirements,	and	to	a	lesser	extent	U.S.	plans	that	are	closed	to	new	participants.	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	Postretirement	Benefit	Plans

# Obligations	and	Funded	Status

The	postretirement	health	care	plans	are	not	funded.	The	projected	benefit	obligations,	plan	assets	and	funded	status	of	PMI's	pension	plans,	and	the	accumulated	benefit obligation	and	net	amount	accrued	for	PMI's	postretirement	health	care	plans,	at	December	31,	2017	and	2016,	were	as	follows:

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

At	December	31,	2017	and	2016,	the	Swiss	pension	plan	represented	57%	and	57%	of	the	benefit	obligation,	respectively,	and	approximately	57%	of	the	fair	value	of plan	 assets	 for	 each	 of	 the	 years.	At	December	31,	2017	 and	2016,	 the	 U.S.	 pension	 plan	 represented	5%	 and	5%	 of	 the	 benefit	 obligation,	 respectively,	 and approximately	4%	and	5%	of	the	fair	value	of	plan	assets	at	December	31,	2017	and	2016,	respectively.

At	December	31,	2017	and	2016,	the	amounts	recognized	on	PMI's	consolidated	balance	sheets	for	the	pension	and	postretirement	plans	were	as	follows:

| 2017 | 2016 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| $47 | $33 |  |  |
| (26) | (23) | $(10) | $(10) |
| (1,451) | (1,940) | (238) | (217) |
| $(1,430) | $(1,930) | $(248) | $(227) |

The	accumulated	benefit	obligation,	which	represents	benefits	earned	to	date,	for	the	pension	plans	was	$8,496	million	and	$7,931	million	at	December	31,	2017	and 2016,	respectively.

For	pension	plans	with	accumulated	benefit	obligations	in	excess	of	plan	assets,	the	projected	benefit	obligation,	accumulated	benefit	obligation	and	fair	value	of	plan assets	were	$7,287	million,	$6,953	million	and	$5,835	million,	respectively,	as	of	December	31,	2017.	The	projected	benefit	obligation,	accumulated	benefit	obligation and	fair	value	of	plan	assets	were	$6,934	million,	$6,622	million	and	$5,009	million,	respectively,	as	of	December	31,	2016.

The	following	weighted-average	assumptions	were	used	to	determine	PMI's	pension	and	postretirement	benefit	obligations	at	December	31:

The	discount	rate	for	the	largest	pension	plans	is	based	on	a	yield	curve	constructed	from	a	portfolio	of	high	quality	corporate	bonds	that	produces	a	cash	flow	pattern equivalent	to	each	plan's	expected	benefit	payments.		The	discount	rate	for	the	remaining	plans	is	developed	from	local	bond	indices	that	match	local	benefit	obligations as	closely	as	possible.

# Components	of	Net	Periodic	Benefit	Cost

Net	periodic	pension	and	postretirement	health	care	costs	consisted	of	the	following	for	the	years	ended	December	31,	2017,	2016	and	2015:

|  | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Service\tcost |  |  |  |  |  |  |
|  | $208 | $207 | $205 | $4 | $3 | $4 |
| Interest\tcost |  |  |  |  |  |  |
|  | 108 | 146 | 156 | 8 | 9 | 9 |
| Expected\treturn\ton\tplan\tassets |  |  |  |  |  |  |
|  | (326) | (346) | (340) | — | — | — |
| Amortization: |  |  |  |  |  |  |
| Net\tlosses |  |  |  |  |  |  |
|  | 186 | 186 | 194 | 5 | 2 | 4 |
| Prior\tservice\tcost |  |  |  |  |  |  |
|  | 6 | 4 | 4 | — | — | — |
| Settlement\tand\tcurtailment | 6 | 4 | 3 | — | — | — |
| Net\tperiodic\tpension\tand\tpostretirement\tcosts | $188 | $201 | $222 | $17 | $14 | $17 |

As	of	December	31,	2016,	PMI	elected	to	change	the	method	used	to	calculate	the	service	and	interest	cost	components	of	the	net	periodic	pension	benefit	costs. Historically,	these	costs	were	determined	utilizing	a	single	weighted-average	discount	rate	based	on	a	yield	curve	used	to	measure	the	benefit	obligation	at	the	beginning of	the	period.	As	of	January	1,	2017,	PMI	utilized	a	full	yield	curve	approach	in	the	estimation	of	the	service	and	interest	costs	by	applying	the	specific	spot	rates	along the	yield	curve	to	the	relevant	projected	cash	flows.	Specifically,	service	costs	were	determined	based	on	duration-specific	spot	rates	applied	to	service	cost	cash	flows, and	interest	costs	were	determined	by	applying	duration-specific	spot	rates	to	the	year-by-year	projected	benefit	payments.		PMI	changed	to	the	new	method	to	provide	a more	precise	measurement	of	service	and	interest	costs	by	improving	the	correlation	between	the	projected	benefit	cash	flows	to	the	corresponding	spot	rates	along	the yield	curve.	PMI	accounted	for	this	change	as	a	change	in	accounting	estimate	on	a	prospective	basis.	This	change	did	not	affect	the	measurement	of	PMI's	pension	plan obligations	and	did	not	have	a	material	impact	on	PMI's	consolidated	results	of	operations,	financial	position	or	cash	flows.

Settlement	and	curtailment	charges	were	due	primarily	to	early	retirement	programs.

For	the	pension	plans,	the	estimated	net	loss	and	prior	service	cost	that	are	expected	to	be	amortized	from	accumulated	other	comprehensive	earnings	into	net	periodic benefit	cost	during	2018	are	$171	million	and	$2	million,	respectively.

The	following	weighted-average	assumptions	were	used	to	determine	PMI's	net	pension	and	postretirement	health	care	costs:

|  | Pension |  |  | Postretirement |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| 1.68% | 1.81% | 2.04% | 3.68% | 4.45% | 4.20% |
| 1.27 | 1.81 | 2.04 | 3.68 | 4.45 | 4.20 |
| 4.80 | 5.36 | 5.38 |  |  |  |
| 1.68 | 2.03 | 2.12 |  |  |  |
|  |  |  | 7.15 | 6.23 | 6.62 |

PMI's	expected	rate	of	return	on	pension	plan	assets	is	determined	by	the	plan	assets'	historical	long-term	investment	performance,	current	asset	allocation	and	estimates of	future	long-term	returns	by	asset	class.

PMI	and	certain	of	its	subsidiaries	sponsor	defined	contribution	plans.	Amounts	charged	to	expense	for	defined	contribution	plans	totaled	$58	million,	$56	million	and $52	million	for	the	years	ended	December	31,	2017,	2016	and	2015,	respectively.

# Plan	Assets

PMI's	investment	strategy	for	pension	plans	is	based	on	an	expectation	that	equity	securities	will	outperform	debt	securities	over	the	long	term.	Accordingly,	the	target allocation	of	PMI's	plan	assets	is	broadly	characterized	as	approximately	a	60%/40%	split	between	equity	and	debt	securities.	The	strategy	primarily	utilizes	indexed U.S.	equity	securities,	international	equity	securities	and	investment-grade	debt	securities.	PMI's	plans	have	no	investments	in	hedge	funds,	private	equity	or	derivatives. PMI	attempts	to	mitigate	investment	risk	by	rebalancing	between	equity	and	debt	asset	classes	once	a	year	or	as	PMI's	contributions	and	benefit	payments	are	made.

The	fair	value	of	PMI's	pension	plan	assets	at	December	31,	2017	and	2016,	by	asset	category	was	as	follows:

(a)	Investment	funds	whose	objective	seeks	to	replicate	the	returns	and	characteristics	of	specified	market	indices	(primarily	MSCI	—	Europe,	Switzerland,	North	America,	Asia Pacific,	Japan;	Russell	3000;	S&P	500	for	equities,	and	Citigroup	EMU	and	Barclays	Capital	U.S.	for	bonds),	primarily	consist	of	mutual	funds,	common	trust	funds	and commingled	funds.	Of	these	funds,	60%	are	invested	in	U.S.	and	international	equities;	20%	are	invested	in	U.S.	and	international	government	bonds;	10%	are	invested	in	real estate	and	other	money	markets,	and	10%	are	invested	in	corporate	bonds.

(b)	In	accordance	with	FASB	ASC	Subtopic	820-10,	certain	investments	measured	at	fair	value	using	the	net	asset	value	per	share	practical	expedient	have	not	been	classified	in	the fair	value	hierarchy.	The	fair	value	amounts	presented	in	this	table	are	intended	to	permit	reconciliation	of	the	fair	value	hierarchy	to	the	amounts	presented	in	the	statement	of financial	position.

(a)	Investment	funds	whose	objective	seeks	to	replicate	the	returns	and	characteristics	of	specified	market	indices	(primarily	MSCI	—	Europe,	Switzerland,	North	America,	Asia Pacific,	Japan;	Russell	3000;	S&P	500	for	equities,	and	Citigroup	EMU	and	Barclays	Capital	U.S.	for	bonds),	primarily	consist	of	mutual	funds,	common	trust	funds	and commingled	funds.	Of	these	funds,	60%	were	invested	in	U.S.	and	international	equities;	19%	were	invested	in	U.S.	and	international	government	bonds;	11%	were	invested	in real	estate	and	other	money	markets,	and	10%	were	invested	in	corporate	bonds.

See	Note	16.	Fair	Value	Measurements	for	a	discussion	of	the	fair	value	of	pension	plan	assets.

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.	Currently, PMI	anticipates	making	contributions	of	approximately	$53	million	in	2018	to	its	pension	plans,	based	on	current	tax	and	benefit	laws.	However,	this	estimate	is	subject to	change	as	a	result	of	changes	in	tax	and	other	benefit	laws,	as	well	as	asset	performance	significantly	above	or	below	the	assumed	long-term	rate	of	return	on	pension assets,	or	changes	in	interest	and	currency	rates.

The	estimated	future	benefit	payments	from	PMI	pension	plans	at	December	31,	2017,	are	as	follows:

PMI's	expected	future	annual	benefit	payments	for	its	postretirement	health	care	plans	are	estimated	to	be	not	material	through	2027.

