UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromtoCommission File Number: 001-33708

PHILIP MORRIS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

Virginia

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

120 Park Avenue
New York
New York

10017(Address of principal executive offices)(Zip Code)917-663-2000(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
2.000% Notes due 2020
Floating Notes due 2020
1.750% Notes due 2020
4.500% Notes due 2020
1.875% Notes due 2021
1.875% Notes due 2021
4.125% Notes due 2021
2.900% Notes due 2021
2.625% Notes due 2022
2.375% Notes due 2022
2.500% Notes due 2022
2.500% Notes due 2022
2.625% Notes due 2023
2.125% Notes due 2023
3.600% Notes due 2023
2.875% Notes due 2024
2.875% Notes due 2024
0.625% Notes due 2024

Trading Symbol(s)Name of each exchange on which registered

PM
PM20B
PM20C
PM20A
PM20
PM21B
PM21C
PM21
PM21A
PM22A
PM22B
PM22
PM22C
PM23
PM23B
PM23A
PM24
PM24C
PM24B

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
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

Trading Symbol(s)Name of each exchange on which registered

PM24A
PM25
PM25A
PM26A
PM26
PM26B
PM27
PM28
PM29
PM29A
PM31
PM33
PM36
PM37A
PM38
PM39
PM41
PM42
PM42A
PM43
PM43A
PM44

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
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
New York Stock Exchange
New York Stock Exchange

3.250% Notes due 2024
2.750% Notes due 2025
3.375% Notes due 2025
2.750% Notes due 2026
2.875% Notes due 2026
0.125% Notes due 2026
3.125% Notes due 2027
3.125% Notes due 2028
2.875% Notes due 2029
3.375% Notes due 2029
0.800% Notes due 2031
3.125% Notes due 2033
2.000% Notes due 2036
1.875% Notes due 2037
6.375% Notes due 2038
1.450% Notes due 2039
4.375% Notes due 2041
4.500% Notes due 2042
3.875% Notes due 2042
4.125% Notes due 2043
4.875% Notes due 2043
4.250% Notes due 2044
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 ☑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 ☑
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 thepreceding 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 ☑No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2of the Exchange Act.
Large accelerated filer ☑
Non-accelerated filer☐

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 orrevised 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 ☑
As of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately$122 billion based on
the closing sale price of the common stock as reported on the New York Stock Exchange.

ClassOutstanding at January 31, 2020

Common Stock,no par value

1,555,911,930 shares
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 Part III
to be held on May 6, 2020, to be filed with the Securities and Exchange Commission (“SEC”) on or about March 26,
2020.

TABLE OF CONTENTS
PagePART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures

1
5
10
10
11
11

Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial DataManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

11
14
15
52
53
114
114
114

PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

115
116
116
117
117

PART IV
Item 15.

Exhibits and Financial Statement Schedules

118

PART II
Item 5.

Signatures

123

In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.
Trademarks and service marks in this report are the registered property of, or licensed by, the subsidiaries of Philip Morris International Inc. and are italicized.

PART I
Item 1.

Business.

General Development of Business
GeneralPhilip Morris International Inc. is a Virginia holding company incorporated in 1987. We are a leading international tobacco company engaged in the manufactureand sale of cigarettes, smoke-free products and associated electronic devices and accessories, and other nicotine-containing products in markets outside the UnitedStates of America. In addition, we ship a version of our Platform 1 device and its consumables authorized by the U.S. Food and Drug Administration ("FDA") to
Altria Group, Inc., for sale in the United States under license.
We are leading a transformation in the tobacco industry to create a smoke-free future, based on a new category of reduced-risk products that, while not risk free,
are a much better choice than continuing to smoke. Our goal is to ultimately replace cigarettes with smoke-free products to the benefit of adults who would
otherwise continue to smoke, society, the company and its shareholders.
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 tosmokers who switch to these products versus continuing smoking. We have a range of RRPs in various stages of development, scientific assessment andcommercialization. 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. Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation,
we aim to ensure that our RRPs meet adult consumer preferences and rigorous regulatory requirements.
Our IQOS smoke-free product brand portfolio includes heated tobacco and nicotine-containing vapor products. Our leading smoke-free platform ("Platform 1") isa 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 a n d HEETS FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks andParliament HeatSticks. Platform 1 was first introduced in Nagoya, Japan, in 2014. As of December 31, 2019, Platform 1is available for sale in 52 markets in key
cities or nationwide.
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-sellinginternational cigarette, which accounted for approximately 37% of our total 2019 cigarette shipment volume. Marlboro is complemented in the premium-pricecategory 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 78% of our cigarette shipment volume in 2019. We also own a number of important local cigarette brands, such as Dji
Sam Soe, Sampoerna A and Sampoerna U in Indonesia, and Fortune and Jackpot in the Philippines.
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, toparticipate 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 claimsof 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 thatare otherwise compliant with law.
Description of BusinessWe manage our business in six operating segments as follows:•

The European Union Region (“EU”) is headquartered in Lausanne, Switzerland, and covers all the European Union countries and also Switzerland,
Norway, Iceland and the United Kingdom;•

The Eastern Europe Region (“EE”) is also headquartered in Lausanne and includes Southeast Europe, Central Asia, Ukraine, Israel andRussia;1

•The Middle East & Africa Region (“ME&A”) is also headquartered in Lausanne and covers the African continent, the Middle East, Turkey and ourinternational duty free business;•

The South & Southeast Asia Region (“S&SA”) is headquartered in Hong Kong and includes Indonesia, the Philippines and other markets in thisregion;•The East Asia & Australia Region (“EA&A”) is also headquartered in Hong Kong and includes Australia, Japan, South Korea, the People's Republic ofChina and other markets in this region, as well as Malaysia and Singapore; and•The Latin America & Canada Region (“LA&C”) is headquartered in New York and covers the South American continent, Central America, Mexico, theCaribbean and Canada. LA&C also includes transactions under license with Altria Group, Inc., for the distribution of our Platform 1 product in the UnitedStates.

As of March 22, 2019, we deconsolidated the financial results of our Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from our financial
statements. For further details, see Item 8, Note 22. Deconsolidation of RBH.
Following the deconsolidation of our Canadian subsidiary, we will continue to report the volume of brands sold by RBH for which other PMI subsidiaries are thetrademark owners. These include HEETS, Next, Philip Morris and Rooftop, which together accounted for approximately 40% of RBH's total shipment volume in2018.
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 andmay, in defined instances, exclude the People's Republic of China and/or our duty free business. In addition, to reflect the deconsolidation of RBH, effective March
22, 2019, PMI's total market share has been restated for previous periods.
Our total shipments, including cigarettes and heated tobacco units, decreased by 2.0% in 2019 to 766.4 billion units. We estimate that international industry
volumes, including cigarettes and heated tobacco units, were approximately 5.1 trillion units in 2019, a 0.9% decrease from 2018. Excluding the People’s Republicof China (“PRC”), we estimate that international cigarette and heated tobacco unit volume was 2.7 trillion units in 2019, a 2.0% decrease from 2018. We estimatethat our reported share of the international market (which is defined as worldwide cigarette and heated tobacco unit volume, excluding the United States ofAmerica) was approximately 15.1% in 2019, 15.2% in 2018 and 15.1% in 2017. Excluding the PRC, we estimate that our reported share of the international market
was approximately 28.4%, 28.3%, and 27.8% in 2019, 2018 and 2017, respectively.
Shipments of our principal cigarette brand, Marlboro, decreased by 0.6% in 2019 and represented approximately 10.0% of the international cigarette market,
excluding the PRC, in 2019, 9.7% in 2018 and 9.7% in 2017.
Total shipment volume of heated tobacco units reached 59.7 billion units in 2019, up from 41.4 billion units in 2018.
We have a market share of at least 15% and, in a number of instances, substantially more than 15%, in approximately 95 markets, including Algeria, Argentina,
Australia, Austria, Belgium, Brazil, the Czech Republic, Egypt, France, Germany, Hong Kong, Hungary, Indonesia, Israel, Italy, Japan, Kazakhstan, Korea,
Kuwait, Mexico, the Netherlands, the Philippines, Poland, Portugal, Russia, Saudi Arabia, the Slovak Republic, Spain, Switzerland, Turkey and Ukraine.

2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 aparticular 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;andOur own brand retail and e-commerce infrastructures for our RRP products andaccessories.

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, brandloyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our
RRPs. In the combustible product category, we predominantly sell American blend cigarette brands, such as Marlboro, L&M, Parliament, Philip Morris andChesterfield, which are the most popular across many of our markets. In the RRP product category, we predominantly sell Platform 1 devices and heated tobacco
units under the IQOS brand umbrella. We seek to compete in all profitable retail price categories, although our brand portfolio is weighted towards the premiumprice category.
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 pricecategories, and product regulation that diminishes the ability to differentiate tobacco products and restricts adult consumer access to truthful and non-misleading
information about our RRPs. Competitors include three large international tobacco companies, new market entrants, particularly with respect to innovative
products, 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.
Certain new market entrants may alienate consumers from innovative products through inappropriate marketing campaigns and messaging and inferior productsatisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase thespeed and extent of the dissemination of inaccurate and misleading information about our RRPs.
Procurement and Raw Materials
We purchase tobacco leaf of various types, grades and styles throughout the world, mostly through independent tobacco suppliers. In 2019, we also contracted
directly with farmers in several countries, including Argentina, Brazil, Colombia, Ecuador, Italy, Pakistan, the Philippines and Poland. In 2019, direct sourcing
from farmers represented approximately 23% of PMI’s global leaf requirements. The largest supplies of tobacco leaf are sourced from Argentina, Brazil, China,
Italy, Indonesia (mostly for domestic use in kretek products), Malawi, Mozambique, the 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 400 suppliers. In 2019, our top ten suppliers of directmaterials 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, theadequate 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 Platform 1 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 their3

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. Financial Statements and Supplementary Data of this Annual
Report on Form 10-K (“Item 8”) in Note 5. Product Warranty to our consolidated financial statements. We discuss our RRP products in more detail in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K (“Item 7”) in 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
As described in more detail in “Distribution & Sales” above, in many of our markets we sell our products to distributors. In 2019, sales to a distributor in theEuropean Union Region and a distributor in the East Asia & Australia Region each amounted to 10 percent or more of our consolidated net revenues. See Item 8,
Note 12. Segment Reporting for more information. We believe that none of our business segments is dependent upon a single customer or a few customers, the lossof which would have a material adverse effect on our consolidated results of operations. In some of our markets, particularly in the European Union and in the
East Asia & Australia Regions, a loss of a distributor may result in a temporary market disruption.
Employees
At December 31, 2019, we employed approximately 73,500 people worldwide, including full-time, temporary and part-time staff. Our businesses are subject to anumber 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.
Information About Our Executive Officers
The disclosure regarding executive officers is hereby incorporated by reference to the discussion under the heading “Information about our Executive Officers as
of February 6, 2020” in Part III, Item 10. Directors, Executive Officers and Corporate Governance of this Annual Report on Form 10-K (“Item 10”).
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, HEETS and IQOS, or have the right to use them in all countries where we use them.
In addition, we have a large number of granted patents and pending patent applications worldwide. 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”), a wholly owned subsidiary of Altria
Group, Inc. The Intellectual Property Agreement allocates ownership of jointly funded intellectual property as follows:•

PMI owns all rights to jointly funded intellectual property outside the United States, its territories and possessions;
and
4

•

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

The parties agreed to submit disputes under the Intellectual Property Agreement first to negotiation between senior executives and then to binding arbitration.
Seasonality
Our business segments are not significantly affected by seasonality, although in certain markets cigarette consumption trends may rise during the summer months
due to outdoor use, longer daylight, 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 acrossour 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 environmental impact, including climate change. Our environmental and occupational health and safety management system includes
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 this management system at our manufacturing centersaround the world, in accordance with internationally recognized standards for safety and environmental management. The environmental performance data wereport externally is also verified by a qualified third party. Our subsidiaries expect to continue to make investments in order to drive improved performance andmaintain 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, andare not expected to have, a material adverse effect on our consolidated results of operations, capital expenditures, financial position, earnings or competitive
position.
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 of1934, as amended (the “Exchange Act”). 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.

Item 1A.

Risk Factors.

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Reporton Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome ofmatters 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.
5We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Our RRPs
constitute a new product category in its early stages that is less predictable than our mature cigarette business. 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 andwhether 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 forwardlooking 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 ourmarkets.

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 tobe 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 ofcounterfeiting, contraband, "illicit whites" and legal cross-border purchases. Significant regulatory developments will continue to 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”). Since it came into
force in 2005, 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:
•
•
•
•
•
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•

restrictions on or licensing of outlets permitted to sellcigarettes;
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 labelingrequirements;
restrictions on packaging design, including the use of colors, and plain
packaging;
restrictions on packaging and cigarette formats anddimensions;
restrictions or bans on the display of tobacco product packaging at the point of sale and restrictions or bans on cigarette vending
machines;
6

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•
•
•
•
•
•

requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke
constituents;
disclosure, restrictions, or bans of tobacco productingredients;
increased restrictions on smoking in public and work places and, in some instances, in private places andoutdoors;
regulation, restrictions or prohibitions of novel tobacco or nicotine-containing
products;
elimination of duty free sales and duty free allowances fortravelers;
encouraging litigation against tobacco companies;
andexcluding tobacco companies from transparent public dialogue regarding public health and other policy
matters.

Our financial results could be significantly affected by regulatory initiatives resulting in a significant decrease in demand for our brands, in particular requirementsthat lead to a commoditization of tobacco products or impede adult consumers' ability to convert to our RRPs, as well as any significant increase in the cost ofcomplying 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 aparticular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. See Item 8, Note 18. Contingencies to our consolidated
financial statements for a discussion of pending litigation and Item 7, Business Environment—Reduced-Risk Products (RRPs)—Legal Challenges to RRPs.
•

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

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 ourbusiness. 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 and restricts adult consumer access to truthful and nonmisleading information about our RRPs. Competitors include three large international tobacco companies, new market entrants, particularly with respect toinnovative products, 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.
Certain new market entrants may alienate consumers from innovative products through inappropriate marketing campaigns and messaging and inferior productsatisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase thespeed and extent of the dissemination of inaccurate and misleading information about our RRPs.
•

Because we have operations in numerous countries, our results may be influenced by economic, regulatory and political developments, natural
disasters, pandemics 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 thethreat of war may have a significant impact on the business environment. Natural disasters, pandemics, economic, political, regulatory or other developments 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 growthof our profitability.
In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful conduct, given thebreadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners.
7

•

We may be unable to anticipate changes in adult consumer
preferences.

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

promotebrandequitysuccessfully;
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;
andbe able to protect or enhance margins through priceincreases.

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.
•

The financial and business performance of our reduced-risk products is less predictable than our cigarettebusiness.

Our RRPs are novel products in a new category, and the pace at which adult smokers adopt them may vary, depending on the competitive, regulatory, fiscal andcultural environment, and other factors in a specific market. There may be periods of accelerated growth and periods of slower growth for these products, thetiming and drivers of which may be more difficult for us to predict versus our mature cigarette business. The impact of this lower predictability on our projected
results for a specific period may be significant, particularly during the early stages of this new product category.
•We lose revenues as a result of counterfeiting, contraband, cross-border purchases, “illicit whites,” non-tax-paid volume produced by local
manufacturers, and counterfeiting of our Platform 1 device and heated tobacco units.

Large quantities of counterfeit cigarettes are sold in the international market. We believe that Marlboro is the most heavily counterfeited international cigarettebrand, although we cannot quantify the revenues we lose as a result of this activity. In addition, our revenues are reduced by contraband, legal cross-borderpurchases, “illicit whites” and non-tax-paid volume produced by local manufacturers. Our revenues and consumer satisfaction with our Platform 1 device andheated tobacco units may be adversely affected by counterfeit products that do not meet our product quality standards and scientific validation procedures.
•

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 ofunderpayment of income taxes, customs duties and/or excise taxes, allegations of false and misleading usage of descriptors, allegations of unlawful advertising,and allegations of unlawful labor practices. 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 Item, 8, 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 riskof harm to adult smokers who switch to them versus continued smoking; and effectively advocate for the development of science-based regulatory frameworks forthe 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, or if heat-not-burn products are inequitably regulated compared toother RRP categories without regard to the totality of the scientific evidence available for such products, we may be at a competitive disadvantage. In addition,actions of some market entrants, such as the inappropriate marketing of e-vapor products to youth, as well as alleged health consequences associated with the useof certain e-vapor products, may unfavorably impact public opinion and/or mischaracterize all e-vapor products or other RRPs to consumers, regulators and policy
makers8

without regard to the totality of scientific evidence for specific products. This may impede our efforts to advocate for the development of science-based regulatory
frameworks for the development and commercialization of RRPs. 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. Moreover, the FDA’s premarket tobacco productauthorization of a version of our Platform 1 product is subject to strict marketing, reporting and other requirements and is not a guarantee that the product willremain authorized, particularly if there is a significant uptake in youth initiation.
•

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

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 ourcompetitiveness.

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, operating income and EPS 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 paymentsfrom 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 andJobs 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 insignificant 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 toconvert 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 businessdisruption.
•

Our ability to grow profitability may be limited by our inability to introduce new products, enter new markets or improve our margins throughhigher 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 salesof 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 the9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 achieve our strategic goals may be impaired if we fail to attract and retain the best global
talent.

To be successful, we must continue transforming our culture and ways of working, align our talent with our business needs, innovate and transform to a consumercentric business. We compete for talent, including in areas that are new to us, such as digital and technical solutions, with companies in the consumer products,
technology and other sectors that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best global talent with the right degree ofdiversity, experience and skills to achieve our strategic goals.
•

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 data and communicate internally and externally with employees, suppliers,
consumers, 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 acompetitive disadvantage, result in a loss of revenue, assets or personal or other sensitive data, litigation and regulatory action, cause damage to our reputation andthat of our brands and result in significant remediation and other costs. Failure to protect personal data, respect the rights of data subjects, and adhere to strict
cybersecurity protocols could subject us to substantial fines and other legal challenges under regulations such as the EU General Data Protection Regulation. As
we are increasingly relying on digital platforms in our business, the magnitude of these risks is likely to increase.
•

We may be unable to adequately protect our intellectual property rights, and disputes relating to intellectual property rights could harm ourbusiness.

Our intellectual property rights are valuable assets, and their protection is important to our business. If the steps we take to protect our intellectual property rights
globally, including through a combination of trademark, design, patent and other intellectual property rights, are inadequate, or if others infringe or misappropriate
our intellectual property rights, notwithstanding legal protection, our business could suffer. Intellectual property rights of third parties may limit our ability tointroduce new products or improve the quality of existing products in one or more markets. Competitors or other third parties may claim that we infringe theirintellectual property rights. Any such claims, regardless of merit, could divert management’s attention, be costly, disruptive, time-consuming and unpredictableand expose us to litigation costs and damages, and impede our ability to manufacture and sell new products or improve existing products. If, as a result, we areunable to manufacture or sell our RRPs or improve their quality in one or more markets, our ability to convert adult smokers to our RRPs in such markets would
be adversely affected.
•

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.
We own or lease various manufacturing, office and research and development facilities in locations primarily outside the United States. We own properties in
Switzerland where our operations center and state-of-the-art research and development facility are located.

10

At December 31, 2019, we operated and owned a total of 38 manufacturing facilities across our six operating segments. Among them, 7 factories produced heated
tobacco units.
In 2019, certain facilities each manufactured over 30 billion units (cigarettes and heated tobacco units combined). The largest manufacturing facilities, in terms ofvolume, are located in Indonesia (S&SA), Turkey (ME&A), the Philippines (S&SA), Russia (EE), Poland (EU), Lithuania (EU), and Italy (EU). As part of ourglobal operating model, products manufactured in a particular manufacturing facility are not necessarily distributed in the operating segment where the facility is
located.
We have integrated the production of our heated tobacco units into a number of our existing manufacturing facilities, and we are progressing with our plans tobuild manufacturing capacity for our other RRP platforms. We will continue to optimize our manufacturing infrastructure.
We believe the properties owned or leased by our subsidiaries are maintained in good condition and are believed to be suitable and adequate for our present needs.

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 (ticker symbol "PM"). AtJanuary 31, 2020,
there were approximately 50,800 holders of record of our common stock.

11

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, 2014, 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&P 500 Index

December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2019$100.00$113.40$123.10$147.60$98.60$133.00$100.00$108.20$109.70$130.20$118.30$146.40$100.00$101.40$113.50$138.30$132.20$173.90(1) The PMI Peer Group presented in this graph is the same as that used in the prior year. 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, andUnilever NV and PLC.
Note: Figures are rounded to the nearest $0.10.

12Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2019
Our share repurchase activity for each of the three months in the quarter endedDecember 31, 2019, was as follows:

PeriodOctober 1, 2019 –October 31, 2019 (1)November 1, 2019 –November 30, 2019 (1)December 1, 2019 –December 31, 2019 (1)Pursuant to Publicly Announced
Plans or Programs
October 1, 2019 –October 31, 2019 (2)November 1, 2019 –November 30, 2019 (2)December 1, 2019 –December 31, 2019 (2)For the Quarter Ended
December 31, 2019

Total
Number of
SharesRepurchased

Total Numberof Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

Average
Price Paid
per Share

Approximate
Dollar Valueof Shares thatMay Yet be
Purchased
Under the Plans
or Programs

—

$

—

—

$

—

—

$

—

—

$

—

—

$

—

—

$

—

—

$

—

897

$

75.37

690

$

81.33

1,186

$

82.69

2,773

$

79.98

(1) During this reporting period, we did not have an authorized share repurchaseprogram.
(2) Shares repurchased represent shares tendered to us by employees who vested in restricted and performance share unit awards and used shares to pay all, ora portion of, the related taxes.

13

Item 6.

Selected Financial Data.

(in millions of dollars, except per share data)
2019

2018

2017

2016

2015

Summary of Operations:
Revenues including excise taxes$

77,921$

79,823$78,098$74,953$73,908

Excise taxes on products

48,11650,19849,35048,26847,114

Net revenues

29,80529,62528,74826,685

26,794

Operating income

10,531

11,377

11,581

10,903

10,745

7,185

7,911

6,035

6,967

6,873

4.61

5.08

3.88

4.48

4.42

4.61

5.08

3.88

4.48

4.42

4.62

4.49

4.22

4.12

4.04

42,87539,80142,96836,851

33,956

26,656

26,97531,33425,85125,25031,04531,75934,33929,06728,480Net earnings attributable to PMI
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Total assets
Long-term debt (1)Total debt

(1) Excluding current portion of long-term debt.

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

14

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 leading a transformation in the tobacco industry to create a smoke-free future and ultimately replace cigarettes with smoke-free products to the benefit ofadults who would otherwise continue to smoke, society, the company and its shareholders. We are a leading international tobacco company engaged in the
manufacture and sale of cigarettes, as well as smoke-free products and associated electronic devices and accessories, and other nicotine-containing products inmarkets outside the United States. In addition, we ship a version of our Platform 1 device and its consumables authorized by the U.S. Food and Drug
Administration ("FDA") to Altria Group, Inc., for sale in the United States under license. We are building a future on a new category of smoke-free products that,while not risk free, are a much better choice than continuing to smoke. 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 IQOS
smoke-free product brand portfolio includes heat-not-burn tobacco and nicotine-containing vapor products.
We manage our business in six operating segments:•

European("EU");

Union•

Eastern Europe ("EE");•

Middle East & Africa ("ME&A"), which includes our international duty freebusiness;•

South & Southeast Asia ("S&SA");•

East Asia & Australia ("EA&A"); and•Latin America & Canada ("LA&C"), which includes transactions under license with Altria Group, Inc. for the distribution of our Platform 1 product in
the United States.

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 ofcigarettes, 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 continuing smoking.
We use the term net revenues to refer to our operating revenues from the sale of our products, including shipping and handling charges billed to customers, net ofsales and promotion incentives, and excise taxes. 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 premiumprice 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).
Our cost of sales consists principally of: tobacco leaf, non-tobacco raw materials, labor and manufacturing costs; shipping and handling costs; and the cost of the
IQOS devices produced by third-party electronics manufacturing service providers. Estimated costs associated with IQOS warranty programs are generally
provided for in cost of sales in the period the related revenues are recognized.
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 ourcreditors 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 tomake payment on our debt securities, are from the receipt of15

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 that are otherwise compliant with law.

Executive Summary
The following executive summary provides significant highlights from the Discussion and Analysis that follows.
Consolidated Operating Results•

Net Revenues – Net revenues of $29.8 billion for the year ended December 31, 2019, increased by $0.2 billion, or 0.6%, from the comparable 2018 amount.
The change in our net revenues from the comparable 2018 amount was driven by the following (variances not to scale with year-to-date results):

Net revenues, excluding unfavorable currency, increased by 3.8%, mainly reflecting: a favorable pricing variance, notably in Germany, Indonesia, Japan, thePhilippines and Turkey; and favorable volume/mix, mainly driven by heated tobacco unit and IQOS device volume in the EU and Russia, and heated tobacco
unit volume in Japan, partly offset by unfavorable volume/mix of cigarettes, notably in Australia, the EU, Indonesia, Japan and Russia, unfavorable heated
tobacco unit volume in PMI Duty Free, and unfavorable IQOS device volume in Japan and Korea. The currency-neutral growth in net revenues of 3.8% camedespite the unfavorable impact of $763 million, shown in "Other" above, predominantly resulting from the deconsolidation of our Canadian subsidiary,
Rothmans, Benson & Hedges, Inc. ("RBH"), effective March 22, 2019. For further details on the deconsolidation of RBH, see Item 8, Note 18. Contingencies
and Note 22. Deconsolidation of RBH.
Net revenues by product category for the years ended December 31, 2019 and 2018, are shown below:

16•

Diluted Earnings Per Share – The changes in our reported diluted earnings per share (“diluted EPS”) for the year endedDecember 31, 2019, from thecomparable 2018 amounts, were as follows:
Diluted EPS
For the year ended December 31, 2018$2018 Asset impairment and exit costs
2018 Tax items% Growth(Decline)

5.08
—
0.02

Subtotal of 2018 items

0.022019 Asset impairment and exit costs
2019 Canadian tobacco litigation-related expense
2019 Loss on deconsolidation of RBH
2019 Russia excise and VAT audit charge
2019 Fair value adjustment for equity security investments
2019 Tax items(0.23)(0.09)(0.12)(0.20)
0.02
0.04

Subtotal of 2019 items(0.58)

Currency
Interest
Change in tax rate
Operations(0.13)
0.04(0.04)
0.22

For the year ended December 31, 2019

$

4.61

(9.3)%

Income taxes – The 2018 Tax items that decreased our 2018 diluted EPS by$0.02 per share in the table above represented a current income tax charge of $185
million primarily due to an increase in our final 2017 transition tax liability, mostly offset by a deferred income tax benefit of $154 million primarily due tothe recognition of deferred tax assets for net operating losses in the state of New York.
The 2019 Tax items that increased our 2019 diluted EPS by $0.04 per share in the table above was primarily due to a reduction in estimated U.S. federal
income tax on dividend repatriation for the years 2015-2018 ($67 million).
The change in the tax rate that decreased our diluted EPS by $0.04 per share in the table above was primarily due to changes in earnings mix by taxing
jurisdiction and U.S. state deferred income tax expense, partially offset by repatriation cost differences.
For further details, see Item 8, Note 11. Income Taxes.
Asset impairment and exit costs – As a part of the optimization of our global manufacturing infrastructure, we recorded pre-tax asset impairment and exit costsof $422 million during 2019, representing $362 million net of income tax and a diluted EPS charge of $0.23 per share. This charge primarily related to acigarette plant closure in Berlin, Germany (approximately $0.19 per share), as well as the closure of a cigarette plant in Argentina, Colombia and Pakistan.
The total pre-tax charge was included in marketing, administration and research costs on the consolidated statements of earnings. For further details, see Item
8, Note 21. Asset Impairment and Exit Costs.
Canadian tobacco litigation-related expense – In the first quarter of 2019, we recorded a pre-tax charge of $194 million, representing $142 million net of tax,
relating to the judgment against RBH in two Québec smoking and health class actions. The charge of $0.09 per share reflects our assessment of the portion of
the judgment that represents probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the
judgment. The total pre-tax charge was included in marketing, administration and research costs on the consolidated statements of earnings and was includedin the operating income of the Latin America & Canada segment. For further details, see Item 8, Note 18. Contingencies and Item 8, Note 22. Deconsolidationof RBH.
17

Loss on deconsolidation of RBH – Following the judgment in the two Québec smoking and health class actions, RBH obtained an initial order from theOntario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act (“CCAA”), which is a Canadian federal law that
permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course with minimal disruption to its customers, suppliersand employees. The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes
certain elements of control of the business from both PMI and RBH. As a result, we have determined that we no longer have a controlling financial interest
over RBH and that we do not exert "significant influence" over RBH under U.S. GAAP. Therefore, we deconsolidated RBH as of the date of the CCAA filingon March 22, 2019, and will account for our continuing investment in RBH as an equity security, without readily determinable fair value.
A loss on the deconsolidation of RBH of $239 million was included in marketing, administration and research costs on the consolidated statements of earnings
and was included in the operating income of the Latin America & Canada segment. The $0.12 per share impact also included a tax benefit of $49 million
within the provision for income taxes, as discussed above, related to the reversal of a deferred tax liability on the unremitted earnings of RBH. For further
details, see Item 8, Note 18. Contingencies and Item 8, Note 22. Deconsolidation of RBH.
Russia excise and VAT audit charge – As a result of the final tax assessment for the 2015-2017 financial years received by our Russian affiliate, in the third
quarter of 2019, PMI recorded a pre-tax charge of $374 million in marketing, administration and research costs in the consolidated statements of earnings,
representing $315 million net of income tax and a diluted EPS charge of $0.20. The pre-tax charge of $374 million was included in the operating income of theEastern Europe segment. For further details, see Item 8, Note 18. Contingencies.
Fair Value adjustment for equity security investments – In the fourth quarter of 2019, PMI recorded a favorable fair value adjustment for its equity security
investments of $35 million after tax (or $0.02 per share increase in diluted EPS). The fair value adjustment for its equity security investments was included inequity investments and securities (income)/loss, net ($44 million income) and provision for income taxes ($9 million expense) on the consolidated statementsof earnings in 2019. For further details, see Item 8, Note 16. Fair Value Measurements.
Currency – The unfavorable currency impact during 2019 results from the fluctuations of the U.S. dollar, especially against the Euro, Russian ruble andTurkish lira. 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 our ongoing efforts to optimize our capital structure following the passage of the U.S. Tax
Cuts and Jobs Act. This included the decision to use existing cash to repay $2.5 billion and $4.0 billion of long-term debt that matured in 2018 and in 2019,respectively.
Operations – The increase in diluted EPS of $0.22 from our operations in the table above was due primarily to the following segments:•

European Union: Favorable volume/mix and favorable pricing, partially offset by higher marketing, administration and research costs and higher
manufacturing costs;•

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

Middle East & Africa: Favorable pricing, lower manufacturing costs and lower marketing, administration and research costs, partially offset byunfavorable volume/mix; and•East Asia & Australia: Favorable pricing and lower manufacturing costs, partially offset by unfavorable volume/mix and higher marketing, administration
and research costs;

partially offset by•

Latin America & Canada: Unfavorable impact resulting from the deconsolidation of RBH, as well asunfavorable volume/mix, partially offset by lower
marketing, administration and research costs, favorable pricing and lower manufacturing costs; and•Eastern Europe: Higher marketing, administration and research costs and higher manufacturing costs, partially offset by favorable volume/mix andfavorable pricing.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.
18

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 andmethods 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 andexpenses, as well as our disclosure of contingencies. If actual amounts differ from previous estimates, we include the revisions in our consolidated results ofoperations 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 moresignificant assumptions, estimates, accounting policies and methods used in the preparation of our consolidated financial statements:
Revenue Recognition - We recognize revenue as performance obligations are satisfied. Our primary performance obligation is the distribution and sales ofcigarettes and other nicotine-containing products, including reduced-risk products. Our performance obligations are typically satisfied upon shipment or delivery to
our customers. The company estimates the cost of sales returns based on historical experience, and these estimates are immaterial. Estimated costs associated withwarranty 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. The transaction price is typically based on the amount billed to the customer andincludes estimated variable consideration where applicable. Such variable consideration is typically not constrained and is estimated based on the most likely
amount that PMI expects to be entitled to under the terms of the contracts with customers, historical experience of discount or rebate redemption, where relevant,and the terms of any underlying discount or rebate programs, which may change from time to time as the business and product categories evolve.
Inventories - Our inventories are valued at the lower of cost or market based upon assumptions about future demand and market conditions. The valuation of
inventory also requires us to estimate obsolete and excess inventory. We perform regular reviews of our inventory on hand, as well as our future purchasecommitments with our suppliers, considering multiple factors, including demand forecasts, product life cycle, current sales levels, pricing strategy and cost trends.
If our review indicates that inventories of raw materials, components or finished products have become obsolete or are in excess of anticipated demand or thatinventory cost exceeds net realizable value, we may be required to make adjustments that will impact the results of operations.
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. While the company has the option to perform a qualitative assessment for both goodwill and nonamortizable intangible assets to determine if it is more likely than not that an impairment exists, the company elects to perform the quantitative assessment for ourannual 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, 2019, the carrying value of our goodwill was$5.9 billion, which is related to ten reporting units, each of which consists of agroup 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,
2019. 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, andwe 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 Costs - We incur certain costs to support our products through programs that include advertising, marketing, consumer engagement and tradepromotions. 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
19

required in estimating the potential performance and compliance for each program. For volume-based incentives provided to customers, management continuallyassesses 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 inestimating 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 ouremployees 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 effectof the modifications is generally amortized over future periods. We believe that the assumptions utilized in calculating our obligations under these plans arereasonable based upon our historical experience and advice from our actuaries.
Weighted-average discount rate assumptions for pension and postretirement plan obligations at December 31, 2019 and 2018 are as follows:
Pension plans
Postretirement plans

2019
0.83%
3.28%

2018
1.61%
3.97%

We anticipate that assumption changes will increase 2020 pre-tax pension and postretirement expense to approximately $256 million as compared withapproximately $201 million in 2019, excluding amounts related to employee severance and early retirement programs. The anticipated increase is primarily due tohigher amortization of unrecognized actuarial gains/losses of $73 million, coupled with higher service cost of $48 million, partially offset by lower interest cost of$49 million and higher expected return on plan assets of $18 million and other movements of $1 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 2020 pension and postretirement expense by approximately $65 million, and a fiftybasis-point increase in our discount rate would decrease our 2020 pension and postretirement expense by approximately $58 million. Similarly, a fifty-basis-point
decrease (increase) in the expected return on plan assets would increase (decrease) our 2020 pension expense by approximately $36 million.
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 fromfederal, 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 ofchanging facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materiallydifferent 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 toexpense 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.
We are required to assess the likelihood of recovering deferred tax assets against future sources of taxable income. If we determine, using all available evidence,that we do not reach the more likely than not threshold for recovery, a valuation allowance is recorded. Significant judgment is required in determining the needfor and amount of valuation allowances for deferred tax assets including estimates of future taxable income in the applicable jurisdictions and the feasibility of ongoing tax planning strategies, as applicable.
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.
20

Hedging - As discussed below in “Market Risk,” we use derivative financial instruments principally to reduce exposures to market risks resulting fromfluctuations 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 into the same line item as the impact of the underlying transaction and in the periods when the related hedged transactions arealso 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.
Fair value of non-marketable equity securities - For further details, see Item 8, Note 22. Deconsolidation of RBH.
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 themonetary 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, andlitigation is subject to uncertainty. At the present time, except as stated otherwise in Item 8, Note 18. Contingencies, while it is reasonably possible that an
unfavorable outcome in a case may occur, after assessing the information available to it: (i) management has not concluded that it is probable that a loss has been
incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-relatedcases; 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.

Consolidated Operating Results
Our net revenues and operating income by segment were as follows:2019(in millions)

2018

2017

Net Revenues
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada$

9,817 $
3,282
4,042
5,094
5,364
2,206

9,298 $
2,921
4,114
4,656
5,580
3,056

8,318
2,711
3,988
4,417
6,373
2,941

$

29,805 $29,625 $28,748European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada$

3,970 $
547
1,684
2,163
1,932
235

4,105 $
902
1,627
1,747
1,851
1,145

3,691
887
1,884
1,514
2,608
997

Operating income$

10,531 $

11,377 $

11,581

Net revenues
Operating Income

Items affecting the comparability of results from operations were as follows:•

Russia excise and VAT audit charge - See Item 8, Note 18. Contingencies for details of the $374 million pre-tax charge included in the Eastern Europe
segment for the year ended December 31, 2019.

•

Asset impairment and exit costs - See Item 8, Note 21. Asset Impairment and Exit Costs for details of the $422 million pre-tax charge for the year ended
December 31, 2019, as well as a breakdown of these costs by segment.

•

Canadian tobacco litigation-related expense - See Item 8, Note 18. Contingencies and Note 22. Deconsolidation of RBH for details of the $194 million pretax charge included in the Latin America & Canada segment for the year ended December 31, 2019.
21

•

Loss on deconsolidation of RBH - See Item 8, Note 22. Deconsolidation of RBH for details of the $239 million loss included in the Latin America & Canada
segment for the year ended December 31, 2019.

