10-Q 1 pm-063014x10qxdoc.htm 10-Q PM-06.30.14-10Q-DOC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-33708
Philip Morris International Inc.
 
 
 
 
 
(Exact name of registrant as specified in its charter)
 
Virginia
13-3435103
(State or other jurisdiction of
    incorporation or organization)
(I.R.S. Employer
    Identification No.)
 
120 Park Avenue
New York, New York
10017
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code
(917) 663-2000
 
 
 
 
 
 
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨     Smaller reporting company  ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
At July 29, 2014, there were 1,562,131,077 shares outstanding of the registrant’s common stock, no par value per share.

-1-


PHILIP MORRIS INTERNATIONAL INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
PART I -
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Balance Sheets at
 
 
June 30, 2014 and December 31, 2013
3 –  4
 
 
 
 
Condensed Consolidated Statements of Earnings for the
 
 
Six Months Ended June 30, 2014 and 2013
 
Three Months Ended June 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Comprehensive Earnings for the
 
 
Six Months Ended June 30, 2014 and 2013
 
Three Months Ended June 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
 
 
Six Months Ended June 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the
 
 
Six Months Ended June 30, 2014 and 2013
10 –  11
 
 
 
 
Notes to Condensed Consolidated Financial Statements
12 – 38
 
 
 
Item 2.
39 – 72
 
 
 
Item 4.
 
 
 
PART II -
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and its subsidiaries.

- 2-


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Cash and cash equivalents
$
1,541

 
$
2,154

Receivables (less allowances of $51 in 2014 and $53 in 2013)
4,081

 
3,853


Inventories:
 
 
 
Leaf tobacco
3,582

 
3,709

Other raw materials
1,595

 
1,596

Finished product
3,094

 
4,541

 
8,271

 
9,846

Deferred income taxes
414

 
502

Other current assets
403

 
497


Total current assets
14,710

 
16,852


Property, plant and equipment, at cost
14,071

 
13,957

Less: accumulated depreciation
7,423

 
7,202

 
6,648

 
6,755

Goodwill (Note 5)
9,085

 
8,893

Other intangible assets, net (Note 5)
3,209

 
3,193

Investments in unconsolidated subsidiaries (Note 16)
1,508

 
1,536

Other assets
1,165

 
939

TOTAL ASSETS
$
36,325

 
$
38,168








See notes to condensed consolidated financial statements.
Continued

- 3-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
 
 
June 30,
2014
 
December 31,
2013
LIABILITIES
 
 
 
Short-term borrowings (Note 12)
$
1,941

 
$
2,400

Current portion of long-term debt (Note 12)
407

 
1,255

Accounts payable
1,109

 
1,274

Accrued liabilities:
 
 
 
Marketing and selling
629

 
503

Taxes, except income taxes
5,008

 
6,492

Employment costs
1,267

 
949

Dividends payable
1,482

 
1,507

Other
1,099

 
1,382

Income taxes
536

 
1,192

Deferred income taxes
102

 
112

Total current liabilities
13,580

 
17,066


Long-term debt (Note 12)
27,161

 
24,023

Deferred income taxes
1,520

 
1,477

Employment costs
1,312

 
1,313

Other liabilities
599

 
563

Total liabilities
44,172

 
44,442


Contingencies (Note 10)

 


STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 

Common stock, no par value
(2,109,316,331 shares issued in 2014 and 2013)

 

Additional paid-in capital
649

 
723

Earnings reinvested in the business
28,601

 
27,843

Accumulated other comprehensive losses
(4,314
)
 
(4,190
)
 
24,936

 
24,376

Less: cost of repurchased stock
   (544,554,521 and 520,313,919 shares in 2014 and 2013, respectively)
34,228

 
32,142

Total PMI stockholders’ deficit
(9,292
)
 
(7,766
)
Noncontrolling interests
1,445

 
1,492

Total stockholders’ deficit
(7,847
)
 
(6,274
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
36,325

 
$
38,168



See notes to condensed consolidated financial statements.