Assumed	health	care	cost	trend	rates	have	a	significant	effect	on	the	amounts	reported	for	the	health	care	plans.	A	one-percentage-point	change	in	assumed	health	care trend	rates	would	have	the	following	effects	as	of	December	31,	2017:

# Postemployment	Benefit	Plans

PMI	and	certain	of	its	subsidiaries	sponsor	postemployment	benefit	plans	covering	substantially	all	salaried	and	certain	hourly	employees.	The	cost	of	these	plans	is charged	to	expense	over	the	working	life	of	the	covered	employees.	Net	postemployment	costs	were	$144	million,	$166	million	and	$187	million	for	the	years	ended December	31,	2017,	2016	and	2015,	respectively.

The	estimated	net	loss	for	the	postemployment	benefit	plans	that	will	be	amortized	from	accumulated	other	comprehensive	losses	into	net	postemployment	costs	during 2018	is	approximately	$60	million.

The	amounts	recognized	in	accrued	postemployment	costs	on	PMI's	consolidated	balance	sheets	at	December	31,	2017	and	2016,	were	$671	million	and	$727	million, respectively.

The	accrued	postemployment	costs	were	determined	using	a	weighted-average	discount	rate	of	3.0%	 and	2.8%	 in	2017	 and	2016,	respectively;	an	assumed	ultimate annual	weighted-average	turnover	rate	of	2.6%	and	2.8%	in	2017	and	2016,	respectively;	assumed	compensation	cost	increases	of	2.3%	in	2017	and	2.6%	in	2016,	and assumed	 benefits	 as	 defined	 in	 the	 respective	 plans.	In	 accordance	 with	 local	 regulations,	 certain	 postemployment	 plans	 are	 funded.	As	 a	 result,	 the	 accrued postemployment	 costs	 disclosed	 above	 are	 presented	 net	 of	 the	 related	 assets	 of	$33	 million	 and	$25	 million	 at	December	 31,	 2017	 and	2016,	 respectively. Postemployment	costs	arising	from	actions	that	offer	employees	benefits	in	excess	of	those	specified	in	the	respective	plans	are	charged	to	expense	when	incurred.

# Comprehensive	Earnings	(Losses)

The	amounts	recorded	in	accumulated	other	comprehensive	losses	at	December	31,	2017,	consisted	of	the	following:

| Pension | Post-<br>retirement | Post-<br>employment | Total |
| :--- | :--- | :--- | :--- |
| $(2,624) | \t $(80) | \t $(617) | \t $(3,321) |
| (35) | 4 | — | (31) |
| (5) | — | — | (5) |
| 327 | 28 | 186 | 541 |
| $(2,337) | \t $(48) | \t $(431) | \t $(2,816) |

| Pension | Post-<br>retirement | Post-<br>employment | Total |
| :--- | :--- | :--- | :--- |
| $(3,074) | \t $(61) | \t $(710) | \t $(3,845) |
| (40) | 5 | — | (35) |
| (5) | — | — | (5) |
| 320 | 20 | 213 | 553 |
| $(2,799) | \t $(36) | \t $(497) | \t $(3,332) |

The	movements	in	other	comprehensive	earnings	(losses)	during	the	year	ended	December	31,	2017,	were	as	follows:

| (in	millions) | Pension | Post-<br>retirement | Post-<br>employment | Total |
| :--- | :--- | :--- | :--- | :--- |
| Amounts\ttransferred\tto\tearnings\tas\tcomponents\tof\tnet\tperiodic\tbenefit\tcost: |  |  |  |  |
| Amortization: |  |  |  |  |
| Net\tlosses | $193 | $2 | $62 | $257 |
| Prior\tservice\tcost | 6 | — | — | 6 |
| Other\tincome/expense: |  |  |  |  |
| Net\tlosses | 4 | — | — | 4 |
| Prior\tservice\tcost | — | — | — | — |
| Deferred\tincome\ttaxes | (26) | — | (17) | (43) |
|  | 177 | 2 | 45 | 224 |
| Other\tmovements\tduring\tthe\tyear: |  |  |  |  |
| Net\tlosses | (437) | (15) | (65) | (517) |
| Prior\tservice\tcost | (18) | — | — | (18) |
| Deferred\tincome\ttaxes | 55 | 4 | 19 | 78 |
|  | (400) | (11) | (46) | (457) |
| Total\tmovements\tin\tother\tcomprehensive\tearnings\t(losses) |  |  |  |  |
|  | $(223) | $(9) | $(1) | $(233) |

| (in	millions) | Pension | Post-<br>retirement | Post-<br>employment | Total |
| :--- | :--- | :--- | :--- | :--- |
| Amounts\ttransferred\tto\tearnings\tas\tcomponents\tof\tnet\tperiodic\tbenefit\tcost: |  |  |  |  |
| Amortization: |  |  |  |  |
| Net\tlosses | $194 | \t $4 | \t $69 | \t $267 |
| Prior\tservice\tcost | 4 | — | — | 4 |
| Other\tincome/expense: |  |  |  |  |
| Net\tlosses | 3 | — | — | 3 |
| Prior\tservice\tcost | 1 | — | — | 1 |
| Deferred\tincome\ttaxes | (26) | (2) | (20) | (48) |
|  | 176 | 2 | 49 | 227 |
| Other\tmovements\tduring\tthe\tyear: |  |  |  |  |
| Net\tlosses | (510) | 12 | (58) | (556) |
| Deferred\tincome\ttaxes | 4 | (4) | 17 | 17 |
|  | (506) | 8 | (41) | (539) |
| Total\tmovements\tin\tother\tcomprehensive\tearnings\t(losses) |  |  |  |  |
|  | $(330) | \t $10 | \t $8 | \t $(312) |

# Additional	Information:

# For	the	Years	Ended	December	31,

Minimum	rental	commitments	under	non-cancelable	operating	leases	in	effect	at	December	31,	2017,	were	as	follows:

# 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	reports	its	net	transaction	gains	or	losses	in	marketing,	administration	and	research	costs	on	the consolidated	statements	of	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.	The	primary	currencies

to	which	PMI	is	exposed	include	the	Australian	dollar,	Canadian	dollar,	Euro,	Indonesian	rupiah,	Japanese	yen,	Mexican	peso,	Philippine	peso,	Russian	ruble,	Swiss franc	and	Turkish	lira.	At	December	31,	2017	and	2016,	PMI	had	contracts	with	aggregate	notional	amounts	of	$26.1	billion	and	$29.2	billion,	respectively.	Of	the	$26.1 billion	aggregate	notional	amount	at	December	31,	2017,	$3.4	billion	related	to	cash	flow	hedges,	$11.3	billion	related	to	hedges	of	net	investments	in	foreign	operations and	$11.4	billion	related	to	other	derivatives	that	primarily	offset	currency	exposures	on	intercompany	financing.	Of	 the	$29.2	billion	aggregate	notional	amount	at December	31,	2016,	$5.0	billion	related	to	cash	flow	hedges,	$10.6	billion	related	to	hedges	of	net	investments	in	foreign	operations	and	$13.6	billion	related	to	other derivatives	that	primarily	offset	currency	exposures	on	intercompany	financing.

The	fair	value	of	PMI's	foreign	exchange	contracts	included	in	the	consolidated	balance	sheet	as	of	December	31,	2017	and	2016,	were	as	follows:

| Asset	Derivatives |  |  | Liability	Derivatives |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair\tValue |  |  | Fair\tValue |  |
| Balance\tSheet\tClassification | 2017 | 2016 | \t Balance\tSheet\tClassification | 2017 | 2016 |
| Other\tcurrent |  |  | Other\taccrued |  |  |
| \t\tassets | $84 | $207 | \t\tliabilities | $197 | $66 |
| Other\tassets | 34 | 436 | \t Other\tliabilities | 880 | 36 |
| Other\tcurrent |  |  | Other\taccrued |  |  |
| \t\tassets | 22 | 161 | \t\tliabilities | 37 | 61 |
| Other\tassets | — | 9 | \t Other\tliabilities | 14 | — |
| $140 | $140 | $813 | $1,128 | $1,128 | $163 |

For	the	years	ended	December	31,	2017,	2016	and	2015,	PMI's	cash	flow	and	net	investment	hedging	instruments	impacted	the	consolidated	statements	of	earnings	and comprehensive	earnings	as	follows:

|  |  |  |  | Classification	of	Gain/(Loss) |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | Reclassified\tfrom\tOther |  |  |  |
|  | Amount\tof\tGain/(Loss)\tRecognized\tin | Amount\tof\tGain/(Loss)\tRecognized\tin | Amount\tof\tGain/(Loss)\tRecognized\tin | Comprehensive | Amount\tof\tGain/(Loss)\tReclassified\tfrom | Amount\tof\tGain/(Loss)\tReclassified\tfrom | Amount\tof\tGain/(Loss)\tReclassified\tfrom |
|  | Other\tComprehensive\tEarnings/(Losses) | Other\tComprehensive\tEarnings/(Losses) | Other\tComprehensive\tEarnings/(Losses) | Earnings/(Losses)\tinto | Other\tComprehensive\tEarnings/(Losses) | Other\tComprehensive\tEarnings/(Losses) | Other\tComprehensive\tEarnings/(Losses) |
|  | 2017 | on\tDerivatives\n2016 | 2015 | Earnings | 2017 | into\tEarnings\n2016 | 2015 |
| Derivatives\tin\tCash\tFlow\nHedging\tRelationship |  |  |  |  |  |  |  |
| Foreign\texchange\tcontracts | $(52) | $12 | $43 |  |  |  |  |
|  |  |  |  | \t Net\trevenues | $60 | $(38) | $149 |
|  |  |  |  | \t Cost\tof\tsales | 1 | 46 | (3) |
|  |  |  |  | Marketing,\tadministration\tand\tresearch |  |  |  |
|  |  |  |  | costs | (7) | (11) | 1 |
|  |  |  |  | Interest\texpense,\tnet | (41) | (30) | (31) |
| Derivatives\tin\tNet\tInvestment\nHedging\tRelationship |  |  |  |  |  |  |  |
| Foreign\texchange\tcontracts | (1,644) | 296 | 253 |  |  |  |  |
| Total | $(1,696) | $308 | $296 |  | $13 | $(33) | $116 |

# Cash	Flow	Hedges

PMI	has	entered	into	foreign	exchange	contracts	to	hedge	the	foreign	currency	exchange	and	interest	rate	risks	related	to	certain	forecasted	transactions.	The	effective portion	of	gains	and	losses	associated	with	qualifying	cash	flow	hedge	contracts	is	deferred	as	a	component	of	accumulated	other	comprehensive	losses	until	the underlying	hedged	transactions	are	reported	in	PMI's	consolidated	statements	of	earnings.	During	the	years	ended	December	31,	2017,	2016	and	2015,	ineffectiveness related	to	cash	flow	hedges	was	not	material.	As

of	December	31,	2017,	PMI	has	hedged	forecasted	transactions	for	periods	not	exceeding	the	next	twelve	months,	with	the	exception	of	one	foreign	exchange	contract that	expires	in	May	2024.	The	impact	of	these	hedges	is	primarily	included	in	operating	cash	flows	on	PMI's	consolidated	statements	of	cash	flows.