Our net revenues by product category were as follows:
PMI Net Revenues by Product Category(in millions)

2019

Combustible Products
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada

2018

2017

$

8,093 $
2,438
3,721
5,094
2,693
2,179

8,433 $
2,597
3,732
4,656
3,074
3,037

8,048
2,657
3,893
4,417
3,156
2,937

Total Combustible Products
Reduced-Risk Products
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada$

24,218 $25,529 $25,107$

1,724 $
844
321
—
2,671
27

865 $
324
382
—
2,506
19

269
55
94
—
3,218
4

Total Reduced-Risk Products$

5,587 $

4,096 $

3,640

Total PMI Net Revenues$

29,805 $29,625 $28,748

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, including shipping and handling charges
billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of 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, including shipping and handling charges
billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of our heated tobacco units, IQOS
devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor products.
We recognize revenue when control is transferred to the customer, typically either upon shipment or delivery of goods.
Revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale
under license in the United States, are included in Net Revenues of the Latin America & Canada segment.
References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six operating segments throughout this"Discussion and Analysis"reflects the currency-neutral variances of: cost of sales (excluding the volume/mix cost component); marketing, administration and research costs (including asset
impairment and exit costs, the Canadian tobacco litigation-related expense, the charge related to the deconsolidation of RBH in Canada, and the Russia excise and
VAT audit charge); and amortization of intangibles. “Cost/Other” also includes the currency-neutral net revenue variance, unrelated to volume/mix and pricecomponents, attributable to fees for certain distribution rights billed to customers in certain markets in the ME&A Region, as well as the impact of thedeconsolidation in RBH.
22

Our shipment volume by segment for cigarettes and heated tobacco units was as follows:
PMI Shipment Volume (Million Units)
2019
Cigarettes
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Cigarettes
Heated Tobacco Units
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada (1)Total Heated Tobacco Units
Cigarettes and Heated Tobacco Units
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total Cigarettes and Heated Tobacco Units

2018

2017

174,319
100,644
134,568
174,934
49,951
72,293

179,622
108,718
136,605
178,469
56,16380,738187,293
119,398
136,759
171,600
62,65384,223

706,709740,315

761,926

12,56913,4532,654—
30,677
299

5,977
4,979
3,403
—
26,866
147

1,889
674
907
—
32,72927

59,652

41,37236,226

186,888
114,097
137,222
174,934
80,62872,592

185,599
113,697
140,008
178,469
83,02980,885

189,182
120,072
137,666
171,600
95,382
84,250766,361

781,687

798,152(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

Following the deconsolidation of our Canadian subsidiary, we will continue to report the volume of brands sold by RBH for which other PMI subsidiaries are thetrademark owners. These include HEETS, Next, Philip Morris and Rooftop, which together accounted for approximately 40% of RBH's total shipment volume in
2018.
Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which for us include ourHEETS, HEETS Marlboro and HEETS FROMMARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks.
Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Latin America & Canada segment.
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 internaland external sources and may, in defined instances, exclude the People's Republic of China and/or our duty free business. In addition, to reflect the deconsolidationof RBH, effective March 22, 2019, PMI's total market share has been restated for previous periods.
In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.
23

North Africa is defined as Algeria, Egypt, Libya, Morocco and Tunisia.
The Gulf Cooperation Council ("GCC") is defined as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).
Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco
units.
From time to time, PMI’s shipment volumes are subject to the impact of distributor inventory movements, and estimated total industry/market volumes are subject
to the impact of inventory movements in various trade channels that include estimated trade inventory movements of PMI’s competitors arising from marketspecific factors that significantly distort reported volume disclosures. Such factors may include changes to the manufacturing supply chain, shipment methods,
consumer demand, timing of excise tax increases or other influences that may affect the timing of sales to customers. In such instances, in addition to reviewing
PMI shipment volumes and certain estimated total industry/market volumes on a reported basis, management reviews these measures on an adjusted basis that
excludes the impact of distributor and/or estimated trade inventory movements. Management also believes that disclosing PMI shipment volumes and estimatedtotal industry/market volumes in such circumstances on a basis that excludes the impact of distributor and/or estimated trade inventory movements improves thecomparability of performance and trends for these measures over different reporting periods.
2019 compared with 2018
The following discussion compares our consolidated operating results for the year endedDecember 31, 2019, with the year ended December 31, 2018.
Estimated international industry cigarette and heated tobacco unit volume, excluding China and the United States, of2.7 trillion, decreased by 2.0%, due to the EU,
EE, S&SA, EA&A and LA&C, as described in the Regional sections below.
Our total shipment volume decreased by 2.0%, due to:•

Middle East & Africa, primarily reflecting lower cigarette shipment volume, notably in Turkey, partly offset by Egypt and Saudi Arabia, and lower heated
tobacco unit shipment volume in PMI Duty Free;•

South & Southeast Asia, reflecting lower cigarette shipment volume, primarily in Indonesia, Pakistan and the Philippines, partly offset by
Thailand;•East Asia & Australia, primarily reflecting lower cigarette shipment volume in Japan and lower cigarette and heated tobacco unit shipment volume in Korea,
partly offset by higher heated tobacco unit shipment volume in Japan; and•Latin America & Canada, reflecting lower cigarette shipment volume, principally in Argentina, Canada (primarily due to the impact of the deconsolidation ofRBH) and Venezuela. Excluding the volume impact from the RBH deconsolidation of approximately 4.3 billion units (reflecting the volume of RBH-owned
brands from March 22, 2018 through December 31, 2018), our total shipment volume in the Region decreased by 5.2%;

partly offset by•

the EU, reflecting higher heated tobacco unit shipment volume across the Region, notably in Italy, partly offset by lower cigarette shipment volume, primarily
in France, Germany and Italy; and•Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, notably in Kazakhstan, Russia and Ukraine, partly offset by lower
cigarette shipment volume, primarily in Russia and Ukraine.

Excluding the volume impact from the RBH deconsolidation of approximately4.3 billion units (reflecting the volume of RBH-owned brands from March 22, 2018
through December 31, 2018 and including Duty-Free sales of these brands in Canada), PMI's total shipment volume decreased by 1.4%.
Impact of Inventory Movements
Excluding the volume impact from the deconsolidation of RBH, and the net favorable impact of estimated distributor inventory movements of approximately1.1
billion units, our total in-market sales declined by 1.5%, due to a 3.7% decline of cigarettes, partly offset by a 35.3% increase in heated tobacco units.
24

The net favorable impact of estimated distributor inventory movements of approximately 1.1 billion units reflected a 2.7 billion favorable impact from heated
tobacco units (driven primarily by Japan, mainly reflecting a favorable comparison with 2018 in which IQOS consumable inventories were reduced, partly offset
by PMI Duty Free), partially offset by a 1.6 billion unfavorable impact from cigarettes (due primarily to Japan, North Africa and Thailand, partly offset by the EU
Region and Saudi Arabia).
Our cigarette shipment volume by brand and heated tobacco unit shipment volume was as follows:
PMI Shipment Volume by Brand (Million Units)
2019

Full-Year
2018

Cigarettes
Marlboro
L&M
Chesterfield
Philip Morris
Parliament
Sampoerna A
Dji Sam Soe
Bond Street
Lark
FortuneOthers262,908
92,87357,18549,16438,72335,13332,43528,025
19,602
12,831
77,830264,423
89,78959,452
49,864
41,69739,522
29,19532,17323,021
16,596
94,583(0.6)%
3.4 %(3.8)%(1.4)%(7.1)%(11.1)%
11.1 %(12.9)%(14.9)%(22.7)%(17.7)%

Total Cigarettes
Heated Tobacco Units (1)706,70959,652

740,315
41,372(4.5)%
44.2 %

766,361

781,687(2.0)%

Total Cigarettes and Heated Tobacco Units

Change(1) Includes shipments to Altria Group, Inc., commencing in the third quarter of 2019, for sale in the United States under license.

Note: Sampoerna A includes Sampoerna; Philip Morris includes Philip Morris/Dubliss; and Lark includes Lark Harmony.

Our cigarette shipment volume of the following brands decreased:•

Marlboro, mainly due to Italy and Japan, partly reflecting the impact of out-switching to heated tobacco units, as well as France, partially offset by thePhilippines, Saudi Arabia and Turkey;•

Chesterfield, mainly due to Argentina, Italy, Russia and Venezuela, partly offset by
Brazil;•Philip Morris, notably due to Argentina, partly offset by Indonesia andRussia;•Parliament, mainly due to Japan, Korea and Russia;•

Sampoerna A in Indonesia, mainly reflecting the impact of retail price increases resulting in widened price gaps with competitors'
products;•

Bond Street, mainly due to Russia andUkraine;•Lark, mainly due to Japan and Turkey;•

Fortune in the Philippines, mainly reflecting up-trading to Marlboro resulting from narrowed price gaps with the below premium price segment;
and•"Others," notably due to: the impact of the deconsolidation of RBH in Canada; mid-price Sampoerna U in Indonesia, partly reflecting the impact of aboveinflation retail price increases; and low-price brands, notably Morven in Pakistan and Next/Dubliss in Russia, partly offset by Jackpot in the Philippines.

The increase in our heated tobacco unit shipment volume was mainly driven by: the EU (notably Italy and Poland), Eastern Europe (notably Kazakhstan, Russia
and Ukraine) and Japan, partly offset by Korea and PMI Duty Free.
25

Our cigarette shipment volume of the following brands increased:•

L&M, mainly driven by Egypt and Thailand, partly offset by Russia and Turkey;
and•

Dji Sam Soe in Indonesia, driven by the strong performance of the DSS Magnum Mild 16 variant and the introduction of 20s and 50s
variants.

2019 International Share of Market (excluding China and the United States)
Our total international market share (excluding China and the United States), defined as our cigarette and heated tobacco unit sales volume as a percentage of totalindustry cigarette and heated tobacco unit sales volume, increased by 0.1 point to 28.4%, reflecting:•Total international heated tobacco unit market share of 2.2%, up by 0.6 points;
and•Total international cigarette market share of 26.2%, down by 0.5
points.

Our total international cigarette market share, defined as our cigarette sales volume as a percentage of total industry cigarette sales volume, was down by0.3 points
to 26.9%, mainly reflecting: out-switching to heated tobacco units, notably in the EU and Japan; and lower cigarette market share, notably in Argentina, Indonesia,
Korea and Turkey.
In 2019, we owned six of the world's top 15 international cigarette brands, with international cigarette market shares as follows: Marlboro, 10.0%; L&M, 3.5%;
Chesterfield, 2.2%; Philip Morris, 1.9%; Parliament, 1.5%; and Bond Street, 1.1%.

26

Key Market Data
Key market data regarding total market size, our shipments and market share were as follows:
PMI Shipments (billion units)
MarketTotal Market(billion units)

Total

Cigarette

PMI Market Share (%)(1)

Heated Tobacco
Unit

Heated Tobacco
Unit

Total

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

Total

2,703.6

2,757.7

766.4

781.7

706.7

740.3

59.7

41.4

28.4

28.3

2.2

1.6

European Union
FranceGermany
Italy
Poland
Spain

37.9
73.3
67.9
46.2
45.3

40.9
75.2
69.0
43.2
45.0

17.0
27.9
34.9
19.0
14.5

18.5
28.1
35.2
17.9
14.1

16.9
27.0
31.4
17.9
14.1

18.4
27.7
33.5
17.6
13.9

0.1
0.9
3.5
1.1
0.3

—
0.4
1.7
0.4
0.2

45.0
38.0
51.8
41.2
31.3

45.5
37.3
51.8
41.5
32.1

0.2
1.2
4.8
2.5
0.7

0.1
0.5
2.2
0.9
0.4

Eastern Europe
Russia

226.5

238.9

68.0

68.0

58.8

64.6

9.2

3.4

30.1

28.3

3.8

1.0

Middle East & Africa
Saudi Arabia
Turkey

20.8
118.9

20.6
118.5

9.2
51.9

7.4
55.0

9.2
51.9

7.4
55.0

—
—

—
—

43.0
43.7

41.5
46.4

—
—

—
—

South & Southeast Asia
Indonesia
Philippines

306.8
70.5

303.6
73.2

98.5
49.7

101.4
51.2

98.5
49.7

101.4
51.2

—
—

—
—

32.1
70.5

33.4
69.9

—
—

—
—

East Asia & Australia
Australia
Japan
Korea

12.0
158.0
68.6

12.8
167.3
69.5

3.3
52.4
15.5

3.8
52.3
17.4

3.3
26.6
10.8

3.8
30.8
12.0

—
25.8
4.6

—
21.4
5.4

27.5
34.5
22.6

29.7
34.0
25.0

—
17.1
6.8

—
15.5
7.8

Latin America & Canada
Argentina
Mexico

33.4
35.5

35.0
35.5

23.3
23.8

25.8
24.2

23.3
23.8

25.8
24.2

—
—

—
—

70.0
67.1

73.8
68.0

—
—

—
—

(1) Market share estimates are calculated using IMS data
Note: % change for Total Market and PMI shipments is computed based on millions of units; PMI Market Share estimates for previous periods are restated to reflect RBH
deconsolidation and exclude RBH-owned brands.

27

Financial Summary
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,

2019(in millions)

2018

Total

Excl.
Curr.

Variance
Fav./(Unfav.)
Total

Currency

Price

Vol/
Mix

Cost/
Other(1)

Net Revenues
Cost of Sales
Marketing, Administration and Research Costs (2)Amortization of Intangibles$

29,805 $ 29,625(10,513) (10,758)(8,695)(7,408)
(66)
(82)

0.6 %
2.3 %
(17.4)%
19.5 %

3.8 % $ 180 $(0.5)%
245(22.0)% (1,287)
15.9 %
16(937) $
302
340
3

1,483 $
—
—
—

397 $
(309)
—
—

(763)
252
(1,627)
13

Operating Income$

10,531 $ 11,377(7.4)%(4.9)% $ (846) $(292) $

1,483 $

88 $(2,125)(1)

Cost/Other variance includes the impact of the RBH deconsolidation.

(2) Unfavorable Cost/Other variance includes asset impairment and exit costs of $422 million in 2019, the Russia excise and VAT audit charge of $374 million in 2019, the 2019loss on deconsolidation of RBH of $239 million, and the 2019 Canadian tobacco litigation-related expense of $194 million, as well as the impact of the RBH deconsolidation.
Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019,
for sale under license in the United States.

Net revenues, excluding unfavorable currency, increased by 3.8%, mainly reflecting: a favorable pricing variance, notably in Germany, Indonesia, Japan, thePhilippines and Turkey; and favorable volume/mix, mainly driven by heated tobacco unit and IQOS device volume in the EU and Russia, and heated tobacco unit
volume in Japan, partly offset by unfavorable volume/mix of cigarettes, notably in Australia, the EU, Indonesia, Japan and Russia, unfavorable heated tobacco unit
volume in PMI Duty Free, and unfavorable IQOS device volume in Japan and Korea. The currency-neutral growth in net revenues of 3.8% came despite theunfavorable impact of $763 million, shown in "Cost/Other," predominantly resulting from the deconsolidation of RBH.
The unfavorable currency in net revenues was due primarily to the Euro, Russian ruble and Turkish lira.
Net revenues include $5.6 billion in 2019 and $4.1 billion in 2018 related to the sale of RRPs. In 2019, approximately $0.7 billion of our $5.6 billion in RRP net
revenues were from IQOS devices.
Operating income decreased by 7.4%. Excluding unfavorable currency ($292 million), asset impairment and exit costs ($422 million) in 2019 related to plantclosures in Argentina, Colombia, Germany and Pakistan as part of global manufacturing infrastructure optimization, the 2019 Russia excise and VAT audit charge($374 million), the 2019 loss on deconsolidation of RBH ($239 million) and the 2019 Canadian tobacco litigation-related expense ($194 million), operating
income increased by 5.9%, primarily reflecting: a favorable pricing variance; favorable volume/mix, mainly driven by heated tobacco units in the EU, Japan andRussia, partly offset by unfavorable volume/mix of cigarettes, notably in Australia, the EU, Indonesia, Japan and Russia, as well as unfavorable heated tobacco unit
volume in PMI Duty Free; and lower manufacturing costs; partly offset by higher marketing, administration and research costs, reflecting increased investment
behind reduced-risk products (mainly in the EU and Eastern Europe), and the net unfavorable impact resulting from the deconsolidation of RBH shown in"Cost/Other."Interest expense, net, of $570 million decreased by $95 million (14.3%), due primarily to our ongoing efforts to optimize our capital structure following thepassage of the Tax Cuts and Jobs Act. This included the decision to use existing cash to repay $2.5 billion and $4.0 billion of long-term debt that matured in 2018and 2019, respectively.
Our effective tax rate increased by 0.3 percentage points to 23.2%. The effective tax rate for the year ended December 31, 2019, was unfavorably impacted bychanges in earnings mix by taxing jurisdiction and U.S. state deferred income tax expense, partially offset by the reversal of a deferred tax liability on theunremitted earnings of our Canadian subsidiary, RBH ($49 million), a reduction in estimated U.S. federal income tax on dividend repatriation for the years 20152018 ($67 million), and other repatriation cost differences. We estimate that our 2020 effective tax rate will be approximately23%, excluding discrete tax events.
Changes in currency exchange rates, earnings mix by taxing jurisdiction, or dividend repatriation costs may have an impact on the effective tax rates, which wemonitor each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions. For further details, see Item 8, Note
11. Income Taxes.
28

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 thatwithin 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 $7.2 billion decreased by $726 million or 9.2%. This decrease was due primarily to lower operating income as discussed above,
partially offset by a lower interest expense, net. Diluted and basic EPS of $4.61 decreased by 9.3%. Excluding an unfavorable currency impact of $0.13, diluted
EPS decreased by 6.7%.
2018 compared with 2017
For a discussion comparing our consolidated operating results for the year ended December 31, 2018, with the year ended December 31, 2017, refer to Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Discussion and Analysis - Consolidated Operating Results in our
Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 7, 2019.

Operating Results by Business Segment
Business Environment
Taxes, Legislation, Regulation and Other Matters Regarding the Manufacture, Marketing, Sale and Use of Tobacco Products
The tobacco industry and our company 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;
andgovernmental
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 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 andpolicy recommendations related to certain articles of the FCTC that go beyond the text of the treaty. In October 2018, the CoP recognized the need for morescientific assessment and improved reporting to define policy on heated tobacco products. Similar to its previous policy recommendations on e-cigarettes, the CoP
invited countries to regulate, restrict or prohibit heated tobacco products, as appropriate under their national laws.
In July 2019, the WHO issued the Report on the Global Tobacco Epidemic 2019. While citing insufficient independent studies regarding the benefits and theunknown long-term health impacts of electronic nicotine delivery systems and heated tobacco products, the WHO has taken the position that such products are notrisk-free and should be regulated in the same manner as cigarettes and in line with the FCTC provisions.
29

It is not possible to predict whether or to what extent measures recommended by the WHO, including the FCTC guidelines, will be implemented.
We agree that all tobacco and nicotine-containing products, including our RRPs, need to be regulated; however, we continue to seek to engage in a dialogue withregulators with respect to those measures that we do not believe would protect public health and, if implemented, could disrupt competition, severely limit ourability to market and sell our products (including our RRPs) to adult smokers, or increase illicit trade. We advocate for measures that would accelerate switching tobetter alternatives to continued smoking and embrace a regulatory framework that recognizes a risk continuum of tobacco and other nicotine-containing products.
Certain measures are discussed in more detail below and in the Reduced-Risk Products (RRPs) section.
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 toturn 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 a significantly revised EU Tobacco Products Directive (TPD), which entered into force in May
2016. All Member States 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 became effective on May 20, 2019;
anda framework for the regulation of novel tobacco products and e-cigarettes, including requirements for health warnings and information leaflets, aprohibition on product packaging text related to reduced risk, and the introduction of notification requirements or authorization procedures inadvance of commercialization.

Plain Packaging and Other Packaging Restrictions: Plain packaging legislation bans the use of branding, logos and colors on packaging other than the brandname and variant that may be printed only in specified locations and in a uniform font. To date, plain packaging laws have been adopted in certain markets in all of
our operating segments, including the key markets of Australia, France, Saudi Arabia and Turkey, and are in various degrees of implementation. Some countries,
such as Canada, New Zealand and Israel, adopted plain packaging regulations that apply to all tobacco products, including RRPs. Other countries are also
considering plain packaging legislation.
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 ofsome 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 ofmentholated 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. In
Brazil, an ingredient ban is currently on appeal by a tobacco industry union, of which our Brazilian subsidiary is a member. It is not possible to predict theoutcome of these legal proceedings.
30

Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia and Russia, governments have banned thedisplay of tobacco products at the point of sale. Other countries are 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, forexample, 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 theworld have adopted, or are likely to adopt, regulations that restrict or ban smoking in public and/or work places, restaurants, bars and nightclubs. Some publichealth groups have called for, and some countries, regional governments and municipalities have adopted or proposed, bans on smoking in outdoor places, as wellas 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 retaillicenses available or banning the sale of tobacco products within specified 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.
The EU Single-Use Plastics Directive, which will require tobacco manufacturers and importers to cover the costs of public collection systems for tobacco productfilters, entered into force on July 2, 2019, after which Member States will have two years to transpose it into national law. While we cannot predict the impact of
this initiative on our business at this time, we are monitoring developments in this area.
Illicit Trade: 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. Excluding China and the U.S., 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 approximately 10% of total cigarette consumption in 2019.
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, 58 Parties, including the European Union, have
ratified it. The Protocol came into force in September 2018. Parties must now start implementing its measures via national legislation. In October 2018, the first
Meeting of the Parties to the Protocol decided to produce a comprehensive report on good practices for the implementation of tracking and tracing systems and toprepare a conceptual framework for global information sharing to combat illicit tobacco trade. We welcome this decision and expect that other Parties will ratify
the Protocol.
We devote substantial resources to help prevent illicit trade in combustible tobacco products and RRPs. For example, we engage with governments, our business
partners and other stakeholders to implement effective measures to combat illicit trade and, in some instances, pursue legal remedies to protect our intellectual
property rights.
The tracking and tracing regulations for cigarettes and roll-your-own products manufactured or destined for the EU became effective on May 20, 2019. The
effective date for other tobacco-containing products, including some of our RRPs such as heated tobacco units, is May 20, 2024. While we expect that thisregulation will increase our operating expenses, we do not expect this increase to be significant.
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
31

million in funding over a 20-year period to address issues such as combating 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 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.
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 toquit. 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 burntobacco 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, while not risk-free, 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 ourcontrol, 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 aleading 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 lessrisk 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 ofscientific 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 tosmoking;
for those adult smokers, our goal is to offer RRPs with a scientifically substantiated risk-reduction profile that approaches as closely as possible thatassociated 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 ofthe highest standard that is made available for scrutiny and review by external independent scientists and relevant regulatory bodies; andto advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs, including thecommunication 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 incorporating our IQOS HeatControl technology, 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.
32

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 was completed andsubmitted to the FDA in the second quarter of 2018. The study showed that all eight of the co-primary clinical risk endpoints moved in the same direction in thegroup that switched to our Platform 1 product as observed for smoking cessation, with statistically significant changes in five of the eight endpoints compared with
on-going smoking. The results of the second six-month term of the 6+6 month exposure response study were received for analysis in the second quarter of 2018; weare analyzing the results, and expect to finalize the report later this year. In addition, as set out in our submission to the FDA referenced above, we completed an
18-month combined chronic toxicity and carcinogenicity study in mice, which was on-going at the time of our FDA submission. We shared the results with the
FDA in August 2018.
Platform 2 uses a pressed carbon heat source which, when ignited, generates a nicotine-containing aerosol by heating tobacco. The results of ourpharmacokinetic study (that measured the nicotine pharmacokinetic profile as well as subjective effects) and of our five-day reduced exposure study indicate that
this platform could be an acceptable substitute for adult smokers who seek an alternative to cigarettes. The reduced exposure study results showed a substantial
reduction in relevant biomarkers of exposure to the measured 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 three-month reduced exposure study. The
results of this study were received at the end of 2017, and the related report was finalized in the second quarter of 2018.
Platform 3 provides an aerosol of nicotine salt. We have explored two routes for this platform, one with electronics and one without, and conducted nicotine
pharmacokinetic studies with both versions. The results of the pharmacokinetic study related to the version without electronics were received, and the related
report was finalized in the fourth quarter of 2018. The results indicate this product's potential as an acceptable alternative to continued cigarette smoking in terms
of product satisfaction. We are conducting a product use and adaptation study in adult smokers and expect the results in 2020.
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 our new e-vapor mesh technology that addresses certain challenges presented by some e-vapor
products currently on the market. Our IQOS MESH products are designed to ensure the consistency and quality of the generated aerosol. We conducted a nicotine
pharmacokinetic study in 2017. The results of this study were received in the second quarter of 2018 for analysis, and the related report was finalized in the fourth
quarter of 2018. The results of this study indicate that IQOS MESH products are an effective means of nicotine delivery while being a satisfying alternative for ecigarette users. In March 2019, a six-month pre-clinical study in mice evaluating the impact of e-cigarette vapor on the risks of pulmonary and cardiovasculardisease compared to cigarette smoke was completed; this study did not pertain to a specific product. The study demonstrated that e-cigarette vapors induce
significantly lower biological responses associated with cardiovascular and pulmonary diseases compared with cigarette smoke. We will also initiate a clinicalstudy to measure selected biomarkers of exposure to HPHCs and assess changes in clinical risk markers.
After we receive the results of our scientific studies mentioned above, in accordance with standard scientific practices, we intend to share the conclusions inscientific forums and to submit them for inclusion in peer-reviewed publications.
The research and development expense for our RRP portfolio accounted for 98%, 92% and 74% of our total research and development expense for the years ended
December 31, 2019, 2018 and 2017, respectively. The research and development expense for the years ended December 31, 2019, 2018 and 2017, is set forth in
Item 8, Note 14. Additional Information to the consolidated financial statements.
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 consumer retail experience, guided consumer trials and customer care, as well as digital communication programs. In orderto accelerate switching to our Platform 1 product, our initial market introductions typically entail one-on-one consumer engagement and introductory device
discounts. These initial commercialization efforts require substantial investment, which we believe will moderate over time.
In 2014, we introduced our Platform 1 product in pilot city launches in Nagoya, Japan, and in Milan, Italy. Since then, we have continuously expanded ourcommercialization activities, and the product is currently available for sale in 52 markets in key cities or nationwide.
We estimate that only a very small percentage of adult smokers who convert to our Platform 1 product switch back to cigarettes.
We have integrated the production of our heated tobacco units into a number of our existing manufacturing facilities, are progressing with our plans to build
manufacturing capacity for our other RRP platforms, and continue to optimize our manufacturing infrastructure.
An 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 Platform 1 and IQOS MESH devices and a small number of other33

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 anticipatedproduction requirements. However, some components and materials necessary for the production of our RRPs, including those for the electronic devices, areobtained from single or limited sources, and can be subject to industry-wide shortages and price fluctuations. Our inability to secure an adequate supply of suchcomponents and materials could negatively impact the commercialization of our RRPs.
Our Platform 1 and IQOS MESH devices are subject to standard product warranties generally for a period of 12 months from the date of purchase or such otherperiods as required by law. We discuss product warranties in more detail in Item 8, Note 5. Product Warranty. The significance of warranty claims is dependent on
a number of factors, including device version mix, product failure rates, logistics and service delivery costs, and warranty policies, and may increase with thenumber of devices sold.
Product quality may affect consumer acceptance of our RRPs.
Our commercialization efforts for the other RRP platforms are as follows:•

We currently market our e-vapor products in Ireland and the U.K. In July 2018, we pilot-launched IQOS MESH, one of our Platform 4 products, inLondon, U.K. In light of the current confusion in the e-vapor category, we have postponed our planned launch of an improved version of this productuntil the third quarter of 2020, when we expect to reach the optimal capacity for commercialization at scale.

•

We completed a small-scale city test of TEEPS, our Platform 2 product, that we had initiated in December 2017 in Santo Domingo, the Dominican
Republic. We are finalizing our improvements to this product and plan to conduct a consumer test by the end of 2020.

•

Depending on the outcome of the use and adaptation study described above as well as consumer research, we plan to conduct a consumer test of our
Platform 3 product by the end of 2020.

RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. We therefore support science-based regulation and taxation of RRPs. Regulation andtaxation 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 and should recognize a continuum of risk for tobacco and other nicotine-containing products. Regulation
should provide minimum standards for all RRP categories and specific rules for product assessment methodologies, ingredients, labeling 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 industry practices, 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 andcommunication of truthful and non-misleading information about such products. These regulations might foreclose or unreasonably restrict adult consumer accesseven 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 for all
RRP categories 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 thejurisdiction of the FDA. We submitted to the FDA a Modified Risk Tobacco Product Application (“MRTPA”) for our Platform 1 product in December 2016, and aPremarket Tobacco Product Application (“PMTA”) for our Platform 1 product in March 2017.
On April 30, 2019, the FDA determined that a version of our Platform 1 product is appropriate for the protection of public health and authorized it for sale in the
United States. The FDA’s decision followed its comprehensive assessment of our PMTA.
The FDA’s marketing order does not mean that the agency “approved” our Platform 1 product. The authorization is subject to strict marketing, reporting and otherrequirements and is not a guarantee that the product will remain authorized, particularly if there is a significant uptake in youth initiation. The FDA will monitor
the marketing of the product.
We plan to file a PMTA application for the IQOS 3 device in the coming months.
34

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 toprovide comments on our application. The FDA closed the public comment period on February 11, 2019. In late 2019, we provided a response to the FDA's
request for clarification regarding our mice study described above. Following our response, the FDA re-opened a public comment period ending February 24,
2020.
The FDA referred our MRTPA to the Tobacco Product Scientific Advisory Committee (“TPSAC”). TPSAC held a meeting on January 24 and January 25, 2018 todiscuss 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.
The FDA review of our MRTPA is on-going.
Separately, in July 2017, the FDA issued a policy announcement aiming to explore the potential of nicotine reduction in cigarettes in conjunction with theavailability of less harmful products that deliver nicotine for adults who choose to use such products. In July 2018, as part of a public consultation procedure, we
submitted our views on this topic to the FDA. It is not possible to predict the regulatory measures that may be recommended by the FDA as a result of this policy.
In the U.S., tobacco and nicotine-containing products that were not commercially marketed as of February 15, 2007 are subject to review and authorization by the
FDA. Following a rise in the use of e-vapor products among minors in the U.S. and an outbreak of lung injuries alleged to be associated with the use of certain evapor products in many states, on January 2, 2020, the FDA announced an enforcement policy against the sale of e-vapor products sold without FDA
authorization, prioritizing enforcement against the sale of cartridge-based e-vapor products with flavors other than tobacco and menthol, and sale of any nicotinecontaining products to minors and where the manufacturer fails to take adequate measures to prevent access by minors.
While we do not sell e-vapor products in the U.S. and therefore are not subject to these actions, we continue to support regulation and industry practices that reflect
the fact that youth should not consume nicotine in any form.
Future FDA actions may influence the regulatory approach of other governments.
Until recently, there were no countries with specific product standards for heat-not-burn products. Effective July 2017 and March 2018, respectively, Russia andUkraine adopted standards that set minimum quality and safety requirements for the consumables and defined methods for demonstrating the absence of
combustion, and the product standards in Kazakhstan that came into force in March 2019 also cover devices. In the UAE, a product standard on minimum quality
and safety of electronic nicotine-containing products, including heat-not-burn products, was approved in March 2019. Effective December 2019, Jordan adopted anational standard for heat-not-burn products (both devices and consumables), and defined a method for demonstrating the absence of combustion in these products.
We expect and encourage other governments to consider similar product standards going forward.
In the EU, all EU Member States 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 ourscientific assessment of our Platform 1 product in over 20 Member States.
In addition, in Italy, in April 2018, we submitted under recent legislation an application for HEETS, used with the IQOS device, requesting regulatory recognitionof the reduction of toxic substances and potential risk reduction resulting from switching to this product compared to continued cigarette smoking. In January
2019, our application was not granted primarily on the grounds of insufficient data and questions of methodology. Due to the constraints of the review process, we
had been unable to supplement the application with all the data we subsequently filed with the FDA and to address methodological questions during the review. We
plan to submit a new application where we will clarify the concerns raised by the decision and further strengthen our application by submitting additional evidence
that became available since we submitted our first application, consistent with our FDA filing. We are confident that our evidence supports our application.
To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain RRPs versus continuingsmoking, including:In December 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 therisk of heat-not-burn products relative to cigarette smoking. This assessment included analysis of scientific data for two heat-not-burn products, one of which was
our Platform 1 product. The assessment concluded that, while still harmful to health,35

compared with the known risks from cigarettes, heat-not-burn products are probably less harmful. Subsequently, in February 2018, Public Health England
published a report stating that the available evidence suggests that heat-not-burn products may be considerably less harmful than cigarettes and more harmful thane-cigarettes.
In May 2018, the German Federal Institute for Risk Assessment (“BfR”) published a study on the Platform 1 aerosol relative to cigarette smoke using the Health
Canada Intense Smoking Regimen. BfR found reductions in selected HPHCs in a range of 80-99%. This publication indicates that significant reductions in thelevels of selected toxicants are likely to reduce toxicant exposure, which BfR stated might be regarded as a discrete benefit compared to combustible cigarettes.
In May 2018, the Dutch National Institute for Public Health and Environment (“RIVM”) published a factsheet on novel tobacco products that heat rather than burntobacco, focusing on our Platform 1 product. RIVM analyzed the aerosol generated by our Platform 1 product and concluded that the use of this product, whilestill harmful to health, is probably less harmful than continued smoking.
In June 2018, the Korean Food and Drug Administration (“KFDA”) issued a statement on products that heat rather than burn tobacco. The KFDA tested threeheat-not-burn products, one of which was our Platform 1 product. The KFDA confirmed that the levels of the nine HPHCs tested in the aerosol of these products
were on average approximately 90% lower compared to those measured in the cigarette smoke of the top five cigarette brands in South Korea. However, the KFDA
stated that it could not establish that the tested heat-not-burn products are less harmful than cigarettes. In October 2018, our Korean affiliate filed a request with alocal court seeking information underlying KFDA’s analysis, conclusions and public statements.
In August 2018, the Science & Technology Committee of the U.K. House of Commons published a report of its inquiry into e-cigarettes and heat-not-burnproducts. The report concluded that e-cigarettes are significantly less harmful to health than smoking tobacco. The report also observed that for those smokers who
don’t accept e-cigarettes, heat-not-burn products may offer a public health benefit despite their relative risk. The report called for a risk-proportionate regulatoryenvironment for both e-cigarettes and heat-not-burn products and noted that e-cigarettes should remain the least taxed, cigarettes the most taxed, with heat-notburn products falling between the two. The U.K. Committee on Advertising Practice announced the removal of a prohibition of health claims in the advertising of
e-cigarettes in the U.K. effective November 2018, with a review of the impact of this decision on market practices 12 months thereafter.
In November 2018, the Eurasian Economic Commission (regulatory body of the Eurasian Union consisting of Armenia, Belarus, Kazakhstan, Kyrgyzstan andRussia) published the results of its commissioned study on novel nicotine-containing products, including our Platform 1 product. The study confirms significantly
lower levels of HPHCs in the aerosol generated by this product compared to cigarette smoke.
In January 2019, scientific media published the results of the study of the China National Tobacco Quality Supervision and Test Centre (“CNTQST”) comparing
the aerosol generated by our Platform 1 product with cigarette smoke. The CNTQST found that the former contained fewer, and lower levels of, harmful
constituents than the latter and concluded that the lower temperature of heating tobacco in our Platform 1 product contributed to the difference. The CNTQST
stated that the reduction in emissions of harmful constituents cannot be interpreted as equivalent to a proportionate harm/risk reduction for smokers.
We make our scientific findings publicly available for scrutiny and peer review through several channels, including our websites. From time to time, adultconsumers, 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. The dissemination of scientificallyunsubstantiated information or studies with a strong confirmation bias by third parties may cause confusion among adult smokers and affect their decision toswitch to better alternatives to continued smoking, such as our RRPs.
To date, we have been largely successful in demonstrating to regulators that our heated tobacco units are not cigarettes due to the absence of combustion, and assuch 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 about our RRPs, including making scientifically substantiated risk-reduction claims, or to treat RRPs differently from cigarettes.
36Legal Challenges to RRPs: We face various administrative and legal challenges related to certain RRP activities, including allegations concerning productclassification, advertising restrictions, corporate communications, product coach activities, scientific substantiation, product liability, and unfair competition.
While we design our programs to comply with relevant regulations, we expect these or similar challenges to continue as we expand our efforts to commercialize
RRPs and to communicate publicly. The outcomes of these matters may affect our RRP commercialization and public communication activities and performancein one or more countries.
Our RRP Business Development Initiatives: In December 2013, we established a strategic framework with Altria Group, Inc. (“Altria”) setting out terms on how
the parties would collaborate to develop and commercialize e-vapor products and commercialize two of our RRPs in the U.S. In late 2018, Altria announced that it
will participate in the e-vapor category only through another e-vapor company in which Altria acquired a minority interest. Regarding heat-not-burn products, as
discussed above, the FDA has authorized a version of our Platform 1 product for sale in the U.S., and we are seeking authorization for our MRTP submission.
These efforts are not affected by Altria's e-vapor announcement. In September 2019, Altria's subsidiary, Philip Morris USA Inc., began commercialization of aversion of our Platform 1 product in the U.S.
In January 2020, we announced an agreement with KT&G, a leading tobacco and nicotine company in South Korea, for the commercialization of KT&G’s smokefree products outside of South Korea on an exclusive basis. For more information, see Acquisitions and Other Business Arrangements below.
Other Developments: In September 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, the first annual contribution of $80 million in thefirst quarter of 2018 and the second annual contribution of $80 million in the first quarter of 2019. 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, including tax, customs, antitrust, advertising, and labor practices. We
describe certain matters pending in Thailand, Russia 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 aseries 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 declaredcustoms 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 basedon grounds not supported by WTO customs valuation rules and inconsistent with several decisions already taken by Thai Customs and other Thai governmental
agencies. On November 12, 2018 and July 12, 2019, the WTO issued its decisions agreeing with the Philippines that the criminal charges against PM Thailand andits former and current employees in connection with import entries of cigarettes from the Philippines and Indonesia, respectively, described in Item 8, Note 18.
Contingencies, are inconsistent with WTO customs valuation rules. In January 2019 and September 2019, Thailand appealed the WTO's decision related to thecriminal charges in connection with import entries of cigarettes from the Philippines and Indonesia, respectively. It is not possible to predict any future
developments in these proceedings while the WTO Appellate Body is not operational.
U.S. GAAP Treatment of Argentina as a Highly Inflationary Economy
Following the categorization of Argentina by the International Practices Task Force of the Center for Audit Quality as a country with a three-year cumulative
inflation rate greater than 100%, the country is considered highly inflationary in accordance with U.S. GAAP. Consequently, we began to account for theoperations of our Argentinian affiliates as highly inflationary, and to treat the U.S. dollar as the functional currency of the affiliates, effective July 1, 2018.