- 4-



Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)

 
 
 
 
 
For the Six Months Ended June 30,
 
2014
 
2013
Net revenues
$
38,830

 
$
39,010

Cost of sales
5,070

 
5,190

Excise taxes on products
24,116

 
23,509

Gross profit
9,644

 
10,311

Marketing, administration and research costs
3,263

 
3,527

Asset impairment and exit costs (Note 2)
512

 
8

Amortization of intangibles
44

 
48

Operating income
5,825

 
6,728

Interest expense, net
522

 
482

Earnings before income taxes
5,303

 
6,246

Provision for income taxes
1,528

 
1,825

Equity (income)/loss in unconsolidated subsidiaries, net
(36
)
 
9

Net earnings
3,811

 
4,412

Net earnings attributable to noncontrolling interests
85

 
163

Net earnings attributable to PMI
$
3,726

 
$
4,249


Per share data (Note 8):
 
 
 
Basic earnings per share
$
2.35

 
$
2.58

Diluted earnings per share
$
2.35

 
$
2.58

Dividends declared
$
1.88

 
$
1.70














See notes to condensed consolidated financial statements.


- 5-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
 
 
For the Three Months Ended June 30,
 
2014
 
2013
Net revenues
$
21,051

 
$
20,483

Cost of sales
2,696

 
2,701

Excise taxes on products
13,254

 
12,566

Gross profit
5,101

 
5,216

Marketing, administration and research costs
1,716

 
1,850

Asset impairment and exit costs (Note 2)
489

 
5

Amortization of intangibles
22

 
24

Operating income
2,874

 
3,337

Interest expense, net
254

 
246

Earnings before income taxes
2,620

 
3,091

Provision for income taxes
752

 
892

Equity (income)/loss in unconsolidated subsidiaries, net
(27
)
 
5

Net earnings
1,895

 
2,194

Net earnings attributable to noncontrolling interests
44

 
70

Net earnings attributable to PMI
$
1,851

 
$
2,124


Per share data (Note 8):
 
 
 
Basic earnings per share
$
1.17

 
$
1.30

Diluted earnings per share
$
1.17

 
$
1.30

Dividends declared
$
0.94

 
$
0.85








See notes to condensed consolidated financial statements.


- 6-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)


 
 
 
 
 
 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
Net earnings
 
$
3,811

 
$
4,412

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 

Change in currency translation adjustment:
 
 
 
 
Unrealized losses, net of income taxes of ($59) in 2014 and $24 in 2013
 
(114
)
 
(722
)

Change in net loss and prior service cost:
 
 
 
 
Net losses and prior service costs, net of income taxes of $3 in 2014 and $- in 2013
 
(41
)
 

Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($26) in 2014 and ($27) in 2013
 
81

 
118


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
Gains transferred to earnings, net of income taxes of $2 in 2014 and $14 in 2013
 
(13
)
 
(95
)
(Losses) gains recognized, net of income taxes of $5 in 2014 and ($23) in 2013
 
(35
)
 
156

Total other comprehensive losses
 
(122
)
 
(543
)
Total comprehensive earnings
 
3,689

 
3,869

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
87

 
88

Redeemable noncontrolling interest (Note 7)
 

 
43

Comprehensive earnings attributable to PMI
 
$
3,602

 
$
3,738

















See notes to condensed consolidated financial statements


- 7-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
(Unaudited)

 
 
For the Three Months Ended June 30,
 
 
2014
 
2013
Net earnings
 
$
1,895

 
$
2,194

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Change in currency translation adjustment:
 
 
 
 
Unrealized losses, net of income taxes of ($55) in 2014 and $52 in 2013
 
(77
)
 
(488
)

Change in net loss and prior service cost:
 
 
 
 
Net losses and prior service costs, net of income taxes of $3 in 2014 and $- in 2013
 
(41
)
 

Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($14) in 2014 and ($13) in 2013
 
43

 
59


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
Gains transferred to earnings, net of income taxes of $1 in 2014 and $10 in 2013
 
(6
)
 