# Hedges	of	Net	Investments	in	Foreign	Operations

PMI	designates	certain	foreign	currency	denominated	debt	and	foreign	exchange	contracts	as	net	investment	hedges,	primarily	of	its	Euro	net	assets.	For	the	years	ended December	31,	2017,	2016	and	2015,	these	hedges	of	net	investments	resulted	in	gains/(losses),	net	of	income	taxes,	of	$(1,725)	million,	$430	million	and	$761	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 years	 ended	December	31,	2017,	2016	 and	2015,	ineffectiveness	related	to	net	investment	hedges	was	not	material.	The	premiums	paid	for,	and	settlements	of,	net investment	hedges	are	included	in	investing	cash	flows	on	PMI's	consolidated	statements	of	cash	flows.

# Other	Derivatives

PMI	 has	 entered	 into	 foreign	 exchange	 contracts	 to	 hedge	 the	 foreign	 currency	 exchange	 and	 interest	 rate	 risks	 related	 to	 intercompany	 loans	 between	 certain subsidiaries,	and	third-party	loans.	While	effective	as	economic	hedges,	no	hedge	accounting	is	applied	for	these	contracts;	therefore,	the	unrealized	gains	(losses) relating	to	these	contracts	are	reported	in	PMI's	consolidated	statements	of	earnings.	For	the	years	ended	December	31,	2017,	2016	and	2015,	the	gains/(losses)	from contracts	for	which	PMI	did	not	apply	hedge	accounting	were	$382	million,	$(85)	million	 and	$(587)	million,	 respectively.	The	gains/(losses)	from	these	contracts substantially	offset	the	losses	and	gains	generated	by	the	underlying	intercompany	and	third-party	loans	being	hedged.

As	a	result,	for	the	years	ended	December	31,	2017,	2016	and	2015,	these	items	impacted	the	consolidated	statement	of	earnings	as	follows:

# (pre-tax,	in	millions)

# 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:

At	December	31,	2017,	PMI	expects	$36	million	of	derivative	gains	that	are	included	in	accumulated	other	comprehensive	losses	to	be	reclassified	to	the	consolidated statement	of	earnings	within	the	next	12	months.	These	gains	are	expected	to	be	substantially	offset	by	the	statement	of	earnings	impact	of	the	respective	hedged transactions.

# Contingent	Features

PMI's	derivative	instruments	do	not	contain	contingent	features.

# Credit	Exposure	and	Credit	Risk

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

# Fair	Value

See	Note	16.	Fair	Value	Measurements	and	Note	19.	Balance	Sheet	Offsetting	for	additional	discussion	of	derivative	financial	instruments.

# Fair	Value	Measurements:

The	authoritative	guidance	defines	fair	value	as	the	exchange	price	that	would	be	received	for	an	asset	or	paid	to	transfer	a	liability	(an	exit	price)	in	the	principal	or	most advantageous	market	for	the	asset	or	liability	in	an	orderly	transaction	between	market	participants	on	the	measurement	date.	The	guidance	also	establishes	a	fair	value hierarchy,	which	requires	an	entity	to	maximize	the	use	of	observable	inputs	and	minimize	the	use	of	unobservable	inputs	when	measuring	fair	value.	The	guidance describes	three	levels	of	input	that	may	be	used	to	measure	fair	value,	which	are	as	follows:

Level	1 — Quoted	prices	in	active	markets	for	identical	assets	or	liabilities;

Level	2

— Observable	inputs	other	than	Level	1	prices,	such	as	quoted	prices	for	similar	assets	or	liabilities;	quoted	prices	in	markets	that	are	not	active;	or	other inputs	that	are	observable	or	can	be	corroborated	by	observable	market	data	for	substantially	the	full	term	of	the	assets	or	liabilities;	and

— Unobservable	inputs	that	are	supported	by	little	or	no	market	activity	and	that	are	significant	to	the	fair	value	of	the	assets	or	liabilities.

PMI's	policy	is	to	reflect	transfers	between	hierarchy	levels	at	the	end	of	the	reporting	period.

# 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	at December	31,	2017	and	2016.	See	Note	15.	Financial	Instruments	for	additional	discussion	of	derivative	financial	instruments.

# Pension	Plan	Assets

The	fair	value	of	pension	plan	assets	determined	by	using	readily	available	quoted	market	prices	in	active	markets	has	been	classified	within	Level	1	of	the	fair	value hierarchy	at	December	31,	2017	and	2016.	The	fair	value	of	pension	plan	assets	determined	by	using	quoted	prices	in	markets	that	are	not	active	has	been	classified within	Level	2	at	December	31,	2017	and	2016.	See	Note	13.	Benefit	Plans	for	additional	discussion	of	pension	plan	assets.

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	$28	million	of capital	lease	obligations,	was	$33,812	million	at	December	31,	2017.	The	aggregate	carrying	value	of	PMI's	debt,	excluding	short-term	borrowings	and	$13	million	of capital	lease	obligations,	was	$28,411	million

at	December	31,	2016.	The	fair	value	of	PMI's	outstanding	debt,	excluding	the	aforementioned	short-term	borrowings	and	capital	lease	obligations,	was	classified	within Level	1	and	Level	2	at	December	31,	2017	and	2016.

The	aggregate	fair	values	of	PMI's	derivative	financial	instruments,	pension	plan	assets	and	debt	as	of	December	31,	2017	and	2016,	were	as	follows:

(a)	In	accordance	with	FASB	ASC	Subtopic	820-10,	certain	investments	measured	at	fair	value	using	the	net	asset	value	per	share	practical	expedient	have	not	been	classified	in	the fair	value	hierarchy.	The	fair	value	amounts	presented	in	these	tables	are	intended	to	permit	reconciliation	of	the	fair	value	hierarchy	to	the	amounts	presented	in	the	statement	of financial	position.

# Accumulated	Other	Comprehensive	Losses:

PMI's	accumulated	other	comprehensive	losses,	net	of	taxes,	consisted	of	the	following:

# Reclassifications	from	Other	Comprehensive	Earnings

The	movements	in	accumulated	other	comprehensive	losses	and	the	related	tax	impact,	for	each	of	the	components	above,	that	are	due	to	current	period	activity	and reclassifications	to	the	income	statement	are	shown	on	the	consolidated	statements	of	comprehensive	earnings	for	the	years	ended	December	31,	2017,	2016,	and	2015. For	the	years	ended	December	31,	2017,	2016,	and	2015,	$2	million,	$(5)	million	and	$1	million	of	net	currency	translation	adjustment	gains/(losses)	were	transferred from	 other	 comprehensive	 earnings	 to	 marketing,	 administration	 and	 research	 costs	 in	 the	 consolidated	 statements	 of	 earnings,	 respectively,	upon	 liquidation	 of subsidiaries.	For	additional	information,	see	Note	13.	Benefit	Plans	and	Note	15.	Financial	Instruments	for	disclosures	related	to	PMI's	pension	and	other	benefits	and derivative	financial	instruments.

# Tobacco-Related	Litigation

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

It	is	possible	that	there	could	be	adverse	developments	in	pending	cases	against	us	and	our	subsidiaries.	An	unfavorable	outcome	or	settlement	of	pending	tobacco- related	litigation	could	encourage	the	commencement	of	additional	litigation.

Damages	claimed	in	some	of	the	tobacco-related	litigation	are	significant	and,	in	certain	cases	in	Brazil,	Canada	and	Nigeria,	range	into	the	billions	of	U.S.	dollars.	The variability	in	pleadings	in	multiple	jurisdictions,	together	with	the	actual	experience	of	management	in	litigating	claims,	demonstrate	that	the	monetary	relief	that	may	be specified	in	a	lawsuit	bears	little	relevance	to	the	ultimate	outcome.	Much	of	the	tobacco-related	litigation	is	in	its	early	stages,	and	litigation	is	subject	to	uncertainty. However,	as	discussed	below,	we	have	to	date	been	largely	successful	in	defending	tobacco-related	litigation.

We	and	our	subsidiaries	record	provisions	in	the	consolidated	financial	statements	for	pending	litigation	when	we	determine	that	an	unfavorable	outcome	is	probable	and the	amount	of	the	loss	can	be	reasonably	estimated.	At	the	present	time,	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.

To	date,	no	tobacco-related	case	has	been	finally	resolved	in	favor	of	a	plaintiff	against	us,	our	subsidiaries	or	indemnitees.

The	table	below	lists	the	number	of	tobacco-related	cases	pending	against	us	and/or	our	subsidiaries	or	indemnitees	as	of	February	9,	2018,	December	31,	2016	and December	31,	2015:

| Type	of	Case | Number	of	Cases	Pending<br>as	of	February	9,	2018 | Number	of	Cases<br>Pending	as	of	December<br>31,	2016 | Number	of	Cases<br>Pending	as	of	December<br>31,	2015 |
| :--- | :--- | :--- | :--- |
| Individual\tSmoking\tand\tHealth\tCases | 57 | 64 | 68 |
| Smoking\tand\tHealth\tClass\tActions | 11 | 11 | 11 |
| Health\tCare\tCost\tRecovery\tActions | 16 | 16 | 16 |
| Label-Related\tClass\tActions | 1 | — | — |
| Individual\tLabel-Related\tCases | 1 | 3 | 3 |
| Public\tCivil\tActions | 2 | 2 | 3 |

Since	1995,	when	the	first	tobacco-related	litigation	was	filed	against	a	PMI	entity,	476	Smoking	and	Health,	Label-Related,	Health	Care	Cost	Recovery,	and	Public Civil	Actions	in	which	we	and/or	one	of	our	subsidiaries	and/or	indemnitees	were	a	defendant	have	been	terminated	in	our	favor.	Thirteen	cases	have	had	decisions	in favor	of	plaintiffs.	Nine	of	these	cases	have	subsequently	reached	final	resolution	in	our	favor	and	four	remain	on	appeal.