37

Asset Impairment and Exit Costs
We discuss asset impairment and exit costs in Item 8, Note 21.Asset Impairment and Exit Costs to our consolidated financial statements.
As part of our transformation to a smoke-free future, we also seek to optimize our organizational design. In January 2020, we commenced the first phase of a twophase restructuring project in Switzerland. This phase may impact approximately 265 existing positions that will be eliminated or relocated, and we initiatedconsultation procedures for the impacted employees as required under the law. The second phase of this restructuring project is expected to commence in thesecond quarter of 2020.

Acquisitions and Other Business Arrangements
We discuss our acquisitions in Item 8, Note 6. Acquisitions to our consolidated financial statements.
On August 27, 2019, we announced that we were in discussions with Altria Group, Inc. regarding a potential all-stock, no premium merger of equals, and on
September 25, 2019, we announced that the merger discussions had ended and that both companies agreed to focus on launching our Platform 1 product in the
United States.
Global Collaboration Agreement with KT&G
In January 2020, PMI announced a global collaboration agreement with the leading tobacco and nicotine company in South Korea, KT&G, to commercialize
KT&G’s smoke-free products outside of the country. The agreement will run for an initial period of three years. The two companies plan for global collaboration
with the intention to actively expand to cover many markets, based on commercial success. The agreement allows PMI to distribute current KT&G smoke-free
products, and their evolutions, on an exclusive basis, and does not restrict PMI from distributing its own or third-party products. KT&G’s smoke-free productbrand portfolio includes heat-not-burn tobacco products (e.g., Lil Mini and Lil Plus), hybrid technologies that combine heat-not-burn tobacco and e-vapor
technologies (e.g., Lil Hybrid), and e-vapor products (e.g., Lil Vapor). PMI will be responsible for the commercialization of smoke-free products supplied under
the agreement.
Products sold under the agreement will be subject to careful assessment to ensure they meet the regulatory requirements in the markets where they are launched, as
well as our standards of quality and scientific substantiation of their harm reduction potential. PMI and KT&G will seek any necessary regulatory approvals that
may be required on a market-by-market basis. There are no current plans to commercialize KT&G products in the United States.
Investments in Unconsolidated Subsidiaries and Equity Securities
We discuss our investments in unconsolidated subsidiaries and equity securities in Item 8, Note 4. Related Parties - Investments in Unconsolidated Subsidiaries,
Equity Securities and Other and Item 8, Note 16. Fair Value Measurements 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 thetrade 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 ourpolicy 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 toTrade Sanctions, either where such sanctions do not apply to our business or pursuant to exemptions or licenses.
A subsidiary sells products to distributors that, in turn, sell those products to duty free customers that supply U.N. peacekeeping forces around the world, including
those in the U.N. peacekeeping mission located in Abyei, a special administrative territory in Sudan. We do not believe that these sales, which are not subject toTrade Sanctions, and are de minimis in volume and value, present a material risk to our shareholders, our reputation or the value of our shares. We have noemployees, operations or assets in the Sudan.
To our knowledge, none of our commercial arrangements results in the governments of any country identified by the U.S. government38

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, 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.
Certain states within the U.S. have enacted legislation permitting or requiring 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.
2019 compared with 2018
The following discussion compares operating results within each of our operating segments for2019 with 2018.
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:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

9,817 $
3,970 $

2018

Total

9,298
4,105

5.6 %
(3.3)%

Variance
Fav./(Unfav.)

Excl.
Curr.
11.6% $
4.8% $

Total
519 $(135) $

Currency

Price(563) $
(330) $

288 $
288 $

Vol/
Mix
794 $
587 $

Cost/
Other
—
(680)

Net revenues, excluding unfavorable currency, increased by 11.6%, reflecting a favorable pricing variance, driven principally by France and Germany, partly
offset by Poland; and favorable volume/mix, primarily driven by heated tobacco unit andIQOS device volume, notably in the Czech Republic, Germany, Greece,
Italy and Poland, partly offset by lower cigarette volume, notably in France and Italy, and unfavorable cigarette volume/mix in Germany.
The net revenues of the European Union segment include$1,724 million in 2019 and $865 million in 2018 related to the sale of RRPs.
Operating income decreased by 3.3%. Excluding asset impairment and exit charges of $342 million in 2019 related to the plant closure in Germany andunfavorable currency of $330 million, operating income increased by 13.1% mainly reflecting: a favorable pricing variance; favorable volume/mix, primarily
driven by heated tobacco unit volume, notably in the Czech Republic, Germany, Greece, Italy and Poland, partly offset by lower cigarette volume, notably inFrance and Italy, and unfavorable cigarette volume/mix in Germany; partially offset by higher manufacturing costs and higher marketing, administration andresearch costs, notably related to increased investment behind reduced-risk products.
39

European Union - Total Market, PMI Shipment and Market Share Commentaries
Total market, PMI shipment volume and market share performance are shown in the table below:
European Union Key Data

Full-Year
Change% / pp

2019

2018

482.5

484.5

(0.4)%PMI Shipment Volume (million units)
Cigarettes
Heated Tobacco Units

174,319
12,569179,6225,977(3.0)%+100.0%Total European Union

186,888

185,599

0.7 %Total Market (billion units)

PMI Market Share
Marlboro
L&M
Chesterfield
Philip Morris
HEETS
Others

18.0%
6.7%
5.8%
2.7%
2.5%
3.1%

18.5%
6.9%
5.9%
2.9%
1.2%
3.1%

(0.5)
(0.2)
(0.1)
(0.2)
1.3
—

Total European Union

38.8%

38.5%

0.3

The estimated total market in the EU decreased by 0.4% to 482.5 billion units, notably due to:•France, down by 7.4%, primarily reflecting the impact of significant excise tax-driven price increases and a higher prevalence of illicit
trade;•

Germany, down by 2.5%, primarily reflecting the impact of price increases in 2018 and March 2019;
and•

Italy, down by 1.5%, primarily reflecting the impact of price increases in 2018 and the first quarter of2019;partly offset by•

Poland, up by 6.8%, primarily reflecting a lower prevalence of illicit trade;and•Spain, up by 0.8%, partly reflecting a lower prevalence of illicit
trade.

Our total shipment volume increased by 0.7% to 186.9 billion units, reflecting:•higher heated tobacco unit shipment volume across the Region (notably Italy), driven by higher market
share;

partly offset by•lower cigarette shipment volume, mainly in France, due to the lower total market and lower cigarette market share, as well as Germany and Italy, partly
reflecting out-switching to heated tobacco units.

Our Regional market share increased by 0.3 points to 38.8%, with gains in the Czech Republic, Germany, Greece and Portugal, partly offset by declines in France,
Poland and Spain.

40Eastern Europe:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

3,282 $
547 $Variance
Fav./(Unfav.)

2018

Total

Excl.
Curr.

Currency

2,921
902

12.4 %(39.4)%

16.1 % $ 361 $(41.9)% $ (355) $

Total

Price

(108) $
23 $

85 $
85 $

Vol/
Mix

Cost/
Other

384 $
—
109 $ (572)

Net revenues, excluding unfavorable currency, increased by 16.1%, reflecting a favorable pricing variance, mainly driven by Russia and Ukraine, and favorable
volume/mix, predominantly driven by heated tobacco unit and IQOS device volume in Russia and Ukraine, and heated tobacco unit volume in Kazakhstan, partly
offset by unfavorable cigarette volume/mix in Russia and lower cigarette volume in Ukraine.
The net revenues of the Eastern Europe segment include $844 million in 2019 and $324 million in 2018 related to the sale of RRPs.
Operating income decreased by 39.4%. Excluding the unfavorable impact of $374 million related to the Russia excise and VAT audit charge, and favorable
currency of $23 million, operating income decreased by 0.4%, due to: higher marketing, administration and research costs, notably reflecting increased investments
behind reduced-risk products (primarily in Russia in support of geographic expansion); and higher manufacturing costs; partly offset by a favorable pricing
variance; and favorable volume/mix, predominantly driven by heated tobacco unit volume in Kazakhstan, Russia and Ukraine, partly offset by unfavorable
cigarette volume/mix in Russia.
Eastern Europe - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in Eastern Europe decreased by 5.4% to 397.4 billion units, notably due to:•

Russia, down by 5.2%, primarily reflecting the impact of price increases, as well as an increase in the prevalence of illicit trade;and•Ukraine, down by 12.0%, primarily reflecting the impact of excise tax-driven price increases, as well as an increase in the prevalence of illicit
trade;

partly offset by•

Kazakhstan, up by 5.7%, partly reflecting a lower prevalence of illicit
trade.

Our Regional market share increased by 1.6 points to 28.7%.
PMI Shipment Volume (million units)

Full-Year
2019

2018

ChangeCigarettes
Heated Tobacco Units

100,644
13,453

108,7184,979(7.4)%+100.0%Total Eastern Europe

114,097

113,697

0.4 %PMI's total shipment volume increased by 0.4% to 114.1 billion units, notably reflecting:•

Kazakhstan, up by 11.6%, reflecting the higher total market and a higher market share of heated tobacco
units;

partly offset by•

Ukraine, down by 3.0%, reflecting the lower total market, partly offset by a higher market share of heated tobacco
units.

41

Middle East & Africa:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

4,042 $
1,684 $

2018

Total

4,114
1,627

(1.8)%
3.5 %Variance
Fav./(Unfav.)

Excl.
Curr.

Total

2.2%
6.8%

$
$

(72) $
57 $Currency

Price(162) $(53) $

207 $
207 $

Vol/
Mix

Cost/
Other

(113) $
(128) $

(4)
31

Net revenues, excluding unfavorable currency, increased by 2.2%, mainly reflecting: a favorable pricing variance, primarily driven by Egypt, the GCC, PMI Duty
Free and Turkey, partly offset by Morocco; partially offset by unfavorable volume/mix, mainly due to heated tobacco unit and cigarette volume in PMI Duty Free,
as well as cigarette volume in Kuwait, partly offset by favorable cigarette volume in Egypt and favorable cigarette volume/mix in Algeria and Saudi Arabia.
The net revenues of the Middle East & Africa segment include$321 million in 2019 and $382 million in 2018 related to the sale of RRPs.
Operating income, excluding unfavorable currency, increased by 6.8%, mainly reflecting a favorable pricing variance; lower manufacturing costs; and lower
marketing, administration and research costs, notably in the GCC; partly offset by unfavorable volume/mix, mainly due to the same factors as for net revenues
noted above.
Middle East & Africa - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in the Middle East & Africa was essentially flat at592.4 billion units, notably reflecting:••

Algeria, up by 7.0%, partly reflecting the timing of estimated trade inventory movements in 2019 compared to 2018;
andEgypt, up by 1.6%, mainly due to the timing of estimated trade inventory movements in 2019 related to anticipated priceincreases;

offset by•

Duty Free, down by 1.6%, mainly reflecting lower purchases by travelers to China;
and•Morocco, down by 16.0%, primarily reflecting the impact of significant excise tax-driven price increases in
2019.

Our Regional market share decreased by 0.2 points to 23.5%.
PMI Shipment Volume (million units)

Full-Year
2019

2018

Cigarettes
Heated Tobacco Units

134,568
2,654

136,605
3,403

Change(1.5)%(22.0)%

Total Middle East & Africa

137,222140,008(2.0)%

Our total shipment volume decreased by 2.0% to 137.2 billion units, notably in:•

PMI Duty Free, down by 7.0%. Excluding the net unfavorable impact of estimated distributor inventory movements of0.4 billion units, PMI's in-market sales
decline was 4.6%, mainly reflecting lower market share and the lower total market; and•Turkey, down by 5.6%, mainly reflecting lower market share, primarily driven by the timing of retail price increases in April 2019 compared tocompetition;

partly offset by•

Egypt, up by 12.2%, primarily reflecting higher market share, driven byL&M, as well as the higher total market;
and
42

•

Saudi Arabia, up by 24.9%. Excluding the net favorable impact of estimated distributor inventory movements of1.5 billion units, mainly attributable to thetiming of shipments compared to 2018, PMI's in-market sales grew by 4.1%, primarily reflecting higher market share.

South & Southeast Asia:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

5,094 $
2,163 $

2018

Total

4,656
1,747

9.4%
23.8%

Variance
Fav./(Unfav.)

Excl.
Curr.

Total

9.6% $
22.8% $

438 $
416 $

CurrencyPrice(10) $
17 $

583 $
583 $

Vol/
Mix

Cost/
Other

(135) $
(99) $—(85)

Net revenues, excluding unfavorable currency, increased by 9.6%, reflecting: a favorable pricing variance, principally driven by Indonesia and the Philippines,
partly offset by unfavorable volume/mix, largely due to Indonesia, partly offset by favorable volume in India and Thailand, as well as favorable mix in thePhilippines.
Operating income increased by 23.8%. Excluding asset impairment and exit costs of $20 million related to a plant closure in Pakistan in the first quarter of 2019 aspart of our global manufacturing infrastructure optimization, and favorable currency of $17 million, operating income increased by 24.0%, mainly reflecting: afavorable pricing variance and lower manufacturing costs, partly offset by unfavorable volume/mix, reflecting the same factors as for net revenues noted above,and higher marketing, administration and research costs, partly due to the Philippines.
South & Southeast Asia - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in South & Southeast Asia decreased by 1.2% to 738.1 billion units, notably due to:•Pakistan, down by 14.0%, mainly reflecting the impact of excise tax-driven priceincreases;•

the Philippines, down by 3.7%, primarily reflecting the impact of price increases in the below premium segment in the fourth quarter of 2018, as well as priceincreases in the third quarter of 2019; and•Vietnam, down by 5.2%, mainly reflecting the impact of excise tax-driven priceincreases;

partly offset by•Indonesia, up by 1.1%, reflecting the absence of an excise tax increase in 2019;
and•Thailand, up by 5.8%, primarily reflecting on-going recovery from the September 2017 excise tax
reform.

Our Regional market share decreased by 0.1 point to 23.7%.
PMI Shipment Volume (million units)

Full-Year
2019

2018

Cigarettes
Heated Tobacco Units

174,934—

178,469—

Change(2.0)%—%

Total South & Southeast Asia

174,934

178,469(2.0)%

Our total shipment volume decreased by 2.0% to 174.9 billion units, notably due to:•Indonesia, down by 2.9%, mainly reflecting lower market share, primarily due to the widened retail price gap of Sampoerna A to competitive brands following
its price increase in October 2018, partly offset by the higher total market;•

Pakistan, down by 8.6%, mainly reflecting the lower total market, partly offset by higher market share driven by favorable retail price gaps with competitors'
brands; and43

•

the Philippines, down by 2.9%, mainly reflecting the lower total market, partly offset by higher market share, notably of
Marlboro;

partly offset by•

Thailand, up by 18.0%, mainly reflecting higher market share, driven by the continued strong performance ofL&M 7.1 and the favorable impact of distribution
expansion in 2018, as well as the higher total market.

East Asia & Australia:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

5,364 $
1,932 $

2018

Total

5,580
1,851

(3.9)%
4.4 %Variance
Fav./(Unfav.)

Excl.
Curr.

Currency

Total(3.4)% $2.4 % $

(216) $
81 $

Price

(26) $
37 $

230 $
230 $

Vol/
Mix

Cost/
Other

(420) $
(292) $—
106

Net revenues, excluding unfavorable currency, decreased by 3.4%, reflecting: unfavorable volume/mix, mainly due to lower cigarette volume in Australia, Japanand Korea, lower IQOS device volume in Japan, and lower heated tobacco unit volume and IQOS device volume in Korea, partly offset by higher heated tobacco
unit volume in Japan. The unfavorable volume/mix was partly offset by a favorable pricing variance, predominantly driven by Australia and Japan.
The net revenues of the East Asia & Australia segment include$2,671 million in 2019 and $2,506 million in 2018 related to the sale of RRPs.
Operating income, excluding favorable currency, increased by 2.4%, mainly reflecting: a favorable pricing variance and lower manufacturing costs, primarily
related to Japan and Korea, partly offset by unfavorable volume/mix, mainly reflecting the same drivers as for net revenues noted above, as well as higher
marketing, administration and research costs.
East Asia & Australia - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in East Asia & Australia, excluding China,decreased by 4.0% to 299.2 billion units, notably due to:••••Australia, down by 5.9%, or by 8.9% excluding the impact of estimated trade inventory movements, mainly reflecting the impact of excise tax-driven retailprice increases;
Japan, down by 5.6%, mainly reflecting the impact of the October 1, 2018 excise tax-driven retail price increases, as well as out-switching to the cigarillo
category;
Korea, down by 1.4%, reflecting the secular decline of the cigarette category, partly offset by the growth of the heat-not-burn category;andTaiwan, down by 1.9%, continuing to reflect the impact of significant excise tax-driven retail price increases in June 2017, as well as an increase in theprevalence of illicit trade.

Our Regional market share, excluding China, decreased by 0.5 points to 26.9%.
PMI Shipment Volume (million units)

Full-Year
2019

2018

Cigarettes
Heated Tobacco Units

49,95130,67756,163
26,866(11.1)%
14.2 %

Total East Asia & Australia

80,62883,029(2.9)%

PMI's total shipment volume decreased by 2.9% to 80.6 billion units, notably in:
44

Change•

Korea, down by 11.1%, principally due to lower cigarette and heated tobacco unit market share, as well as the lower total
market;partly offset by•

Japan, up by 0.3%, reflecting the net favorable impact of estimated distributor inventory movements of approximately 2.6 billion units (comprised ofapproximately 3.4 billion heated tobacco units, partially offset by approximately 0.8 billion cigarettes), mainly due to a favorable comparison with 2018 inwhich IQOS consumable inventories in Japan were reduced. Excluding the impact of these inventory movements, PMI's in-market sales declined by4.2%,
primarily reflecting the lower total market, partly offset by higher heated tobacco unit market share.

Latin America & Canada:
ChangeFav./(Unfav.)Financial Summary Years Ended
December 31,(in millions)
Net Revenues
Operating Income

2019
$
$

2,206 $
235 $

2018
3,056
1,145

Total

Excl.
Curr.

(27.8)%(79.5)%(25.6)% $(80.7)% $Variance
Fav./(Unfav.)
Total(850) $
(910) $

Currency(68) $
14 $

Price

Vol/
Mix

90 $
90 $

(113) $
(89) $

Cost/
Other(1)
(759)
(925)

(1) Unfavorable Cost/Other variance includes the impact of the RBH deconsolidation.

Note: Net Revenues include revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019,
for sale under license in the United States.

Net revenues, excluding unfavorable currency, decreased by 25.6%, predominantly due to: the unfavorable impact shown in "Cost/Other," resulting from thedeconsolidation of RBH; and unfavorable volume/mix, mainly due to lower cigarette volume in Argentina and Canada, partly offset by a favorable pricing
variance, notably in Brazil, Canada, Colombia and Mexico, partially offset by Argentina, mainly due to the adoption of highly inflationary accounting.
The net revenues of the Latin America & Canada segment include$27 million in 2019 and $19 million in 2018 related to the sale of RRPs.
Operating income decreased by 79.5%. Excluding the loss on deconsolidation of RBH ($239 million), the Canadian tobacco litigation-related expense ($194
million), asset impairment and exit costs ($60 million) related to plant closures in Argentina and Colombia as part of our global manufacturing infrastructure
optimization, and favorable currency ($14 million), operating income decreased by 37.6%. This decline was predominantly due to the unfavorable impact, shownin "Cost/Other," resulting from the deconsolidation of RBH; an unfavorable volume/mix, mainly due to lower cigarette volume in Argentina and Canada, partially
offset by a favorable pricing variance, lower manufacturing costs and lower marketing, administration and research costs.
Latin America & Canada - Total Market, PMI Shipment Volume and Market Share Commentaries
The estimated total market in Latin America & Canada decreased by 4.3% to 194.1 billion units, notably due to:•Argentina, down by 4.6%, primarily due to the impact of cumulative price increases and the impact of the economic downturn as of the second half of
2018;

•

Canada, down by 7.7%, primarily due to the impact of cumulative price increases, as well as the growing prevalence of e-vapor products;
and•Venezuela, down by 61.6%, mainly reflecting the deterioration of the socioeconomic environment and the impact of inflation-driven priceincreases.

Our Regional market share decreased by 0.4 points to 36.9%.
45

PMI Shipment Volume (million units)

Full-Year
2019

2018

ChangeCigarettes
Heated Tobacco Units

72,293299

80,738147(10.5)%+100.0%Total Latin America & Canada

72,59280,885(10.3)%

Our total shipment volume decreased by 10.3% to 72.6 billion units, or by 5.2% excluding the impact of the RBH deconsolidation, notably due to:•Argentina, down by 9.4%, primarily reflecting the lower total market, as well as lower market share;
and•Venezuela, down by 74.8%, primarily reflecting the lower total
market.

2018 compared with 2017
For a discussion comparing our consolidated operating results within each of our operating segments for the year ended December 31, 2018, with the year ended
December 31, 2017, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Operating Results by
Business Segment in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission
on February 7, 2019.

Financial Review

For the Years Ended December 31,(in millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities

2019
$

46

2018
10,090 $(1,811)(8,061)

2017
9,478 $
(998)
(9,651)

8,912(3,083)(2,769)2019 compared with 2018
• Net Cash Provided by Operating
Activities
Net cash provided by operating activities of $10.1 billion for the year ended December 31, 2019, increased by $0.6 billion from the comparable 2018 period.
Excluding unfavorable currency movements of $1.0 billion, net cash provided by operating activities increased by $1.6 billion, due to lower working capitalrequirements of $1.3 billion and other movements of $0.3 billion. The unfavorable currency movements represented the impacts on net earnings coupled with thecurrency impacts on subsidiary working capital movements and the related inter-company positions from the fluctuations of the U.S. dollar in 2018 and 2019,especially against the Euro, Mexican peso, Russian ruble and Turkish lira.
The lower working capital requirements were primarily due to higher cash provided by accrued liabilities and other current assets related to the timing of excise
tax-paid inventory movements and excise tax payments, and higher cash provided by accounts payable reflecting a combination of extended payment terms fromvendors in 2019 and higher 2018 payments for IQOS device purchases in the fourth quarter of 2017, partially offset by more cash used for accounts receivableprimarily due to the timing of cash collections.
The other movements of $0.3 billion, excluding currency, was driven by the net impact of the net earnings decline of $0.4 billion adjusted for the add-back of the
non-cash items of $0.7 billion, comprised of $0.3 billion related to the 2019 Canadian tobacco litigation-related expense and the 2019 loss on deconsolidation of
RBH and $0.4 billion related to the 2019 asset impairment and exit costs. While the asset impairment and exit costs were largely non-cash charges in 2019,
approximately $0.2 billion of employee separation costs will be paid by the end of 2021 - see Item 8, Note 21. Asset Impairment and Exit Costs for additional
information.

• Net Cash Used in Investing
Activities
Net cash used in investing activities of $1.8 billion for the year ended December 31, 2019, increased by $0.8 billion from the comparable 2018 period. This
increase in net cash used in investing activities was due principally to the reduction of cash resulting from the deconsolidation of RBH, partly offset by lower
capital expenditures. For further details on deconsolidation of RBH, see Item 8. Note 22. Deconsolidation of RBH.
Our capital expenditures were $0.9 billion in 2019 and $1.4 billion in 2018. The 2019 expenditures were primarily related to our ongoing investments in RRPs. We
expect total capital expenditures in 2020 of approximately $1.0 billion (including capital expenditures related to our ongoing investment in RRPs), to be funded byoperating cash flows.

• Net Cash Used in Financing
Activities
Net cash used in financing activities of $8.1 billion for the year ended December 31, 2019, decreased by $1.6 billion from the comparable 2018 period. The
decrease in net cash used in financing activities was due primarily to 2019 proceeds from long-term debt issuances ($3.8 billion proceeds from our U.S. dollar andEuro debt issuances in 2019) and the purchase of the remaining 49% interest in our Costa Rican affiliates in 2018, partially offset by higher long-term debt
repayments and higher repayments of short-term borrowing. For further details on the purchase of the remaining 49% interest in our Costa Rican affiliates, see
Item 8, Note 6. Acquisitions.
Dividends paid in 2019 and 2018 were $7.2 billion and $6.9 billion, respectively.
2018 compared with 2017
For a discussion comparing our net cash activities (operating, investing and financing) for the year ended December 31, 2018, with the year ended December 31,
2017, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Review in our Annual Report on
Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 7, 2019.
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 threemonths 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 orequity-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 to47manage counterparty exposure, we also enter into reverse repurchase agreements. Such agreements are collateralized with government or corporate securities heldby a custodial bank and, at maturity, cash is paid back to PMI, and the collateral is returned to the bank. For 2018, we had an average balance of $0.3 billion, andwe had a zero balance at December 31, 2018. For 2019, the activity for such reverse repurchase agreements was not material.
We utilize long-term and short-term debt financing, including a commercial paper program that is regularly used to finance ongoing liquidity requirements, as partof 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, coupledwith 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 6, 2020, our credit ratings and outlook by major credit rating agencies were as follows:
Short-termLong-term

Outlook

P-1
A-1
F1

A2
A
A

StableStableStableMoody’sStandard & Poor’s
Fitch

Credit Facilities – On January 31, 2020, we entered into an agreement to amend and extend the term of our $2.0 billion 364-day revolving credit facility fromFebruary 4, 2020, to February 2, 2021.
At February 6, 2020, our committed credit facilities were as follows:(in billions)
Committed
CreditFacilities

Type
364-day revolving credit, expiring February 2, 2021$

Multi-year revolving credit, expiring February 28, 2021

2.0
2.5

Multi-year revolving credit, expiring October 1, 2022

3.5

Total facilities$

8.0

At February 6, 2020, 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.
All but the $2.0 billion 364-day revolving credit facility in the table above require 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, 2019, ourratio calculated in accordance with the agreements was 11.2 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.
We plan to replace our existing $2.5 billion multi-year revolving credit facility, expiring February 28, 2021 with a new $2.0 billion revolving credit facility
expiring February 10, 2025. The new credit facility, which is expected to close on February 10, 2020, will not include the consolidated EBITDA to consolidated
interest expense ratio covenant discussed above.
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 $2.7 billion at December 31, 2019,48

and $3.3 billion at December 31, 2018, are for the sole use of our subsidiaries. Borrowings under these arrangements amounted to $338 million at December 31,
2019, and $730 million at December 31, 2018.
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, 2019, and December 31, 2018, we had no commercial paper outstanding. The average commercial
paper balance outstanding during 2019 and 2018 was $2.3 billion and $3.4 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 ofDecember 31, 2019, 2018 and 2017, were $0.9 billion, $1.0 billion and $1.1 billion, respectively. The net proceeds received are included in cash provided byoperating 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 $31.0 billion at December 31, 2019, and $31.8 billion at December 31, 2018. 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 2.5% in 2019 and 2018. 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 issubject 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. During February 2020, we plan to file a new shelf registration statement with the
Securities and Exchange Commission.
Our debt issuances in 2019 were as follows:(in millions)
Type
U.S. dollar notes
U.S. dollar notes
EURO notes
EURO notes
EURO notes

(a)
(b)
(c)
(c)
(c)

Face Value

Interest Rate

$900
$750
€500 (approximately $557)€750 (approximately $835)€750 (approximately $835)

2.875%
3.375%
0.125%
0.800%
1.450%

(d)
(d)
(d)

Issuance

Maturity

May 2019
May 2019
August 2019
August 2019
August 2019

May 2024
August 2029
August 2026
August 2031
August 2039(a) Interest on these notes is payable semi-annually in arrears beginning in November 2019.
(b) Interest on these notes is payable semi-annually in arrears beginning in August 2019.
(c) Interest on these notes is payable annually in arrears beginning in August 2020.
(d) 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 have been and will be used for general corporate purposes, including repayment ofoutstanding commercial paper and refinancing of outstanding 2.000% Notes due 2020, outstanding Floating Rate Notes due 2020 and outstanding Euro
denominated 1.750% Notes due 2020.
The weighted-average time to maturity of our long-term debt was 10.2 years at the end of2019 and 9.6 years at the end of 2018.
•

Off-Balance
Obligations

Sheet

Arrangements

andAggregate

Contractual

We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations discussed below.
49

Guarantees – At December 31, 2019, we were contingently liable for $0.5 billion of guarantees of our own performance, of which $0.3 billion related to our
obligations under indemnity agreements to enable appeals of customs assessments against our distributors, and $0.2 billion 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, 2019, our thirdparty guarantees were insignificant.
Aggregate Contractual Obligations – The following table summarizes our contractual obligations at December 31, 2019:
Payments Due
2021-2022

2023-2024

2025 and
Thereafter$4,051$5,779$4,890$16,242

877

1,534

1,273

6,440

949

222

286

158

283

Inventory and production costs

3,493

2,199

885

409

—

Other

2,180

977

578

213

412

5,673

3,176

1,463

622

412

1,992

278

408

661

645

$49,700$8,604$9,470$7,604$24,022(in millions)

Total

2020

Long-term debt (1)$30,962Interest on borrowings (2)10,124

Operating leases (3)Purchase obligations (4):Other long-term liabilities (5)(1) Amounts represent the expected cash payments at the face value of our long-term debt and finance lease obligations. For further details, see Item 8, Note 7. Indebtedness to our consolidated

financial statements.
(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, 2019. Amounts exclude the amortization of debt discounts, the amortizationof 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 maturity of PMI"s operating lease liabilities, on an undiscounted basis.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) arecommitments 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. Other purchase obligations also include the expected future contributions to the Foundation for a Smoke-Free World. For further details
see Business Environment—Other Developments. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to bepurchased, 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 transition tax (as discussed in Item 8, Note 11. Income Taxes to our consolidated financial statements), postretirement health care costs,
accruals established for employment costs and accruals established for Exit activities (for further details, see Note 21. Asset impairment and Exit 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 areunable 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$77 million in 2020, based on current tax and benefit laws (as discussed in Item 8, Note 13. Benefit Plans to our consolidated financial statements).

ŸEquity and Dividends

We discuss our stock awards as of December 31, 2019, in Item 8, Note 9. Stock Plans to our consolidated financial statements.
During 2019, 2018 and 2017, we did not repurchase any shares under a share repurchase program, and we do not presently intend to repurchase shares of ourcommon stock in 2020.
Dividends paid in 2019 were $7.2 billion. During the third quarter of 2019, our Board of Directors approved a 2.6% increase in the quarterly dividend to $1.17 percommon share. As a result, the present annualized dividend rate is $4.68 per common share.
50

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 andMoody’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 theextent 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 theworld. 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 and interest 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 and foreign currency
price-sensitive derivative financial instruments. This computation includes our debt 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 and a one-day holding period using a "parametricdelta-gamma" approximation technique to determine the observed interrelationships between movements in interest rates and various currencies and in calculating
the risk of the underlying positions in the portfolio. These interrelationships were determined by observing interest rate and forward currency rate movements
primarily over the preceding quarter for determining value at risk at December 31, 2019 and 2018, and primarily over each of the four preceding quarters for the
calculation of average value at risk amounts during each year.
Fair Value Impact
At
December 31, 2019

AverageHigh

Low

Foreign currency rates

$18

$20

$24

$18

Interest rates

$301

$247

$346

$169

(in millions)At
December 31, 2018

AverageHigh

Low

Foreign currency rates

$19

$20

$23

$19

Interest rates

$142

$132

$152

$96

(in millions)

Instruments sensitive to:Fair Value Impact

Instruments sensitive to:

The value at risk computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest andforeign 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 to51

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
Forward-Looking and Cautionary Statements
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 andin 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 factthat 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. Our RRPs
constitute a new product category in its early stages that is less predictable than our mature cigarette business. 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 andwhether 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 topredict or identify all risk factors. Consequently, you should not consider this discussion of potential risks or uncertainties to be complete. We do not undertake toupdate 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.
52

Item 8.

Financial Statements and Supplementary Data.

Consolidated Statements of Earnings(in millions of dollars, except per share data)
for the years ended December 31,

2019

Revenues including excise taxes

$

2018

77,921$

2017

79,823$78,098

Excise taxes on products

48,11650,19849,350

Net revenues

29,80529,62528,748

Cost of sales

10,513

10,75810,432

19,292

18,86718,316

8,695

7,408

6,647

66

82

88

10,531

11,377

11,581

570

665

914

89

41

78

Gross profit
Marketing, administration and research costs (Notes 18, 21 & 22)
Amortization of intangibles
Operating income
Interest expense, net (Note 14)
Pension and other employee benefit costs (Note 13)
Earnings before income taxes

9,872

10,671

10,589Provision for income taxes (Note 11)

2,293

2,445

4,307

Equity investments and securities (income)/loss, net

(149)

(60)

(59)

7,728

8,286

6,341

543

375

306

Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to PMI

$

7,185

$

7,911

$

6,035

$

4.61

$

5.08

$

3.88

$

4.61

$

5.08

$

3.88

Per share data (Note 10):
Basic earnings per share
Diluted earnings per share

See notes to consolidated financial statements.
53

Consolidated Statements of Comprehensive Earnings(in millions of dollars)
2019

for the years ended December 31,

Net earnings$
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustments:
Unrealized gains (losses), net of income taxes of ($161) in 2019, ($47) in 2018 and $620 in 2017
(Gains)/losses transferred to earnings, net of income taxes of $0 in 2019, 2018 and 2017
(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $0 in 2019,2018 and 2017 (Note 22)
Change in net loss and prior service cost:
Net gains (losses) and prior service costs, net of income taxes of $247 in 2019, $65 in 2018 and($17) in 2017
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($69)
in 2019, ($43) in 2018 and ($31) in 2017
(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of ($15) in2019, $0 in 2018 and $0 in 2017 (Note 22)
Change in fair value of derivatives accounted for as hedges:
Gains (losses) recognized, net of income taxes of $2 in 2019, ($4) in 2018 and $8 in 2017
(Gains) losses transferred to earnings, net of income taxes of $3 in 2019, $5 in 2018 and $2 in 2017

2018

7,728

$

2017

8,286

$

6,341

505
—

(812)
—

330
(2)

502

—

—

(454)

(1,046)

523

243

218

228

27

—

—

(18)
(14)

24
(31)

(44)
(11)

Total other comprehensive earnings (losses)

791(1,647)

1,024

Total comprehensive earnings
Less comprehensive earnings attributable to:Noncontrolling interests

8,519

6,639

7,365

586

304

306

$

Comprehensive earnings attributable to PMI

See notes to consolidated financial statements.
54

7,933

$

6,335

$

7,059

Consolidated Balance Sheets(in millions of dollars, except share data)
at December 31,

2019

2018

AssetsCash and cash equivalents

$

6,861

$

6,593

Trade receivables (less allowances of $20 in 2019 and $25 in 2018)

3,080

2,950

Other receivables

637

614

2,052

2,318

1,596

1,405

5,587

5,081

9,235

8,804

701

481

20,514

19,442

566

600

4,132

3,975

9,354

9,096

394

886

14,446

14,557

7,815

7,356

6,631

7,201

Goodwill (Note 3)

5,858

7,189

Other intangible assets, net (Note 3)

2,113

2,278

Investments in unconsolidated subsidiaries and equity securities (Notes 4 & 16)

4,635

1,269

Deferred income taxes

1,153

977

Other assets

1,971

1,445

Inventories:
Leaf tobacco
Other raw materials
Finished product

Other current assets
Total current assets
Property, plant and equipment, at cost:
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress

Less: accumulated depreciation

Total Assets$

See notes to consolidated financial statements.
55

42,875$39,801

at December 31,

2019

2018

Liabilities
Short-term borrowings (Note 7)$

Current portion of long-term debt (Note 7)
Accounts payable

338

$

730

4,051

4,054

2,299

2,068

666

732

5,837

5,088

1,042

794

1,831

1,783

1,973

1,366

796

576

18,833

17,191

26,656

26,975

908

898

3,634

3,083

2,443

2,393

52,47450,540

—

—

2,019

1,939

30,98731,014(9,363)(10,111)

23,643

22,84235,22035,301(11,577)(12,459)

1,978

1,720

(9,599)(10,739)

Accrued liabilities:
Marketing and selling
Taxes, except income taxes
Employment costs
Dividends payable
Other
Income taxes (Note 11)
Total current liabilities
Long-term debt (Note 7)
Deferred income taxes
Employment costs
Income taxes and other liabilities (Note 11)
Total liabilities

Contingencies (Note 18)
Stockholders’ (Deficit) Equity
Common stock, no par value (2,109,316,331 shares issued in 2019 and 2018)
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses

Less: cost of repurchased stock (553,421,668 and 554,736,610 shares in 2019 and 2018, respectively)
Total PMI stockholders’ deficit
Noncontrolling interests
Total stockholders’ deficit
Total Liabilities and Stockholders’ (Deficit) Equity

See notes to consolidated financial statements.