(64
)
(Losses) gains recognized, net of income taxes of $2 in 2014 and ($10) in 2013
 
(11
)
 
60

Total other comprehensive losses
 
(92
)
 
(433
)
Total comprehensive earnings
 
1,803

 
1,761

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
53

 
35

Redeemable noncontrolling interest (Note 7)
 

 
(3
)
Comprehensive earnings attributable to PMI
 
$
1,750

 
$
1,729













See notes to condensed consolidated financial statements

- 8-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
for the Six Months Ended June 30, 2014 and 2013
(in millions of dollars, except per share amounts)
(Unaudited)
 
PMI Stockholders’ (Deficit) Equity
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Earnings
Reinvested in
the
Business
 
Accumulated
Other
Comprehensive Losses
 
Cost of
Repurchased
Stock
 
Noncontrolling
Interests
 
Total
Balances, January 1, 2013
$

 
$
1,334

 
$
25,076

 
$
(3,604
)
 
$
(26,282
)
 
$
322

 
 
$
(3,154
)
 
Net earnings
 
 
 
 
4,249

 
 
 
 
 
96

(a) 
 
4,345

(a) 
Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(511
)
 
 
 
(8
)
(a) 
 
(519
)
(a) 
Issuance of stock awards and exercise of stock options
 
 
(28
)
 
 
 
 
 
134

 
 
 
 
106

 
Dividends declared ($1.70 per share)
 
 
 
 
(2,788
)
 
 
 
 
 
 
 
 
(2,788
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(169
)
 
 
(169
)
 
Common stock repurchased
 
 
 
 
 
 
 
 
(3,046
)
 
 
 
 
(3,046
)
 
Balances, June 30, 2013
$

 
$
1,306

 
$
26,537

 
$
(4,115
)
 
$
(29,194
)
 
$
241

 
 
$
(5,225
)
 
Balances, January 1, 2014
$

 
$
723

 
$
27,843

 
$
(4,190
)
 
$
(32,142
)
 
$
1,492

 
 
$
(6,274
)
 
Net earnings
 
 
 
 
3,726

 
 
 
 
 
85

 
 
3,811

 
Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(124
)
 
 
 
2

 
 
(122
)
 
Issuance of stock awards and exercise of stock options
 
 
(74
)
 
 
 
 
 
164

 
 
 
 
90

 
Dividends declared ($1.88 per share)
 
 
 
 
(2,968
)
 
 
 
 
 
 
 
 
(2,968
)
 
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(134
)
 
 
(134
)
 
Common stock repurchased
 
 
 
 
 
 
 
 
(2,250
)
 
 
 
 
(2,250
)
 
Balances, June 30, 2014
$

 
$
649

 
$
28,601

 
$
(4,314
)
 
$
(34,228
)
 
$
1,445

 
 
$
(7,847
)
 
(a) For the six months ended June 30, 2013, net earnings attributable to noncontrolling interests exclude $67 million of earnings related to the redeemable noncontrolling interest, which were originally reported outside of the equity section in the condensed consolidated balance sheet at June 30, 2013. Other comprehensive earnings, net of income taxes, also exclude $24 million of net currency translation adjustment losses related to the redeemable noncontrolling interest at June 30, 2013. In December 2013, the redeemable noncontrolling interest balance of $1,275 million was reclassified to noncontrolling interests due to the termination of an exit rights agreement. See Note 7. Redeemable Noncontrolling Interests for further details.


See notes to condensed consolidated financial statements.