The	table	below	lists	the	verdict	and	significant	post-trial	developments	in	the	four	pending	cases	where	a	verdict	was	returned	in	favor	of	the	plaintiff:

Date Location	of Court/Name	of Plaintiff Type	of Case Verdict Post-Trial Developments February	2004 Brazil/The	Smoker	Health Defense	Association Class	Action The	Civil	Court	of	São	Paulo found	defendants	liable	without hearing	evidence.	In	April	2004, the	court	awarded	"moral damages"	of	R$1,000 (approximately	$305)	per	smoker per	full	year	of	smoking	plus interest	at	the	rate	of	1%	per month,	as	of	the	date	of	the ruling.	The	court	did	not	assess actual	damages,	which	were	to	be assessed	in	a	second	phase	of	the case.	The	size	of	the	class	was	not defined	in	the	ruling. Defendants	appealed	to	the	São	Paulo Court	of	Appeals,	which	annulled	the ruling	in	November	2008,	finding	that	the trial	court	had	inappropriately	ruled without	hearing	evidence	and	returned	the case	to	the	trial	court	for	further proceedings.	In	May	2011,	the	trial	court dismissed	the	claim.	Plaintiff	appealed	the decision.	In	February	2015,	the	appellate court	unanimously	dismissed	plaintiff's appeal.	In	September	2015,	plaintiff appealed	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. This	appeal	is	still	pending.

Date Location	of Court/Name	of Plaintiff Type	of Case Verdict Post-Trial Developments May	27,	2015 Canada/Cecilia	Létourneau Class	Action On	May	27,	2015,	the	Superior Court	of	the	District	of	Montreal, Province	of	Quebec	ruled	in	favor of	the	Létourneau	class	on liability	and	awarded	a	total	of CAD	131	million	(approximately $104	million)	in	punitive damages,	allocating	CAD	46 million	(approximately	$37 million)	to	our	subsidiary.	The trial	court	ordered	defendants	to pay	the	full	punitive	damage award	into	a	trust	within	60	days. The	court	did	not	order	the payment	of	compensatory damages. In	June	2015,	our	subsidiary	commenced the	appellate	process	with	the	Court	of Appeal	of	Quebec.	Our	subsidiary	also filed	a	motion	to	cancel	the	trial	court's order	for	payment	into	a	trust notwithstanding	appeal.	In	July	2015,	the Court	of	Appeal	granted	the	motion	to cancel	and	overturned	the	trial	court's ruling	that	our	subsidiary	make	the payment	into	a	trust.	In	August	2015, plaintiffs	filed	a	motion	for	security	with the	Court	of	Appeal	covering	both	the Létourneau	case	and	the	Blais	case described	below.	In	October	2015,	the Court	of	Appeal	granted	the	motion	and ordered	our	subsidiary	to	furnish	security totaling	CAD	226	million	(approximately $180	million)	to	cover	both	the Létourneau	and	Blais	cases.	The	hearing for	the	merits	appeal	took	place	in November	2016.	(See	below	for	further detail.)

# Location	of

Date Court/Name	of Plaintiff Type	of Case Verdict Post-Trial Developments May	27,	2015 Canada/Conseil	Québécois	Sur Le	Tabac	Et	La	Santé	and	Jean- Yves	Blais Class	Action On	May	27,	2015,	the	Superior Court	of	the	District	of	Montreal, Province	of	Quebec	ruled	in	favor of	the	Blais	class	on	liability	and found	the	class	members' compensatory	damages	totaled approximately	CAD	15.5	billion (approximately	$12.3	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	$2.5	billion)).	The trial	court	awarded	CAD	90,000 (approximately	$71,500)	in punitive	damages,	allocating CAD	30,000	(approximately $23,900)	to	our	subsidiary.	The trial	court	ordered	defendants	to pay	CAD	1	billion (approximately	$795	million)	of the	compensatory	damage	award, CAD	200	million	(approximately $159	million)	of	which	is	our subsidiary's	portion,	into	a	trust within	60	days. In	June	2015,	our	subsidiary	commenced the	appellate	process	with	the	Court	of Appeal	of	Quebec.	Our	subsidiary	also filed	a	motion	to	cancel	the	trial	court's order	for	payment	into	a	trust notwithstanding	appeal.	In	July	2015,	the Court	of	Appeal	granted	the	motion	to cancel	and	overturned	the	trial	court's ruling	that	our	subsidiary	make	the payment	into	a	trust.	In	August	2015, plaintiffs	filed	a	motion	for	security	with the	Court	of	Appeal.	In	October	2015,	the Court	of	Appeal	granted	the	motion	and ordered	our	subsidiary	to	furnish	security totaling,	together	with	the	Létourneau	case, CAD	226	million	(approximately	$180 million).	The	hearing	for	the	merits	appeal took	place	in	November	2016.	(See	below for	further	detail.)

# Verdict

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	$5,558),	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.

# Post-Trial Developments

On	August	23,	2016,	our	subsidiary	filed its	notice	of	appeal.	On	October	31,	2017, the	Civil	and	Commercial	Court	of Appeals	of	Mar	del	Plata	ruled	that plaintiff's	claim	was	barred	by	the	statute	of limitations	and	it	reversed	the	trial	court's decision.	On	November	28,	2017,	plaintiff filed	an	extraordinary	appeal	of	the reversal	of	the	trial	court's	decision	to	the Supreme	Court	of	the	Province	of	Buenos Aires.

Pending	claims	related	to	tobacco	products	generally	fall	within	the	following	categories:

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

As	of	February	9,	2018,	there	were	a	number	of	smoking	and	health	cases	pending	against	us,	our	subsidiaries	or	indemnitees,	as	follows:

•11	cases	brought	on	behalf	of	classes	of	individual	plaintiffs	in	Brazil	(2)	and	Canada	(9),	compared	with	11	such	cases	on	December	31,	2016,	and	11	such cases	on	December	31,	2015.

In	the	first	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	$305)	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 Supreme	Court	of	Justice	denied	plaintiff's	appeal.	In	March	2017,	plaintiff	filed	an	en	banc	appeal	to	the	Supreme	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.

In	the	second	class	action	pending	in	Brazil,	Public	Prosecutor	of	São	Paulo	v.	Philip	Morris	Brasil	Industria	e	Comercio	Ltda.,	Civil	Court	of	the	City	of	São	Paulo, Brazil,	filed	August	6,	2007,	our	subsidiary	is	a	defendant.	The	plaintiff,	the	Public	Prosecutor	of	the	State	of	São	Paulo,	is	seeking	(i)	damages	on	behalf	of	all	smokers nationwide,	former	smokers,	and	 their	relatives;	(ii)	damages	on	behalf	 of	 people	 exposed	 to	 environmental	 tobacco	 smoke	 nationwide,	 and	 their	 relatives;	 and (iii)	reimbursement	of	the	health	care	costs	allegedly	incurred	for	the	treatment	of	tobacco-related	diseases	by	all	Brazilian	States	and	Municipalities,	and	the	Federal District.	In	an	interim	ruling	issued	in	December	2007,	the	trial	court	limited	the	scope	of	this	claim	to	the	State	of	São	Paulo	only.	In	December	2008,	the	Seventh	Civil Court	of	São	Paulo	issued	a	decision	declaring	that	it	lacked	jurisdiction	because	the	case	involved	issues	similar	to	the	ADESF	case	discussed	above	and	should	be transferred	to	the	Nineteenth	Lower	Civil	Court	in	São	Paulo	where	the	ADESF	case	is	pending.	The	court	further	stated	that	these	cases	should	be	consolidated	for	the purposes	of	judgment.	In	April	2010,	the	São	Paulo	Court	of	Appeals	reversed	the	Seventh	Civil	Court's	decision	that	consolidated	the	cases,	finding	that	they	are	based on	different	legal	claims	and	are	progressing	at	different	stages	of	proceedings.	This	case	was	returned	to	the	Seventh	Civil	Court	of	São	Paulo,	and	our	subsidiary	filed its	closing	arguments	in	December	2010.	In	March	2012,	the	trial	court	dismissed	the	case	on	the	merits.	In	January	2014,	the	São	Paulo	Court	of	Appeals	rejected plaintiff's	appeal	and	affirmed	the	trial	court	decision.	In	July	2014,	plaintiff	appealed	to	the	Superior	Court	of	Justice.

In	the	first	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,	 our	 subsidiary	 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.		Trial	began	in	March	2012	and	concluded	in	December	2014.	The	trial	court	issued	its	judgment	on	May	27,	2015.	The	trial	court	found	our subsidiary	and	two	other	Canadian	manufacturers	liable	and	awarded	a	total	of	CAD	131	million	(approximately	$104	million)	in	punitive	damages,	allocating	CAD	46 million	(approximately	$37	million)	to	our	subsidiary.	The	trial	court	found	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.	The	trial	court	also	found	that	defendants	conspired	to prevent	consumers	from	learning	the	dangers	of	smoking.	The	trial	court	further	held	that	these	civil	faults	were	a	cause	of	the	class	members'	addiction.	The	trial	court rejected	other	grounds	of