$

42,875$39,801

56

Consolidated Statements of Cash Flows(in millions of dollars)
for the years ended December 31,

2019

2018

2017

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESNet earnings

$

7,728

$

8,286

$

6,341

Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization

964

989

875

Deferred income tax (benefit) provision

(141)

(100)

(501)

Asset impairment and exit costs, net of cash paid (Note 21)

371

(3)

(10)

(331)

53

(92)

(548)

(613)

730

451

(51)

425

1,108

910

(554)

75

(135)

1,370

(110)

(66)

252

394

10,090

9,478

8,912

Capital expenditures(852)(1,436)(1,548)Investments in unconsolidated subsidiaries and equity securities

(31)

(63)

(111)

—

—

Cash effects of changes in:
Receivables, net
Inventories
Accounts payable
Accrued liabilities and other current assets
Income taxes
Pension plan contributions

(200)

Other

613
Net cash provided by operating activities(1)

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

Deconsolidation of RBH (Note 22)(1,346)(2)

Net investment hedges

386

416

(1,527)

Other

32

85

103

(1,811)(998)(3,083)

Net cash used in investing activities

See notes to consolidated financial statements.
57

2019

for the years ended December 31,

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIESShort-term borrowing activity by original maturity:
Net issuances (repayments) - maturities of 90 days or lessIssuances - maturities longer than 90 days
Repayments - maturities longer than 90 days
Long-term debt proceeds
Long-term debt repaid
Dividends paid
Sale (purchase) of subsidiary shares to/(from) noncontrolling interests (Note 6)
Other

$

Net cash used in financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash(3):Increase (Decrease)
Balance at beginning of year
Balance at end of year

2018

(364)
989
(989)
3,819
(3,998)(7,161)
51
(408)

$

255
—
—
—
(2,484)(6,885)
(81)
(456)

2017

$

(127)
1,634
(1,634)6,850(2,551)(6,520)5(426)(8,061)(9,651)(2,769)

27

(685)

1,085

245
6,620

(1,856)
8,476

4,145
4,331

$

6,865

$

6,620

$

8,476

$
$

800
2,430

$
$

882
2,749

$
$

1,050
3,403

Cash Paid:
Interest
Income taxes( 1 ) Includes

the Loss on Deconsolidation of RBH ( $239 million) and the Canadian tobacco litigation-related charge ($194 million) that were included in marketing,administration and research costs in the consolidated statements of earnings for the year ended December 31, 2019. For further details on these charges, see Note 22.
Deconsolidation of RBH.

(2) Includes deconsolidation of RBH cash and cash equivalents of $1,323 million and restricted cash of $23 million.
(3) The amounts for cash and cash equivalents shown above include restricted cash of $4 million, $27 million

respectively, which were included in other current assets in the consolidated balance sheets.

See notes to consolidated financial statements.
58

and $29 million as of December 31, 2019, 2018 and 2017,

Consolidated Statements of Stockholders' (Deficit) Equity(in millions of dollars, except per share data)
PMI Stockholders’ (Deficit) Equity

CommonStock
Balances, January 1, 2017$—

Earnings
Reinvested
in theBusiness

Additional
Paid-in
Capital
$

1,964

$

Net earnings

30,397

Accumulated Other
Comprehensive
Losses$(9,559)

Cost of
Repurchased
Stock$(35,490)

Noncontrolling
Interests
$

6,035

Total
$

306

Other comprehensive earnings (losses), netof income taxes

1,024

20

108

Dividends declared ($4.22 per share)

128(6,573)(6,573)

Payments to noncontrolling interests

(255)

Other

(12)

Balances, December 31, 2017

—

1,972

29,859Net earnings(8,535)(35,382)

7,911

Other comprehensive earnings (losses), netof income taxes(1,572)Issuance of stock awards

47

(255)

17

5

1,856

(10,230)

375

8,286

(75)

(1,647)

81

Dividends declared ($4.49 per share)

128(6,994)(6,994)

Payments to noncontrolling interests(435)

Adoption of new accounting standards (1)

(435)

238

Other (Note 6)

238

(80)

Balances, December 31, 2018

—

(4)

1,939

31,014Net earnings(10,111)(35,301)

7,185

Other comprehensive earnings (losses), netof income taxes

219

Issuance of stock awards

79

(1)

(85)

1,720

(10,739)

543

7,728

43

262

81

Dividends declared ($4.62 per share)160(7,212)(7,212)

Payments to noncontrolling interests(378)

Deconsolidation of RBH (Note 22)

(378)

529

Other

1
$

—

$

2,019

529

—
$

30,987(10,900)
6,341

1,024

Issuance of stock awards

Balances, December 31, 2019

1,788

$

(9,363)50$(35,220)

$

1,978

51
$

(9,599)(1) Financial Accounting Standard Update ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial

Liabilities”

See notes to consolidated financial statements.
59Notes to Consolidated Financial Statements
Note 1.
Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees are engaged in the
manufacture and sale of cigarettes and other nicotine-containing products, including reduced-risk products, in markets outside of the United States of America. In
addition, PMI ships a version of its Platform 1 device and its consumables authorized by the U.S. Food and Drug Administration ("FDA") to Altria Group, Inc., forsale in the United States under license. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.
Reduced-risk products ("RRPs") is the term PMI uses to refer to products that present, are likely to present, or have the potential to present less risk of harm tosmokers who switch to these products versus continuing smoking. PMI has a range of RRPs in various stages of development, scientific assessment andcommercialization.
"Platform 1" is the term PMI uses to refer to PMI’s reduced-risk product that uses a precisely controlled heating device incorporating ourIQOS HeatControl
technology, into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.
Basis of presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of thefinancial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among
other things: pension and benefit plan assumptions; useful lives and valuation assumptions of goodwill and other intangible assets; valuation assumptions for nonmarketable equity securities; marketing programs, and income taxes. Actual results could differ from those estimates.
The consolidated financial statements include PMI, as well as its wholly owned and majority-owned subsidiaries. Investments in which PMI exercises significant
influence (generally 20%-50% ownership interest) are accounted for under the equity method of accounting. Investments not accounted for under the equity
method of accounting are measured at fair value, if it is readily determinable, with changes in fair value recognized in net income. Investments without readily
determinable fair values, non-marketable equity securities, are measured and recorded using a measurement alternative that values the security at cost minus any
impairment. All intercompany transactions and balances have been eliminated.
As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's financial
statements. For further details, see Note 22. Deconsolidation of RBH.

Note 2.
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.
60

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 andequipment are depreciated over periods ranging from 3 to 15 years, and buildings and building improvements over periods up to40 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 andthe 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 ofdeferred 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 aretranslated 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 notdesignated 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 isdesignated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported inaccumulated other comprehensive losses are reclassified to the consolidated statements of earnings, into the same line item as the impact of the underlying
transaction, in the periods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified in the same manner as theaffected 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 thecarrying 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 bedisposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Impairment of investment in non-marketable equity securities
Non-marketable equity securities are subject to periodic impairment reviews during which PMI considers both qualitative and quantitative factors that may have asignificant impact on the investees' fair value. Upon determining that an impairment may exist, the security’s fair value is calculated and compared to its carrying
value, and an impairment is recognized immediately if the carrying value exceeds the fair value. For further details see Note 22. Deconsolidation of RBH.
61

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 theinvestments may not be recoverable. An impairment loss would be recorded whenever a decline in value of an equity investment below its carrying amount isdetermined 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 valueof 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 periodof 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, aredetermined on a separate company basis, and the related assets and liabilities are recorded in PMI’s consolidated balance sheets. Significant judgment is requiredin determining income tax provisions and in evaluating tax positions. PMI recognizes accrued interest and penalties associated with uncertain tax positions as partof the provision for income taxes on the consolidated statements of earnings. PMI recognizes income taxes associated with Global Intangible Low-Taxed Income("GILTI") taxes as current period expense rather than including these amounts in the measurement of deferred taxes.
Inventories
Inventories are stated at the lower of cost or market. The first-in, first-out and average cost methods are used to cost substantially all inventories. It is a generally
recognized industry practice to classify leaf tobacco inventory as a current asset, although part of such inventory, because of the duration of the aging process,ordinarily would not be utilized within one year.
Leases
PMI determines that a contract contains a lease if the contract conveys a right to control the use of the identified asset for a period of time in exchange forconsideration. Lease expense is recognized on a straight-line basis over the lease term. At lease commencement, PMI recognizes lease liabilities and thecorresponding right-of-use assets (at the present value of future payments) for predominately all of its operating leases. The recognition of the right-of-use asset andlease liability includes renewal options when it is reasonably certain that they will be exercised. Certain of PMI’s leases include payments that are based onchanges to an index or on actual usage. These lease payments are adjusted periodically and are included within variable lease costs. PMI accounts for lease andnonlease components as a single-lease component with the exception of its vehicle leases, of which PMI accounts for the lease components separately from thenonlease components. Additionally, leases with an initial term of 12 months or less are not included in the right-of-use asset or lease liability on the consolidated
statement of financial position.
Marketing costs
PMI supports its products with advertising, adult consumer engagement and trade promotions. Such programs include, but are not limited to, discounts, rebates, instore display incentives, e-commerce, mobile and other digital platforms, adult consumer activation and promotion activities, as well as costs associated with adultconsumer experience outlets and other adult consumer touchpoints and volume-based incentives. Advertising, as well as certain consumer engagement and tradeactivities costs, are expensed as incurred. Trade promotions are recorded as a reduction of revenues based on amounts estimated as being due to customers at theend of a period, based principally on historical utilization. For interim reporting purposes, advertising and certain consumer engagement expenses are charged toearnings based on estimated sales and related expenses for the full year.
Revenue recognition
PMI recognizes revenue primarily through the manufacture and sale of cigarettes and other nicotine-containing products, including reduced-risk products. The
majority of PMI revenues are generated by sales through direct and indirect distribution networks with short-term payment conditions and where control istypically transferred to the customer either upon shipment or delivery of goods. PMI evaluates the transfer of control through evidence of the customer’s receipt
and acceptance, transfer of title, PMI’s right to payment for those products and the customer’s ability to direct the use of those products upon receipt. Typically,
PMI’s performance obligations are satisfied and revenue is recognized either upon shipment or delivery of goods.
In certain instances, PMI facilitates shipping and handling activities after control has transferred to the customer. PMI has elected to record all shipping andhandling activities as costs to fulfill a contract. The shipping and handling costs that have not been incurred at the time revenue is recognized are accrued. The
transaction price is typically based on the amount billed to the customer and includes estimated variable consideration, where applicable. Such variableconsideration is typically not constrained and is estimated based on the most likely amount that PMI expects to be entitled to under the terms of the contracts withcustomers, historical experience of discount62

or rebate redemption, where relevant, and the terms of any underlying discount or rebate programs, which may change from time to time as the business andproduct categories evolve. PMI has elected to exclude excise taxes collected from customers from the measurement of the transaction price, thereby presenting
revenues net of excise taxes. Estimated costs associated with warranty programs are generally provided for in cost of sales in the period the related revenues arerecognized.
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 forawards 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 probablethat the employee will fulfill the service condition. For further details, see Note 9. Stock Plans.

Note 3.
Goodwill and Other Intangible Assets, net:
The movements in goodwill were as follows:
EuropeanUnion(in millions)
Balance at January 1, 2018
Changes due to:Currency$

Balances, December 31, 2018
Changes due to:Currency
Deconsolidation of RBH
Balances, December 31, 2019$

Middle East &South &
Eastern Europe
AfricaSoutheast Asia

1,419 $

321 $

102 $

Latin
America &CanadaEast Asia &Australia

3,010 $

567 $

Total

2,247 $

7,666

(62)

(18)

(15)

(215)

(31)

(136)

(477)

1,357

303

87

2,795

536

2,111

7,189

(19)

(3)

2

103

15

34
(1,463)132(1,463)

1,338 $

300 $

89 $

2,898 $

551 $

682 $

5,858

At December 31, 2019, goodwill primarily reflects PMI’s acquisitions in Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the businesscombination in the Philippines.
For details on the deconsolidation of RBH, see Note 22. Deconsolidation of RBH.
Details of other intangible assets were as follows:
December 31, 2019(in millions)

WeightedAverage
Remaining
Useful Life

Non-amortizable intangible assets

Gross
Carrying
Amount$December 31, 2018

Accumulated
Amortization

1,319

Gross
Carrying
Amount

Net
$

1,319

$

Accumulated
Amortization

1,269

Net
$

1,269

Amortizable intangible assets:
Trademarks

14 years

Distribution networks

8 years

Other*

9 years

Total other intangible assets$

1,217 $

526

691

1,488 $

608

880

113

72

41

141

82

59

106

44

62

107

37

70

2,755 $

642 $

2,113

3,005 $

727 $

2,278

* Includes farmer contracts and intellectual property rights

63$

Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico. The increase since December 31, 2018,
was due to currency movements of $50 million.
The decrease in the gross carrying amount of amortizable intangible assets fromDecember 31, 2018, was mainly due to the deconsolidation of RBH's trademarksof ($275 million) and distribution network of ($29 million), partially offset by currency movements of $6 million.
The change in the accumulated amortization from December 31, 2018 was mainly due to the deconsolidation of RBH's trademarks of ($133 million) anddistribution network of ($18 million), partially offset by the 2019 amortization of $66 million and by currency movements of $2 million.
Amortization expense for each of the next five years is estimated to be$73 million or less, assuming no additional transactions occur that require the amortizationof intangible assets.
During the second quarter of 2019, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential impairment, andno
impairment charges were required as a result of this review.

Note 4.
Related Parties - Investments in Unconsolidated Subsidiaries, Equity Securities and Other:
Investments in unconsolidated subsidiaries:
At December 31, 2019 and 2018, PMI had total investments in unconsolidated subsidiaries of $1,053 million and $981 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 isadjusted for PMI's proportionate share of earnings or losses, dividends, capital contributions, changes in ownership interests and movements in currency translation
adjustments. The carrying value of our equity method investments at December 31, 2019 and 2018, exceeded our share of the unconsolidated subsidiaries' bookvalue by $901 million and $835 million, respectively. The difference between the investment carrying value and the amount of underlying equity in net assets,
excluding $863 million and $793 million attributable to goodwill as of December 31, 2019 and 2018, respectively, is being amortized on a straight-line basis overthe underlying assets' estimated useful lives of 10 to 20 years. At December 31, 2019 and 2018, PMI received year-to-date dividends from unconsolidated
subsidiaries of $100 million and $118 million, respectively.
PMI holds a 23% equity interest in Megapolis Distribution BV, the holding company of CJSC TK Megapolis, PMI's distributor in Russia (Eastern Europe
segment).
PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25% economic interest in
Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by the Algerian state-owned enterpriseManagement et Développement des Actifs et des Ressources Holding ("MADAR Holding"), which is part of the Middle East & Africa segment, manufactures anddistributes under license some of PMI’s brands.
The initial investments in Megapolis Distribution BV and EITA were recorded at cost and are included in investments in unconsolidated subsidiaries and equity
securities on the consolidated balance sheets.
Equity securities:
Following the deconsolidation of RBH, PMI recorded the continuing investment in RBH, PMI's wholly owned subsidiary, at fair value of$3,280 million at thedate of deconsolidation, within investments in unconsolidated subsidiaries and equity securities. For further details, see Note 22. Deconsolidation of RBH.
Transactions between PMI and RBH are considered to be related-party transactions from the date of deconsolidation and are included in the tables below.
64

Other related parties:
United Arab Emirates-based Trans-Emirates Trading and Investments (FZC) ("TTI") holds a 33% non-controlling interest in Philip Morris Misr LLC ("PMM"), an
entity incorporated in Egypt which is consolidated in PMI’s financial statements in the Middle East & Africa segment. PMM sells, under license, PMI brands in
Egypt through an exclusive distribution agreement with a local entity that is also controlled by TTI.
IPM India, PMI's consolidated subsidiary in the South & Southeast Asia segment, has a non-controlling interest of43.7% held by Godfrey Phillips India Ltd, who
also acts as contract manufacturer and distributor for IPM. Amounts in the tables below include transactions between these related parties, beginning in 2019. Prior
periods do not include these transactions as they were not material.
Financial activity with the above related parties:
PMI’s net revenues and expenses with the above related parties were as follows:
For the Years Ended December 31,(in millions)

2019

2018

2017

Net revenues
Megapolis Group
Other

$

2,236 $
1,015

1,994 $
720

1,874
647

Net revenues (a)$3,251 $

2,714 $

2,521

Expenses:
Other

$

63 $

21 $

23

Expenses

$

63 $

21 $

23

(a) Net revenues exclude excise taxes and VAT billed to customers. Prior year's amounts have been reclassified to conform with the current year's presentation.

PMI’s balance sheet activity with the above related parties was as follows:
At December 31,(in millions)

2019

2018

Receivables:
Megapolis Group
Other

$

375 $
148

172
136

Receivables

$

523 $

308

Payables:
Other

$

20 $

8

Payables

$

20 $

8

The activities with the above related parties are in the ordinary course of business, and are primarily for distribution, service fees, contract manufacturing andlicense agreements. PMI eliminated its respective share of all significant intercompany transactions with the equity method investees.
65

Note 5.
Product Warranty:
PMI's IQOS devices are subject to standard product warranties generally for a period of12 months from the date of purchase or such other periods as required bylaw. PMI generally provides in cost of sales for the estimated cost of warranty in the period the related revenue is recognized. PMI assesses the adequacy of its
accrued product warranties and adjusts the amounts as necessary based on actual experience and changes in future estimates. Factors that affect product warranties
may vary across markets but typically include device version mix, product failure rates, logistics and service delivery costs, and warranty policies. PMI accounts
for its product warranties within other accrued liabilities. At December 31, 2019 and December 31, 2018, these amounts were as follows:
At December 31,(in millions)

2019

Balance at beginning of period
Changes due to:Warranties issued
Settlements
Currency$

Balance at end of period

$

2018
67 $

71

303
(230)
—

179
(183)
—

140 $

67

Note 6.
Acquisitions:
On March 21, 2018, PMI acquired the remaining 49% interest in Tabacalera Costarricense, S.A. and Mendiola y Compañía, S.A. for a net purchase price of $95
million, which includes $2 million of contingent consideration. As a result, PMI now owns 100% of these Costa Rican affiliates. The purchase of the remaining
49% interest resulted in a decrease to PMI’s additional paid-in capital of $86 million.

Note 7.
Indebtedness:
Short-Term Borrowings
At December 31, 2019 and 2018, PMI’s short-term borrowings and related average interest rates consisted of the following:
December 31, 2019(in millions)
Commercial paper

Amount Outstanding$

Bank loans$

December 31, 2018

Average Year-End
Rate

Amount Outstanding

Average Year-End
Rate

—

—% $

—

—%

338

5.5

730

5.8

338

$

730

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, 2019 and 2018, based upon current market interest rates, approximate the amounts disclosed
above.
66

Long-Term Debt
At December 31, 2019 and 2018, PMI’s long-term debt consisted of the following:
December 31,(in millions)

2019

U.S. dollar notes, 1.875% to 6.375% (average interest rate 3.516%), due through 2044

$

2018

19,783$

20,819Foreign currency obligations:Euro notes, 0.125% to 3.125% (average interest rate 1.950%), due through 2039
Swiss franc notes, 1.000% to 2.000% (average interest rate 1.521%), due through 2024
Other (average interest rate 3.125%), due through 2025

Less current portion of long-term debt

9,822

8,656

899

1,374

203

180

30,70731,0294,051$

26,656

4,054$

26,975

Other debt:
Other foreign currency debt above includes mortgage debt in Switzerland and finance lease obligations atDecember 31, 2019 and December 31, 2018.
Debt Issuances Outstanding:
PMI’s debt issuances outstanding at December 31, 2019, were as follows:67

(in millions)
Face Value

Interest
Rate

Issuance

Maturity

U.S. dollar notes$300

Floating

February 2017

February 2020

U.S. dollar notes$1,0002.000%

February 2017

February 2020

U.S. dollar notes$1,0004.500%March 2010

March 2020

U.S. dollar notes$750

1.875%

February 2016

February 2021

U.S. dollar notes$350

4.125%

May 2011

May 2021

U.S. dollar notes$750

2.900%

November 2011

November 2021

U.S. dollar notes$500

2.625%

February 2017

February 2022

$750

2.375%

August 2017

August 2022

$750

2.500%

August 2012

August 2022

$750

2.500%

November 2017

November 2022

Type

U.S. dollar notes
U.S. dollar notes
U.S. dollar notes
U.S. dollar notes$600

2.625%March 2013

March 2023

U.S. dollar notes$500

2.125%

May 2016

May 2023

U.S. dollar notes$500

3.600%

November 2013

November 2023

U.S. dollar notes$900

2.875%

May 2019

May 2024

U.S. dollar notes$750

3.250%

November 2014

November 2024

U.S. dollar notes$750

3.375%

August 2015

August 2025

U.S. dollar notes$750

2.750%

February 2016

February 2026

U.S. dollar notes$500

3.125%

August 2017

August 2027

U.S. dollar notes$500

3.125%

November 2017

March 2028

U.S. dollar notes$750

3.375%

May 2019

August 2029

U.S. dollar notes$1,5006.375%

May 2008

May 2038

U.S. dollar notes$750

4.375%

November 2011

November 2041

U.S. dollar notes$700

4.500%March 2012

March 2042

U.S. dollar notes$750

3.875%

August 2012

August 2042

U.S. dollar notes$850

4.125%March 2013

March 2043

U.S. dollar notes$750

4.875%

November 2013

November 2043

$750

4.250%

November 2014

November 2044

$500

4.250%

May 2016

November 2044

€1,250 (approximately $1,621)

1.750%March 2013

March 2020

€750 (approximately $1,029)

1.875%March 2014

March 2021

€600 (approximately $761)

2.875%

May 2012

May 2024€500 (approximately $582)

0.625%

November 2017

November 2024

€750 (approximately $972)

2.750%March 2013

March 2025

€1,000 (approximately $1,372)

2.875%March 2014

March 2026

€500 (approximately $557)

0.125%

August 2019

August 2026

€500 (approximately $697)

2.875%

May 2014

May 2029€750 (approximately $835)

0.800%

August 2019

August 2031

U.S. dollar notes
U.S. dollar notes(a)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)EURO notes(b)Euro notes(b)

Swiss franc notes(b)

Swiss franc notes(b)

Swiss franc notes(b)€500 (approximately $648)

3.125%

June 2013

June 2033€500 (approximately $578)

2.000%

May 2016

May 2036€500 (approximately $582)

1.875%

November 2017

November 2037

€750 (approximately $835)

1.450%

August 2019

August 2039

CHF325 (approximately $334)

1.000%

September 2012

September 2020

CHF300 (approximately $335)

2.000%

December 2011

December 2021

CHF250 (approximately $283)

1.625%

May 2014

May 2024

68

(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 andrepurchase of PMI's common stock until 2015.
Aggregate maturities:
Aggregate maturities of long-term debt are as follows:(in millions)

2020

$

2021

4,051
3,015

2022

2,764

2023

1,607

2024

3,283

2025-2029

6,332

2030-2034

1,400

Thereafter

8,510
30,962

Debt discounts(255)

Total long-term debt$

30,707

See Note 16. Fair Value Measurements for additional disclosures related to the fair value of PMI’s debt.
Credit Facilities
On January 28, 2019, PMI entered into an agreement to extend the term of its$2.0 billion 364-day revolving credit facility from February 5, 2019, to February 4,
2020.
At December 31, 2019, PMI’s total committed credit facilities and commercial paper outstanding were as follows:
Committed
CreditFacilities

Type(in billions of dollars)
364-day revolving credit, expiring February 4, 2020$

Multi-year revolving credit, expiring February 28, 2021

Commercial
Paper

2.0
2.5

Multi-year revolving credit, expiring October 1, 2022

3.5

Total facilities$

Commercial paper outstanding

8.0
$

—

At December 31, 2019, there were no borrowings under these committed credit facilities, and the entire committed amounts were available for borrowing.
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, 2019, PMI’s ratio calculated in accordance with theagreements was 11.2 to 1.0. These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require PMI topost 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.
69

On January 31, 2020, PMI entered into an agreement to amend and extend the term of its$2 billion 364-day revolving credit facility from February 4, 2020, to
February 2, 2021.
In addition to the committed credit facilities discussed above, certain subsidiaries maintain short-term credit arrangements to meet their respective working capitalneeds. These credit arrangements, which amounted to approximately $2.7 billion at December 31, 2019, and $3.3 billion at December 31, 2018, are for the sole useof the subsidiaries. Borrowings under these arrangements amounted to $338 million at December 31, 2019, and $730 million at December 31, 2018.

Note 8.
Capital Stock:
Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares were as follows:
Shares Issued
Balances, January 1, 2017

2,109,316,331

Issuance of stock awards
Balances, December 31, 2017

2,109,316,331

Issuance of stock awards
Balances, December 31, 2018

2,109,316,331

Issuance of stock awards
Balances, December 31, 2019

2,109,316,331

SharesRepurchased

SharesOutstanding(557,930,784)

1,551,385,547

1,832,215

1,832,215(556,098,569)

1,553,217,762

1,361,959

1,361,959(554,736,610)

1,554,579,721

1,314,942

1,314,942(553,421,668)

1,555,894,663

At December 31, 2019, 27,371,404 shares of common stock were reserved for stock awards under PMI’s stock plans, and250 million shares of preferred stock,
without par value, were authorized but unissued. PMI currently has no plans to issue any shares of preferred stock.

Note 9.
Stock Plans:
In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). Under the 2017 Plan, PMI
may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to
25 million shares of PMI’s common stock may be issued under the 2017 Plan. At December 31, 2019, shares available for grant under the 2017 Plan were
20,127,360.
In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 NonEmployee Directors Plan”). A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any
corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in
the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors Plan. At
December 31, 2019, shares available for grant under the plan were 954,084.
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 toforfeiture 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.
70During 2019, the activity for RSU awards was as follows:
WeightedAverage Grant
Date Fair Value
Per Share

Number of
SharesBalance at January 1, 2019
Granted
VestedForfeited
Balance at December 31, 2019

3,318,795 $

96.26

1,726,760

77.28(1,126,057)

89.56(193,628)

89.36

3,725,870 $89.85

During the years ended December 31, 2019, 2018 and 2017, the weighted-average grant date fair value of the RSU awards granted to PMI employees and therecorded compensation expense related to RSU awards were as follows:
Weighted-Average
Grant Date Fair
Value Per RSU
Award Granted(in millions, except per RSU award
granted)Total Weighted-Average
Grant Date Fair Value of
RSU Awards Granted

2019

$

133

$

77.28 $

118

2018

$

129

$

100.19 $

114

2017

$

119

$

98.59 $

111

Compensation Expense
related to RSU Awards

The fair value of the RSU awards at the date of grant is amortized to expense over the restriction period, typicallythree years after the date of the award, or upon
death, disability or reaching the age of 58. As of December 31, 2019, PMI had $124 million of total unrecognized compensation costs related to non-vested RSU
awards. These costs are expected to be recognized over a weighted-average period of approximately two years, or upon death, disability or reaching the age of 58.
During the years ended December 31, 2019, 2018 and 2017, share and fair value information for PMI RSU awards that vested were as follows:(dollars in millions)Shares of RSU Awards
that Vested

Grant Date Fair Valueof Vested Shares of
RSU Awards

Total Fair Value of
RSU Awards that
Vested2019

1,126,057

$

101 $

95

2018

1,451,876

$

121 $

149

2017

2,022,856

$

158 $

208

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 theachievement of certain performance factors, which are predetermined at the time of grant, typically over a three-year performance cycle with performance metrics
for such PSUs consisting of PMI’s Total Shareholder Return (TSR) relative to a predetermined peer group and on an absolute basis ( 50% weight), PMI’s
currency-neutral compound annual adjusted operating income growth rate, excluding acquisitions (30% weight), and PMI’s performance against specific measuresof PMI's transformation (20% weight). 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 such PSUs that can vest is zero, with a target percentage of 100 and a maximum
percentage of 200. Each such vested PSU entitles the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 will resultin 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.
71During 2019, the activity for PSU awards was as follows:
Grant Date
Fair Value Subject toOther Performance
Factors Per Share

Number of
SharesBalance at January 1, 2019

1,194,970

95.85 $

117.09647,700

77.23

83.59

(330,616)

89.02

104.60(164,594)

90.28

107.0988.19 $

107.61

Granted
VestedForfeited
Balance at December 31, 2019

1,347,460$

Grant Date
Fair Value Subject to
TSR Performance
Factor Per Share$

During the years ended December 31, 2019, 2018 and 2017, the grant date fair value of the PSU awards granted to PMI employees and the recorded compensation
expense related to PSU awards were as follows:(in millions, except per PSU award granted)

PSU Grant Date Fair Value Subject PSU Grant Date Fair Value Subject
to Other Performance Factors
to TSR Performance Factor
Total

Per PSU Award

Total

Compensation Expense
related to PSU Awards

Per PSU Award

Total

2019

$

30 $

77.23

$

21 $

83.59

$

54

2018

$

20 $

100.69$24 $

118.98

$

24

2017

$

19 $

98.29

$

25 $

128.72$

37

The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market price of
PMI’s stock at the date of the grant. The grant date fair value of the PSU market-based awards subject to the TSR performance factor was determined by using theMonte Carlo simulation model. The following assumptions were used to determine the grant date fair value of the PSU awards subject to the TSR performancefactor for the years ended December 31, 2019, 2018 and 2017:
For the Years Ended December 31,
2019

2018

2017

2.4%
21.4% (b)2.3%
19.6% (c)1.5%
15.8% (c)Risk-free interest rate (a)Expected volatility(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.
(c) Determined using a weighted-average of historical and implied volatility.

The fair value of the PSU award at the date of grant is amortized to expense over the performance period, which is typicallythree years after the date of the award,or upon death, disability or reaching the age of 58. As of December 31, 2019, PMI had $33 million of total unrecognized compensation cost related to non-vested
PSU awards. This cost is recognized over a weighted-average performance cycle period of approximately two years, or upon death, disability or reaching the age of58.
During the year ended December 31, 2019, share and fair value information for PMI PSU awards that vested were as follows:(dollars in millions)2019

Shares of PSU Awards
that Vested
330,616

Grant Date Fair Valueof Vested Shares of
PSU Awards$

During the years ended December 31, 2018 and 2017, there were no PSU awards that vested.

72

32 $

Total Fair Value of
PSU Awards that
Vested28

Note 10.
Earnings per Share:
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and therefore areincluded in PMI’s earnings per share calculation pursuant to the two-class method.
Basic and diluted earnings per share (“EPS”) were calculated using the following:
For the Years Ended December 31,(in millions)

2019

Net earnings attributable to PMI

$

2018

7,185

Less distributed and undistributed earnings attributable to share-based payment awards

$

7,911

17

Net earnings for basic and diluted EPS

$

7,168

Weighted-average shares for basic EPS
Plus contingently issuable performance stock units (PSUs)
Weighted-average shares for diluted EPS

2017
$

16
$

6,035
14

7,895

$

6,021

1,555

1,555

1,552

1

—

1

1,556

1,555

1,553

For the 2019, 2018 and 2017 computations, there were no antidilutive stock options.

Note 11.
Income Taxes:
Earnings before income taxes and provision for income taxes consisted of the following for the years endedDecember 31, 2019, 2018 and 2017:(in millions)

2019

Earnings before income taxes

2018

2017

$

9,872

$

10,671$

10,589

$

17

$

120

$

1,662

Provision for income taxes:
United States federal and state:
Current
Deferred
Total United States

24

(113)

(384)

41

7

1,278

2,417

2,425

3,146

(165)

13

(117)

2,252

2,438

3,029

Outside United States:
Current
Deferred
Total outside United States
Total provision for income taxes

$

2,293

$

2,445

$

4,307

In December 2017, the Tax Cuts and Jobs Act was signed into law. Accordingly, PMI recorded a provisional charge of $1.6 billion in its 2017 income tax
provision, including a charge for the transition tax on accumulated foreign earnings of $1.4 billion (which represented the transition tax of $2.2 billion, net of areversal of $0.7 billion of previously recorded deferred tax liabilities on part of its accumulated foreign earnings and other items of$0.1 billion) and $0.2 billion
due to the re-measurement of U.S. deferred tax assets and liabilities applying the U.S. federal corporate tax rate of 21%.
PMI completed its analysis of the Tax Cuts and Jobs Act during 2018 and adjusted the 2017 provisional estimates to the final amounts based on its 2017 U.S.
federal income tax return as filed. Accordingly, PMI recorded in its income tax provision a charge of $31 million

73

representing a current income tax charge of $185 million, primarily due to an increase in its aggregate foreign cash position used to determine PMI's final 2017transition tax liability, mostly offset by a deferred income tax benefit of $154 million primarily due to the recognition of deferred tax assets for net operating losses
in the state of New York. Updates to the provisional estimates have been recorded in accordance with Staff Accounting Bulletin No. 118 ("SAB 118").
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 eight-year period
beginning in 2018. In December 2018, PMI recorded an increase to income tax payable of $0.1 billion related to PMI’s transition tax liability, in accordance withSAB 118. At December 31, 2019 and December 31, 2018, $1.2 billion and $1.5 billion of PMI's remaining transition tax liability, respectively, was recorded in"income taxes and other liabilities" on PMI's consolidated balance sheet.
At December 31, 2019 and December 31, 2018, U.S. federal and foreign deferred income taxes have been provided on all accumulated earnings of PMI's foreignsubsidiaries.
In accordance with the alternatives provided by ASU 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," PMI haselected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive losses to retained earnings.
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 oflimitations remains open for the years 2015 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years.
Years still open to examination by foreign tax authorities in major jurisdictions include Germany ( 2015 onward), Indonesia (2014 onward), Russia (2017 onward),
Switzerland (2017 onward), and Turkey (2014 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 withrelated interest and penalties. An estimate of any possible change cannot be made at this time.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:(in millions)

2019

Balance at January 1,

$

2018
56

$

2017
145

$

79

Additions based on tax positions related to the current year

10

10

71

Additions for tax positions of previous years

1

15

5

Reductions for tax positions of prior years

(2)

(94)

—

Reductions due to lapse of statute of limitations

(1)

(3)

(7)

Settlements

—

(19)

(4)

Other

(1)

2

1

Balance at December 31,

$

63

$

56

$

145

Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:(in millions)

Unrecognized tax benefits

December 31, 2019$63

Accrued interest and penalties
Tax credits and other indirect benefits
Liability for tax contingencies$

December 31, 2018$56

December 31, 2017
$

145

16

12

23

(12)

(14)

(35)

67

$

54

$

133

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was$50 million at December 31, 2019. The remainder, if
recognized, would principally affect deferred taxes.
For the years ended December 31, 2019, 2018 and 2017, PMI recognized income (expense) in its consolidated statements of earnings of $(4) million, $4 million
and $(11) million, respectively, related to interest and penalties associated with uncertain tax positions.
74

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years endedDecember 31, 2019,2018 and 2017:2019
U.S. federal statutory rate

2018

2017

21.0 %

21.0 %

35.0 %

1.8

1.3(12.2)
16.4

Increase (decrease) resulting from:
Foreign rate differences
Dividend repatriation cost

(0.5)

2.5

Global intangible low-taxed income

1.4

1.2

U.S. state taxes

0.7

(1.1)

Foreign derived intangible income

(1.2)

(1.1)

—

(0.9)

1.5

23.2 %

22.9 %

40.7 %

Other
Effective tax rate

The 2019 effective tax rate increased 0.3 percentage points to 23.2%. The change in the effective tax rate for 2019, as compared to 2018, was unfavorably impacted
by changes in earnings mix by taxing jurisdiction and U.S. state deferred income tax expense, partially offset by the reversal of a deferred tax liability on theunremitted earnings of PMI's Canadian subsidiary, RBH ($49 million), a reduction in estimated U.S. federal income tax on dividend repatriation for the years
2015-2018 ($67 million), and other repatriation cost differences.
The 2018 effective tax rate decreased 17.8 percentage points to 22.9%. The change in the effective tax rate for 2018, as compared to 2017, was primarily due to theTax Cuts and Jobs Act, which reduced the U.S. federal income tax rate from 35% to 21%, in addition to repatriation cost differences and earnings mix by taxing
jurisdiction.
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 theTax 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 andliabilities at December 31, 2017, resulting in a tax charge of $0.2 billion.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
At December 31,(in millions)

2019

2018

Deferred income tax assets:
Accrued postretirement and postemployment benefits
Accrued pension costs
Inventory
Accrued liabilities
Net operating loss carryforwards and tax credits
Other
Total deferred income tax assets
Less: valuation allowance
Deferred income tax assets, net of valuation allowance

$

184

$

193

620

390

176

136

130

138

486

452

101

37

1,697

1,346

(304)

(257)

1,393

1,089

(469)

(508)

(180)

(222)

Deferred income tax liabilities:
Trade names
Property, plant and equipment

Unremitted earnings
Foreign exchange
Total deferred income tax liabilities
Net deferred income tax assets

$

75

(243)

(123)

(256)

(157)

(1,148)(1,010)

245

$

79

At December 31, 2019, PMI recorded deferred tax assets for net operating loss carryforwards and tax credits of$486 million, with varying dates of expiration,
primarily after 2024, including $98 million with an unlimited carryforward period. A t December 31, 2019, PMI has recorded a valuation allowance of $304
million against deferred tax assets that do not meet the more-likely-than not recognition threshold.
At December 31, 2018, PMI recorded deferred tax assets for net operating loss carryforwards of$452 million, with varying dates of expiration, primarily after
2023, including $87 million with an unlimited carryforward period. At December 31, 2018, PMI has recorded a valuation allowance of $257 million against
deferred tax assets that do not meet the more-likely-than-not recognition threshold. The increases in deferred tax assets for net operating loss carryforwards and thevaluation allowance during 2018 are primarily due to law changes associated with the Tax Cuts and Jobs Act, as discussed above.