- 9-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
For the Six Months Ended June 30,
 
2014
 
2013
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
3,811

 
$
4,412

 
 
 
 
Adjustments to reconcile net earnings to operating cash flows:
 
 
 
Depreciation and amortization
427

 
441

Deferred income tax provision
81

 
69

Asset impairment and exit costs, net of cash paid
282

 
(4
)
Cash effects of changes, net of the effects from acquired companies:
 
 
 
Receivables, net
(245
)
 
(534
)
Inventories
1,484

 
472

Accounts payable
2

 
61

Income taxes
(675
)
 
(800
)
Accrued liabilities and other current assets
(1,666
)
 
154

Pension plan contributions
(82
)
 
(56
)
Other
1

 
285

Net cash provided by operating activities
3,420

 
4,500

 
 
 
 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital expenditures
(508
)
 
(520
)
Purchase of businesses, net of acquired cash
(103
)
 

Investments in unconsolidated subsidiaries
(16
)
 
(3
)
Other
83

 
32

Net cash used in investing activities
(544
)
 
(491
)
 

















See notes to condensed consolidated financial statements.

Continued

- 10-


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Six Months Ended June 30,
 
2014
 
2013
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 
 
 
 
 
 
Short-term borrowing activity by original maturity:
 
 
 
    Net repayments - maturities of 90 days or less
$
(255
)
 
$
(101
)
    Issuances - maturities longer than 90 days
921

 
535

    Repayments - maturities longer than 90 days
(1,094
)
 
(139
)
Long-term debt proceeds
3,632

 
5,205

Long-term debt repaid
(1,240
)
 
(2,738
)
Repurchases of common stock
(2,281
)
 
(3,028
)
Issuance of common stock
1

 

Dividends paid
(2,993
)
 
(2,815
)
Other
(178
)
 
(218
)
Net cash used in financing activities
(3,487
)
 
(3,299
)
Effect of exchange rate changes on cash and cash equivalents
(2
)
 
(107
)
 
 
 
 
Cash and cash equivalents:
 
 
 
(Decrease) Increase
(613
)
 
603

Balance at beginning of period
2,154

 
2,983

Balance at end of period
$
1,541

 
$
3,586








See notes to condensed consolidated financial statements.

- 11-


Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Background and Basis of Presentation:
Background
Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Throughout these financial statements, the term “PMI” refers to Philip Morris International Inc. and its subsidiaries.
Basis of Presentation
The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and such principles are applied on a consistent basis. It is the opinion of PMI’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings attributable to PMI for any interim period are not necessarily indicative of results that may be expected for the entire year.
Certain prior years' amounts have been reclassified to conform to the current year's presentation, due to the separate disclosure of investments in unconsolidated subsidiaries. For further details, see Note 16. Investments in Unconsolidated Subsidiaries.
These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report to Shareholders and which are incorporated by reference into PMI’s Annual Report on Form 10-K for the year ended December 31, 2013.

Note 2. Asset Impairment and Exit Costs:
Pre-tax asset impairment and exit costs consisted of the following:

(in millions)
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Separation programs:
 
 
 
 
 
 
 
European Union
$
359

 
$

 
$
359

 
$

Asia
24

 

 
1

 

Total separation programs
383

 

 
360

 

Contract termination charges:
 
 
 
 
 
 
 
Asia

 
8

 

 
5

Total contract termination charges

 
8

 

 
5

Asset impairment charges:
 
 
 
 
 
 
 
European Union
129

 

 
129

 

Total asset impairment charges
129

 

 
129

 

Asset impairment and exit costs
$
512

 
$
8

 
$
489

 
$
5

Movement in Exit Cost Liabilities
The movement in exit cost liabilities for the six months ended June 30, 2014 was as follows:
 
(in millions)
 
Liability balance, January 1, 2014
$
308

Charges
383

Cash spent
(230
)
Currency/other
(22
)
Liability balance, June 30, 2014
$
439


- 12-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Cash payments related to exit costs at PMI were $230 million and $30 million for the six months and three months ended June 30, 2014, respectively, and $12 million and $7 million for the six months and three months ended June 30, 2013, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $439 million, and will be substantially paid by the second quarter of 2015.

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

The Netherlands

On April 4, 2014, PMI announced the initiation by its affiliate, Philip Morris Holland B.V. (“PMH”), of consultations with employee representatives on a proposal to discontinue cigarette production at its factory located in Bergen op Zoom, the Netherlands. PMH has reached an agreement with the trade unions and their members on a social plan, and plans to cease cigarette production by September 1, 2014. For the six months and three months ended June 30, 2014, total pre-tax asset impairment and exit costs of $488 million were recorded for this program in the European Union segment.