fault	advanced	by	the	class,	holding	that:	(i)	the	evidence	was	insufficient	to	show	that	defendants	marketed	to	youth,	(ii)	defendants'	advertising	did	not	convey	false information	about	the	characteristics	of	cigarettes,	and	(iii)	defendants	did	not	commit	a	fault	by	using	the	descriptors	light	or	mild	for	cigarettes	with	a	lower	tar delivery.	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	ordered	defendants	to	pay	the	full	punitive	damage	award	into	a	trust	within	60	days	and found	that	a	claims	process	to	allocate	the	awarded	damages	to	individual	class	members	would	be	too	expensive	and	difficult	to	administer.	The	trial	court	ordered	a briefing	on	the	proposed	process	for	the	distribution	of	sums	remaining	from	the	punitive	damage	award	after	payment	of	attorneys'	fees	and	legal	costs.	In	June	2015, our	subsidiary	commenced	the	appellate	process	by	filing	its	inscription	of	appeal	of	the	trial	court's	judgment	with	the	Court	of	Appeal	of	Quebec.	Our	subsidiary	also filed	a	motion	to	cancel	the	trial	court's	order	for	payment	into	a	trust	within	60	days	notwithstanding	appeal.	In	July	2015,	the	Court	of	Appeal	granted	the	motion	to cancel	and	overturned	the	trial	court's	ruling	that	our	subsidiary	make	the	payment	into	a	trust	within	60	days.	In	August	2015,	plaintiffs	filed	a	motion	with	the	Court	of Appeal	seeking	security	in	both	the	Létourneau	case	and	the	Blais	case	described	below.	In	October	2015,	the	Court	of	Appeal	granted	the	motion	and	ordered	our subsidiary	to	furnish	security	totaling	CAD	226	million	(approximately	$180	million),	in	the	form	of	cash	into	a	court	trust	or	letters	of	credit,	in	six	equal	consecutive quarterly	installments	of	approximately	CAD	37.6	million	(approximately	$29.9	million)	beginning	in	December	2015	through	March	2017.	See	the	Blais	description for	further	detail	concerning	the	security	order.	The	Court	of	Appeal	heard	oral	arguments	on	the	merits	appeal	in	November	2016.	Our	subsidiary	and	PMI	believe	that the	findings	of	liability	and	damages	were	incorrect	and	should	ultimately	be	set	aside	on	any	one	of	many	grounds,	including	the	following:	(i)	holding	that	defendants violated	Quebec	law	by	failing	to	warn	class	members	of	the	risks	of	smoking	even	after	the	court	found	that	class	members	knew,	or	should	have	known,	of	the	risks, (ii)	finding	that	plaintiffs	were	not	required	to	prove	that	defendants'	alleged	misconduct	caused	 injury	 to	each	class	member	 in	direct	contravention	of	binding precedent,	(iii)	creating	a	factual	presumption,	without	any	evidence	from	class	members	or	otherwise,	that	defendants'	alleged	misconduct	caused	all	smoking	by	all class	members,	(iv)	holding	that	the	addiction	class	members'	claims	for	punitive	damages	were	not	time-barred	even	though	the	case	was	filed	more	than	three	years after	a	prominent	addiction	warning	appeared	on	all	packages,	and	(v)	awarding	punitive	damages	to	punish	defendants	without	proper	consideration	as	to	whether punitive	damages	were	necessary	to	deter	future	misconduct.

In	the	second	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,	our	subsidiary	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.	Trial	began	in	March	2012	and	concluded	in December	2014.	The	trial	court	issued	its	judgment	on	May	27,	2015.	The	trial	court	found	our	subsidiary	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	$12.3	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	$2.5	billion)).	In	addition,	the	trial	court	awarded	CAD	90,000	(approximately	$71,500)	in	punitive	damages,	allocating	CAD	30,000	(approximately $23,900)	to	our	subsidiary	and	found	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.	The	trial	court	also	found	that	defendants	conspired	to	prevent	consumers	from	learning	the dangers	of	smoking.	The	trial	court	further	held	that	these	civil	faults	were	a	cause	of	the	class	members'	diseases.	The	trial	court	rejected	other	grounds	of	fault advanced	by	the	class,	holding	that:	(i)	the	evidence	was	insufficient	to	show	that	defendants	marketed	to	youth,	(ii)	defendants'	advertising	did	not	convey	false information	about	the	characteristics	of	cigarettes,	and	(iii)	defendants	did	not	commit	a	fault	by	using	the	descriptors	light	or	mild	for	cigarettes	with	a	lower	tar delivery.	The	trial	court	estimated	the	disease	class	at	99,957	members.	The	trial	court	ordered	defendants	to	pay	CAD	1	billion	(approximately	$795	million)	of	the compensatory	damage	award	into	a	trust	within	60	days,	CAD	200	million	(approximately	$159	million)	of	which	is	our	subsidiary's	portion	and	ordered	briefing	on	a proposed	claims	process	for	the	distribution	of	damages	to	individual	class	members	and	for	payment	of	attorneys'	fees	and	legal	costs.	In	June	2015,	our	subsidiary commenced	the	appellate	process	by	filing	its	inscription	of	appeal	of	the	trial	court's	judgment	with	the	Court	of	Appeal	of	Quebec.	Our	subsidiary	also	filed	a	motion to	cancel	the	trial	court's	order	for	payment	into	a	trust	within	60	days	notwithstanding	appeal.	In	July	2015,	the	Court	of	Appeal	granted	the	motion	to	cancel	and overturned	the	trial	court's	ruling	that	our	subsidiary	make	an	initial	payment	within	60	days.	In	August	2015,	plaintiffs	filed	a	motion	with	the	Court	of	Appeal	seeking an	order	that	defendants	place	irrevocable	letters	of	credit	totaling	CAD	5	billion	(approximately	$3.97	billion)	into	trust,	to	secure	the	judgments	in	both	the	Létourneau and	Blais	cases.	Plaintiffs	subsequently	withdrew	their	motion	for	security	against	JTI-MacDonald	Corp.	and	proceeded	only	against	our	subsidiary	and	Imperial Tobacco	Canada	Ltd.	In	October	2015,	the	Court	of	Appeal	granted	the	motion	and	ordered	our	subsidiary	to	furnish	security	totaling	CAD	226	million	(approximately $180	million)	to	cover	both	the	Létourneau	 and	Blais	cases.	Such	security	may	take	the	form	of	cash	into	a	court	trust	or	letters	of	credit,	in	six	equal	consecutive quarterly	installments	of	approximately	CAD	37.6	million	 (approximately	$29.9	million)	beginning	in	December	2015	through	March	2017.	The	Court	of	Appeal ordered	Imperial	Tobacco	Canada	Ltd.	to	furnish	security	totaling	CAD	758	million	(approximately	$603	million)	in	seven	equal	consecutive	quarterly	installments	of approximately	CAD	108	million	(approximately	$85.9	million)	beginning	in	December	2015	through	June	2017.	In	March	2017,	our	subsidiary	made	its	sixth	and	final quarterly	installment	of	security	for	approximately	CAD	37.6	million	(approximately	$29.9	million)	into	a	court	trust.	This	payment	is	included	in	other	assets	on	the consolidated	balance	sheets	and	in	cash	used	in	operating	activities	in	the	consolidated	statements	of	cash	flows.	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.	The	Court	of	Appeal	heard	oral	arguments	on	the	merits	appeal	in	November	2016.	Our	subsidiary	and	PMI	believe	that	the findings	of	liability	and	damages	were	incorrect	and	should	ultimately	be	set	aside	on	any	one	of	many	grounds,	including	the	following:	(i)	holding	that	defendants violated	Quebec	law	by	failing	to	warn	class	members	of	the	risks	of	smoking	even	after	the	court	found	that	class	members	knew,	or	should	have	known,	of	the	risks, (ii)	finding	that	plaintiffs	were	not	required	to	prove	that	defendants'	alleged	misconduct	caused	 injury	 to	each	class	member	 in	direct	contravention	of	binding precedent,	(iii)	creating	a	factual	presumption,	without	any	evidence	from	class	members	or	otherwise,	that	defendants'	alleged	misconduct	caused	all	smoking	by	all class	members,	(iv)	relying	on	epidemiological	evidence	that	did	not	meet	recognized	scientific	standards,	and	(v)	awarding	punitive	damages	to	punish	defendants without	proper	consideration	as	to	whether	punitive	damages	were	necessary	to	deter	future	misconduct.

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, our	subsidiaries,	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	September	2009,	plaintiff's	counsel	informed defendants	that	he	did	not	anticipate	taking	any	action	in	this	case	while	he	pursues	the	class	action	filed	in	Saskatchewan	(see	description	of	Adams,	below).

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,	our	subsidiaries,	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.	Preliminary	motions	are	pending.

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,	our	subsidiaries,	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.	No	activity	in	this	case	is	anticipated	while	plaintiff's	counsel	pursues	the	class	action	filed	in	Saskatchewan	(see	description of	Adams,	above).

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, our	subsidiaries,	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.	No	activity in	this	case	is	anticipated	while	plaintiff's	counsel	pursues	the	class	action	filed	in	Saskatchewan	(see	description	of	Adams,	above).

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,	our	subsidiaries,	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, our	subsidiaries,	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,	our	subsidiaries,	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.	Plaintiff's	counsel	has	indicated	that	he	does	not intend	to	take	any	action	in	this	case	in	the	near	future.

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	February	9,	2018,	there	were	16	health	care	cost	recovery	cases	pending	against	us,	our	subsidiaries	or	indemnitees	in	Canada	(10),	Korea	(1)	and	Nigeria	(5), compared	with	16	such	cases	on	December	31,	2016	and	16	such	cases	on	December	31,	2015.

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,	our	subsidiaries,	our	 indemnitee	(PM	USA),	and	other	members	of	 the	 industry	are defendants.	The	 plaintiff,	 the	 government	 of	 the	 province	 of	 British	 Columbia,	 brought	 a	 claim	 based	 upon	 legislation	 enacted	 by	 the	 province	 authorizing	 the government	to	file	a	direct	action	against	cigarette	manufacturers	to	recover	the	health	care	costs	it	has	incurred,	and	will	incur,	resulting	from	a	"tobacco	related wrong."	The	Supreme	Court	of	Canada	has	held	that	the	statute	is	constitutional.	We	and	certain	other	non-Canadian	defendants	challenged	the	jurisdiction	of	the	court. The	court	rejected	the	jurisdictional	challenge.	Pre-trial	discovery	is	ongoing.

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,	our	subsidiaries,	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."	Pre-trial	discovery	is	ongoing.	In	June	2017,	the	trial	court	set	a	trial	date	for	November	4,	2019.

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,	our	subsidiaries,	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."	Pre-trial	discovery	is	ongoing.

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,	our	subsidiaries,	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."	Pre-trial	discovery	is	ongoing.

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,	our	subsidiary,	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."	Pre-trial discovery	is	ongoing.

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,	our	subsidiaries,	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."	Pre-trial	discovery	is	ongoing.

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,	our	subsidiaries,	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."	Defendants	filed	their	defenses	in	September	2014.	Pre-trial	discovery	is	ongoing.

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,	our	subsidiaries,	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."	Defendants	filed	their	defenses	in	February	2015.	While	discovery	initially	was	scheduled	to	begin	in	2017	by agreement	of	the	parties,	to	date,	the	discovery	process	has	not	started.