Note 12.
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 outsideof the United States of America. In addition, PMI ships a version of its Platform 1 device and its consumables authorized by the FDA to Altria Group, Inc. for salein the United States under license. Operating segments for PMI are organized by geographic region and managed by segment managers who are responsible for theoperating and financial results of the regions inclusive of all product categories sold in the region. PMI’s operating segments are the European Union; Eastern
Europe; Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Latin America & Canada. PMI records net revenues and operating income toits segments based upon the geographic area in which the customer resides. Revenues from shipments of Platform 1 devices, heated tobacco units and accessories
to Altria Group, Inc. for sale under license in the United States are included in Net Revenues of the Latin America & Canada segment.
PMI’s chief operating decision maker evaluates segment performance and allocates resources based on regional operating income, which includes results from all
product categories sold in each region. 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.
PMI disaggregates its net revenue from contracts with customers by both geographic location and product category for each of PMI'ssix operating segments, as
PMI believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
Net revenues by segment were as follows:
For the Years Ended December 31,(in millions)2019

Net revenues:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Net revenues

2018

2017

$

9,817
3,282
4,042
5,094
5,364
2,206

$

9,298
2,921
4,114
4,656
5,580
3,056

$

8,318
2,711
3,988
4,417
6,373
2,941

$

29,805$29,625$28,748

Total net revenues attributable to customers located in Japan, PMI's largest market in terms of net revenues, were$3.9 billion, $3.8 billion and $4.7 billion in 2019,2018 and 2017, respectively. Total net revenues attributable to customers located in Indonesia were $3.1 billion, $3.1 billion and $3.2 billion in 2019, 2018 and2017, respectively. PMI had one customer in the East Asia & Australia segment that accounted for 13%, 13% and 16% of PMI’s consolidated net revenues, andone customer in the European Union segment that accounted for 10%, 10% and 10% of PMI’s consolidated net revenues in 2019, 2018 and 2017, respectively.
76

PMI's net revenues by product category were as follows:
For the Years Ended December 31,(in millions)

2019

Combustible products:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada

2018

2017

$

8,093
2,438
3,721
5,094
2,693
2,179

$

8,433
2,597
3,732
4,656
3,074
3,037

$

8,048
2,657
3,893
4,417
3,156
2,937

Total combustible products
Reduced-risk products:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada$

24,218$25,529$25,107

$

1,724
844
321
—
2,671
27

$

865
324
382
—
2,506
19

$

269
55
94
—
3,218
4

Total reduced-risk products

$

5,587

$

4,096

$

3,640

$

29,805$29,625$28,748

Total PMI net revenues

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

Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including shipping and handling charges
billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's cigarettes and other tobacco
products combined. Other tobacco products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include
reduced-risk products.
Net revenues related to reduced-risk products refer to the operating revenues generated from the sale of these products, including shipping and handling charges
billed to customers, net of sales and promotion incentives, and excise taxes. These net revenue amounts consist of the sale of PMI's heated tobacco units, IQOS
devices and related accessories, and other nicotine-containing products, which primarily include PMI's e-vapor products.
PMI recognizes revenue, when control is transferred to the customer, typically either upon shipment or delivery of goods.
Operating income by segment were as follows:
For the Years Ended December 31,(in millions)

2019

2018

2017

Operating income:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Operating income

77

$

3,970
547
1,684
2,163
1,932
235

$

4,105
902
1,627
1,747
1,851
1,145

$

3,691
887
1,884
1,514
2,608
997

$

10,531$

11,377$

11,581

Items affecting the comparability of results from operations were as follows:•

Russia excise and VAT audit charge - See Note 18. Contingencies for details of the $374 million pre-tax charge included in the Eastern Europe segment for
the year ended December 31, 2019.

•

Asset impairment and exit costs - See Note 21. Asset Impairment and Exit Costs for details of the $422 million pre-tax charge for the year ended December
31, 2019, as well as a breakdown of these costs by segment.

•

Canadian tobacco litigation-related expense - See Note 18. Contingencies and Note 22. Deconsolidation of RBH for details of the $194 million pre-tax
charge included in the Latin America & Canada segment for the year ended December 31, 2019.

•

Loss on deconsolidation of RBH - See Note 22. Deconsolidation of RBH for details of the $239 million loss included in the Latin America & Canada
segment for the year ended December 31, 2019.

Other segment data were as follows:
For the Years Ended December 31,(in millions)

2019

2018

2017

Depreciation expense:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada

$

254
147
90
142
185
69

$

269
101
105
154
173
94

887
11

Other
Total depreciation expense

$

898

$

213
76
88
153
160
85

896
11
$

907

775
12
$

787

For the Years Ended December 31,(in millions)

2019

2018

2017

Capital expenditures:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada

$

466
132
35
100
67
52

$

852
—

Other
Total capital expenditures

$

78

852

813
136
65
129
215
74

$

1,432
4
$

1,436

956
97
85
140
87
175
1,540
8

$

1,548

At December 31,(in millions)

2019

2018

2017

Long-lived assets:
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada

$

4,275
774
369
1,361
829
478

Total long-lived assets
Other

$

4,216
547
362
1,297
781
779

8,086
516

Total property, plant and equipment, net and Other assets

$

8,602

$

4,130
546
430
1,419
659
885

7,982
664
$

8,069
1,126

8,646

$

9,195

Long-lived assets consist of non-current assets other than goodwill; other intangible assets, net; deferred tax assets, investments in unconsolidated subsidiaries andequity securities, and financial instruments. PMI's largest markets in terms of long-lived assets are Italy, Switzerland and Indonesia. Total long-lived assets locatedin Italy, which is reflected in the European Union segment above, were $1.1 billion, $1.1 billion and $1.2 billion at December 31, 2019, 2018 and 2017,
respectively. Total long-lived assets located in Switzerland, which is reflected in the European Union segment above, were $1.1 billion, $1.0 billion and $0.9
billion at December 31, 2019, 2018 and 2017, respectively. Total long-lived assets located in Indonesia, which is reflected in the South & Southeast Asia segment
above, were $0.8 billion, $0.7 billion and $0.8 billion at December 31, 2019, 2018 and 2017, respectively.

Note 13.
Benefit Plans:
Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local
statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees.
In general, health care benefits for non-U.S. retired employees are covered through local government plans.
Pension and other employee benefit costs per the consolidated statements of earnings consisted of the following for December 31, 2019, 2018 and 2017:(in millions)2019

Net pension costs (income)Net postemployment costs
Net postretirement costs
Total pension and other employee benefit costs

79

2018

2017

$

(18)
100
7

$

(51)
80
12

$

(20)
85
13

$

89

$

41

$

78

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, 2019 and 2018, were as follows:
Pension(1)(in millions)2019

Benefit obligation at January 1$

Service cost

Postretirement
2018

9,152

$

2019

9,028

$

2018
209

$

248

214

210

2

4

118

109

7

9

(250)

(218)

(8)

(8)

50

1

1,430

210

27

(34)

29

(196)

—

(9)

(166)

—

(42)

—

35

8

(5)

(1)

Benefit obligation at December 31,

10,612

9,152

190

209

Fair value of plan assets at January 1,

6,888

7,598

1,211

(447)

200

110

44

24

(250)

(218)

—

—

7

(179)

(172)

—

7,928

6,888

Interest cost
Net benefits paid
Settlement and curtailment
Actuarial losses (gains)
Currency
Deconsolidation of RBH
OtherActual return on plan assets
Employer contributions
Standard employee contributions
Net benefits paid
Settlement and curtailment
Currency
Deconsolidation of RBH
Fair value of plan assets at December 31,
Net pension and postretirement liability recognized at December 31,$(2,684)$(2,264)

—

$

(190)

$

(209)

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

At December 31, 2019, actuarial losses (gains) consisted primarily of losses for assumption changes related to lower discount rate for Swiss, German and Dutch
plans. At December 31, 2018, actuarial losses (gains) consisted of losses for experience differences related to the change in population profile, coupled with
updated mortality table assumptions for the Swiss plan.
At December 31, 2019 and 2018, the Swiss pension plan represented 62% and 60% of the benefit obligation, respectively, and approximately 59% and 57% of thefair value of plan assets at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the U.S. pension plan represented 4% and 4% of thebenefit obligation, respectively, and approximately 4% and 4% of the fair value of plan assets atDecember 31, 2019 and 2018, respectively.
80

At December 31, 2019 and 2018, the amounts recognized on PMI's consolidated balance sheets for the pension and postretirement plans were as follows:
Pension(in millions)

2019

Other assets

2018

$

43

Accrued liabilities — employment costs

Postretirement

$

(20)

(2,704)$(2,684)

2018

37

(23)

Long-term employment costs

2019

$

(8)

(2,281)$(2,264)

$

(10)

(182)
$

(190)

(199)
$

(209)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was$9,969 million and $8,557 million at December 31, 2019and 2018, respectively.
For pension plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of plan assets were$8,962
million and $6,825 million, respectively, as of December 31, 2019. The accumulated benefit obligation and fair value of plan assets were $7,641 million and$5,866 million, respectively, as of December 31, 2018.
For pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan assets were$10,364 million and$7,654 million, respectively, as of December 31, 2019. The projected benefit obligation and fair value of plan assets were $8,807 million and $6,504 million,
respectively, as of December 31, 2018.
The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at December 31:
Pension2019
Discount rate
Rate of compensation increase
Interest crediting rate
Health care cost trend rate assumed for next year
Ultimate trend rate
Year that rate reaches the ultimate trend rate

Postretirement
2018

0.83%

1.61%

1.82

1.86

3.20

3.40

2019

2018

3.28%

3.97%

6.21

6.17

5.09

4.59

2023

2040

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.
81Components of Net Periodic Benefit Cost
Net periodic pension and postretirement health care costs consisted of the following for the years endedDecember 31, 2019, 2018 and 2017:
Pension(in millions)

Service cost

2019
$

2018
214

Interest cost
Expected return on plan assets

Postretirement

$

2017
210

$

2019
208

2018

$

2

$

2017
4

$

4

118

109

108

7

9

8

(328)

(349)

(326)

—

—

—

189

172

186

—

4

5

(1)

2

6

—

(1)

—

Amortization:
Net losses
Prior service cost
Settlement and curtailment
Net periodic pension and postretirement costs

4
$

196

15
$

159

6
$

188

—
$

9

—
$

16

—
$

17

Settlement and curtailment charges were due primarily to employee severance and early retirement programs.
The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:
Pension2019

2018

Postretirement
2017

2019

2018

2017

Discount rate - service cost

2.14%

1.92%

1.68%

3.97%

3.79%

3.68%

Discount rate - interest cost

1.35

1.25

1.27

3.97

3.79

3.68

4.70

4.76

4.80

1.86

1.65

1.68

3.40

3.40

3.40
6.17

6.17

7.15

Expected rate of return on plan assets
Rate of compensation increase
Interest crediting rate
Health care cost trend rate

PMI’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation andestimates 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 $63 million, $66 million
and $58 million for the years ended December 31, 2019, 2018 and 2017, 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, thetarget allocation of PMI’s plan assets is broadly characterized as approximately 60% in equity securities and approximately 40% in debt securities and other assets.
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.
82

The fair value of PMI’s pension plan assets atDecember 31, 2019 and 2018, by asset category was as follows:

Asset Category(in millions)

Cash and cash equivalents

Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities(Level 1)

At December 31,
2019
$

276

$

Significant
Other
Observable
Inputs(Level 2)

Significant
Unobservable
Inputs(Level 3)276

Equity securities:
U.S. securities

170

170

International securities

563

563

Investment funds(a)

6,125

4,625

197

137

282

282

6

6

International government bonds
Corporate bonds
Other
Total assets in the fair value hierarchy$

Investment funds measured at net asset
value(b)Total assets

7,619

$

6,059

$

1,500
60

$

1,560

$

—

309
$

7,928

(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America,

Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and JP Morgan EMBI for bonds), primarily consist of mutual funds, common trust funds andcommingled funds. Of these funds, 63% are invested in U.S. and international equities; 16% are invested in U.S. and international government bonds; 12% are invested inreal estate and other money markets, and 9% 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 thestatement of financial position.

Asset Category(in millions)

Cash and cash equivalents

Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities(Level 1)

At December 31,
2018
$

84

$

Significant
Other
Observable
Inputs(Level 2)

Significant
Unobservable
Inputs(Level 3)84

Equity securities:
U.S. securities

139

139

International securities

442

442

Investment funds(a)

5,508

3,595

176

120

232

232

19

19

International government bonds
Corporate bonds
Other
Total assets in the fair value hierarchy$

Investment funds measured at net asset
value(b)Total assets

6,600

$

4,631

$

1,913
56

$

1,969

$

—

288
$

6,888

(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, 57% were invested in U.S. and international equities; 20% were invested in U.S. and international government bonds; 12% were
invested in real estate and other money markets, and 11% were invested in corporate bonds.

83

(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 thestatement of financial position.

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 $77 million in 2020 to its pension plans, based on current tax and benefit laws. However, thisestimate 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 atDecember 31, 2019, are as follows:(in millions)

2020

$

317

2021

340

2022

341

2023

351

2024

361

2025 - 2029

2,008

PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through2029.
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 $171 million, $158 million and $144 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
The amounts recognized in accrued postemployment costs on PMI's consolidated balance sheets atDecember 31, 2019 and 2018, were $751 million and $708
million, respectively. The change in the liability is primarily due to actuarial losses of $152 million in 2019 resulting from increased employee severance rate
primarily in countries in the European Union segment, coupled with the periodic expense, partially offset by cash payments.
The accrued postemployment costs were determined using a weighted-average discount rate of3.0% and 3.1% in 2019 and 2018, respectively; an assumed ultimate
annual weighted-average turnover rate of 3.0% and 3.2% in 2019 and 2018, respectively; assumed compensation cost increases of 2.6% in 2019 and 2.6% in 2018,
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 $40 million and $38 million at December 31, 2019 and 2018, 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, 2019, consisted of the following:(in millions)

Net losses$

Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized

Postretirement

Pension$(3,718) $Postemployment

(63)

$

(775)

Total
$

(4,556)

3

2

—

5

(4)

—

—

(4)

520

24

182

726

(3,199) $

(37)

84

$

(593)

$

(3,829)

The amounts recorded in accumulated other comprehensive losses at December 31, 2018, consisted of the following:(in millions)

Net losses

$

(27)

3

—

(24)

(4)

—

—

(4)

379

20

164

563

(3,090) $(18)

Deferred income taxes

$

(702)

Total

(41)

Net transition obligation$

Postemployment(3,438) $Prior service cost

Losses to be amortized

Postretirement

Pension

$

(538)

$

$

(4,181)(3,646)

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

Net losses$

Prior service cost
Net transition obligation
Deferred income taxes
Losses to be amortized

Postretirement

Pension$Postemployment
$

(617)

Total

(2,624) $

(80)

(35)

4

—

(31)

(5)

—

—

(5)

327

28

186

541

(2,337) $

(48)

$

(431)

$

$

(3,321)(2,816)The movements in other comprehensive earnings (losses) during the year ended December 31, 2019, were as follows:(in millions)

Postretirement

PensionPostemployment

Total

Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses$

Prior service cost

198

$

3

32

(1)

$

77

$

—

278
31

Other income/expense:
Net losses
Deferred income taxes

3

—

—

3

(51)

(1)

(17)

(69)

182

1

60

243

Other movements during the year:
Net losses

(521)

(27)

(150)

(698)

Prior service cost

(2)

—

—

(2)

Deconsolidation of RBH (net of deferred income taxes)

26

1

Deferred income taxes

Total movements in other comprehensive earnings (losses)

$

85

27

206

6

35

247

(291)

(20)

(115)

(426)

(109) $

(19)

$

(55)

$

(183)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2018, were as follows:(in millions)

Postretirement

PensionPostemployment

Total

Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses

$

180

$

5

$

62

$

247

Prior service cost

—

(1)

—

(1)

Net transition obligation

1

—

—

1

Net losses

14

—

—

14

Deferred income taxes

(28)

(1)

(14)

(43)

167

3

48

218

(1,008)34(147)(1,121)

8
80

—
(7)

—
(8)

8
65

(920)

27

(155)

(1,048)(753) $

30

Other income/expense:

Other movements during the year:
Net losses
Prior service cost
Deferred income taxes
Total movements in other comprehensive earnings (losses)

$

$

(107)

$

(830)

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

Postretirement

PensionPostemployment

Total

Amounts transferred to earnings as components of net periodic benefit
cost:
Amortization:
Net losses$

Prior service cost

175

$

5

$

68

$

248

5

—

—

5

6
(10)

—
(1)

—
(20)

6
(31)

176

4

48

228

Net losses

509

(12)

28

525

Prior service cost

13
(13)

—
5

—
(9)

13
(17)

509

(7)

19

521

Other income/expense:
Net losses
Deferred income taxes
Other movements during the year:

Deferred income taxes
Total movements in other comprehensive earnings (losses)

$

86

685

$

(3)

$

67

$

749

Note 14.
Additional Information:
For the Years Ended December 31,(in millions)

Research and development expense
Advertising expense
Foreign currency net transaction (gains)/losses
Interest expense

2019

Total lease cost

2017

$

465

$

383

$

453

$

730

$

896

$

830

$

(95)

$

21

$

49

$

796

$

855

$

1,096

Interest income
Interest expense, net

2018

(226)
$

570

$

332

(190)

(1)

(182)

$

665

$

914

$

312

$

313

(1) For additional information on total lease costs, see Note 23. Leases.

Note 15.
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 tomarket 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 aspecified 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 andexpected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as
foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from thirdparty and intercompany actual and forecasted transactions. Both foreign exchange contracts and interest rate contracts are collectively referred to as derivative
contracts ("derivative contracts"). The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine
peso, Russian ruble and Swiss franc. At December 31, 2019 and 2018, PMI had contracts with aggregate notional amounts of $24.1 billion and $27.4 billion,
respectively. Of the $24.1 billion aggregate notional amount at December 31, 2019, $2.8 billion related to cash flow hedges, $9.9 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 $27.4
billion aggregate notional amount at December 31, 2018, $3.2 billion related to cash flow hedges, $10.1 billion related to hedges of net investments in foreign
operations and $14.1 billion related to other derivatives that primarily offset currency exposures on intercompany financing.
87The fair value of PMI’s derivative exchange contracts included in the consolidated balance sheet as ofDecember 31, 2019 and 2018, were as follows:
Derivative Assets

Derivative Liabilities
Fair Value

Balance Sheet Classification(in millions)

Derivative contracts designated as
hedging instruments

Other current assets

Derivative contracts not designated as
hedging instruments

2019$

Fair Value

Balance SheetClassification

2018

319

$

54

Other assets

21

99

Other current assets

50

67

Other assets——

Total derivatives

$

390

$

2019

Other accrued liabilities
Income taxes andother liabilities$

Other accrued liabilities
Income taxes andother liabilities

220

$

2018
23

$

47

301

525

70

46

25

13

419

$

631

For the years ended December 31, 2019, 2018 and 2017, PMI's cash flow and net investment hedging instruments impacted the consolidated statements of earnings
and comprehensive earnings as follows:(pre-tax, in millions)

For the Year Ended December 31,
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive
Earnings/(Losses) into
Earnings

Amount of Gain/(Loss) Recognized in
Other Comprehensive
Earnings/(Losses) on Derivatives
2019
Derivatives in Cash Flow
Hedging Relationship
Derivative contracts

$

2018

(20)

$

2017

28

$

2019

Total

369
$

349

$

2018

2017

(52)
Net revenues
Cost of sales
Marketing, administration andresearch costs
Interest expense, net

Derivatives in Net Investment
Hedging Relationship
Derivative contracts

Amount of Gain/(Loss) Reclassified
from Other Comprehensive
Earnings/(Losses) into Earnings

324(1,644)352$ (1,696)

$

22
1

$

2
(8)

$

17

$

18 $
—

60
1

6
(1)

(7)
(41)

23 $

13

Cash Flow Hedges
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to certain forecasted transactions. Gains and losses
associated with qualifying cash flow hedge contracts are deferred as components of accumulated other comprehensive losses until the underlying hedgedtransactions are reported in PMI’s consolidated statements of earnings. As of December 31, 2019, PMI has hedged forecasted transactions for periods notexceeding the next twelve months, with the exception of one derivative contract that expires in May 2024. The impact of these hedges is primarily included inoperating cash flows on PMI’s consolidated statements of cash flows.
88Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and derivative contracts as net investment hedges, primarily of its Euro net assets. For the years ended
December 31, 2019, 2018 and 2017, these hedges of net investments resulted in gains (losses), net of income taxes, of$470 million, $521 million and $(1,725)
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 ofaccumulated 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, 2019 and 2018, the gains for amounts excluded from the effectiveness testing recognized in earnings were$230 million
and $260 million, respectively. These gains were accounted for in interest expense, net, on the consolidated statement of earnings. The premiums paid for, andsettlements of, net investment hedges are included in investing cash flows on PMI’s consolidated statements of cash flows.
Other Derivatives
PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries,
and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating tothese contracts are reported in marketing, administration and research costs in PMI’s consolidated statements of earnings. For the years ended December 31, 2019,2018 and 2017, the gains (losses) from contracts for which PMI did not apply hedge accounting were$(57) million, $405 million and $382 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, 2019, 2018 and 2017, these items impacted the consolidated statement of earnings as follows:(pre-tax, in millions)
Derivatives not Designated as
Hedging Instruments

Statement of Earnings
Classification of Gain/(Loss)

Amount of Gain/(Loss)
Recognized in Earnings
2019

2018

2017

Derivative contracts
Interest expense, net
Total

$

94

$

62

$

(60)

$

94

$

62

$

(60)

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 toearnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated other comprehensive losses, net ofincome taxes, as follows:
For the Years Ended December 31,(in millions)

Gain as of January 1,

2019
$

35

Derivative (gains)/losses transferred to earnings
Change in fair value
Gain as of December 31,

2018

$

$

2017
42

$

97

(14)

(31)

(11)

(18)

24

(44)

3

$

35

$

42

A t December 31, 2019, PMI expects $22 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to theconsolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by the statement of earnings impact of therespective hedged transactions.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
89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 valueof the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals andcredit 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.

Note 16.
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
Level 2—

Level 3——

Quoted prices in active markets for identical assets or liabilities;
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; andUnobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Equity Securities
The fair value of PMI’s equity securities, which are determined by using quoted prices in active markets, have been classified within Level 1.
Derivative Financial Instruments
PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable
market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing foreign exchange spot rates and interest rate
differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology
based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative financial instruments have beenclassified within Level 2 at December 31, 2019 and 2018. 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 fairvalue hierarchy at December 31, 2019 and 2018. The fair value of pension plan assets, determined by using quoted prices in markets that are not active, has beenclassified within Level 2 at December 31, 2019 and 2018. See Note 13. Benefit Plans for additional discussion of pension plan assets.
Debt
The fair value of PMI’s outstanding debt, which is utilized solely for disclosure purposes, is determined using quotes and market interest rates currently available to
PMI for issuances of debt with similar terms and remaining maturities. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $56
million of finance leases, was $30,651 million at December 31, 2019. The aggregate carrying value of PMI’s debt, excluding short-term borrowings and $33
million of finance leases, was $30,996 million at December 31,
90

2018. The fair value of PMI's outstanding debt, excluding the aforementioned short-term borrowings and finance leases, was classified within Level 1 and Level 2
at December 31, 2019 and 2018.
The aggregate fair values of PMI’s investments in equity securities, derivative financial instruments, pension plan assets and PMI's debt as ofDecember 31, 2019,were as follows:

Fair Value at
December 31, 2019(in millions)

Quoted Prices in Active
Markets for
Identical Assets/Liabilities(Level 1)

Significant Other
Observable Inputs(Level 2)

Significant
Unobservable Inputs(Level 3)

Assets:Equity securities (1)$Derivative contracts
Pension plan assets
Total assets in fair value hierarchy

$

332

390

$

—

390

—

6,059

1,560

—

7,619
$

Pension plan assets measured at net asset
value (2)Total assets

332

8,341

$

—

$

—

$

6,391

$

1,950

$

—

$

32,821

$

167

$

—

309
$

8,650

$

32,988

Liabilities:
Debt
Derivative contracts
Total liabilities

419$

33,407—$32,821

419
$

586

—
$

(1) Unrealized pre-tax gain of $44 million ($35 million net of tax) on equity securities was recorded in the consolidated statement of earnings for the year ended—
December 31,

2019.
(2) 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 thestatement of financial position.

91

The aggregate fair values of PMI’s investments in equity securities, derivative financial instruments, pension plan assets and PMI's debt as of December 31, 2018 ,were as follows:

Fair Value at December
31, 2018

Quoted Prices in Active
Markets for
Identical Assets/Liabilities(Level 1)$$(in millions)

Significant Other
Observable Inputs(Level 2)

Significant
Unobservable Inputs(Level 3)

Assets:Equity securities

288

Derivative contracts
Pension plan assets
Total assets in fair value hierarchy

$

$

—

$

—

220

—

220

—

6,600

4,631

1,969

—

7,108

Pension plan assets measured at net asset
value (1)Total assets

288

$

4,919

$

2,189

$

—

$

30,997

$

165

$

—

288
$

7,396

$

31,162

Liabilities:
Debt
Derivative contracts
Total liabilities

631$

31,793—$30,997

631
$

796

—
$

—

(1) 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 thestatement of financial position.

Note 17.
Accumulated Other Comprehensive Losses:
PMI's accumulated other comprehensive losses, net of taxes, consisted of the following:(Losses) Earnings

At December 31,(in millions)2019

Currency translation adjustments$

Pension and other benefits
Derivatives accounted for as hedges
Total accumulated other comprehensive losses

$

2018

2017

(5,537) $(6,500) $(5,761)(3,829)(3,646)(2,816)335

42(9,363) $(10,111) $(8,535)

Reclassifications from Other Comprehensive Earnings
The movements in accumulated other comprehensive losses and the related tax impact, for each of the components above, that are due to current period activity
and reclassifications to the income statement, including those related to the deconsolidation of RBH, are shown on the consolidated statements of comprehensive
earnings for the years ended December 31, 2019, 2018, and 2017. For the year ended 2017, $2 million of net currency translation adjustment gains/(losses) weretransferred from other comprehensive earnings to marketing, administration and research costs in the consolidated statements of earnings, respectively, uponliquidation of subsidiaries. For additional information, see Note 13. Benefit Plans for disclosures related to PMI's pension and other benefits, Note 15.Financial
Instruments for disclosures related to derivative financial instruments and Note 22.Deconsolidation of RBH for disclosures related to the deconsolidation of RBH.
92

Note 18.
Contingencies:
Tobacco-Related Litigation
Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions.
Our indemnitees include distributors, licensees, and others that have been named as parties in certain cases and that we have agreed to defend, as well as to pay
costs and some or all of judgments, if any, that may be entered against them. Pursuant to the terms of the Distribution Agreement between Altria Group, Inc.
("Altria") and PMI, PMI will indemnify Altria and Philip Morris USA Inc. ("PM USA"), a U.S. tobacco subsidiary of Altria, for tobacco product claims based in
substantial part on products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for tobacco product claims
based in substantial part on products manufactured by PM USA, excluding tobacco products contract manufactured for PMI.
It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or settlement of pending tobaccorelated 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 isprobable and the amount of the loss can be reasonably estimated. At the present time, except as stated otherwise in this Note 18. Contingencies, while it isreasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded that it isprobable 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 ofthe pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes inthese 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 byan unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries
named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against
us, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may
enter into settlement discussions in particular cases if we believe it is in our best interests to do so.
CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary, Rothmans, Benson & Hedges Inc.
(“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited, sought protection in the Ontario Superior Court of Justice under
the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, March 8, and March 12, respectively. CCAA is a Canadian federal law that permits a
Canadian business to restructure its affairs while carrying on its business in the ordinary course. The initial CCAA order made by the Ontario Superior Court on
March 22, 2019 authorizes RBH to pay all expenses incurred in carrying on its business in the ordinary course after the CCAA filing, including obligations toemployees, vendors, and suppliers. As further described in Note 22. Deconsolidation of RBH, RBH is now deconsolidated from our consolidated financial
statements. As part of the CCAA proceedings, there is currently a comprehensive stay up to and including March 12, 2020 of all tobacco-related litigation pendingin Canada against RBH and the other defendants, including PMI and our indemnitees (PM USA and Altria), namely, the smoking and health class actions filed invarious Canadian provinces and health care cost recovery actions. These proceedings are presented below under the caption “Stayed Litigation — Canada.” Ernst& Young Inc. has been appointed as monitor of RBH in the CCAA proceedings. In accordance with the CCAA process, as the parties work towards a plan ofarrangement or compromise in a confidential mediation, it is anticipated that the court will set additional hearings and further extend the stay of proceedings. On
April 17, 2019, the Ontario Superior Court ruled that RBH and the other defendants will not be allowed to file an application to the Supreme Court of Canada forleave to appeal the Court of Appeal’s decision in the Létourneau and the Blais cases so long as the comprehensive stay of all tobacco-related litigation in Canada
remains in effect and that the time period to file the application would be extended by the stay period. While RBH believes that the findings of liability anddamages in both Létourneau and the Blais cases were incorrect, the CCAA proceedings will provide a forum for RBH to seek resolution through a plan ofarrangement or compromise of all tobacco-related
93

litigation pending in Canada. It is not possible to predict the resolution of the underlying legal proceedings or the length of the CCAA process.
Stayed Litigation — Canada
Smoking and Health Litigation — Canada
In the first class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson &Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, RBH and other Canadian manufacturers (Imperial Tobacco
Canada Ltd. and JTI-Macdonald Corp.) are defendants. The plaintiffs, an anti-smoking organization and an individual smoker, sought compensatory and punitive
damages for each member of the class who allegedly suffers from certain smoking-related diseases. The class was certified in 2005. The trial court issued its
judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable and found that the class members’ compensatory damages
totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $11.7 billion). The trial court awarded compensatory damages on a joint
and several liability basis, allocating 20% to our subsidiary (approximately CAD3.1 billion, including pre-judgment interest (approximately $2.34 billion)). In
addition, the trial court awarded CAD 90,000 (approximately $67,980) in punitive damages, allocating CAD 30,000 (approximately $22,660) to RBH. The trial
court estimated the disease class at 99,957 members. RBH appealed to the Court of Appeal of Quebec. In October 2015, the Court of Appeal ordered RBH tofurnish security totaling CAD 226 million (approximately $170.7 million) to cover both the Létourneau and Blais cases, which RBH has paid in installments
through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD 758 million (approximately $573 million) ininstallments through June 2017. JTI Macdonald Corp. was not required to furnish security in accordance with plaintiffs’ motion. The Court of Appeal ordered thatthe security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon further order of the Court of Appeal. On March 1,
2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the compensatory and punitive damages award while
reducing the total amount of compensatory damages to approximately CAD 13.5 billion including interest (approximately $10.2 billion) due to the trial court’s
error in the calculation of interest. The compensatory damages award is on a joint and several basis with an allocation of 20% to RBH (approximately CAD 2.7
billion, including pre-judgment interest (approximately $2.04 billion)). The Court of Appeal upheld the trial court’s findings that defendants violated the Civil
Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers ofsmoking and by conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either need notprove, or had adequately proven, that these faults were a cause of the class members’ injuries. In accordance with the judgment, defendants are required to deposit
their respective portions of the damages awarded in both the Létourneau case described below and the Blais case, approximately CAD 1.1 billion (approximately$831 million), into trust accounts within 60 days. RBH’s share of the deposit is approximately CAD 257 million (approximately $194.1 million). PMI recorded a
pre-tax charge of $194 million in its consolidated results, representing $142 million net of tax, as tobacco litigation-related expense, in the first quarter of 2019.
The charge reflects PMI’s assessment of the portion of the judgment that represents probable and estimable loss prior to the deconsolidation of RBH andcorresponds to the trust account deposit required by the judgment.
In the second class action pending in Canada, Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec
Superior Court, Canada, filed in September 1998, RBH and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-Macdonald Corp.) are
defendants. The plaintiff, an individual smoker, sought compensatory and punitive damages for each member of the class who is deemed addicted to smoking. The
class was certified in 2005. The trial court issued its judgment on May 27, 2015. The trial court found RBH and two other Canadian manufacturers liable andawarded a total of CAD 131 million (approximately $99 million) in punitive damages, allocating CAD 46 million (approximately $34.7 million) to RBH. The trial
court estimated the size of the addiction class at 918,000 members but declined to award compensatory damages to the addiction class because the evidence did notestablish the claims with sufficient accuracy. The trial court found that a claims process to allocate the awarded punitive damages to individual class members
would be too expensive and difficult to administer. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability
and the total amount of punitive damages awarded allocating CAD 57 million including interest (approximately $43.1 million) to RBH. See the Blais description
above and Note 22. Deconsolidation of RBH below for further detail concerning the security order pertaining to bothLétourneau and Blais cases and the impact ofthe decision on PMI’s financial statements.
RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention of applicable law on several
grounds including the following: (i) defendants had no obligation to warn class members who knew, or should have known, of the risks of smoking; (ii) defendants
cannot be liable to class members who would have smoked regardless of what warnings were given; and (iii) defendants cannot be liable to all class members
given the individual differences between class members.
In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12,2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own
addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”),
94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 healthcare costs allegedly caused by tobacco products.
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Saskatchewan, Canada, filed
July 10, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges
her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a
proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heartdisease, or cancer, as well as restitution of profits.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al., The Supreme Court (trial court), Nova Scotia, Canada,
filed June 18, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker,
alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalfof a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government
health care costs allegedly caused by tobacco products.
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15,
2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own
addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory andpunitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursementof government health care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with thecomplaint.
In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25,
2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own
addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a
proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates,
dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.
In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al., Supreme Court, British Columbia, Canada, filed June 25,
2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, allegesthat the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory andpunitive 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 thedate the claim was filed. In December 2014, plaintiff filed an amended statement of claim.
In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice,filed June 20,
2012, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own
addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposedclass comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as
well as restitution of profits.
Health Care Cost Recovery Litigation — Canada
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme
Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, RBH, our indemnitee (PM USA), and other members of the industry are
defendants. The plaintiff, the government of the province of British Columbia, brought a claim based upon legislation enacted by the province authorizing thegovernment to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related
wrong.”In the second health care cost recovery case filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen's Bench of
New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, RBH, our indemnitees (PM USA and Altria), and other members of
the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation
is similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health carecosts it has incurred, and will incur, as a result of a “tobacco related wrong.”95

In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario Superior Court of Justice,
Toronto, Canada, filed September 29, 2009, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was
filed by the government of the province of Ontario based on legislation enacted in the province. This legislation is similar to the laws introduced in British
Columbia and New Brunswick that authorize the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred,
and will incur, as a result of a “tobacco related wrong.”
In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of
Newfoundland and Labrador, St. Johns, Canada , filed February 8, 2011, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The claim was filed by the government of the province of Newfoundland and Labrador based on legislation enacted in the province that is similar to thelaws introduced in British Columbia, New Brunswick and Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers
to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the fifth health care cost recovery case filed in Canada,Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court of Quebec, Canada,
filed June 8, 2012, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The claim was filed by the government of the provinceof Quebec based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes thegovernment to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related
wrong.”In the sixth health care cost recovery case filed in Canada,Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court of Queen's Bench Alberta,
Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by thegovernment 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 resultof a “tobacco related wrong.”
In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans, Benson & Hedges, Inc., etal., The Queen's Bench, Winnipeg Judicial Centre, Canada , filed May 31, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of theindustry 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 healthcare costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the eighth health care cost recovery case filed in Canada,The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et al., Queen's Bench, Judicial
Centre of Saskatchewan, Canada, filed June 8, 2012, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The
claim was filed by the government of the province of Saskatchewan based on legislation enacted in the province that is similar to the laws enacted in several other
Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred,
and will incur, as a result of a “tobacco related wrong.”
In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v. Rothmans, Benson &Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012, we, RBH, our indemnitees (PM USA andAltria), and other members of the industry are defendants. The claim was filed by the government of the province of Prince Edward Island based on legislation
enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action
against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., etal., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are
defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted inseveral 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.”__________
96

The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our subsidiaries or indemnitees as ofFebruary 3, 2020, February 4, 2019 and February 9, 2018:¹

Type of Case
Individual Smoking and Health Cases
Smoking and Health Class Actions
Health Care Cost Recovery Actions
Label-Related Class Actions
Individual Label-Related Cases
Public Civil Actions

Number of Cases
Pending as of February
3, 2020

Number of Cases
Pending as ofFebruary 4, 2019

Number of Cases
Pending as ofFebruary 9, 2018

50
10
17
—
5
2

55
10
16
1
7
2

57
11
16
1
1
2

Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 501 Smoking and Health, Label-Related, Health Care Cost Recovery, andPublic 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 andfour 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
February 2004

Location of
Court/Name ofPlaintiff
Brazil/The Smoker HealthDefense Association

Type of
Case
Class Action

Verdict
The Civil Court of São Paulo founddefendants liable without hearing
evidence. In April 2004, the court
awarded “moral damages” of
R$1,000 (approximately $233) 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, whichwere to be assessed in a second phaseof the case. The size of the class was
not defined in the ruling.