Other Exit Costs
Other Separation Program Charges
PMI recorded other pre-tax separation program charges of $24 million and $1 million for the six months and three months ended June 30, 2014, respectively, related to severance costs for a factory closure in Australia.

Contract Termination Charges
During the six months and three months ended June 30, 2013, PMI recorded exit costs of $8 million and $5 million, respectively, related to the termination of distribution agreements.

Note 3. Stock Plans:
In May 2012, PMI’s stockholders approved the Philip Morris International Inc. 2012 Performance Incentive Plan (the “2012 Plan”). The 2012 Plan replaced the 2008 Performance Incentive Plan (the “2008 Plan”) and, as a result, there will be no additional grants under the 2008 Plan. Under the 2012 Plan, PMI may grant to eligible employees restricted stock, restricted stock units and deferred stock units, performance-based cash incentive awards and performance-based equity awards. Up to 30 million shares of PMI’s common stock may be issued under the 2012 Plan. At June 30, 2014, shares available for grant under the 2012 Plan were 24,799,330.
In 2008, PMI adopted the Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (the “Non-Employee Directors Plan”). A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the Non-Employee Directors Plan. At June 30, 2014, shares available for grant under the plan were 715,904.
During the six months ended June 30, 2014, PMI granted 2.4 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $77.74 per share. During the six months ended June 30, 2013, PMI granted 2.8 million shares of deferred stock awards to eligible employees at a weighted-average grant date fair value of $88.43 per share. PMI recorded compensation expense related to stock awards of $113 million and $124 million during the six months ended June 30, 2014 and 2013, respectively and $47 million and $52 million during the three months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, PMI had $288 million of total unrecognized compensation cost related to non-vested deferred stock awards. The cost is recognized over the original restriction period of the awards, which is typically three or more years after the date of the award, subject to earlier vesting on death or disability or normal retirement, or separation from employment by mutual agreement after reaching age 58.

During the six months ended June 30, 2014, 3.4 million shares of PMI restricted stock and deferred stock awards vested. The grant date fair value of all the vested shares was approximately $205 million. The total fair value of restricted stock and deferred stock awards that vested during the six months ended June 30, 2014 was approximately $270 million.


- 13-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 4. Benefit Plans:

Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.
Pension Plans
Components of Net Periodic Benefit Cost
Net periodic pension cost consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
 
For the Six Months Ended June 30,
 
For the Six Months Ended June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
3

 
$
4

 
$
104

 
$
127

Interest cost
 
8

 
8

 
103

 
84

Expected return on plan assets
 
(8
)
 
(8
)
 
(177
)
 
(173
)
Amortization:
 

 

 

 

Net loss
 
3

 
6

 
57

 
102

Prior service cost
 

 
1

 
4

 
5

  Net transition obligation
 

 

 

 
1

Net periodic pension cost
 
$
6

 
$
11

 
$
91

 
$
146

 
 
U.S. Plans
 
Non-U.S. Plans
 
 
For the Three Months Ended June 30,
 
For the Three Months Ended June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
2

 
$
2

 
$
52

 
$
62

Interest cost
 
4

 
4

 
52

 
41

Expected return on plan assets
 
(4
)
 
(4
)
 
(89
)
 
(86
)
Amortization:
 
 
 
 
 
 
 
 
Net loss
 
1

 
3

 
29

 
51

Prior service cost
 

 
1

 
2

 
3

Net transition obligation
 

 

 

 
1

Net periodic pension cost
 
$
3

 
$
6

 
$
46

 
$
72


Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded U.S. and non-U.S. plans. Employer contributions of $82 million were made to the pension plans during the six months ended June 30, 2014. Currently, PMI anticipates making additional contributions during the remainder of 2014 of approximately $53 million to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.