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,	our	subsidiaries,	our	indemnitees	(PM	USA	and	Altria),	and other	members	of	the	industry	are	defendants.	The	claim	was	filed	by	the	government	of	the	province	of	Prince	Edward	Island	based	on	legislation	enacted	in	the province	that	is	similar	to	the	laws	enacted	in	several	other	Canadian	provinces.	The	legislation	authorizes	the	government	to	file	a	direct	action	against	cigarette manufacturers	to	recover	the	health	care	costs	it	has	incurred,	and	will	incur,	as	a	result	of	a	"tobacco	related	wrong."	Defendants	filed	their	defenses	in	February	2015. While	discovery	initially	was	scheduled	to	begin	in	2017	by	agreement	of	the	parties,	to	date,	the	discovery	process	has	not	started.

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,	our	subsidiaries,	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."	Defendants	filed	their	defenses	in	July	2015.	While	discovery	initially	was	scheduled	to	begin	in	2017 by	agreement	of	the	parties,	to	date,	the	discovery	process	has	not	started.

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

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

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	approximately	$53.7	million	allegedly	incurred	in	treating	3,484	patients	with	small	cell	lung	cancer,	squamous	cell	lung	cancer,	and	squamous	cell	laryngeal cancer	from	2003	to	2012.	The	case	is	now	in	the	evidentiary	phase.

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

As	of	February	9,	2018,	there	was	1	case	brought	by	an	individual	plaintiff	in	Italy	(1)	pending	against	our	subsidiaries,	compared	with	3	such	cases	on	December	31, 2016,	and	3	such	cases	on	December	31,	2015,	and	one	purported	class	action	in	Israel	(1).

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

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.

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

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.

# 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	$2.54	billion).	In	 May	 2017,	 the	 King	 of	 Thailand	 signed	 a	 new	 customs	 act.	 The	 new	 act,	 which	 took	 effect	 in	 November	 2017, substantially	limits	the	amount	of	fines	that	Thailand	could	seek	in	these	proceedings.	Trial	in	the	case	began	in	November	2017	and	is	presently	expected	to	conclude	in April	2018.	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.

The	DSI	also	conducted	an	investigation	into	alleged	underpayment	by	PM	Thailand	of	customs	duties	and	excise	taxes	relating	to	imports	from	Indonesia	covering	the period	2000-2003.	On	January	26,	2017,	the	Public	Prosecutor	filed	charges	against	PM	Thailand	and	its	former	Thai	employee	in	the	Bangkok	Criminal	Court	alleging that	PM	Thailand	and	its	former	employee	jointly	and	with	the	intention	to	defraud	the	Thai	government	under-declared	import	prices	of	cigarettes	to	avoid	full	payment of	taxes	and	duties	in	connection	with	import	entries	during	the	period	from	January	2002	to	July	2003.	The	government	is	seeking	a	fine	of	approximately	THB	19.8 billion	 (approximately	$621	million).	The	case	is	in	pre-trial	proceedings.	The	trial	is	scheduled	to	begin	in	the	last	quarter	of	2018.	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.	In	May	2017,	the	King	of	Thailand	signed	a	new	customs	act.	The new	act,	which	took	effect	in	November	2017,	substantially	limits	the	amount	of	fines	that	Thailand	could	seek	in	these	proceedings.	On	November	29,	2017,	PM Thailand	received	notices	of	assessment	in	the	aggregate	amount	of	approximately	THB	25.6	billion	(approximately	$803	million)	from	the	Thai	Customs	Department alleging	that	PM	Thailand	under-declared	customs	values	for	the	imports	from	Indonesia	covering	the	period	2001-2003.	The	notices	include	the	Indonesian	import entries	subject	to	the	proceedings	discussed	above	and	are	in	addition	to	the	fine	sought	by	the	government	in	the	criminal	proceedings.	PM	Thailand	filed	its	appeal against	the	notices	in	December	2017.	We	believe	that	all	of	the	notices	of	assessment	are	barred	by	the	applicable	statutes	of	limitations	and	are	otherwise	without merit.

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	$249	million),	of	which	KRW	100	billion (approximately	$92	million)	was	paid	in	2016	and	KRW	172	billion	(approximately	$157	million)	was	paid	in	the	first	quarter	of	2017.	These	amounts	are	included	in other	assets	in	the	consolidated	balance	sheets	and	in	cash	used	in	operating	activities	in	the	consolidated	statements	of	cash	flows.	 	PM	Korea	is	appealing	the assessments.	The	tax	authorities	have	also	referred	the	matter	to	the	Public	Prosecutor,	who	will	further	investigate	and	decide	whether	to	file	criminal	charges	against PM	Korea	and/or	other	alleged	co-offenders.	If	the	Public	Prosecutor	decides	to	prosecute,	it	may	seek	up	to	three	times	the	underpaid	tax	for	company	criminal	penalties and	up	to	five	times	the	underpaid	tax	for	individual	criminal	penalties.	PM	Korea	believes	that	it	has	paid	cigarette-related	taxes	in	compliance	with	the	South	Korean tax	laws.	In	addition,	the	South	Korean	Ministry	of	Strategy	and	Finance	("MOSF")	filed	a	criminal	complaint	with	the	Public	Prosecutor	against	PM	Korea	and	its managing	director.	In	its	criminal	complaint,	the	MOSF	alleged	that	PM	Korea	exceeded	the	monthly	product	withdrawal	limits	that	the	MOSF	had	set	in	its	notice.	The Public	Prosecutor	will	investigate	the	MOSF's	criminal	complaint	and	decide	whether	to	prosecute.		PM	Korea	disagrees	with	the	MOSF's	allegations.

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.

# Balance	Sheet	Offsetting:

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	consolidated	balance	sheets.	Collateral	associated	with	these	arrangements	is	in	the	form	of	cash	and	is	unrestricted.	See	Note	15.	Financial Instruments	for	disclosures	related	to	PMI's	derivative	financial	instruments.

The	effects	of	these	derivative	financial	instrument	assets	and	liabilities	on	PMI's	consolidated	balance	sheets	were	as	follows:

| (in	millions) | Gross<br>Amounts<br>Recognized | Gross	Amount	Offset<br>in	the	Consolidated<br>Balance	Sheet | Net	Amounts<br>Presented	in	the<br>Consolidated<br>Balance	Sheet | Gross	Amounts	Not	Offset	in	the<br>Consolidated<br>Balance	Sheet<br>Financial<br>Instruments | Cash	Collateral<br>Received/Pledged | Net	Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| \tAt\tDecember\t31,\t2017 |  |  |  |  |  |  |
| \tAssets |  |  |  |  |  |  |
| \tForeign\texchange\tcontracts | $140 | $— | $140 | $(50) | $(78) | $12 |
| \tLiabilities |  |  |  |  |  |  |
| \tForeign\texchange\tcontracts | $1,128 | $— | $1,128 | $(50) | $(1,004) | $74 |
| \tAt\tDecember\t31,\t2016 |  |  |  |  |  |  |
| \tAssets |  |  |  |  |  |  |
| \tForeign\texchange\tcontracts | $813 | $— | $813 | $(126) | $(607) | $80 |
| \tLiabilities |  |  |  |  |  |  |
| \tForeign\texchange\tcontracts | $163 | $— | $163 | $(126) | $(31) | $6 |

# Sale	of	Accounts	Receivable:

To	mitigate	risk	and	enhance	cash	and	liquidity	management	PMI	sells	trade	receivables	to	unaffiliated	financial	institutions.	These	arrangements	allow	PMI	to	sell,	on an	ongoing	basis,	certain	trade	receivables	without	recourse.	The	trade	receivables	sold	are	generally	short-term	in	nature	and	are	removed	from	the	consolidated balance	sheets.	PMI	sells	trade	receivables	under	two	types	of	arrangements,	servicing	and	non-servicing.	For	servicing	arrangements,	PMI	continues	to	service	the	sold trade	receivables	on	an	administrative	basis	and	does	not	act	on	behalf	of	the	unaffiliated	financial	institutions.	When	applicable,	a	servicing	liability	is	recorded	for	the estimated	fair	value	of	the	servicing.	The	amounts	associated	with	the	servicing	liability	were	not	material	for	the	years	ended	December	31,	2017	and	2016.	Under	the non-servicing	arrangements,	PMI	does	not	provide	any	administrative	support	or	servicing	after	the	trade	receivables	have	been	sold	to	the	unaffiliated	financial institutions.

Cumulative	trade	receivables	sold,	including	excise	taxes,	for	the	years	ended	December	31,	2017	 and	2016,	 were	$10,003	million	 and	$9,447	million,	respectively. PMI's	operating	cash	flows	were	positively	impacted	by	the	amount	of	the	trade	receivables	sold	and	derecognized	from	the	consolidated	balance	sheets,	which remained	outstanding	with	the	unaffiliated	financial	institutions.	The	trade	receivables	sold	that	remained	outstanding	under	these	arrangements	as	of	December	31, 2017,	2016	and	2015,	were	$1,092	million,	$729	million	and	$888	million,	respectively.	The	net	proceeds	received	are	included	in	cash	provided	by	operating	activities in	the	consolidated	statements	of	cash	flows.	The	difference	between	the	carrying	amount	of	the	trade	receivables	sold	and	the	sum	of	the	cash	received	is	recorded	as	a loss	on	sale	of	trade	receivables	within	marketing,	administration	and	research	costs	in	the	consolidated	statements	of	earnings.	For	the	years	ended	December	31,	2017, 2016	and	2015	the	loss	on	sale	of	trade	receivables	was	immaterial.

# New	Accounting	Standards:

On	February	25,	2016,	the	Financial	Accounting	Standards	Board	("FASB")	issued	Accounting	Standards	Update	ASU	2016-02,	"Leases"	("ASU	2016-02").	 ASU 2016-02	requires	organizations	that	lease	assets	to	recognize	on	the	balance	sheet	the	assets	and	liabilities	for	the	rights	and	obligations	created	by	those	leases. Additionally,	ASU	2016-02	modifies	current	guidance	for	lessors'	accounting.	ASU	2016-02	is	effective	for	interim	and	annual	reporting	periods	beginning	on	or	after January	1,	2019,	with	early	adoption	permitted.	PMI	has	identified	its	lease	management	system	and	is	in	the	process	of	identifying	and	evaluating	the	applicable	leases. PMI	is	currently	assessing	the	impact	that	the	adoption	of	ASU	2016-02	will	have	on	its	financial	position	and	results	of	operations.