______¹ Includes cases pending in Canada.
97

Post-Trial
Developments
Defendants appealed to the São Paulo Courtof Appeals, which annulled the ruling inNovember 2008, finding that the trial court
had inappropriately ruled without hearing
evidence and returned the case to the trial
court for further proceedings. In May 2011,
the trial court dismissed the claim. In March
2017, plaintiff filed an en banc appeal to theSuperior Court of Justice. In addition, thedefendants filed a constitutional appeal to
the Federal Supreme Tribunal on the basisthat plaintiff did not have standing to bring
the lawsuit. Both appeals are still pending.

Date
May 27, 2015

Location of
Court/Name ofPlaintiff
Canada/Conseil Québécois Sur
Le Tabac Et La Santé and JeanYves Blais

Type of
Case
Class Action

Verdict
On May 27, 2015, the Superior Courtof the District of Montreal, Provinceof Quebec ruled in favor of theBlais class on liability and found theclass members’ compensatory
damages totaled approximately CAD
15.5 billion (approximately $11.7
billion), including pre-judgmentinterest. The trial court awarded
compensatory damages on a joint andseveral liability basis, allocating 20%
to our subsidiary (approximately
CAD 3.1 billion including prejudgment interest (approximately$2.34 billion)). The trial court
awarded CAD 90,000 (approximately$67,980) in punitive damages,
allocating CAD 30,000(approximately $22,660) to our
subsidiary. The trial court ordered
defendants to pay CAD 1 billion(approximately $755.3 million) of thecompensatory damage award, CAD
200 million (approximately $151.1
million) of which is our subsidiary’s
portion, into a trust within 60 days.

98

Post-Trial
Developments
In June 2015, RBH commenced theappellate process with the Court of Appealof Quebec. On March 1, 2019, the Court ofAppeal issued a decision largely affirming
the trial court's decision. (See “Stayed
Litigation — Canada” for further detail.)Date
May 27, 2015

Date
August 5, 2016

Location of
Court/Name ofPlaintiff
Canada/Cecilia Létourneau

Location of
Court/Name ofPlaintiff
Argentina/Hugo LespadaType of
Case
Class Action

Verdict
On May 27, 2015, the Superior Courtof the District of Montreal, Provinceof Quebec ruled in favor of the
Létourneau class on liability andawarded a total of CAD 131 million(approximately $99 million) inpunitive damages, allocating CAD 46
million (approximately $34.7
million) to RBH. The trial court
ordered defendants to pay the fullpunitive damage award into a trust
within 60 days. The court did notorder the payment of compensatory
damages.

Type of
Case
Individual
ActionVerdict
On August 5, 2016, the Civil Court
No. 14 - Mar del Plata, issued averdict in favor of plaintiff, anindividual smoker, and awarded him
ARS 110,000 (approximately$1,825), plus interest, incompensatory and moral damages.
The trial court found that our
subsidiary failed to warn plaintiff ofthe risk of becoming addicted tocigarettes.

Post-Trial
Developments
In June 2015, RBH commenced theappellate process with the Court of Appealof Quebec. On March 1, 2019, the Court ofAppeal issued a decision largely affirming
the trial court's decision. (See “Stayed
Litigation — Canada” for further detail.)

Post-Trial
Developments
On August 23, 2016, our subsidiary filed its
notice of appeal. On October 31, 2017, theCivil and Commercial Court of Appeals of
Mar del Plata ruled that plaintiff's claim wasbarred 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 thetrial court's decision to the Supreme Courtof 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 andconsumer 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 3, 2020, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:99•

50 cases brought by individual plaintiffs in Argentina (31), Brazil (5), Canada (2), Chile (5), Costa Rica (1), Italy (1), the Philippines (1), Poland (2),Turkey (1) and Scotland (1), compared with 55 such cases on February 4, 2019, and 57 cases on February 9, 2018; and•10 cases brought on behalf of classes of individual plaintiffs in Brazil (1 ) and Canada (9), compared with 10 such cases on February 4, 2019 and 11 suchcases on February 9, 2018.

The class actions pending in Canada are described above under the caption “Smoking and Health Litigation — Canada.”
In the class action pending in Brazil, The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower
Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995, our subsidiary and another member of the industry are
defendants. The plaintiff, a consumer organization, is seeking damages for all addicted smokers and former smokers, and injunctive relief. In 2004, the trial court
found defendants liable without hearing evidence and awarded “moral damages” of R$1,000 (approximately $233) 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 theclaim. In February 2015, the appellate court unanimously dismissed plaintiff's appeal. In September 2015, plaintiff appealed to the Superior Court of Justice. In
February 2017, the Chief Justice of the Superior Court of Justice denied plaintiff's appeal. In March 2017, plaintiff filed an en banc appeal to the Superior Court ofJustice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring thelawsuit. Both appeals are still pending.
Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost
expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including unjust
enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud,
negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governingcompetition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive andequitable 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 3, 2020, there were 17 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Brazil (1 ), Canada (10), Korea (1) andNigeria (5), compared with 16 such cases on February 4, 2019 and 16 such cases on February 9, 2018.
The health care cost recovery actions pending in Canada are described above under the caption “Health Care Cost Recovery Litigation — Canada.”
In the health care cost recovery case in Brazil, The Attorney General of Brazil v. Souza Cruz Ltda., et al., Federal Trial Court, Porto Alegre, Rio Grande do Sul,
Brazil, filed May 21, 2019, we, our subsidiaries, and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating allegedsmoking-related diseases for the past five years, payment of anticipated costs of treating future alleged smoking-related diseases, and moral damages. Our
subsidiaries were served with the complaint. A challenge to the service of PMI as improper is pending.
In the first health care cost recovery case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court ofLagos 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 ofKano State, Kano, Nigeria, filed May 9, 2007, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating allegedsmoking-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 ofGombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff
100seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-relateddiseases 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 withthe 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 Courtof 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 thewrit 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 ofOgun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost oftreating 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 theirproducts more harmful and addictive, and misled consumers into believing that Lights cigarettes are safer than regular cigarettes. The National Health Insurance
Service seeks to recover damages allegedly incurred in treating 3,484 patients with small cell lung cancer, squamous cell lung cancer, and squamous cell laryngeal
cancer from 2003 to 2012. The case is now in the evidentiary phase.
Label-Related Cases: These cases, brought by individual plaintiffs, or on behalf of a class or purported class of individual plaintiffs, allege that the use of thedescriptor “Lights” or other alleged misrepresentations or omissions of labeling information constitute fraudulent and misleading conduct. Plaintiffs' allegations ofliability 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 3, 2020, there were 5 label-related cases brought by individual plaintiffs in Italy (1) and Chile (4) pending against our subsidiaries, compared with 7
such case on February 4, 2019, and 1 such case on February 9, 2018.
An individual plaintiff filed a purported class action certification motion, 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 were defendants. Plaintiff sought torepresent a class of smokers in Israel who have purchased cigarettes imported by defendants since July 18, 2010. Plaintiff estimated the class size to be 7,000,000
smokers. Plaintiff alleged that defendants misled consumers by not disclosing sufficient information about carbon monoxide, tar, and nicotine yields of, andtobacco contained in, the imported cigarettes. Plaintiff sought various forms of relief, including an order for defendants to label cigarette packs in accordance withplaintiff’s demands, and damages for misleading consumers, breach of autonomy and unjust enrichment. In September 2019, plaintiff voluntarily withdrew theclass certification motion, and the trial court dismissed the case with prejudice.
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 rightto 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 productdefect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors,
smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or
private institutions.
As of February 3, 2020, there were 2 public civil actions pending against our subsidiaries in Argentina (1) and Venezuela (1), compared with 2 such cases on
February 4, 2019, and 2 such cases on February 9, 2018.
In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Argentina,
filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer association, seeks the establishment of arelief 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 asa co-plaintiff in the case. The case is currently awaiting a court decision on the merits.
101

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 theplaintiffs 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 topay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim
meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and BAT's subsidiary as interested third parties. In February
2013, our subsidiary answered the complaint.
Reduced-Risk Products
In Colombia, an individual filed a purported class action, Ana Ferrero Rebolledo vs. Philip Morris Colombia S.A., et al., in April 2019 against our subsidiaries
with the Civil Court of Bogota related to the marketing of our Platform 1 product. Plaintiff alleges that our subsidiaries advertise the product in contravention oflaw and in a manner that misleads consumers by portraying the product in a positive light, and further asserts that the Platform 1 vapor contains many toxic
compounds, creates a high level of dependence, and has damaging second-hand effects. Plaintiff seeks injunctive relief and damages on her behalf and on a behalfof two classes (class 1 - all Platform 1 consumers in Colombia who seek damages for the purchase price of the product and personal injuries related to the alleged
addiction, and class 2 - all residents of the neighborhood where the advertising allegedly took place who seek damages for exposure to the alleged illegal
advertising). Our subsidiaries answered the complaint in January 2020.
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 isseeking a fine of approximately THB 80.8 billion (approximately $2.58 billion). In May 2017, Thailand enacted a new customs act. The new act, which took effectin November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices arein compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law and that the allegations of the Public Prosecutor areinconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies. Trial in the case began in November 2017 and concluded
in September 2019. In November 2019, the trial court found our subsidiary guilty of under-declaration of the prices and imposed a fine of approximately THB 1.2
billion (approximately $38.4 million). The trial court dismissed all charges against the individual defendants. In December 2019, as required by the Thai law, oursubsidiary paid the fine. 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. Our subsidiary will appeal the trial court’s decision. If our subsidiary ultimately prevails on appeal, then Thailand will be required toreturn this payment to our subsidiary.
The DSI also conducted an investigation into alleged underpayment by PM Thailand of customs duties and excise taxes relating to imports from Indonesia
covering the period 2000-2003. On January 26, 2017, the Public Prosecutor filed charges against PM Thailand and its former Thai employee in the Bangkok
Criminal Court alleging that PM Thailand and its former employee jointly and with the intention to defraud the Thai government under-declared import prices ofcigarettes 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 $633 million). In May 2017, Thailand enacted a new customs act. The new act, which took effect inNovember 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. PM Thailand believes that its declared import prices are incompliance with the Customs Valuation Agreement of the World Trade Organization and Thai law, and that the allegations of the Public Prosecutor areinconsistent with several decisions already taken by Thai Customs and a Thai court. Trial in the case began in November 2018 and concluded in December 2019.
The case is awaiting a court decision in March 2020.
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"), ourSouth 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 $227 million), of
which KRW 100 billion (approximately $83.5 million) was paid in 2016 and KRW 172 billion (approximately $143.7 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 appealed the assessments. In January 2020, a trial court ruled that PM Korea did not102underpay the approximately KRW 218 billion (approximately $182 million) in taxes that were subject to its jurisdiction. The tax authorities have appealed thisdecision. If the tax authorities ultimately lose, then they would be required to return the paid amounts to PM Korea. PM Korea's appeal of approximately KRW 54
billion of alleged underpayments (approximately $45 million) is pending at another court. The tax authorities have also referred the matter to the Public Prosecutor.
On June 19, 2018, the Public Prosecutor decided not to file criminal charges against PM Korea and/or other alleged co-offenders. The Public Prosecutor alsodecided not to prosecute PM Korea and its managing director in connection with a criminal complaint against them that had been filed by the South Korean
Ministry of Strategy and Finance (“MOSF”). In the criminal complaint, the MOSF alleged that PM Korea exceeded the monthly product withdrawal limits that the
MOSF had set in its notice. In March 2019, the Supreme Prosecutor's Office dismissed both the tax authorities' and the MOSF's appeals on the decisions of the
Public Prosecutor, concluding the criminal investigations in these matters.
The Moscow Tax Inspectorate for Major Taxpayers (“MTI”) conducted an audit of AO Philip Morris Izhora (“PM Izhora”), our Russian affiliate, for the 20152017 financial years. On July 26, 2019, MTI issued its initial assessment, claiming that intercompany sales of cigarettes between PM Izhora and another Russian
affiliate prior to excise tax increases and submission by PM Izhora of the maximum retail sales price notifications for cigarettes to the tax authorities were improper
under Russian tax laws and resulted in underpayment of excise taxes and VAT. In August 2019, PM Izhora submitted its objections disagreeing with MTI’s
allegations set forth in the initial assessment and MTI’s methodology for calculating the alleged underpayments. MTI accepted some of PM Izhora’s arguments
and in September 2019, issued the final tax assessment claiming an underpayment of RUB 24.3 billion (approximately $374 million), including penalties andinterest. In accordance with Russian tax laws, PM Izhora paid the entire amount of MTI’s final assessment. This amount was neither imposed on, nor concurrent
with, the specific revenue-producing transaction, nor was it collected from customers of our Russian affiliates. PMI believes that the loss of $374 million in thismatter is probable and estimable. Consequently, in the third quarter of 2019, PMI recorded a pre-tax charge of $374 million, in marketing, administration andresearch costs in the consolidated statements of earnings, representing $315 million net of income tax. Under the Russian law, PM Izhora has until mid-September
2020 to challenge the final tax assessment to the Federal Tax Service and is considering whether to pursue such challenge.
A putative shareholder class action lawsuit, In re Philip Morris International Inc. Securities Litigation, is pending in the United States District Court for theSouthern District of New York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between July 26, 2016 and April 18, 2018. The
lawsuit names Philip Morris International Inc. and certain officers and employees as defendants and includes allegations that the defendants made false and/or
misleading statements and/or failed to disclose information about PMI’s business, operations, financial condition, and prospects, related to product sales of, andalleged irregularities in clinical studies of, PMI’s Platform 1 product. The lawsuit seeks various forms of relief, including damages. In November 2018, the court
consolidated three putative shareholder class action lawsuits with similar allegations previously filed in the Southern District of New York (namely, City ofWestland Police and Fire Retirement System v. Philip Morris International Inc., et al, Greater Pennsylvania Carpenters’ Pension Fund v. Philip MorrisInternational Inc., et al., and Gilchrist v. Philip Morris International Inc., et al. ) into these proceedings. A putative shareholder class action lawsuit, Rubenstahl v.
Philip Morris International Inc., et al., that had been previously filed in December 2017 in the United States District Court for the District of New Jersey, wasvoluntarily dismissed by the plaintiff due to similar allegations in these proceedings. On February 4, 2020, the court granted defendants’ motion in its entirety,
dismissing all but one of the plaintiffs’ claims with prejudice. The court noted that one of plaintiffs’ claims (allegations relating to four non-clinical studies of
PMI’s Platform 1 product) did not state a viable claim but allowed plaintiffs to replead that claim by March 3, 2020. We believe that this lawsuit is without merit
and, in the event that plaintiffs take further action, will continue to defend it vigorously.
We are also involved in additional litigation arising in the ordinary course of our business. While the outcomes of these proceedings are uncertain, management
does not expect that the ultimate outcomes of other litigation, including any reasonably possible losses in excess of current accruals, will have a material adverse
effect on our consolidated results of operations, cash flows or financial position.

Note 19.
Balance Sheet Offsetting:
Derivative Financial Instruments
PMI uses foreign exchange contracts and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party andintercompany actual and forecasted transactions. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby theright 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 isunrestricted. See Note 15. Financial Instruments for disclosures related to PMI's derivative financial instruments.
103

The effects of these derivative financial instrument assets and liabilities on PMI's consolidated balance sheets were as follows:

Gross Amount
Offset in theConsolidated
Balance Sheet

Net Amounts
Presented in theConsolidated
Balance Sheet

Gross Amounts Not Offset in theConsolidated
Balance Sheet(in millions)

Gross Amounts
Recognized

Financial
Instruments

Cash Collateral
Received/Pledged

At December 31, 2019
AssetsDerivative contracts

$

390 $

— $

390 $

(297) $

(91)

$

2

Liabilities
Derivative contracts

$

419 $

— $

419 $

(297) $

(59)

$

63

At December 31, 2018
AssetsDerivative contracts

$

220 $

— $

220 $

(124) $

(80)

$

16

Liabilities
Derivative contracts

$

631 $

— $

631 $

(124) $

(427)

$

80

Net Amount

Note 20.
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 tosell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from theconsolidated 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, 2019 and 2018. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables havebeen sold to the unaffiliated financial institutions.
Cumulative trade receivables sold, including excise taxes, for the years endedDecember 31, 2019 and 2018, were $10.7 billion and $11.0 billion, respectively.
PMI’s operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the consolidated balance sheets, which
remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as ofDecember 31, 2019, 2018 and 2017, were $0.9 billion, $1.0 billion and $1.1 billion, respectively. The net proceeds received are included in cash provided byoperating 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 theyears ended December 31, 2019, 2018 and 2017 the loss on sale of trade receivables was immaterial.

Note 21.
Asset Impairment and Exit Costs:
Global Manufacturing Infrastructure Optimization
In light of declining PMI cigarette volumes resulting from lower total industry volumes and the shift to smoke-free alternatives, PMI continues to optimize its
global manufacturing infrastructure.

104

Germany
On November 4, 2019, PMI announced that, as part of its global manufacturing infrastructure optimization, its German affiliate, Philip Morris Manufacturing
GmbH ("PMMG"), reached an agreement with employee representatives to end cigarette production in its factory in Berlin, Germany, by January 1, 2020. As aresult of this agreement, during 2019, PMI recorded pre-tax asset impairment and exit costs of $342 million in the European Union segment. This amount included
pension and employee separation costs of $251 million, which will be paid in cash, and asset impairment costs of$91 million, primarily related to machinery andequipment, which are non-cash charges.
Other
During 2019, PMI also recorded pre-tax asset impairment and exit costs of$80 million as part of its global manufacturing infrastructure optimization. These costs
were related to a cigarette plant closure in Argentina ($15 million), Colombia ($45 million) and Pakistan ($20 million). The charges were reflected in the Latin
America & Canada segment (Argentina and Colombia) and the South & Southeast Asia segment (Pakistan).
Asset Impairment and Exit Costs by Segment
During 2019, pre-tax asset impairment and exit costs consisted of the following:(in millions)2019

Separation programs:
European Union
South & Southeast Asia
Latin America & Canada

$

251
3
49

Total separation programs

303

Asset impairment charges
European Union
South & Southeast Asia
Latin America & Canada

91
17
11

Total asset impairment charges

119

Asset impairment and exit costs$

422

The total pre-tax asset impairment and exit costs above were included in marketing, administration and research costs on the consolidated statements of earnings.
During 2018 and 2017, PMI did not incur asset impairment and exit costs.
Movement in Exit Cost Liabilities
The movement in exit cost liabilities for theyear ended December 31, 2019 was as follows:(in millions)
Liability balance, January 1, 2019
Charges, net
Cash spent
Currency/other(a)

$

—
303
(49)
(63)

Liability balance, December 31, 2019$

191(a) Relates primarily to the reclassification of pension amounts.

Future cash payments for exit costs incurred to date are anticipated to be substantially paid by the end of 2021, with approximately$115 million expected to be
paid in 2020.

105

Note 22.
Deconsolidation of RBH:
As discussed in Note 18. Contingencies, following the March 1, 2019, judgment of the Court of Appeal of Québec in two class action lawsuits against PMI's
Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), PMI recorded in its consolidated results a pre-tax charge of $194 million, representing $142
million net of tax, in the first quarter of 2019. This pre-tax Canadian tobacco litigation-related expense was included in marketing, administration and researchcosts on PMI's consolidated statement of earnings for the year ended December 31, 2019. The charge reflects PMI’s assessment of the portion of the judgment that
represents probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment. RBH’s share of
the deposit is approximately CAD 257 million.
On March 22, 2019, RBH obtained an initial order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement
Act ("CCAA"), which is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course withminimal disruption to its customers, suppliers and employees.
The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements ofcontrol of the business from both PMI and RBH. As a result, PMI has determined that it no longer has a controlling financial interest over RBH as defined in ASC
810 (Consolidation), and PMI deconsolidated RBH as of the date of the CCAA filing. PMI has also determined that it does not exert "significant influence" over
RBH as that term is defined in ASC 323 (Investments-Equity Method and Joint Ventures). Therefore, as of March 22, 2019, PMI accounted for its continuing
investment in RBH in accordance with ASC 321 (Investments-Equity Securities) as an equity security, without readily determinable fair value.
Following the deconsolidation, the carrying value of assets and liabilities of RBH was removed from the consolidated balance sheet of PMI, and the continuing
investment in RBH was recorded at fair value at the date of deconsolidation. The total amount deconsolidated from PMI’s balance sheet was $3,519 million,
including $1,323 million of cash, $1,463 million of goodwill, $529 million of accumulated other comprehensive earnings, primarily related to historical currencytranslation and $204 million of other assets and liabilities, net. While PMI is accounting for its investment in RBH as an equity security, PMI would recognize
dividends as income upon receipt. However, while it remains under creditor protection, RBH does not anticipate paying dividends.
The fair value of PMI’s continuing investment in RBH of $3,280 million was determined at the date of deconsolidation, recorded within Investments inunconsolidated subsidiaries and equity securities and is assessed for impairment on an ongoing basis. The estimated fair value of the underlying business wasdetermined based on an income approach using a discounted cash flow analysis, as well as a market approach for certain contingent liabilities. The information
used in the estimate includes observable inputs, primarily a discount rate of 8%, a terminal growth rate of 2.5% and information about total tobacco market size in
Canada and RBH’s share of the market, as well as unobservable inputs such as operating budgets and strategic plans, various inflation scenarios, estimatedshipment volumes, and expected product pricing and projected margins.
The difference between the carrying value of the assets and liabilities of RBH that were deconsolidated and the fair value of the continuing investment, as
determined at the date of deconsolidation, was $239 million, before tax, and this loss on deconsolidation is reflected within marketing, administration and researchcosts on PMI’s consolidated statement of earnings for the year ended December 31, 2019. PMI also recorded a tax benefit of $49 million within the provision forincome taxes for the year ended December 31, 2019, related to the reversal of a deferred tax liability on unremitted earnings of RBH.
RBH is party to transactions with PMI and its consolidated subsidiaries entered into in the normal course of business; these transactions include royalty payments
and recharge of various corporate expenses for services benefiting RBH. Up to the date of CCAA filing, these transactions were eliminated on consolidation andhad no impact on PMI’s consolidated statement of earnings. After deconsolidating RBH, these transactions are treated as third-party transactions in PMI’s
financial statements. The amount of these related-party transactions is included within Note 4. Related Parties - Investments in Unconsolidated Subsidiaries,
Equity Securities and Other.
Developments in the CCAA process, including resolution through a plan of arrangement or compromise of all pending tobacco-related litigation currently stayed in
Canada, as discussed in Note 18. Contingencies, could result in a material change in the fair value of PMI’s continuing investment in RBH.

106

Note 23.
Leases:
PMI’s operating leases are principally for real estate (office space, warehouses and retail store space) and vehicles. Lease terms range from 1 year to 74 years, someof which include options to renew, which are reasonably certain to be renewed. Lease terms may also include options to terminate the lease. The exercise of alease renewal or termination option is at PMI’s discretion.
PMI’s operating leases at December 31, 2019, were as follows:(in millions)

December 31, 2019

Assets:Other assets
$

766

$

194

Liabilities:
Current
Accrued liabilities - Other
Noncurrent
Income taxes and other liabilities
569
Total lease liabilities$

763

For information regarding PMI’s immaterial finance leases, see Note 16.Fair Value Measurements.
The components of PMI’s lease cost were as follows for theyear ended December 31, 2019:(in millions)

December 31, 2019

Operating lease cost
$

242
61
29

$

332

Short-term lease cost
Variable lease cost
Total lease cost

For the year ended December 31, 2019, lease cost of $79 million was recorded in cost of sales and $253 million was recorded in marketing, administration andresearch cost.
Maturity of PMI’s operating lease liabilities, on an undiscounted basis, as ofDecember 31, 2019, was as follows (as calculated under the new guidance ASC 842(Leases)):(in millions)

Total

2020
2021
2022
2023
2024
Thereafter

$

222
162
124
92
66
283

Total lease payments
949
Less: Interest
186
Present value of lease liabilities
$

107

763

Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2018, were as follows (as calculated under legacy guidance ASC
840 (Leases)):(in millions)

Total

2019
2020
2021
2022
2023

$

147
103
73
52
43

Thereafter

354
$

772

Other information related to PMI’s operating leases was as follows for theyear ended December 31, 2019:(in millions)

December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities in Operating cash flows
$

240

$

221

Leased assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term (years)
9.6
Weighted-average discount rate(1)4.4%(1) PMI’s weighted-average discount rate is based on its estimated pre-tax cost of debt adjusted for country-specific risk.

For further details, see Note 24. New Accounting Standards.

Note 24.
New Accounting Standards:
Recently adopted
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 thoseleases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginningon or after January 1, 2019, with early adoption permitted. PMI has identified its lease management system and has identified and evaluated the applicable leases.
In addition to the guidance in ASU 2016-02, PMI has evaluated ASU 2018-11, which was issued in July 2018 and provides an optional transitional method. As aresult of this evaluation, PMI elected to use the optional transition method, which allows companies to use the effective date as the date of initial application ontransition and not adjust comparative period financial information or make the new required disclosures for periods prior to the effective date. Additionally, PMI
elected to use the hindsight practical expedient, as well as the package of practical expedients permitted under the transition guidance within the new standard.
Upon adoption, PMI recognized lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately all of its
operating leases in place at that time. At January 1, 2019, PMI's adoption of ASU 2016-02 resulted in an increase of approximately $0.7 billion on its assets andliabilities in its statement of financial position. ASU 2016-02 did not have a material impact on its results of operations or cash flows. For further details, see Note
23. Leases.
On January 1, 2019, PMI elected to early adopt ASU 2018-15 “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The adoption of ASU 2018-15 did not have amaterial impact on PMI's consolidated financial position or results of operations.

108

Note 25.
Quarterly Financial Data (Unaudited):
2019 Quarters(in millions, except per share data)
Net revenues
Gross profit
Net earnings attributable to PMI

1st

2nd

3rd

4th

$

6,751

$

7,699

$

7,642

$

7,713

$

4,286

$

5,034

$

5,037

$

4,935

$

1,354

$

2,319

$

1,896

$

1,616

$

0.87

$

1.49

$

1.22

$

1.04

$

0.87

$

1.49

$

1.22

$

1.04

$

1.14

$

1.14

$

1.17

$

1.17

Per share data:
Basic EPS
Diluted EPS
Dividends declared2018 Quarters(in millions, except per share data)
Net revenues
Gross profit
Net earnings attributable to PMI

1st

2nd

3rd

4th

$

6,896

$

7,726

$

7,504

$

7,499

$

4,281

$

4,982

$

4,886

$

4,718

$

1,556

$

2,198

$

2,247

$

1,910

$

1.00

$

1.41

$

1.44

$

1.23

$

1.00

$

1.41

$

1.44

$

1.23

$

1.07

$

1.14

$

1.14

$

1.14

Per share data:
Basic EPS
Diluted EPS
Dividends declared

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 thetotal for the year.

109

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders ofPhilip Morris International Inc.:
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 (the "Company") as ofDecember 31, 2019and 2018, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ (deficit) equity and of cash flows for each of the three years
in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited theCompany's internal control over financial reporting as of December 31, 2019, 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 the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
COSO.
Basis for Opinions
The Company'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 overFinancial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company’s internal control overfinancial 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 andregulations 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 reasonableassurance 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 andevaluating 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 withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
110Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or
required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii)involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Fair Value of Equity Investment in Rothmans, Benson & Hedges Inc. ("RBH")
As described in Note 22 to the consolidated financial statements, the Company recorded the fair value of its continuing investment in RBH of $3.28 billion within
Investments in unconsolidated subsidiaries and equity securities in the consolidated balance sheets. This investment was recorded as of March 22, 2019, which
represented the fair value at the date of deconsolidation. The estimated fair value of the underlying business was determined based on an income approach using a
discounted cash flow analysis, as well as a market approach for certain contingent liabilities. The discounted cash flow analysis and market approach include
management assumptions relevant for forecasting operating cash flows, which are subject to changes in business conditions, such as volumes, pricing, the terminal
growth rate, discount rates, inflation scenarios, and other strategic plans. The difference between the carrying value of the assets and liabilities of RBH that were
deconsolidated and the fair value of the continuing investment was recorded as a $239 million pre-tax loss on deconsolidation within marketing, administration andresearch costs on the Company’s consolidated statement of earnings.
The principal considerations for our determination that performing procedures relating to the deconsolidation of RBH is a critical audit matter are that there wassignificant judgment by management required when developing the fair value measurement of the continuing investment in RBH. This led to a high degree ofauditor subjectivity, judgment and effort in performing procedures and evaluating the estimated fair value of RBH which included significant assumptions related
to the terminal growth rate, discount rates, inflation scenarios, and operating cash flow projections; and to evaluate management's estimate of the value of certain
contingent liabilities. The audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained
from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to the estimated fair value of the RBH investment, including controls over the
discounted cash flow analysis and market approach, input data and key assumptions utilized in determination of the fair value. These procedures also included,
among others, testing management’s process for determining the fair value of the continuing investment in RBH as of the date of deconsolidation. This included
evaluating the appropriateness of the discounted cash flow analysis and market approach to value the contingent liabilities including the reasonableness of the input
data and significant assumptions used by management in developing the fair value measurement including the terminal growth rate, discount rates, inflation
scenarios, operating cash flow projections, market size and market share data. Professionals with specialized skill and knowledge were used to assist in evaluating
the Company’s discounted cash flow analysis and market approach, and evaluation of significant assumptions, including the terminal growth rate, discount rates
and inflation scenarios utilized by the Company. Evaluating whether the significant assumptions were reasonable involved considering (i) the past performance of
the associated Canadian reporting unit, and (ii) whether they were consistent with evidence obtained in other areas of the audit.
Smoking and Health and Health Care Cost Recovery Contingencies
As described in Note 18 to the consolidated financial statements, the Company has 77 smoking and health cases and health care cost recovery actions pending. The
Company records provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and theamount of the loss can be reasonably estimated. Except as stated otherwise in Note 18, while it is reasonably possible that an unfavorable outcome in a case may
occur, after assessing the information available, (i) management has not concluded that it is probable that a loss has been incurred in any of the pending smoking
and health and health care cost recovery tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending
smoking and health and health care cost recovery 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.
The principal considerations for our determination that performing procedures relating to smoking and health and health care cost recovery contingencies is a
critical audit matter are that there was significant judgment by management when determining the probability of a loss being incurred and an estimate of theamount or range of the potential loss for each case, which in turn led to a high degree of auditor
111

subjectivity, judgment and effort in evaluating management’s assessment related to the loss contingencies associated with smoking and health and health care cost
recovery related claims.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of smoking and health and health care cost
recovery litigation matters, including controls over determining the probability and range of loss as well as financial statement disclosures. These procedures also
included, among others, evaluating the completeness of the Company’s description of smoking and health and health care cost recovery contingencies, obtaining
and evaluating the letters of audit inquiry with external and internal legal counsel, evaluating the reasonableness of management’s assessment regarding whether anunfavorable outcome is reasonably possible or probable and reasonably estimable, and evaluating the sufficiency of the Company’s smoking and health and healthcare cost recovery contingencies disclosures.

/S/ PRICEWATERHOUSECOOPERS SA
PricewaterhouseCoopers SA/S/

CHAD MUELLER

Chad Mueller/S/

CLAUDIA BENZClaudia Benz

Lausanne, Switzerland
February 7, 2020
PricewaterhouseCoopers SA has served as the Company’s auditor since 2008.

112

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 inaccordance 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 anddirectors 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.
Management assessed the effectiveness of PMI’s internal control over financial reporting as of December 31, 2019. 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 andtesting 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, 2019, 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 includedin this report, has audited the effectiveness of PMI’s internal control over financial reporting as of December 31, 2019, as stated in their report herein.
February 7, 2020

113

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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 theeffectiveness 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 havematerially 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.

None.

PART III
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, theinformation 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 ofstockholders to be held on May 6, 2020, that will be filed with the SEC on or about March 26,2020 (the “proxy statement”), and, except as indicated therein, madea part hereof.

114

Item 10.

Directors, Executive Officers and Corporate Governance.

Information About Our Executive Officers as of February 6, 2020:
Name
André Calantzopoulos
Massimo Andolina
Drago Azinovic
Werner BarthCharles BendottiFrank de Rooij
Frederic de Wilde
Marc S. Firestone
Stacey Kennedy
Martin G. King
Michael Kunst
Andreas Kurali
Bin Li
Marco Mariotti
Mario Masseroli
Deepak Mishra
John O'Mullane
Jacek Olczak
Paul Riley
Marian Salzman
Jaime Suarez
Michael Voegele
Stefano Volpetti
Jerry E. Whitson
Miroslaw Zielinski

OfficeChief Executive Officer
Senior Vice President, Operations
President, Middle East & Africa Region and PMI Duty Free
Senior Vice President, Commercial
Senior Vice President, People and Culture
Vice President, Treasury and Corporate FinancePresident, European Union Region
President, External Affairs and General Counsel
President, South and Southeast Asia Region
Chief Financial Officer
Senior Vice President, Commercial Transformation
Vice President and Controller
Chief Product Officer
President, Eastern Europe Region
President, Latin America & Canada Region
Chief Strategy Officer
Chief Life Sciences Officer
Chief Operating Officer
President, East Asia and Australia Region
Senior Vice President, Global Communications
Chief Digital Officer
Chief Technology Officer
Chief Consumer Officer
Deputy General Counsel and Corporate Secretary
Chief New Ventures Officer

Age
62
51
57
55
47
54
52
60
47
55
51
54
48
55
49
48
66
55
54
61
46
47
48
64
58

All of the above-mentioned officers, except Ms. Salzman, Mr. Mishra, Mr. Kunst, Mr. Voegele, Mr. O'Mullane, Mr. Volpetti and Mr. Li, have been employed by
us in various capacities during the past five years.
Before joining Philip Morris International Inc. in April 2018, Ms. Salzman headed Havas PR North America, where she had served as Chief Executive Officer
from 2011.
Before joining Philip Morris International Inc. in September 2018, Mr. Mishra was Managing Director, Portfolio Operations at Centerbridge Partners, a private
equity firm, from 2014, where he led commercial, operational and digital transformation in various business sectors. From 2001 to 2014, Mr. Mishra was Partnerand part of the Consumer Goods, Retail and Operations leadership team of McKinsey & Co, where he supported clients in their transformation projects.
Before joining Philip Morris International Inc. in January 2019, Mr. Kunst was Partner at Bain & Company from 2009, most recently working with us on ourtransformation projects.
Before joining Philip Morris International Inc. in February 2019, Mr. Voegele had served in various senior capacities at Adidas Group from 2011, most recently,
as Global CIO and part of the core leadership team at Adidas Group.
Before joining Philip Morris International Inc. in May 2019, Mr. O'Mullane was Global Head SVP Innovation and Development for Consumer Health at Bayer
AG from 2014.
115

Before joining Philip Morris International Inc. in June 2019, Mr. Volpetti served in various executive capacities at the Procter & Gamble Company from 1996,
most recently, as Vice President of a global business unit. He also served as Chief Marketing Officer at Luxottica Group S.p.A. in 2015.
Before joining Philip Morris International Inc. in August 2019, Mr. Li served in various executive capacities at Harman International, a subsidiary of Samsung
Electronics Co. Ltd., from 2010, most recently, as Senior Vice President and General Manager, Consumer Audio Product Development and Operations.
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, ProductInnovation and Regulatory Affairs and Nominating and Corporate Governance committees of the Board of Directors. All of these documents are available free ofcharge on our website at www.pmi.com. Any waiver granted by Philip Morris International Inc. to its principal executive officer, principal financial officer orcontroller 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 Delinquent Section 16(a) Reports 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 compensationplans at December 31, 2019, were as follows:

Number of Securities
to be Issued upon
Exercise of Outstanding
Options and Vesting of RSUs
and PSUs(a)

Equity compensation plansapproved by stockholders

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans(excluding Securities
reflected in column (a))(c)

Weighted Average
Exercise Price of
Outstanding Options(b)6,289,960 (1) $—21,081,444(1) Represents 3,725,870 shares of common stock that may be issued upon vesting of the restricted share units and 2,564,090 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.
Also refer to Stock Ownership Information—Ownership of Equity Securities section of the proxy statement.
116

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.
117

PART IV
Item 15.