- 14-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 5. Goodwill and Other Intangible Assets, net:
Goodwill and other intangible assets, net, by segment was as follows:

 
 
Goodwill
 
Other Intangible Assets, net
(in millions)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
European Union
 
$
1,609

 
$
1,472

 
$
620

 
$
604

Eastern Europe, Middle East & Africa
 
584

 
617

 
225

 
228

Asia
 
4,039

 
3,960

 
1,260

 
1,251

Latin America & Canada
 
2,853

 
2,844

 
1,104

 
1,110

Total
 
$
9,085

 
$
8,893

 
$
3,209

 
$
3,193

Goodwill is due primarily to PMI’s acquisitions in Canada, Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the business combination in the Philippines. The movements in goodwill from December 31, 2013, were as follows:
(in millions)
 
European
Union
 
Eastern
Europe,
Middle East
&
Africa
 
Asia
 
Latin
America &
Canada
 
Total
Balances, December 31, 2013
 
$
1,472

 
$
617

 
$
3,960

 
$
2,844

 
$
8,893

Changes due to:
 
 
 
 
 
 
 
 
 
 
Acquisitions
 
153

 

 

 

 
153

Currency
 
(16
)
 
(33
)
 
79

 
9

 
39

Balances, June 30, 2014
 
$
1,609

 
$
584

 
$
4,039

 
$
2,853

 
$
9,085

The increase in goodwill from acquisitions was due to the preliminary purchase price allocation for PMI's June 2014 purchase of Nicocigs Limited, a U.K.-based e-vapor company. For further details, see Note 17. Acquisitions and Other Business Arrangements.
Additional details of other intangible assets were as follows:
 
 
June 30, 2014
 
December 31, 2013
(in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizable intangible assets
 
$
1,818

 
 
 
$
1,798

 
 
Amortizable intangible assets
 
1,983

 
$
592

 
1,940

 
$
545

Total other intangible assets
 
$
3,801

 
$
592

 
$
3,738

 
$
545



- 15-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007. Amortizable intangible assets primarily consist of certain trademarks, distribution networks and non-compete agreements associated with business combinations. The gross carrying amount, the range of useful lives as well as the weighted-average remaining useful life of amortizable intangible assets at June 30, 2014, were as follows:


(dollars in millions)
Gross Carrying Amount
Initial Estimated
Useful Lives
    
Weighted-Average
Remaining Useful Life
Trademarks
$
1,595

2 - 40 years
    
24 years
Distribution networks
162

20 - 30 years
    
14 years
Non-compete agreements
134

3 - 10 years
    
1 year
Other (including farmer
  contracts and intellectual property rights)
92

12.5 - 17 years
    
13 years
 
$
1,983

 
 
 

Pre-tax amortization expense for intangible assets during the six months ended June 30, 2014 and 2013 was $44 million and $48 million, respectively, and $22 million and $24 million for the three months ended June 30, 2014 and 2013, respectively. Amortization expense for each of the next five years is estimated to be $88 million or less, assuming no additional transactions occur that require the amortization of intangible assets.
The increase in the gross carrying amount of other intangible assets from December 31, 2013, was due to currency movements, as well as the purchase of additional patent rights related to an aerosol delivery technology acquired in 2011.
During the first quarter of 2014, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential impairment, and no impairment charges were required as a result of this review.

Note 6. Financial Instruments:
Overview
PMI operates in markets outside of the United States of America, with manufacturing and sales facilities in various locations around the world. PMI utilizes certain financial instruments to manage foreign currency and interest rate exposure. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings. PMI reports its net transaction gains or losses in marketing, administration and research costs on the condensed consolidated statements of earnings.
PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts, to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Australian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At June 30, 2014, PMI had contracts with aggregate notional amounts of $16.4 billion of which $3.8 billion related to cash flow hedges, $2.6 billion related to hedges of net investments in foreign operations and $10.0 billion related to other derivatives that primarily offset currency exposures on intercompany financing.