On	January	5,	2016,	the	FASB	issued	Accounting	Standard	Update	ASU	2016-01,	"Financial	Instruments	-	Overall	(Subtopic	825-10):	Recognition	and	Measurement of	Financial	Assets	and	Financial	Liabilities"	("ASU	2016-01").	ASU	2016-01	will	require	equity	investments	(except	those	accounted	for	under	the	equity	method	of accounting,	or	those	that	result	in	consolidation	of	the	investee)	to	be	measured	at	fair	value	with	changes	in	fair	value	recognized	in	net	income.	Additionally,	ASU 2016-01	also	changes	certain	disclosure	requirements	and	other	aspects	of	current	U.S.	GAAP.	ASU	2016-01	is	effective	for	interim	and	annual	reporting	periods beginning	on	or	after	January	1,	2018.	PMI	has	identified	certain	cost	investments	which	are	applicable	to	ASU	2016-01.	At	January	1,	2018,	the	cumulative	effect	of this	change	to	PMI's	Earnings	Reinvested	in	the	Business	is	an	increase	of	$238	million,	which	is	net	of	$63	million	in	taxes.

On	May	28,	2014,	the	FASB	issued	Accounting	Standards	Update	ASU	2014-09,	"Revenue	from	Contracts	with	Customers"	("ASU	2014-09").	ASU	2014-09	contains principles	that	an	entity	will	need	to	apply	to	determine	the	measurement	of	revenue	and	timing	of	when	it	is	recognized.	The	underlying	principle	is	that	an	entity	will recognize	revenue	to	depict	the	transfer	of	promised	goods	or	services	to	customers	in	an	amount	that	reflects	the	consideration	to	which	the	entity	expects	to	be	entitled in	exchange	for	those	goods	or	services.

ASU	2014-09	is	effective	for	interim	and	annual	reporting	periods	beginning	on	or	after	January	1,	2017.	In	July	2015,	the	FASB	approved	a	proposal	which	allows	for a	deferral	of	the	implementation	until	January	1,	2018,	and	permits	early	application,	but	not	before	the	original	effective	date	of	January	1,	2017.	In	addition	to	the guidance	in	ASU	2014-09,	PMI	has	evaluated	ASU	2016-12,	which	was	issued	in	May	2016	and	provides	some	practical	expedients	to	the	original	standard.	As	a	result of	this	evaluation,	PMI	made	an	accounting	policy	election	to	exclude	excise	taxes	collected	from	customers	from	the	measurement	of	the	transaction	price,	thereby presenting	revenues,	net	of	excise	taxes.	PMI	has	adopted	ASU	2014-09	on	January	1,	2018	retrospectively	to	each	prior	period	presented.	PMI	has	elected	this	transition method	solely	to	reflect	the	change	in	excise	tax	presentation	in	all	prior	periods.	Based	on	PMI's	assessment	to	date,	the	underlying	principles	of	the	new	standard, relating	to	the	measurement	of	revenue	and	the	timing	of	recognition,	are	closely	aligned	with	PMI's	current	business	model	and	practices.	As	a	result,	other	than	excise tax	presentation,	the	adoption	of	ASU	2014-09	will	not	have	any	other	material	impact	on	the	consolidated	financial	position	or	results	of	operations.

# Quarterly	Financial	Data	(Unaudited):

Basic	and	diluted	EPS	are	computed	independently	for	each	of	the	periods	presented.	Accordingly,	the	sum	of	the	quarterly	EPS	amounts	may	not	agree	to	the	total	for the	year.

# Report	of	Independent	Registered	Public	Accounting	Firm

# To	the	Board	of	Directors	and	Stockholders	of

Philip	Morris	International	Inc.	and	Subsidiaries:

# Opinions	on	the	Financial	Statements	and	Internal	Control	over	Financial	Reporting

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Philip	Morris	International	Inc.	and	its	subsidiaries	(PMI)	as	of	December	31,	2017	and	2016,	and	the related	consolidated	statements	of	earnings,	comprehensive	earnings,	stockholders'	(deficit)	equity	and	of	cash	flows	for	each	of	the	three	years	in	the	periods	ended December	31,	2017,	including	the	related	notes	(collectively	referred	to	as	the	"consolidated	financial	statements").	We	also	have	audited	the	Company's	internal	control over	 financial	 reporting	 as	 of	December	31,	2017,	 based	 on	 criteria	 established in	Internal	 Control - Integrated	 Framework	(2013) issued	 by	 the	 Committee	 of Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).

In	our	opinion,	the	consolidated	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	PMI	as	of	December	31,	2017	and 2016,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2017	in	conformity	with	accounting	principles generally	accepted	in	the	United	States	of	America.	Also	in	our	opinion,	PMI	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of December	31,	2017,	based	on	criteria	established	in	Internal	Control	—Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the Treadway	Commission	(COSO).

# Basis	for	Opinions

PMI's	management	is	responsible	for	these	consolidated	financial	statements,	for	maintaining	effective	internal	control	over	financial	reporting,	and	for	its	assessment	of the	effectiveness	of	internal	control	over	financial	reporting,	included	in	the	accompanying	Report	of	Management	on	Internal	Control	over	Financial	Reporting.	Our responsibility	is	to	express	opinions	on	PMI's	consolidated	financial	statements	and	on	PMI's	internal	control	over	financial	reporting	based	on	our	audits.	We	are	a public	accounting	firm	registered	with	the	Public	Company	Accounting	Oversight	Board	(United	States)	("PCAOB")	and	are	required	to	be	independent	with	respect	to the	Company	in	accordance	with	the	U.S.	federal	securities	laws	and	the	applicable	rules	and	regulations	of	the	Securities	and	Exchange	Commission	and	the	PCAOB.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	PCAOB.	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain	reasonable	assurance about	whether	the	consolidated	financial	statements	are	free	of	material	misstatement,	whether	due	to	error	or	fraud,	and	whether	effective	internal	control	over	financial reporting	was	maintained	in	all	material	respects.

Our	audits	of	the	consolidated	financial	statements	included	performing	procedures	to	assess	the	risks	of	material	misstatement	of	the	consolidated	financial	statements, whether	due	to	error	or	fraud,	and	performing	procedures	that	respond	to	those	risks.	Such	procedures	included	examining,	on	a	test	basis,	evidence	regarding	the amounts	and	disclosures	in	the	consolidated	financial	statements.	Our	audits	also	included	evaluating	the	accounting	principles	used	and	significant	estimates	made	by management	as	well	as	evaluating	the	overall	presentation	of	the	consolidated	financial	statements.	Our	audit	of	internal	control	over	financial	reporting	included obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control	based	on	the	assessed	risk.	Our	audits	also	included	performing	such	other	procedures	as	we	considered	necessary	in	the circumstances.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinions.

# Definition	and	Limitations	of	Internal	Control	over	Financial	Reporting

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	 and	 directors	 of	 the	 company;	 and	 (iii)	 provide	 reasonable	 assurance	 regarding	 prevention	 or	 timely	 detection	 of	 unauthorized	 acquisition,	 use,	 or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or procedures	may	deteriorate.

# PricewaterhouseCoopers	SA

/S/				DR.	MICHAEL	ABRESCH

Barry	J.	Misthal Dr.	Michael	Abresch

Lausanne,	Switzerland

PricewaterhouseCoopers	SA	has	served	as	the	Company's	auditor	since	2008.

# Report	of	Management	on	Internal	Control	Over	Financial	Reporting

Management	of	Philip	Morris	International	Inc.	("PMI")	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting	as	defined	in Rules	13a-15(f)	and	15d-15(f)	under	the	Securities	Exchange	Act	of	1934,	as	amended.	PMI's	internal	control	over	financial	reporting	is	a	process	designed	to	provide reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	accounting principles	generally	accepted	in	the	United	States	of	America.	Internal	control	over	financial	reporting	includes	those	written	policies	and	procedures	that:

•pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of PMI;

•provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	accounting	principles generally	accepted	in	the	United	States	of	America;

•provide	reasonable	assurance	that	receipts	and	expenditures	of	PMI	are	being	made	only	in	accordance	with	the	authorization	of	management	and	directors	of PMI;	and

•provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use	or	disposition	of	assets	that	could	have	a	material	effect on	the	consolidated	financial	statements.

Internal	 control	 over	 financial	 reporting includes the	 controls themselves,	 monitoring	 and internal	 auditing	 practices	 and	 actions taken to	 correct	 deficiencies	 as identified.

Management	assessed	the	effectiveness	of	PMI's	internal	control	over	financial	reporting	as	of	December	31,	2017.	Management	based	this	assessment	on	criteria	for effective	internal	control	over	financial	reporting	described	in	Internal	Control	—	Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of the	Treadway	Commission.	Management's	assessment	 included	an	evaluation	of	 the	design	of	PMI's	 internal	control	over	financial	reporting	and	 testing	of	 the operational	effectiveness	of	its	internal	control	over	financial	reporting.	Management	reviewed	the	results	of	its	assessment	with	the	Audit	Committee	of	our	Board	of Directors.

Based	on	this	assessment,	management	determined	that,	as	of	December	31,	2017,	PMI	maintained	effective	internal	control	over	financial	reporting.

PricewaterhouseCoopers	SA,	an	independent	registered	public	accounting	firm,	who	audited	and	reported	on	the	consolidated	financial	statements	of	PMI	included	in this	report,	has	audited	the	effectiveness	of	PMI's	internal	control	over	financial	reporting	as	of	December	31,	2017,	as	stated	in	their	report	herein.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure.

# Item	9A. Controls	and	Procedures.

PMI	carried	out	an	evaluation,	with	the	participation	of	PMI's	management,	including	PMI's	Chief	Executive	Officer	and	Chief	Financial	Officer,	of	the	effectiveness	of PMI's	disclosure	controls	and	procedures	(as	defined	in	Rule	13a-15(e)	under	the	Securities	Exchange	Act	of	1934,	as	amended)	as	of	the	end	of	the	period	covered	by this	report.	Based	upon	that	evaluation,	PMI's	Chief	Executive	Officer	and	Chief	Financial	Officer	concluded	that	PMI's	disclosure	controls	and	procedures	are effective.	There	have	been	no	changes	in	PMI's	internal	control	over	financial	reporting	during	the	most	recent	fiscal	quarter	that	have	materially	affected,	or	are reasonably	likely	to	materially	affect,	PMI's	internal	control	over	financial	reporting.

The	Report	of	Management	on	Internal	Control	over	Financial	Reporting	and	the	Report	of	Independent	Registered	Public	Accounting	Firm	are	included	in	Item	8.