Exhibits and Financial Statement Schedules.

(a) Index to Consolidated Financial Statements and Schedules

Consolidated Statements of Earnings for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Earnings for the years ended December 31,
2019, 2018 and 2017
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018and 2017
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended
December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control Over Financial Reporting

Page
53
54
55 - 56
57 - 58
59
60 - 109
110 - 112
113

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:
2.1

—

3.1

—

3.2

—

4.1

—

4.2

—

4.3
4.4

—
—

4.6

—

10.1

—

10.2

—

Distribution Agreement between Altria Group, Inc. and Philip Morris International Inc. dated January 30, 2008
(incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 filed February 7, 2008).
Amended and Restated Articles of Incorporation of Philip Morris International Inc. (incorporated by reference to Exhibit
3.1 to the Registration Statement on Form 10 filed February 7, 2008).
Amended and Restated By-Laws of Philip Morris International Inc., effective as of March 7, 2019 (incorporated byreference to Exhibit 3.1 to the Current Report on Form 8-K filed March 7, 2019).
Specimen Stock Certificate of Philip Morris International Inc. (incorporated by reference to Exhibit 4.1 to theRegistration Statement on Form 10 filed February 7, 2008).
Indenture dated as of April 25, 2008, between Philip Morris International Inc. and HSBC Bank USA, National
Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-3, dated
April 25, 2008).
Description of Common Stock.
Description of Debt Securities.
The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of theRegistrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its
consolidated subsidiaries to the Commission upon request.
Employee Matters Agreement between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28,
2008 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed March 31, 2008).
Intellectual Property Agreement between Philip Morris International Inc. and Philip Morris USA Inc., dated as ofJanuary 1, 2008 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form 10 filed March 5,2008).
118

10.3

—

10.4

__

10.5

__

10.6

__

10.7

__

10.8

__

10.9

__

10.10

__

10.11

__

10.12

—

10.13

—

Credit Agreement relating to a US$3,500,000,000 Revolving Credit Facility (including a US$800,000,000 swingline
option) dated as of October 25, 2011, among Philip Morris International Inc. and the Initial Lenders named therein andCitibank International plc, as Facility Agent, and Citibank, N.A., as Swingline Agent, and Citigroup Global Markets
Limited, Barclays Capital, BNP Paribas, Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Securities Inc.,
Goldman Sachs International, HSBC Bank PLC, J.P. Morgan Limited, RBS Securities Inc. and Société Générale as
Mandated Lead Arrangers and Bookrunners (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed October 26, 2011).
Amendment No. 1, dated as of August 31, 2012, to the Credit Agreement, dated as of October 25, 2011, among Philip
Morris International Inc., the lenders named therein and Citibank International plc, as Facility Agent (incorporated byreference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
Credit Agreement, dated as of February 12, 2013, among Philip Morris International Inc., the lenders named therein andCitibank Europe PLC, UK Branch (formerly, The Royal Bank of Scotland plc), as Administrative Agent (incorporated byreference to Exhibit 10.1 to the Current Report on Form 8-K filed February 15, 2013).
Extension Agreement, effective February 7, 2017, to the Credit Agreement, dated as of February 12, 2013, among Philip
Morris International Inc., the lenders party thereto, Citibank Europe PLC, UK Branch (formerly, Citibank International
Limited), as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
January 30, 2017).
Extension Agreement, effective January 31, 2014, to Credit Agreement, dated as of February 12, 2013, among Philip
Morris International Inc., the lenders party thereto and Citibank Europe PLC, UK Branch (formerly, The Royal Bank of
Scotland plc), as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 2014).
Credit Agreement, dated as of February 28, 2014, among Philip Morris International Inc., the lenders named therein, J.P.
Morgan Europe Limited, as Facility Agent, and JPMorgan Chase Bank, N.A., as Swingline Agent (incorporated byreference to Exhibit 10.1 to the Current Report on Form 8-K filed March 3, 2014).
Extension Agreement, effective as of February 10, 2015, to Credit Agreement dated as of February 12, 2013, among
Philip Morris International Inc., the lenders named therein and Citibank Europe PLC, UK Branch (formerly, The RoyalBank of Scotland plc), as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed January 29, 2015).
Extension Agreement, effective as of February 28, 2015, to the Credit Agreement, dated as of February 28, 2014, among
Philip Morris International Inc., the lenders named therein, J.P. Morgan Europe Limited, as Facility Agent, andJPMorgan Chase Bank, N.A. as Swingline Agent (incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed January 29, 2015).
Amendment No. 1, dated as of July 20, 2015, to the Credit Agreement, dated as of February 12, 2013, among Philip
Morris International Inc., the lenders named therein, The Royal Bank of Scotland plc, as resigning administrative agent,
and Citibank Europe PLC, UK Branch (formerly, Citibank International Limited), as successor administrative agent(incorporated by reference to Exhibit 10.52 to the Annual Report on Form 10-K for the year ended December 31, 2015).
Credit Agreement, dated as of October 1, 2015, among Philip Morris International Inc., the lenders named therein,
Citibank Europe PLC, UK Branch (formerly, Citibank International Limited), as Facility Agent, and Citibank, N.A., as
Swingline Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed October 5, 2015).
Amendment No. 2, effective as of February 9, 2016, to the Credit Agreement dated as of February 12, 2013, with thelenders named therein and Citibank Europe PLC, UK Branch (formerly, Citibank International Limited), as
administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 28,2016).

11910.14

—

10.15

—

10.16

—

10.17

—

10.18

—

10.19

—

10.20
10.21

—
—

10.22

—

10.23

—

10.24

—

10.25

—

10.26

—

10.27

—

10.28

—

10.29

—

Extension Agreement, effective as of February 28, 2016, to the Credit Agreement, dated as of February 28, 2014, among
Philip Morris International Inc., each lender named therein, J.P. Morgan Europe Limited, as facility agent, and JPMorgan
Chase Bank, N.A., as swingline agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed
January 28, 2016).
Extension Agreement, effective as of October 1, 2016, to the Credit Agreement dated as of October 1, 2015, among
Philip Morris International Inc., lenders named therein, Citibank Europe PLC, UK Branch (formerly, Citibank
International Limited), as facility agent, and Citibank, N.A., as swingline agent (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed August 31, 2016).
Extension Agreement, effective as of October 1, 2017, to the Credit Agreement, dated as of October 1, 2015, among
Philip Morris International Inc., the lenders party thereto and Citibank Europe PLC, UK Branch (formerly, Citibank
International Limited), as facility agent, and Citibank N.A., as swingline agent (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed August 29, 2017).
Extension Agreement, effective as of February 6, 2018, to the Credit Agreement, dated as of February 12, 2013, among
Philip Morris International Inc., the lenders named therein, Citibank Europe PLC, UK Branch (formerly, Citibank
International Limited), as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed January 29, 2018).
Extension Agreement, effective as of February 5, 2019, to the Credit Agreement dated as of February 12, 2013, among
Philip Morris International Inc., the lenders named therein, Citibank Europe PLC, UK Branch (formerly, Citibank
International Limited), as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed January 29, 2019).
Philip Morris International Inc. Automobile Policy (incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form 10 filed February 7, 2008).*
Philip Morris International Inc. Amended and Restated Automobile Policy, dated as of October 1, 2019.*
Philip Morris International Benefit Equalization Plan, amended and restated (incorporated by reference to Exhibit 10.2 tothe Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).*
Philip Morris International Inc. 2012 Performance Incentive Plan, effective May 9, 2012 (incorporated by reference to
Exhibit A to the Definitive Proxy Statement filed on March 30, 2012).*
Philip Morris International Inc. 2017 Performance Incentive Plan, effective May 3, 2017 (incorporated by reference to
Exhibit B to the Definitive Proxy Statement filed on March 23, 2017).*Pension Fund of Philip Morris in Switzerland (IC) (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q for the quarter ended March 31, 2015).*
Summary of Supplemental Pension Plan of Philip Morris in Switzerland (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).*
Form of Restated Employee Grantor Trust Enrollment Agreement (Executive Trust Arrangement) (incorporated byreference to Exhibit 10.18 to the Registration Statement on Form 10 filed February 7, 2008).*
Form of Restated Employee Grantor Trust Enrollment Agreement (Secular Trust Arrangement) (incorporated byreference to Exhibit 10.19 to the Registration Statement on Form 10 filed February 7, 2008).*
Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (as amended and restated asof January 1, 2018) (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the year ended
December 31, 2017).*
Philip Morris International Inc. 2008 Deferred Fee Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.21 to the Registration Statement on Form 10 filed February 7, 2008).*120

10.30

—

10.31

—

10.32

—

10.33

—

10.34

—

10.35

—

10.36

—

10.37

—

10.38

—

10.39

—

10.40

—

10.41

—

10.42

—

Supplemental Letter to the Employment Agreement (as amended) with André Calantzopoulos (incorporated by reference
to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). The Employment
Agreement was previously filed as Exhibit 10.22 to the Registration Statement on Form 10 filed February 7, 2008 and isincorporated by reference to this Exhibit 10.30. The Amendment to the Employment Agreement was previously filed as
Exhibit 10.1 to the Current Report on Form 8-K/A filed June 13, 2013, and is incorporated by reference to this Exhibit
10.30.*
Supplemental Letter to Employment Agreement with Marc S. Firestone (incorporated by reference to Exhibit 10.5 to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). The Employment Agreement was previously filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and is incorporated byreference to this Exhibit 10.31. The Amendment to the Employment Agreement was previously filed as Exhibit 10.25 to
the Annual Report on Form 10-K for the year ended December 31, 2013, and is incorporated by reference to this Exhibit
10.31.*
Employment Agreement,with Martin G. King, as of January 1, 2018 (incorporated by reference to Exhibit 10.30 to theAnnual Report on Form 10-K for the year ended December 31, 2017).*
Supplemental Letter to the Employment Agreement (as amended) with Jacek Olczak (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. The Employment Agreement waspreviously filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, and isincorporated by reference to this Exhibit 10.33. The Amendment to the Employment Agreement was previously filed as
Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2013 and is incorporated by reference
to this Exhibit 10.33.*
Supplemental Letter to the Employment Agreement (as amended) with Miroslaw Zielinski (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019). 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 isincorporated by reference to this Exhibit 10.34. The Amendment to the Employment Agreement was previously filed as
Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2013 and is incorporated by reference
to this Exhibit 10.34.*
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).*
Time Sharing Agreement between PMI Global Services Inc. and André Calantzopoulos, dated May 8, 2013 (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).*
Amendment No. 1 to the Time Sharing Agreement between PMI Global Services Inc. and André Calantzopoulos, dated
December 23, 2014 (incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the year ended
December 31, 2014).*
Termination of the Time Sharing Agreement between PMI Global Services Inc. and André Calantzopoulos, dated
November 12, 2019.*
Agreement with Louis C. Camilleri (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form 10
filed February 7, 2008).*
Amended and Restated Supplemental Management Employees’ Retirement Plan (incorporated by reference to Exhibit
10.27 to the Annual Report on Form 10-K for the year ended December 31, 2008).*
Supplemental Equalization Plan, amended and restated as of June 29, 2015 (incorporated by reference to Exhibit 10.2 tothe Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).*
Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement (Secular Trust) (incorporated
by reference to Exhibit 10.31 to the Annual Report on Form 10-K for the year ended December 31, 2008).*121

10.43

—

10.44

—

10.45

—

10.46

—

10.47

—

10.48

—

10.49

—

10.50

—

10.51

—

10.52

—

21
23
24
31.1

—
—
—
—

31.2

—

32.1

—

32.2

—

101.INS—

101.SCH—

Subsidiaries of Philip Morris International Inc.
Consent of independent registered public accounting firm.
Powers of attorney.
Certification of the Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Actof 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Actof 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags areembedded within the Inline XBRL document.
XBRL Taxonomy Extension Schema.

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XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

101.CAL
101.DEF
101.LAB
101.PRE
104*

Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement (Executive Trust) (incorporated
by reference to Exhibit 10.32 to the Annual Report on Form 10-K for the year ended December 31, 2008).*
Philip Morris International Inc. Form of Indemnification Agreement with Directors and Executive Officers (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K filed September 18, 2009).*
Form of Deferred Stock Agreement (2015 Grants) (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed February 10, 2015).*
Philip Morris International Inc. Tax Return Preparation Services Policy (incorporated by reference to Exhibit 10.51 to theAnnual Report on Form 10-K for the year ended December 31, 2014).*
Form of Restricted Stock Unit Agreement (2017 Grants) (incorporated by reference to Exhibit 10.1 to the Current Reporton Form 8-K filed February 7, 2017).*
Form of Performance Share Unit Agreement (2017 Grants) (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed February 7, 2017).*
Form of Restricted Stock Unit Agreement (2018 Grants) (incorporated by reference to Exhibit 10.1 to the Current Reporton Form 8-K filed February 13, 2018).*
Form of Performance Share Unit Agreement (2018 Grants) (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed February 13, 2018).*
Form of Restricted Stock Unit Agreement (2019 Grants) (incorporated by reference to Exhibit 10.1 to the Current Reporton Form 8-K filed February 12, 2019).*
Form of Performance Share Unit Agreement (2019 Grants) (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed February 12, 2019).*

Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible toparticipate.
122

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.
PHILIP MORRIS INTERNATIONAL INC.
By:

/s/

A NDRÉ C ALANTZOPOULOS(André Calantzopoulos
Chief Executive Officer)

Date: February 7, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the date indicated:
Signature/s/

ANDRÉ CALANTZOPOULOS

/s/

Date

Chief Executive Officer

February 7, 2020

(André Calantzopoulos)/s/ MARTIN G. KING

Chief Financial Officer

February 7, 2020

(Martin G. King)/s/ ANDREAS KURALI

Vice President and Controller

February 7, 2020

(Andreas Kurali)*LOUIS C. CAMILLERI,MASSIMO FERRAGAMO,WERNER GEISSLER,LISA A. HOOK,JENNIFER LI,
JUN MAKIHARA,
KALPANA MORPARIA,
LUCIO A. NOTO,FREDERIK PAULSEN,
ROBERT B. POLET,
STEPHEN M. WOLF
*By:

Title

Directors

ANDRÉ CALANTZOPOULOS

February 7, 2020

(André Calantzopoulos
Attorney-in-fact)123

Exhibit 4.3
DESCRIPTION OF THE REGISTRANT’S SECURITIESREGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
DESCRIPTION OF CAPITAL STOCK
The following description is a summary of the material terms that are included in our amended and restated articles of incorporation and our amended andrestated bylaws. This summary is qualified in its entirety by the specific terms and provisions contained in our amended and restated articles of incorporation andour amended and restated bylaws, copies of which are incorporated by reference to exhibits to the Annual Report on Form 10-K for the year ended December 31,
2019, and by the provisions of applicable law. We encourage you to read our amended and restated articles of incorporation and our amended and restated bylaws.
Common Stock
Authorized Common Stock. Our authorized capital stock consists of 6,000,000,000 shares of common stock, no par value, and 250,000,000 shares ofpreferred stock, no par value.
Authorized But Unissued Capital Stock. Virginia law does not require shareholder approval for any issuance of authorized shares other than in connection
with certain mergers to which we may be a party. However, the NYSE rules require shareholder approval of certain issuances of common stock or securities
convertible into or exchangeable for common stock equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of ourcommon stock. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate
corporate acquisitions.
Voting. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders.
Approval of an amendment of our articles of incorporation, a merger, a share exchange, a sale of all our property or a dissolution must be approved by a majorityof all votes entitled to be cast.
Dividends. The holders of our common stock are entitled to receive dividends and other distributions as may be declared by our Board, subject to thepreferential rights of any outstanding preferred stock.
Other Rights. Upon our liquidation, dissolution or winding-up, after payment in full of the amounts required to be paid to holders of any outstanding sharesof preferred stock, if any, all holders of our common stock will be entitled to receive a pro rata distribution of all of our assets and funds legally available for
distribution.
No shares of our common stock are subject to redemption or have preemptive rights to purchase additional shares of our common stock or any of our othersecurities.
Listing of Common StockA primary listing for our common stock is on the NYSE under the trading symbol “PM.” The secondary listing for our common stock is on the SIX Swiss
Exchange under the trading symbol “PMI.”
Transfer Agent and Registrar
The transfer agent and registrar of our common stock is Computershare Trust Company, N.A.
Preferred Stock
Our Board of Directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series or classes and todesignate the rights, preferences and privileges of each series or class, which may be greater than the rights of our common stock. It is not possible to state theactual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until ourBoard of Directors determines the specific rights of the holders of the preferred stock. However, the effects might include:•

restricting dividends on our common stock;•diluting the voting power of our common stock;•

impairing liquidation rights of our common stock; or•delaying or preventing a change in control of us without further action by our shareholders.

We have no present plans to issue any shares of preferred stock.

Board of Directors; Removal; Vacancies
Virginia law provides that the Board of Directors of a Virginia corporation shall consist of a number of individuals specified in or fixed in accordance withthe bylaws of the corporation or, if not specified in or fixed in accordance with the bylaws, then a number specified in or fixed in accordance with the articles ofincorporation of the corporation. We do not have a classified board of directors. All directors are elected annually.
Under Virginia law, our Board of Directors may amend the bylaws from time to time to increase or decrease the number of directors; provided, that any
decrease in the number of directors may not shorten any incumbent director’s term or reduce any quorum or voting requirements until the person ceases to be adirector.
Under Virginia law, a member of our Board of Directors may be removed with or without cause by a majority of the votes entitled to be cast at a meeting ofshareholders called expressly for that purpose at which a quorum is present. If a director is elected by a voting group of shareholders, only the shareholders of thatvoting group may participate in the vote to remove the director.
Our bylaws provide that any vacancy occurring on our Board of Directors may be filled by the affirmative vote of the majority of the remaining directors,
though less than a quorum.
No Cumulative Voting
Our articles of incorporation and bylaws do not provide for cumulative voting in the election of directors.
Majority Voting for Directors
The Company’s bylaws provide that, where the number of nominees for director does not exceed the number of directors to be elected, directors shall beelected by a majority rather than by a plurality vote. Under applicable law, a director’s term extends until his or her successor is duly elected and qualified. Thus,
an incumbent director who fails to receive a majority vote would continue to serve as a holdover director. To address that possibility, our Corporate Governance
Guidelines require a director who receives less than a majority of the votes cast to offer to resign. The Nominating and Corporate Governance Committee would
then consider, and recommend to the Board, whether to accept or reject the offer. In a contested election in which one or more nominees are properly proposed byshareholders, a director-nominee will be elected by a plurality of the votes cast in such election.
Shareholder Nominations and Proposals
Our bylaws set forth the procedures a shareholder must follow to nominate directors or to bring other business before shareholder meetings. Our bylaws
provide that, subject to the rights of holders of any outstanding shares of preferred stock, a shareholder may nominate one or more persons for election as directors,
or bring other matters, at a meeting only if advance written notice of the shareholder’s nomination has been given, either by personal delivery or certified mail, toand received by, our Corporate Secretary whose address is Avenue de Rhodanie 50, 1007 Lausanne, Switzerland, within such time periods and following suchprocedures as set forth in the bylaws.

In addition, our bylaws permit an eligible shareholder or group of shareholders who have owned 3% or more of our common stock for at least three years tonominate and include in our proxy statement director candidates to occupy up to 20% of the authorized Board seats.
Business brought before a meeting that does not comply with our by-law provisions will not be transacted.
Special Shareholder Meetings
Under our bylaws, only our Board of Directors or our chairman may call special meetings of shareholders.

Anti-Takeover Statutes
Affiliated Transactions Statute. Virginia law contains provisions governing affiliated transactions. In general, these provisions prohibit a Virginia
corporation from engaging in affiliated transactions with an interested shareholder, which is any holder of more than 10% of any class of its outstanding voting
shares, for a period of three years following the date that such person became an interested shareholder, unless:•a majority of disinterested directors; and•the holders of two-thirds of the voting shares, other than the shares beneficially owned by the interested shareholder, approve the affiliatedtransaction.

Affiliated transactions subject to this approval requirement include mergers, share exchanges, material dispositions of corporate assets not in the ordinary
course of business, any dissolution of the corporation proposed by or on behalf of an interested shareholder or any reclassification, including reverse stock splits,
recapitalizations or mergers of the corporation with its subsidiaries, which increases the percentage of voting shares owned beneficially by an interested
shareholder by more than 5%.
Control Share Acquisitions Statute. We have opted out of the Virginia anti-takeover law regulating control share acquisitions.

Exhibit 4.4
DESCRIPTION OF DEBT SECURITIESThe following description of the Company’s 2.000% notes due 2020 (the “2.000% 2020 Notes”), floating rate notes due 2020 (the“2020 Floating Rate Notes”), 1.750% notes due 2020 (the “1.750% 2020 Notes”), 4.500% notes due 2020 (the “4.500% 2020 Notes”),
1.875% notes due 2021 (the “1.875% USD 2021 Notes”), 1.875% notes due 2021 (the “1.875% EURO 2021 Notes”), 4.125% notes due
2021 (the “4.125% 2021 Notes”), 2.900% notes due 2021 (the “2.900% 2021 Notes”), 2.625% notes due 2022 (the “2.625% 2022 Notes”),
2.375% notes due 2022 (the “2.375% 2022 Notes”), 2.500% notes due August 2022 (the “2.500% August 2022 Notes”), 2.500% notes due
November 2022 (the “2.500% November 2022 Notes”), 2.625% notes due 2023 (the “2.625% 2023 Notes”), 2.125% notes due 2023 (the“2.125% 2023 Notes”), 3.600% notes due 2023 (the “3.600% 2023 Notes”), 2.875% notes due 2024 (the “2.875% USD 2024 Notes”),
2.875% notes due 2024 (the “2.875% EURO 2024 Notes”), 0.625% notes due 2024 (the “0.625% 2024 Notes”), 3.250% notes due 2024 (the“3.250% 2024 Notes”), 2.750% notes due 2025 (the “2.750% 2025 Notes”), 3.375% notes due 2025 (the “3.375% 2025 Notes”), 2.750%
notes due 2026 (the “2.750% 2026 Notes”), 2.875% notes due 2026 (the “2.875% 2026 Notes”), 0.125% notes due 2026 (the “0.125% 2026
Notes”), 3.125% notes due 2027 (the “2027 Notes”), 3.125% notes due 2028 (the “2028 Notes”), 2.875% notes due 2029 (the “2.875% 2029
Notes”), 3.375% notes due 2029 (the “3.375% 2029 Notes”), 0.800% notes due 2031 (the “2031 Notes”), 3.125% notes due 2033 (the “2033
Notes”), 2.000% notes due 2036 (the “2036 Notes”), 1.875% notes due 2037 (the “2037 Notes”), 6.375% notes due 2038 (the “2038 Notes”),
1.450% notes due 2039 (the “2039 Notes”), 4.375% notes due 2041 (the “2041 Notes”), 4.500% notes due 2042 (the “4.500% 2042 Notes”),
3.875% notes due 2042 (the “3.875% 2042 Notes”), 4.125% notes due 2043 (the “4.125% 2043 Notes”), 4.875% notes due 2043 (the“4.875% 2043 Notes”) and 4.250% notes due 2044 (the “2044 Notes”), which we refer to collectively as the “notes,” is a summary and is notcomplete.
This summary is qualified in its entirety by the specific terms and provisions contained in the indenture, dated as of April 25, 2008,
between Philip Morris International Inc. and HSBC Bank USA, National Association, as trustee, under which the notes were issued (the“indenture”).
GeneralThe notes are our direct unsecured obligations and rank equally with all of our other unsecured and unsubordinated debt. The
indenture does not limit the amount of debt we may issue under the indenture and provides that additional notes may be issued up to theaggregate principal amount authorized by a board resolution. We may issue notes from time to time in one or more series with the same orvarious maturities, at par, at a discount or at a premium.
There is no requirement that any other notes that we issue be issued under the indenture. Thus, any other notes that we issue may be
issued under other indentures or documentation containing provisions different from those included in the indenture or the applicableprospectus to one or more issues of the notes.
We may, without the consent of the holders of the notes, issue additional notes of a certain series having the same ranking and thesame interest rate, maturity and other terms as the notes of such series, except for the public offering price and issue date. Any additional
notes of a series having such similar terms, together with the applicable series of notes, will constitute a single series of notes under theindenture. No additional notes of a series may be issued if an event of default has occurred with respect to such series of notes.

12.000% 2020 Notes
We issued $1,000,000,000 aggregate principal amount of 2.000% 2020 Notes, maturing February 21, 2020 and bearing interest at a
rate of 2.000% per annum, payable semiannually on February 21 and August 21 of each year. As of February 6, 2020, $1,000,000,000
aggregate principal amount of the 2.000% 2020 Notes was outstanding.
2020 Floating Rate Notes
We issued $300,000,000 aggregate principal amount of 2020 Floating Rate Notes, maturing February 21, 2020 and bearing interest
at a rate of LIBOR plus 0.420% per annum, as determined by the calculation agent, payable quarterly on February 21, May 21, August 21
and November 21 of each year. As of February 6, 2020, $300,000,000 aggregate principal amount of the 2020 Floating Rate Notes wasoutstanding.
1.750% 2020 Notes
We issued €1,250,000,000 aggregate principal amount of 1.750% 2020 Notes, maturing March 19, 2020 and bearing interest at a rateof 1.750% per annum, payable annually on March 19 of each year. As of February 6, 2020, €1,250,000,000 aggregate principal amount of
the 1.750% 2020 Notes was outstanding.
4.500% 2020 Notes
We issued $1,000,000,000 aggregate principal amount of 4.500% 2020 Notes, maturing March 26, 2020 and bearing interest at a rateof 4.500% per annum, payable semiannually on March 26 and September 26 of each year. As of February 6, 2020, $1,000,000,000 aggregate
principal amount of the 4.500% 2020 Notes was outstanding.
1.875% USD 2021 Notes
We issued $750,000,000 aggregate principal amount of 1.875% USD 2021 Notes, maturing February 25, 2021 and bearing interest at
a rate of 1.875% per annum, payable semiannually on February 25 and August 25 of each year. As of February 6, 2020, $750,000,000
aggregate principal amount of the 1.875% USD 2021 Notes was outstanding.
1.875% EURO 2021 Notes
We issued €750,000,000 aggregate principal amount of 1.875% EURO 2021 Notes, maturing March 3, 2021 and bearing interest at a
rate of 1.875% per annum, payable annually on March 3 of each year. As of February 6, 2020, €750,000,000 aggregate principal amount of
the 1.875% EURO 2021 Notes was outstanding.
4.125% 2021 Notes
We issued $350,000,000 aggregate principal amount of 4.125% 2021 Notes, maturing May 17, 2021 and bearing interest at a rate of
4.125% per annum, payable semiannually on May 17 and November 17 of each year. As of February 6, 2020, $350,000,000 aggregate
principal amount of the 4.125% 2021 Notes was outstanding.

22.900% 2021 Notes
We issued $750,000,000 aggregate principal amount of 2.900% 2021 Notes, maturing November 15, 2021 and bearing interest at a
rate of 2.900% per annum, payable semiannually on May 15 and November 15 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 2.900% 2021 Notes was outstanding.
2.625% 2022 Notes
We issued $500,000,000 aggregate principal amount of 2.625% 2022 Notes, maturing February 18, 2022 and bearing interest at a
rate of 2.625% per annum, payable semiannually on February 18 and August 18 of each year. As of February 6, 2020, $500,000,000
aggregate principal amount of the 2.625% 2022 Notes was outstanding.
2.375% 2022 Notes
We issued $750,000,000 aggregate principal amount of 2.375% 2022 Notes, maturing August 17, 2022 and bearing interest at a rateof 2.375% per annum, payable semiannually on February 17 and August 17 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 2.375% 2022 Notes was outstanding.
2.500% August 2022 Notes
We issued $750,000,000 aggregate principal amount of 2.500% August 2022 Notes, maturing August 22, 2022 and bearing interest
at a rate of 2.500% per annum, payable semiannually on February 22 and August 22 of each year. As of February 6, 2020, $750,000,000
aggregate principal amount of the 2.500% August 2022 Notes was outstanding.
2.500% November 2022 Notes
We issued $750,000,000 aggregate principal amount of 2.500% November 2022 Notes, maturing November 2, 2022 and bearing
interest at a rate of 2.500% per annum, payable semiannually on May 2 and November 2 of each year. As of February 6, 2020, $750,000,000
aggregate principal amount of the 2.500% November 2022 Notes was outstanding.
2.625% 2023 Notes
We issued $600,000,000 aggregate principal amount of 2.625% 2023 Notes, maturing March 6, 2023 and bearing interest at a rate of
2.625% per annum, payable semiannually on March 6 and September 6 of each year. As of February 6, 2020, $600,000,000 aggregate
principal amount of the 2.625% 2023 Notes was outstanding.
2.125% 2023 Notes
We issued $500,000,000 aggregate principal amount of 2.125% 2023 Notes, maturing May 10, 2023 and bearing interest at a rate of
2.125% per annum, payable semiannually on May 10 and November 10 of each year. As of February 6, 2020, $500,000,000 aggregate
principal amount of the 2.125% 2023 Notes was outstanding.

33.600% 2023 Notes
We issued $500,000,000 aggregate principal amount of 3.600% 2023 Notes, maturing November 15, 2023 and bearing interest at a
rate of 3.600% per annum, payable semiannually on May 15 and November 15 of each year. As of February 6, 2020, $500,000,000 aggregate
principal amount of the 3.600% 2023 Notes was outstanding.
2.875% USD 2024 Notes
We issued $900,000,000 aggregate principal amount of 2.875% USD 2024 Notes, maturing May 1, 2024 and bearing interest at a
rate of 2.875% per annum, payable semiannually on May 1 and November 1 of each year. As of February 6, 2020, $900,000,000 aggregate
principal amount of the 2.875% USD 2024 Notes was outstanding.
2.875% EURO 2024 Notes
We issued €600,000,000 aggregate principal amount of 2.875% EURO 2024 Notes, maturing May 30, 2024 and bearing interest at a
rate of 2.875% per annum, payable annually on May 30 of each year. As of February 6, 2020, €600,000,000 aggregate principal amount of
the 2.875% EURO 2024 Notes was outstanding.
0.625% 2024 Notes
We issued €500,000,000 aggregate principal amount of 0.625% 2024 Notes, maturing November 8, 2024 and bearing interest at a
rate of 0.625% per annum, payable annually on November 8 of each year. As of February 6, 2020, €500,000,000 aggregate principal amountof the 0.625% 2024 Notes was outstanding.
3.250% 2024 Notes
We issued $750,000,000 aggregate principal amount of 3.250% 2024 Notes, maturing November 10, 2024 and bearing interest at a
rate of 3.250% per annum, payable semiannually on May 10 and November 10 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 3.250% 2024 Notes was outstanding.
2.750% 2025 Notes
We issued €750,000,000 aggregate principal amount of 2.750% 2025 Notes, maturing March 19, 2025 and bearing interest at a rateof 2.750% per annum, payable annually on March 19 of each year. As of February 6, 2020, €750,000,000 aggregate principal amount of the
2.750% 2025 Notes was outstanding.
3.375% 2025 Notes
We issued $750,000,000 aggregate principal amount of 3.375% 2025 Notes maturing August 11, 2025 and bearing interest at a rateof 3.375% per annum, payable semiannually on February 11 and August 11 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 3.375% 2025 Notes was outstanding.

42.750% 2026 Notes
We issued $750,000,000 aggregate principal amount of 2.750% 2026 Notes, maturing February 25, 2026 and bearing interest at a
rate of 2.750% per annum, payable semiannually on February 25 and August 25 of each year. As of February 6, 2020, $750,000,000
aggregate principal amount of the 2.750% 2026 Notes was outstanding.
2.875% 2026 Notes
We issued €1,000,000,000 aggregate principal amount of 2.875% 2026 Notes, maturing March 3, 2026 and bearing interest at a rateof 2.875% per annum, payable annually on March 3 of each year. As of February 6, 2020, €1,000,000,000 aggregate principal amount of the2.875% 2026 Notes was outstanding.
0.125% 2026 Notes
We issued €500,000,000 aggregate principal amount of 0.125% 2026 Notes, maturing August 3, 2026 and bearing interest at a rate of
0.125% per annum, payable annually on August 3 of each year. As of February 6, 2020, €500,000,000 aggregate principal amount of the
0.125% 2026 Notes was outstanding.
2027 Notes
We issued $500,000,000 aggregate principal amount of 2027 Notes, maturing August 17, 2027 and bearing interest at a rate of
3.125% per annum, payable semiannually on February 17 and August 17 of each year. As of February 6, 2020, $500,000,000 aggregate
principal amount of the 2027 Notes was outstanding.
2028 Notes
We issued $500,000,000 aggregate principal amount of 2028 Notes, maturing March 2, 2028 and bearing interest at a rate of 3.125%
per annum, payable semiannually on March 2 and September 2 of each year. As of February 6, 2020, $500,000,000 aggregate principal
amount of the 2028 Notes was outstanding.
2.875% 2029 Notes
We issued €500,000,000 aggregate principal amount of 2.875% 2029 Notes, maturing May 14, 2029 and bearing interest at a rate of
2.875% per annum, payable annually on May 14 of each year. As of February 6, 2020, €500,000,000 aggregate principal amount of the2.875% 2029 Notes was outstanding.
3.375% 2029 Notes
We issued $750,000,000 aggregate principal amount of 3.375% 2029 Notes, maturing August 15, 2029 and bearing interest at a rateof 3.375% per annum, payable semiannually on February 15 and August 15 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 3.375% 2029 Notes was outstanding.