# Item	9B. Other	Information.

Except	for	the	information	relating	to	the	executive	officers	set	forth	in	Item	10	and	the	information	relating	to	equity	compensation	plans	set	forth	in	Item	12,	the information	called	for	by	Items	10-14	 is	hereby	 incorporated	by	reference	 to	PMI's	definitive	proxy	statement	for	use	 in	connection	with	 its	annual	meeting	of stockholders	to	be	held	on	May	9,	2018,	that	will	be	filed	with	the	SEC	on	or	about	March	29,	2018	(the	"proxy	statement"),	and,	except	as	indicated	therein,	made	a	part hereof.

# Item	10. Directors,	Executive	Officers	and	Corporate	Governance.

# Executive	Officers	as	of	February	9,	2018:

| Name | Office | Age |
| :--- | :--- | :--- |
| André\tCalantzopoulos | Chief\tExecutive\tOfficer | 60 |
| Massimo\tAndolina | Senior\tVice\tPresident,\tOperations | 49 |
| Drago\tAzinovic | President,\tMiddle\tEast\t&amp;\tAfrica\tRegion\tand\tPMI\tDuty\tFree | 55 |
| Werner\tBarth | Senior\tVice\tPresident,\tCommercial | 53 |
| Charles\tBendotti | Senior\tVice\tPresident,\tPeople\tand\tCulture | 45 |
| Patrick\tBrunel | Chief\tInformation\tOfficer | 52 |
| Frank\tde\tRooij | \t Vice\tPresident,\tTreasury\tand\tCorporate\tFinance | 52 |
| Frederic\tde\tWilde | President,\tEuropean\tUnion\tRegion | 50 |
| Marc\tS.\tFirestone | President,\tExternal\tAffairs\tand\tGeneral\tCounsel | 58 |
| Paul\tJanelle | \t Vice\tPresident,\tCorporate\tPlanning\tand\tBusiness\tDevelopment | 52 |
| Stacey\tKennedy | President,\tSouth\tand\tSoutheast\tAsia\tRegion | 45 |
| Martin\tG.\tKing | Chief\tFinancial\tOfficer | 53 |
| Andreas\tKurali | \t Vice\tPresident\tand\tController | 52 |
| Marco\tMariotti | President,\tEastern\tEurope\tRegion | 53 |
| Jacek\tOlczak | Chief\tOperating\tOfficer | 53 |
| Jeanne\tPollès | President,\tLatin\tAmerica\t&amp;\tCanada\tRegion | 52 |
| Paul\tRiley | President,\tEast\tAsia\tand\tAustralia\tRegion | 52 |
| Jaime\tSuarez | Chief\tDigital\tOfficer | 44 |
| Jerry\tE.\tWhitson | \t Deputy\tGeneral\tCounsel\tand\tCorporate\tSecretary | 62 |
| Miroslaw\tZielinski | President,\tScience\tand\tInnovation | 56 |

All	of	the	above-mentioned	officers	have	been	employed	by	us	in	various	capacities	during	the	past	five	years.

# Codes	of	Conduct	and	Corporate	Governance

We	have	adopted	the	Philip	Morris	International	Code	of	Conduct,	which	complies	with	requirements	set	forth	in	Item	406	of	Regulation	S-K.	This	Code	of	Conduct applies	to	all	of	our	employees,	including	our	principal	executive	officer,	principal	financial	officer,	principal	accounting	officer	or	controller,	and	persons	performing similar	functions.	We	have	also	adopted	a	code	of	business	conduct	and	ethics	that	applies	to	the	members	of	our	Board	of	Directors.	These	documents	are	available	free of	charge	on	our	website	at	www.pmi.com.

In	addition,	we	have	adopted	corporate	governance	guidelines	and	charters	for	our	Audit,	Finance,	Compensation	and	Leadership	Development,	Product	Innovation	and Regulatory	Affairs	and	Nominating	and	Corporate	Governance	committees	of	the	Board	of	Directors.	All	of	these	documents	are	available	free	of	charge	on	our	website at	www.pmi.com.	Any	waiver	granted	by	Philip	Morris	International	Inc.	to	its	principal	executive	officer,	principal	financial	officer	or	controller	or	any	person performing	similar	functions	under	the	Code	of	Conduct,	or	certain	amendments	to	the	Code	of	Conduct,	will	be	disclosed	on	our	website	at	www.pmi.com.

The	information	on	our	website	is	not,	and	shall	not	be	deemed	to	be,	a	part	of	this	Report	or	incorporated	into	any	other	filings	made	with	the	SEC.

Also	refer	to	Board	Operations	and	Governance	-	Committees	of	the	Board,	Election	of	Directors	-	Process	for	Nominating	Directors	and	Election	of	Directors	- Director	Nominees	and	Section	16(a)	Beneficial	Ownership	Reporting	Compliance	sections	of	the	proxy	statement.

# Item	11. Executive	Compensation.

Refer	to	Compensation	Discussion	and	Analysis	and	Compensation	of	Directors	sections	of	the	proxy	statement.

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters.

The	number	of	shares	to	be	issued	upon	exercise	or	vesting	and	the	number	of	shares	remaining	available	for	future	issuance	under	PMI's	equity	compensation	plans	at December	31,	2017,	were	as	follows:

|  |  | Number	of	Securities |
| :--- | :--- | :--- |
| Number\tof\tSecurities |  | Remaining\tAvailable\tfor |
| to\tbe\tIssued\tupon |  | Future\tIssuance\tUnder |
| Exercise\tof\tOutstanding | Weighted\tAverage | Equity\tCompensation\tPlans |
| Options\tand\tVesting\tof\tRSUs | Exercise\tPrice\tof | (excluding\tSecurities |
| and\tPSUs | Outstanding\tOptions | reflected\tin\tcolumn\t(a)) |
| (a) | (b) | (c) |
| 5,254,460(1) | \t $— | 25,991,850 |

(1)	Represents	3,612,400	shares	of	common	stock	that	may	be	issued	upon	vesting	of	the	restricted	share	units	and	1,642,060	shares	that	may	be	issued	upon	vesting	of the	performance	share	units	if	maximum	performance	targets	are	achieved	for	each	performance	cycle.	PMI	has	not	granted	options	since	the	spin-off	from	Altria	on March	28,	2008.

# Item	13. Certain	Relationships	and	Related	Transactions,	and	Director	Independence.

Refer	to	Related	Person	Transactions	and	Code	of	Conduct	and	Election	of	Directors	-	Independence	of	Nominees	sections	of	the	proxy	statement.

# Item	14. Principal	Accounting	Fees	and	Services.

Refer	to	Audit	Committee	Matters	section	of	the	proxy	statement.

# PART	IV

# Item	15. Exhibits	and	Financial	Statement	Schedules.

(a)	Index	to	Consolidated	Financial	Statements	and	Schedules

|  | Page |
| :--- | :--- |
| Consolidated\tBalance\tSheets\tat\tDecember\t31,\t2017\tand\t2016 | 69\t-\t70 |
| Consolidated\tStatements\tof\tEarnings\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016\tand\t2015 | 71 |
| Consolidated\tStatements\tof\tComprehensive\tEarnings\tfor\tthe\tyears\tended\tDecember\t31,\n\t\t\t2017,\t2016\tand\t2015 | 72 |
| Consolidated\tStatements\tof\tStockholders'\t(Deficit)\tEquity\tfor\tthe\tyears\tended\n\t\t\tDecember\t31,\t2017,\t2016\tand\t2015 | 73 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016\n\t\t\tand\t2015 | 74\t-\t75 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 76\t-\t118 |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 119\t-\t120 |
| Report\tof\tManagement\ton\tInternal\tControl\tOver\tFinancial\tReporting | 121 |

Schedules	have	been	omitted	either	because	such	schedules	are	not	required	or	are	not	applicable.

(b)	The	following	exhibits	are	filed	as	part	of	this	Report:

     10.32 — Supplemental	Letter	to	the	Employment	Agreement	(as	amended)	with	Miroslaw	Zielinski	(incorporated	by	reference	to Exhibit	10.3	to	the	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	June	30,	2017).	The	Employment	Agreement	was previously	filed	as	Exhibit	10.2	to	the	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	March	31,	2013	and	is incorporated	by	reference	to	this	Exhibit	10.32.	The	Amendments	to	the	Employment	Agreement	were	previously	filed	as Exhibit	10.28	to	the	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2013	and	as	Exhibit	10.8	to	the	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	March	31,	2017,	and	are	incorporated	by	reference	to	this	Exhibit	10.32.*

10.33 — Time	Sharing	Agreement	between	PMI	Global	Services	Inc.	and	Louis	C.	Camilleri	dated	August	18,	2010	(incorporated	by reference	to	Exhibit	10.1	to	the	Current	Report	on	Form	8-K	filed	August	19,	2010).*

Philip	Morris	International	Inc.	2008	Stock	Compensation	Plan	for	Non-Employee	Directors	(amended	and	restated	as	of

12 	 — Statement	regarding	computation	of	ratios	of	earnings	to	fixed	charges.

        21 	 — Subsidiaries	of	Philip	Morris	International	Inc.

23 	 — 	 Consent	of	independent	registered	public	accounting	firm.

31.1 — Certification	of	the	Registrant's	Chief	Executive	Officer	pursuant	to	Rule	13a-14(a)/15d-14(a)	of	the	Securities	Exchange	Act	of 1934,	as	amended,	as	adopted	pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	of	2002.

        32.2 — Certification	of	the	Registrant's	Chief	Financial	Officer	pursuant	to	18	U.S.C.	1350,	as	adopted	pursuant	to	Section	906	of	the Sarbanes-Oxley	Act	of	2002.

101.LAB 	 — 	 XBRL	Taxonomy	Extension	Label	Linkbase.

   101.PRE 	 — 	 XBRL	Taxonomy	Extension	Presentation	Linkbase.

* Denotes	management	contract	or	compensatory	plan	or	arrangement	in	which	directors	or	executive	officers	are	eligible	to participate.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf by	the	undersigned,	thereunto	duly	authorized.

/s/				ANDRÉ	CALANTZOPOULOS

(André	Calantzopoulos

Chief	Executive	Officer)

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant and	in	the	capacities	and	on	the	date	indicated:



Question: what is the percentage change in the pre-tax pension and postretirement expense from 2017 to 2018?
Calculation: pension_change = 164 - 199
percent_change = pension_change / 199
answer = percent_change * 100
Answer: -17.6%