52031 Notes
We issued €750,000,000 aggregate principal amount of 2031 Notes, maturing August 1, 2031 and bearing interest at a rate of 0.800%
per annum, payable annually on August 1 of each year. As of February 6, 2020, €750,000,000 aggregate principal amount of the 2031 Notes
was outstanding.
2033 Notes
We issued €500,000,000 aggregate principal amount of 2033 Notes, maturing June 3, 2033 and bearing interest at a rate of 3.125%
per annum, payable annually on June 3 of each year. As of February 6, 2020, €500,000,000 aggregate principal amount of the 2033 Notes
was outstanding.
2036 Notes
We issued €500,000,000 aggregate principal amount of 2036 Notes, maturing May 9, 2036 and bearing interest at a rate of 2.000%
per annum, payable annually on May 9 of each year. As of February 6, 2020, €500,000,000 aggregate principal amount of the 2036 Notes
was outstanding.
2037 Notes
We issued €500,000,000 aggregate principal amount of 2037 Notes, maturing November 6, 2037 and bearing interest at a rate of
1.875% per annum, payable annually on November 6 of each year. As of February 6, 2020, €500,000,000 aggregate principal amount of the2037 Notes was outstanding.
2038 Notes
We issued $1,500,000,000 aggregate principal amount of 2038 Notes, maturing May 16, 2038 and bearing interest at a rate of
6.375% per annum, payable semiannually on May 16 and November 16 of each year. As of February 6, 2020, $1,500,000,000 aggregate
principal amount of the 2038 Notes was outstanding.
2039 Notes
We issued €750,000,000 aggregate principal amount of 2039 Notes, maturing August 1, 2039 and bearing interest at a rate of 1.450%
per annum, payable annually on August 1 of each year. As of February 6, 2020, €750,000,000 aggregate principal amount of the 2039 Notes
was outstanding.
2041 Notes
We issued $750,000,000 aggregate principal amount of 2041 Notes, maturing November 15, 2041 and bearing interest at a rate of
4.375% per annum, payable semiannually on May 15 and November 15 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 2041 Notes was outstanding.
4.500% 2042 Notes
We issued $700,000,000 aggregate principal amount of 4.500% 2042 Notes, maturing March 20, 2042 and bearing interest at a rateof 4.500% per annum, payable semiannually on March 20 and September620 of each year. As of February 6, 2020, $700,000,000 aggregate principal amount of the 4.500% 2042 Notes was outstanding.
3.875% 2042 Notes
We issued $750,000,000 aggregate principal amount of 3.875% 2042 Notes, maturing August 21, 2042 and bearing interest at a rateof 3.875% per annum, payable semiannually on February 21 and August 21 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 3.875% 2042 Notes was outstanding.
4.125% 2043 Notes
We issued $850,000,000 aggregate principal amount of 4.125% 2043 Notes, maturing March 4, 2043 and bearing interest at a rate of
4.125% per annum, payable semiannually on March 4 and September 4 of each year. As of February 6, 2020, $850,000,000 aggregate
principal amount of the 4.125% 2043 Notes was outstanding.
4.875% 2043 Notes
We issued $750,000,000 aggregate principal amount of 4.875% 2043 Notes, maturing November 15, 2043 and bearing interest at a
rate of 4.875% per annum, payable semiannually on May 15 and November 15 of each year. As of February 6, 2020, $750,000,000 aggregate
principal amount of the 4.875% 2043 Notes was outstanding.
2044 Notes
We issued $1,250,000,000 aggregate principal amount of 2044 Notes, maturing November 10, 2044 and bearing interest at a rate of
4.250% per annum, payable semiannually on May 10 and November 10 of each year. As of February 6, 2020, $1,250,000,000 aggregate
principal amount of the 2044 Notes was outstanding.
Optional Redemption with Payment of “Make-Whole”
2.000% 2020 Notes
We may, at our option, redeem the 2.000% 2020 Notes, in whole at any time or in part from time to time (equal to $2,000 or an
integral multiple of $1,000 in excess thereof). The redemption price will be equal to the greater of (i) 100% of the principal amount of the
2.000% 2020 Notes to be redeemed and (ii) the sum of the present values of each remaining scheduled payment of principal and interest thatwould be due if such notes matured on February 21, 2020 (exclusive of interest accrued to the date of redemption) discounted to theredemption date, on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months), at a rate equal to the applicable
Treasury Rate (as defined below) plus 10 basis points, plus, in each case, accrued and unpaid interest, if any, thereon to, but excluding, theredemption date.
1.875% USD 2021 Notes; 2.625% 2022 Notes; 2.375% 2022 Notes; 2.500% November 2022 Notes; 2.875% USD 2024 Notes

7

Prior to the date that is one month prior to the scheduled maturity date for the 1.875% USD 2021 Notes, 2.625% 2022 Notes, 2.375%
2022 Notes, 2.500% November 2022 Notes and 2.875% USD 2024 Notes, we may, at our option, redeem the 1.875% USD 2021 Notes,
2.625% 2022 Notes, 2.375% 2022 Notes, 2.500% November 2022 Notes and 2.875% USD 2024 Notes, in whole at any time or in part fromtime to time (equal to $2,000 or an integral multiple of $1,000 in excess thereof). The redemption price will be equal to the greater of (i)100% of the principal amount of each of the 1.875% USD 2021 Notes, 2.625% 2022 Notes, 2.375% 2022 Notes, 2.500% November 2022
Notes or 2.875% USD 2024 Notes to be redeemed and (ii) the sum of the present values of each remaining scheduled payment of principal
and interest of the notes to be redeemed that would be due if such notes matured on the date that is one month prior to the scheduled maturity
date (exclusive of interest accrued to the date of redemption) discounted to the redemption date, on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months), at a rate equal to the applicable Treasury Rate (as defined below) plus 10 basis points in the caseof the 2.500% November 2022 Notes, 12.5 basis points in the case of the 2.625% 2022 Notes, the 2.375% 2022 Notes and the 2.875% USD
2024 Notes and 15 basis points in the case of the 1.875% USD 2021 Notes, plus, in each case, accrued and unpaid interest, if any, thereon to,
but excluding, the redemption date.
2.125% 2023 Notes
Prior to March 10, 2023 (the date that is two months prior to the scheduled maturity date for the 2.125% 2023 Notes), we may, at our
option, redeem the 2.125% 2023 Notes, in whole at any time or in part from time to time (equal to $2,000 or an integral multiple of $1,000 in
excess thereof), at a redemption price equal to the greater of (i) 100% of the principal amount of the 2.125% 2023 Notes to be redeemed and(ii) the sum of the present values of each remaining scheduled payment of principal and interest of the notes to be redeemed that would be
due if such notes matured on March 10, 2023 (exclusive of interest accrued to the date of redemption) discounted to the redemption date, on asemiannual basis (assuming a 360-day year consisting of twelve 30-day months), at a rate equal to the applicable Treasury Rate (as defined
below) plus 10 basis points, plus, in each case, accrued and unpaid interest, if any, thereon to, but excluding, the redemption date.
3.375% 2025 Notes; 2.750% 2026 Notes; 2027 Notes; 2028 Notes; 3.375% 2029 Notes
Prior to the date that is three months prior to the scheduled maturity date for the 3.375% 2025 Notes, 2.750% 2026 Notes, 2027
Notes, 2028 Notes and 3.375% 2029 Notes, we may, at our option, redeem the 3.375% 2025 Notes, 2.750% 2026 Notes, 2027 Notes, 2028
Notes and 3.375% 2029 Notes, in whole at any time or in part from time to time (equal to $2,000 or an integral multiple of $1,000 in excess
thereof). The redemption price will be equal to the greater of (i) 100% of the principal amount of each of the 3.375% 2025 Notes, 2.750%
2026 Notes, 2027 Notes, 2028 Notes or 3.375% 2029 Notes to be redeemed and (ii) the sum of the present values of each remaining
scheduled payment of principal and interest of the notes to be redeemed that would be due if such notes matured on the date that is threemonths prior to the scheduled maturity date (exclusive of interest accrued to the date of redemption) discounted to the redemption date, on asemiannual basis (assuming a 360-day year consisting of twelve 30-day months), at a rate equal to the applicable Treasury Rate (as defined
below) plus 15 basis points in the case of the 2027 Notes, 2028 Notes and 3.375% 2029 Notes and 20 basis points in the case of the 3.375%
2025 Notes and 2.750% 2026 Notes, plus, in each case, accrued and unpaid interest, if any, thereon to, but excluding, the redemption date.
0.625% 2024 Notes; 0.125% 2026 Notes; 2031 Notes; 2036 Notes; 2037 Notes; 2039 Notes
Prior to the date that is three months prior to the scheduled maturity date, we may, at our option, redeem the 0.625% 2024 Notes,
0.125% 2026 Notes, 2031 Notes, 2036 Notes, 2037 Notes and 2039 Notes,

8

in whole at any time or in part from time to time (in €1,000 increments, provided that any remaining principal amount thereof shall be at least
the minimum authorized denomination thereof), at a redemption price equal to the greater of (i) 100% of the principal amount of the 0.625%
2024 Notes, 0.125% 2026 Notes, 2031 Notes, 2036 Notes, 2037 Notes or 2039 Notes to be redeemed and (ii) the sum of the present values ofeach remaining scheduled payment of principal and interest of the notes to be redeemed that would be due if such notes were due on the datethat is three months prior to the scheduled maturity date for the notes (exclusive of interest accrued to the date of redemption) discounted to theredemption date on an annual basis (Actual/Actual (ICMA)), at a rate equal to the applicable Comparable Government Bond Rate (as defined
below) plus 15 basis points in the case of the 0.625% 2024 Notes and the 0.125% 2026 Notes, 20 basis points in the case of the 2036 Notes,
2037 Notes and 25 basis points in the case of the 2031 Notes and the 2039 Notes, plus, in each case, accrued and unpaid interest, if any,
thereon to, but excluding, the redemption date.
Optional Redemption at Par
We may, at our option, redeem the notes of an applicable series to which a Par Call Date relates, in whole at any time or in part fromtime to time, on or after the applicable Par Call Date, at a redemption price equal to 100% of the principal amount of the notes being
redeemed, plus, in each case, accrued and unpaid interest, if any, thereon to, but excluding, the redemption date.
“Par Call Date” means (i) with respect to the 1.875% USD 2021 Notes, 2.625% 2022 Notes, 2.375% 2022 Notes, 2.500% November
2022 Notes and 2.875% USD 2024 Notes, the date that is one month prior to the maturity date of the applicable notes, (ii) with respect to the2.125% 2023 Notes, the date that is two months prior to the maturity date of the applicable notes and (iii) with respect to the 0.625% 2024
Notes, the 3.375% 2025 Notes, 2.750% 2026 Notes, 0.125% 2026 Notes, 2027 Notes, 2028 Notes, 3.375% 2029 Notes, 2031 Notes, 2036
Notes, 2037 Notes and 2039 Notes, the date that is three months prior to the maturity date of the applicable notes.
Payment of Additional Amounts
Subject to the exceptions and limitations set forth below, we will pay to the beneficial owner of any note who is a non-United States
person (as defined below) such additional amounts as may be necessary to ensure that every net payment on such note, after deduction orwithholding by us or any of our paying agents for or on account of any present or future tax, assessment or other governmental charge
imposed upon or as a result of such payment by the United States or any political subdivision or taxing authority of the United States, will not
be less than the amount provided in such note to be then due and payable. However, we will not pay additional amounts if the beneficial
owner is subject to taxation solely for reasons other than its ownership of the note, nor will we pay additional amounts for or on account of:(a) any tax, assessment or other governmental charge that is imposed or withheld solely by reason of the existence of any present orformer connection (other than the mere fact of being a beneficial owner of a note) between the beneficial owner (or between a fiduciary,
settlor, beneficiary or person holding a power over such beneficial owner, if the beneficial owner is an estate or trust, or a member orshareholder of the beneficial owner, if the beneficial owner is a partnership or corporation) of a note and the United States, including, without
limitation, such beneficial owner (or such fiduciary, settlor, beneficiary, person holding a power, member or shareholder) being or having
been a citizen or resident of the United States or treated as being or having been a resident thereof;(b) any tax, assessment or other governmental charge that is imposed or withheld solely by reason of the beneficial owner (or afiduciary, settlor, beneficiary or person holding a power over such9

beneficial owner, if the beneficial owner is an estate or trust, or a member or shareholder of the beneficial owner, if the beneficial owner is apartnership or corporation) (1) being or having been present in, or engaged in a trade or business in, the United States, (2) being treated ashaving been present in, or engaged in a trade or business in, the United States, or (3) having or having had a permanent establishment in the
United States;(c) any tax, assessment or other governmental charge that is imposed or withheld solely by reason of the beneficial owner (or afiduciary, settlor, beneficiary or person holding a power over such beneficial owner, if the beneficial owner is an estate or trust, or a memberor shareholder of the beneficial owner, if the beneficial owner is a partnership or corporation) being or having been with respect to the UnitedStates a personal holding company, a controlled foreign corporation, a passive foreign investment company or a foreign private foundation orother foreign tax exempt organization, or being a corporation that accumulates earnings to avoid United States federal income tax;(d) any tax, assessment or other governmental charge imposed on a beneficial owner that actually or constructively owns 10% ormore of the total combined voting power of all of our classes of stock that are entitled to vote within the meaning of Section 871(h)(3) of theInternal Revenue Code of 1986, as amended, or the Code;(e) any tax, assessment or other governmental charge that is payable by any method other than withholding or deduction by us or
any paying agent from payments in respect of such note;(f)

any gift, estate, inheritance, sales, transfer, personal property or excise tax or any similar tax, assessment or other governmental

charge;(g) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment in respect of
any note if such payment can be made without such withholding by at least one other paying agent;(h) any tax, assessment or other governmental charge that is imposed or withheld by reason of a change in law, regulation, or
administrative or judicial interpretation that becomes effective more than 15 days after the payment becomes due or is duly provided for,whichever occurs later;(i) any tax, assessment or other governmental charge imposed as a result of the failure of the beneficial owner to comply withapplicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity orconnection with the United States of the holder or beneficial owner of a note, if such compliance is required by statute or regulation of theUnited States as a precondition to relief or exemption from such tax, assessment or other governmental charge;(j)
any tax, assessment or other governmental charge imposed by reason of the failure of the beneficial owner to fulfill thestatement requirements of Section 871(h) or Section 881(c) of the Code;(k)
Code; or(l)

any tax, assessment or other governmental charge imposed pursuant to the provisions of Sections 1471 through 1474 of the
any combination of items (a), (b), (c), (d), (e), (f), (g), (h), (i), (j) and (k).

In addition, we will not pay additional amounts to a beneficial owner of a note that is a fiduciary, partnership, limited liability
company or other fiscally transparent entity, or to a beneficial owner of a note that is not the sole beneficial owner of such note, as the casemay be. This exception, however, will apply

10only to the extent that a beneficiary or settlor with respect to the fiduciary, or a beneficial owner or member of the partnership, limited
liability company or other fiscally transparent entity, would not have been entitled to the payment of an additional amount had thebeneficiary, settlor, beneficial owner or member received directly its beneficial or distributive share of the payment. The term “beneficial
owner” includes any person holding a note on behalf of or for the account of a beneficial owner.
As used herein, the term “non-United States person” means a person that is not a United States person. The term United States
person means a citizen or resident of the United States or, a corporation or partnership created or organized in or under the laws of the UnitedStates or any political subdivision thereof, an estate the income of which is subject to United States federal income taxation regardless of its
source, a trust subject to the primary supervision of a court within the United States and the control of one or more United States persons as
described in Section 7701(a)(30) of the Code, or a trust that existed on August 20, 1996, and elected to continue its treatment as a domestic
trust. “United States” means the United States of America (including the States and the District of Columbia), its territories, its possessions
and other areas subject to its jurisdiction (including the Commonwealth of Puerto Rico).
Redemption for Tax Reasons
We may redeem a series of notes prior to maturity in whole as specified in the particular prospectus supplement at a redemption priceequal to the principal amount of such notes plus any accrued interest and additional amounts to the date fixed for redemption upon theoccurrence of events specified in the indenture. If we exercise our option to redeem a series of notes, we will deliver to the trustee acertificate signed by an authorized officer stating that we are entitled to redeem the notes and the written opinion of independent legal
counsel if required.
Issuance in EuroWith respect to the euro denominated notes, initial holders were required to pay for the notes in euro, and all payments of interest andprincipal, including payments made upon any redemption of the notes, are payable in euro. If we are unable to obtain euro due to theimposition of exchange controls or other circumstances beyond our control (including the dissolution of the European Monetary Union) or if
the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency orfor the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of thenotes will be made in U.S. dollars until the euro is again available to us or so used. In such circumstances, the amount payable on any date ineuro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second
business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on thebasis of the then most recent euro/U.S. dollar exchange rate available on or prior to the second business day prior to the relevant payment
date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event ofdefault under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any
calculation or conversion in connection with the foregoing.
Consolidation, Merger or Sale
Under the indenture, we may not consolidate with or merge into any other corporation or convey or transfer our properties and assets
substantially as an entirety to any person unless:11•the corporation formed by such consolidation or into which we are merged or the person which acquires by conveyance ortransfer our properties and assets substantially as an entirety is a corporation organized and existing under the laws of the UnitedStates, any state thereof or the District of Columbia and expressly assumes, by a supplemental indenture, payment of the principalof and any premium and interest (including any additional amounts payable) on all the notes and the performance of every
covenant of the indenture;• after giving effect to the transaction, no Event of Default (as defined below) with respect to any series of notes, and no event
which, after notice or lapse of time or both, would become an Event of Default, will have happened and be continuing;• the successor corporation assuming the notes agrees, by supplemental indenture, to indemnify the individuals liable therefor forthe amount of United States federal estate tax paid solely as a result of such assumption in respect of notes held by individuals
who are not citizens or residents of the United States at the time of their death; and• we deliver to the trustee an officers’ certificate and an opinion of counsel, each stating that the consolidation, merger, conveyanceor transfer and the supplemental indenture comply with these provisions. (Section 801)
The successor corporation will assume all of our obligations under the indenture as if it were an original party to the indenture. After
assuming such obligations, the successor corporation will have all of our rights and powers under the indenture. (Section 802)
Waivers Under the Indenture
Under the indenture, the holders of not less than a majority in aggregate principal amount of all affected series of the outstanding
notes (voting as a single class), may on behalf of all holders of such affected series:••

waive our compliance with certain covenants of the indenture; and (Section 1009)
waive any past default under the indenture, except:• a default in the payment of the principal of, or any premium or interest on, any notes; and• a default with respect to a covenant or provision of the indenture which itself cannot be modified or amended without theconsent of the holder of each affected note.

(Section 513)

Events of Default
When we use the term “Event of Default” in the indenture with respect to a particular series of notes, we mean any of the following:••••

we fail to pay any installment of interest on any note of that series for 30 days after payment was due;
we fail to make payment of the principal of, or any premium on, any notes of that series when due;
we fail to make any sinking fund payment when due with respect to notes of that series;
we fail to perform any other covenant or warranty in respect of any notes of that series contained in the indenture or in such notes
or in the applicable board resolution under which such series is issued and this failure continues for 90 days after we receive
written notice of it from the trustee or holders of 25% in aggregate principal amount of all outstanding series of the notes

12or, with respect to any such covenant or agreement which is not applicable to all series of notes, by the holders of at least 25% in
aggregate principal amount of the affected series (in each case voting as a single class);• we or a court take certain actions relating to bankruptcy, insolvency or reorganization of our company; or• any other event of default that may be specified for the notes of the series or in the board resolution with respect to the notes ofthat series. (Section 501)
A default with respect to a single series of notes under the indenture will not necessarily constitute a default with respect to any otherseries of notes issued under the indenture. A default under our other indebtedness will not be a default under the indenture. The trustee may
withhold notice to the holders of notes of any default, except for defaults that involve our failure to pay principal or any premium or interest,
if it determines in good faith that the withholding of notice is in the interest of the holders. (Section 602)
If an Event of Default for any series of notes occurs and continues (other than an Event of Default involving our bankruptcy,
insolvency or reorganization), either the trustee or the holders of at least 25% in aggregate principal amount of all outstanding series of thenotes to which it is applicable or, if such default is not applicable to all series of notes, the holders of at least 25% in principal amount of all
series to which it is applicable (in each case voting as a single class) may require us upon notice in writing to us, to immediately repay theentire principal of all notes of such series together with accrued interest on the notes.
If an Event of Default occurs which involves our bankruptcy, insolvency or reorganization, then all unpaid principal amounts of allnotes of such series together with accrued interest on the notes and accrued interest on all notes of each series then outstanding will
immediately become due and payable, without any action by the trustee or any holder of notes. (Section 502)
Subject to certain conditions, the holders of a majority in principal amount of the outstanding notes of a series may rescind a
declaration of acceleration if all Events of Default, other than the failure to pay principal or interest due solely because of the declaration ofacceleration, have been cured or waived. (Section 502)
Other than its duties in case of an Event of Default, the trustee is not obligated to exercise any of its rights or powers under theindenture at the request, order or direction of any holders, unless the holders offer the trustee reasonable indemnity. (Section 507) The
holders of a majority in principal amount outstanding of any series of notes may, subject to certain limitations, direct the time, method andplace of conducting any proceeding for any remedy available to the trustee, or exercising any power conferred upon the trustee, for any seriesof notes. (Section 512)
The indenture requires us to file each year with the trustee, an officer’s certificate that states that:••the signing officer has supervised a review of our activities during such year and performance under the indenture; andto the best of his or her knowledge, based on the review, we comply with all conditions and covenants of the indenture. (Section
1005)
A judgment for money damages by courts in the United States, including a money judgment based on an obligation expressed in aforeign currency, will ordinarily be rendered only in U.S. dollars. New York statutory law provides that a court shall render a judgment ordecree in the foreign currency of the underlying obligation and that the judgment or decree shall be converted into U.S. dollars at theexchange rate prevailing on the date of entry of the judgment or decree. If a court requires a conversion to be made on a date other than ajudgment date, the indenture requires us to pay additional amounts necessary to ensure that the amount13

paid in U.S. dollars to a holder is equal to the amount due in such foreign currency or currency unit. (Section 515)
Restrictive Covenants
The indenture includes the following restrictive covenants:
Limitations on Liens
The indenture limits the amount of liens that we or our subsidiaries may incur or otherwise create, in order to secure indebtedness forborrowed money, upon any Principal Facility (as defined below) or any shares of capital stock that any of our subsidiaries owning any
Principal Facility has issued to us or any of our subsidiaries. If we or any of our subsidiaries incur such liens, then we will secure the notes tothe same extent and in the same proportion as the debt that is secured by such liens. This covenant does not apply, however, to any of thefollowing:•in the case of a Principal Facility, liens incurred in connection with the issuance by a state or political subdivision thereof of any
securities the interest on which is exempt from federal income taxes by virtue of Section 103 of the Internal Revenue Code of1986, as amended, or any other laws or regulations in effect at the time of such issuance;• liens existing on the date of the indenture;• liens on property or shares of capital stock existing at the time we or any of our subsidiaries acquire such property or shares ofstock (including acquisition through merger, share exchange or consolidation) or securing the payment of all or part of thepurchase price, construction or improvement thereof incurred prior to, at the time of, or within 180 days after the later of theacquisition, completion of construction or improvement or commencement of full operation of such property for the purpose offinancing all or a portion of such purchase or construction or improvement; or• liens for the sole purpose of extending, renewing or replacing in whole or in part the indebtedness secured by any lien referred toin the foregoing three bullet points or in this bullet point; provided, however, that the principal amount of indebtedness secured
thereby shall not exceed the principal amount of indebtedness so secured at the time of such extension, renewal or replacement,
and that such extension, renewal or replacement shall be limited to all or a part of the property which secured the lien so
extended, renewed or replaced (plus improvements on such property).
Notwithstanding the foregoing, we and/or any of our subsidiaries may create, assume or incur liens that would otherwise be subject
to the restriction described above, without securing notes issued under the indenture equally and ratably, if the aggregate value of all
outstanding indebtedness secured by the liens plus the value of Sale and Leaseback Transactions does not at the time exceed 15% ofConsolidated Net Tangible Assets. (Section 1007)
Sale and Leaseback Transactions
A Sale and Leaseback Transaction by us or any of our subsidiaries of any Principal Facility is prohibited, unless within 90 days ofthe effective date of the arrangement, an amount equal to the greater of the net proceeds of the sale of the property leased pursuant to the Saleand Leaseback Transaction or the fair value of the property at the time of entering into the Sale and Leaseback Transaction as determined byour board of directors (“value”) is applied by us to the retirement of non-subordinated indebtedness for money borrowed with more than one
year stated maturity, including our notes, except that such sales and leasebacks are permitted to the extent that the “value” thereof plus theother secured debt referred to in the last paragraph14

of the subsection entitled “Restrictive Covenants—Limitations on Liens” does not at the time exceed 15% of our Consolidated Net Tangible
Assets. (Section 1008)
There are no other restrictive covenants in the indenture.
Defined Terms“Consolidated Net Tangible Assets” means the excess over current liabilities of all assets appearing on our most recent quarterly or
annual consolidated balance sheet, less goodwill and other intangible assets and the minority interests of others in subsidiaries. (Section 101)
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage, at which thegross redemption yield on the applicable series of notes to be redeemed, if they were to be purchased at such price on the third business day
prior to the date fixed for redemption, would be equal to the gross redemption yield on such business day of the Reference Bond on the basisof the middle market price of the Reference Bond prevailing at 11:00 a.m. (London time) on such dealing day as determined by the
Independent Investment Bank.
“Comparable Treasury Issue” means the U.S. Treasury security or securities selected by an Independent Investment Banker as having
an actual or interpolated maturity comparable to the remaining term of the applicable notes that would be utilized, at the time of selection andin accordance with customary financial practice, in pricing new issues of corporate notes of a comparable maturity to the remaining term ofsuch notes.
“Comparable Treasury Price” means, with respect to any redemption date (1) the average of the Reference Treasury Dealer
Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotation or (2) if the
Independent Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations.
“Independent Investment Bank” means one of the Reference Bond Dealers that we appoint as the Independent Investment Bank fromtime to time.
“Principal Facility” means as all real property constituting part of any manufacturing plant or distribution facility owned and operated
by us or any subsidiary, together with such manufacturing plant or distribution facility, including all attached plumbing, electrical,
ventilating, heating, cooling, lighting and other utility systems, ducts and pipes, but excluding trade fixtures, business machinery, equipment,
motorized vehicles, tools, supplies and materials, security systems, cameras, inventory and other personal property and materials. The term
Principal Facility shall not include any particular manufacturing plant or distribution facility as of any particular date unless its net bookvalue exceeds 0.75% of Consolidated Net Tangible Assets. (Section 1007)“Reference Bond” means, in relation to any Comparable Government Bond Rate calculation, a German government bond whosematurity is closest to the maturity of the applicable series of notes, or if we or the Independent Investment Bank considers that such similarbond is not in issue, such other German government bond as we or the Independent Investment Bank, with the advice of three brokers of,
and/or market makers in, German government bonds selected by us or the Independent Investment Bank, determine to be appropriate fordetermining the Comparable Government Bond Rate.

15

“Reference Bond Dealer” means each of the applicable bond dealers for the applicable series of notes as defined in the respective
prospectus supplements or their respective affiliates or any other broker of, and/or market maker in, German government bonds, selected byus.
“Reference Treasury Dealer” means each of the institutions identified in the applicable prospectus supplement or their affiliates,
which are primary United States government securities dealers and one other leading primary U.S. government securities dealer in New York
City reasonably designated by us; provided, however, that if any of the foregoing shall cease to be a primary U.S. government securities
dealer in New York City (a “Primary Treasury Dealer”), we will substitute therefor another Primary Treasury Dealer.
“Reference Treasury Dealer Quotation” means, with respect to each Reference Treasury Dealer and any redemption date, the average,
as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each caseas a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Treasury Dealer at 2:00
pm New York time on the third business day preceding such redemption date.
“Sale and Leaseback Transaction” means the sale or transfer of a Principal Facility with the intention of taking back a lease of theproperty, except a lease for a temporary period of less than three years, including renewals, with the intent that the use by us or any subsidiary
will be discontinued on or before the expiration of such period. (Section 1008)“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity
or interpolated maturity (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (suchprice expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.
Defeasance
The indenture provides that we may elect either (1) to defease and be discharged from any and all obligations with respect to the notesof a series (except for, among other things, our obligations to register notes mutilated, destroyed, lost or stolen and the maintenance of an
office or agency for payment and money for payments held in trust and to issue temporary notes of that series with respect to such notes)(“legal defeasance”) or (2) to be released from our obligations to comply with the restrictive covenants under the indenture, and any omission
to comply with such obligations will not constitute a default or an event of default with respect to any defeased series of notes (“covenantdefeasance”). Legal defeasance or covenant defeasance, as the case may be, will be conditioned upon, among other things, the deposit by us
with the trustee, in trust, of an amount of cash in the currency or currency unit in which the applicable series of notes is payable, that will
generate sufficient cash, in the opinion of an internationally recognized firm of independent public accountants, to make interest, principal,
premium and any other payments on that series of notes on their due date or redemption date.
We will be required to deliver to the trustee an opinion of counsel that the deposit and related defeasance will not cause the holders
and beneficial owners of the notes of that series to recognize income, gain or loss for U.S. federal income tax purposes as a result of the legal
or covenant defeasance, as the case may be. If we elect legal defeasance, that opinion of counsel must be based upon a ruling from the U.S.
Internal Revenue Service or a change in applicable U.S. federal income tax law to that effect. (Sections 402-404)
Book-Entry; Delivery and Form; Global Notes

16

The notes denominated in euro were offered and sold in denominations of €100,000 and integral multiples of €1,000 in excess thereof
and the notes denominated in U.S. dollars were offered and sold in principal amounts of $2,000 and integral multiples of $1,000 in excess
thereof. The notes of each series were initially represented by one or more fully registered global notes. Each such global note denominatedin euro was deposited with, or on behalf of, a common depositary, and registered in the name of the nominee of the common depositary forthe accounts of Clearstream and Euroclear. Each such global note denominated in U.S. dollars was deposited with, or on behalf of, DTC or
any successor thereto, as depositary, or Depositary, and registered in the name of Cede & Co. (as nominee of DTC).
Except as set forth in the applicable prospectus supplement, the global notes may be transferred, in whole and not in part, only toEuroclear or Clearstream or their respective nominees in the case of the notes denominated in euro and only to DTC in the case of the notes
denominated in U.S. dollars. Unless and until it is exchanged in whole or in part for notes in definitive form, no global note denominated in
U.S. dollars may be transferred except as a whole by the Depositary to a nominee of such Depositary. Investors may elect to hold interests in
the global notes denominated in U.S. dollars through either the Depositary (in the United States) or through Clearstream or Euroclear, if they
are participants in such systems, or indirectly through organizations that are participants in such systems. Holders of the notes denominated ineuro may hold their interests in the global notes in Europe through Clearstream or Euroclear, either as a participant in such systems orindirectly through organizations that are participants in such systems. Clearstream and Euroclear will hold the applicable interests in the
global notes on behalf of their respective participating organizations or customers through customers’ securities accounts in Clearstream’s orEuroclear’s names on the books of their respective depositaries. Book-entry interests in the notes and all transfers relating to the notes will bereflected in the book-entry records of Clearstream and Euroclear or DTC, as the case may be.
Notices
Notices to holders of the notes will be sent by mail or email to the registered holders and will be published, whether the notes are inglobal or definitive form, and, so long as the notes of each series are listed on the New York Stock Exchange, in a daily newspaper of generalcirculation in the City of New York. It is expected that publication will be made in the City of New York in The Wall Street Journal. Anysuch notice shall be deemed to have been given on the date of such publication or, if published more than once, on the date of the first such
publication.
Concerning the Trustee
HSBC Bank USA, National Association is the trustee under the indenture. HSBC Bank USA, National Association or its affiliates
make loans to and perform certain other services for us and certain of our subsidiaries and affiliates. Among other services, HSBC Bank
USA, National Association or its affiliates provide us and our affiliates with investment banking and cash management services, foreignexchange and investment custody account services, and participate in our credit facilities and those of our affiliates.
Governing Law
The laws of the State of New York govern the indenture and the notes. (Section 112)17

Exhibit 10.20
PHILIP MORRIS INTERNATIONAL INC. AMENDED AND RESTATEDAUTOMOBILE POLICY(as of October 1, 2019)
The Registrant has a policy under which company owned or leased automobiles are provided to key executives for business use when required and for personal use
at other times, or at any executive’s election, a cash allowance is provided instead. Such executives are required to include any taxable benefit under this policy intheir annual tax returns.

Exhibit 10.38

PMI GLOBAL SERVICES INC.
120 PARK AVENUE, NEW YORK, NY 10017. U.S.A TELEPHONE (917) 663-4000

November 12, 2019To:

André Calantzopoulos

Re: Time Sharing Agreement -Termination
Dear Sir,
We refer to the Agreement between us dated May 8, 2013, as amended (the “Agreement”). The purpose of this letter is to confirm inwriting the mutual agreement of both parties to terminate the Agreement effective as of November 12, 2019 (hereinafter, the“Termination Date”) without any further formalities, with both parties waiving the 30 days’ notice provision of Section 1 of theAgreement.
Parties’ obligations with respect to the reimbursement of expenses and fees under the Agreement incurred prior to the Termination
Date will continue after the Termination Date.
Please sign and return to us the duplicate copy of this letter, thereby acknowledging your agreement to its terms.
Yours faithfully,
PMI Global Services Inc.
By:/s/ JOHN K. HAMMELName: John K. Hammel
Title: Vice President
Accepted and agreed:
André Calantzopoulos/s/ ANDRÉ CALANTZOPOULOS

Exhibit 21
List of Significant Subsidiaries
As of December 31, 2019
Listed below are subsidiaries of Philip Morris International Inc. (the “Company”) as ofDecember 31, 2019, and their country of organization. This list omits thesubsidiaries of the Company that in the aggregate would not constitute a “significant subsidiary” of the Company, as that term is defined in Rule 1-02(w) ofRegulation S-X.

Name

State orCountry ofOrganization

Compania Colombiana de Tabaco S.A.S.

Colombia

Latin America and Canada Investments B.V.

Netherlands

Limited Liability Company "Philip Morris Sales & Distribution"

UkraineMassalin Particulares S.R.L.

Argentina

Papastratos Cigarettes Manufacturing Company S.A.

GreecePhilip Morris Benelux BVBA

Belgium

Philip Morris Brands Sàrl

Switzerland

Philip Morris Brasil Industria e Comercio Ltda.

BrazilPhilip Morris & Company (UK) Limited

United Kingdom

Philip Morris CR a.s.

Czech Republic

Philip Morris Exports Sàrl

Switzerland

Philip Morris Finance SA

Switzerland

Philip Morris Finland Ltd

Finland

Philip Morris Global Brands Inc.

USA

Philip Morris GmbHGermany

Philip Morris Holland Holdings B.V.

Netherlands

Philip Morris International Holdings B.V.

Netherlands

Philip Morris Investments B.V.

Netherlands

Philip Morris Italia S.r.l.

Italy

Philip Morris Japan Limited

Japan

Philip Morris Kazakhstan LLP

Kazakhstan

Philip Morris Korea Inc.

South Korea

Philip Morris Limited

Australia

Philip Morris Manufacturing GmbHGermany

Philip Morris Manufacturing & Technology Bologna S.p.A.

Italy

Philip Morris Mexico Productos Y Servicios, Sociedad de Responsabilidad Limitada de Capital Variable

MexicoPhilip Morris Mexico, Sociedad Anónima de Capital Variable

MexicoPhilip Morris Misr Limited Liability Company

Egypt

Philip Morris Operations a.d. Nis

SerbiaPhilip Morris (Pakistan) Limited

Pakistan

Philip Morris Philippines Manufacturing Inc.

Philippines

Philip Morris Polska Spolka Akcyjna

PolandPhilip Morris Polska Distribution Sp. z.o.o.

PolandPhilip Morris Romania S.R.L.

Romania

Philip Morris Products S.A.

Switzerland

Philip Morris SA Philip Morris Sabanci Pazarlama ve Satis A.S.

TurkeyPhilip Morris Trading (Thailand) Company Limited

Thailand

Limited Liability Company "Philip Morris Sales and Marketing"RussiaPHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret A.S.

TurkeyPMFTC Inc.

Philippines

PT Hanjaya Mandala Sampoerna Tbk.

Indonesia

PT Philip Morris Indonesia

Indonesia

Tabaqueira II, S.A.

PortugalTabaqueira - Empresa Industrial de Tabacos, S.A.

Portugal

AO "Philip Morris Izhora"

RussiaExhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-216046) and Form S-8 (File Nos. 333-149822, 333149821, 333-181298, 333-217651, 333-229603) of Philip Morris International Inc. of our report dated February 7, 2020 relating to the financial statements and theeffectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS SA
PricewaterhouseCoopers SA/s/ CHAD MUELLER/s/ CLAUDIA BENZ

Chad Mueller

Claudia Benz

Lausanne, Switzerland
February 7, 2020

EXHIBIT 24

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ LOUIS C. CAMILLERI
Louis C. Camilleri

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ MASSIMO FERRAGAMO
Massimo Ferragamo

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ WERNER GEISSLER
Werner Geissler

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ LISA A. HOOK
Lisa A. Hook

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ JENNIFER LI
Jennifer Li

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ JUN MAKIHARA
Jun Makihara

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ KALPANA MORPARIA
Kalpana Morparia

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ LUCIO A. NOTO
Lucio A. Noto

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ FREDERIK PAULSEN
Frederik Paulsen

POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ ROBERT B. POLET
Robert B. PoletPOWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris International Inc., a
Virginia corporation (the “Company”), does hereby constitute and appoint André Calantzopoulos, Martin G. King and Jerry
Whitson, or any one or more of them, his or her true and lawful attorney, for him or her and in his or her name, place and stead, to
execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company
for the year ended December 31, 2019, and any amendments or supplements to said Annual Report and to cause the same to be filedwith the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to beincorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause
to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand and seal as of the 6th day of February, 2020.

/s/ STEPHEN M. WOLF
Stephen M. Wolf

Exhibit 31.1
Certifications
I, André Calantzopoulos, certify that:1.

I have reviewed this annual report on Form 10-K of Philip Morris International
Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:5.

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; andThe registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.

Date: February 7, 2020
/s/ ANDRÉ CALANTZOPOULOS
André Calantzopoulos
Chief Executive Officer-1-

Exhibit 31.2
Certifications
I, Martin G. King, certify that:1.

I have reviewed this annual report on Form 10-K of Philip Morris International
Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:5.

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; andThe registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.

Date: February 7, 2020/s/ MARTIN G. KINGMartin G. King
Chief Financial Officer-1 -Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Philip Morris International Inc. (the “Company”) onForm 10-K for the period ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, André Calantzopoulos, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ANDRÉ CALANTZOPOULOS
André Calantzopoulos
Chief Executive Officer
February 7, 2020

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to Philip Morris International Inc. andwill be retained by Philip Morris International Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Philip Morris International Inc. (the “Company”) onForm 10-K for the period ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Martin G. King, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ MARTIN G. KINGMartin G. King
Chief Financial Officer
February 7, 2020

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to Philip Morris International Inc. andwill be retained by Philip Morris International Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

-1-