- 16-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The fair value of PMI’s foreign exchange contracts included in the condensed consolidated balance sheet as of June 30, 2014 and December 31, 2013, were as follows:

 
 
Asset Derivatives
 
Liability Derivatives
 
 

 
Fair Value
 

 
Fair Value
(in millions)
 
Balance Sheet Classification
 
At June 30, 2014
 
At December 31, 2013
 
Balance Sheet Classification
 
At June 30, 2014
 
At December 31, 2013
Foreign exchange contracts designated as hedging instruments
 
Other current assets
 
$
66

 
$
111

 
Other accrued liabilities
 
$
6

 
$
44

 
 
Other assets
 
13

 

 
Other liabilities
 
44

 
46

Foreign exchange contracts not designated as hedging instruments 
 
Other current assets 
 
11

 
42

 
Other accrued liabilities
 
64

 
12

 
 
 
 
 
 
 
 
Other liabilities
 

 
14

Total derivatives
 
 
 
$
90

 
$
153

 
 
 
$
114

 
$
116



- 17-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Hedging activities, which represent movement in derivatives as well as the respective underlying transactions, had the following effect on PMI’s condensed consolidated statements of earnings and other comprehensive earnings for the six months and three months ended June 30, 2014 and 2013:
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Six Months Ended June 30, 2014
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
32

 
 
 
$

 
 
 
$
32

Cost of sales
 

 
 
 

 
 
 

Marketing, administration and research costs
 
(1
)
 
 
 

 
 
 
(1
)
Operating income
 
31

 
 
 

 
 
 
31

Interest expense, net
 
(16
)
 
 
 
1

 
 
 
(15
)
Earnings before income taxes
 
15

 
 
 
1

 
 
 
16

Provision for income taxes
 
(2
)
 
 
 

 
 
 
(2
)
Net earnings attributable to PMI
 
$
13

 
 
 
$
1

 
 
 
$
14


Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(15
)
 
 
 
 
 
$
2

 
$
(13
)
Recognized losses
 
(40
)
 
 
 
 
 
5

 
(35
)
Net impact on equity
 
$
(55
)
 
 
 
 
 
$
7

 
$
(48
)
Currency translation adjustments
 
 
 
$
36

 
 
 
$
(7
)
 
$
29

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Six Months Ended June 30, 2013
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
125

 
 
 
$

 
 
 
$
125

Cost of sales
 
6

 
 
 

 
 
 
6

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 
131

 
 
 

 
 
 
131

Interest expense, net
 
(22
)
 
 
 
2

 
 
 
(20
)
Earnings before income taxes
 
109

 
 
 
2

 
 
 
111

Provision for income taxes
 
(14
)
 
 
 
1

 
 
 
(13
)
Net earnings attributable to PMI
 
$
95

 
 
 
$
3

 
 
 
$
98


Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(109
)
 
 
 
 
 
$
14

 
$
(95
)
Recognized gains
 
179

 
 
 
 
 
(23
)
 
156

Net impact on equity
 
$
70

 
 
 
 
 
$
(9
)
 
$
61

Currency translation adjustments
 
 
 
$
16

 
 
 
$
(1
)
 
$
15

 
 
 
 
 
 
 
 
 
 
 

- 18-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(in millions)
 
For the Three Months Ended June 30, 2014
Gain (Loss)
 
Cash Flow
Hedges
 
Net
Investment
Hedges
 
Other
Derivatives
 
Income
Taxes
 
Total
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
17

 
 
 
$

 
 
 
$
17

Cost of sales
 

 
 
 

 
 
 

Marketing, administration and research costs
 
(1
)
 
 
 

 
 
 
(1
)
Operating income
 
16

 
 
 

 
 
 
16

Interest expense, net
 
(9
)
 
 
 
3

 
 
 
(6
)
Earnings before income taxes
 
7

 
 
 
3

 
 
 
10

Provision for income taxes
 
(1
)
 
 
 

 
 
 
(1
)
Net earnings attributable to PMI
 
$
6

 
 
 
$
3

 
 
 
$
9

Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(7
)
 
 
 
 
 
$
1

 
$
(6
)
Recognized losses
 
(13
)
 
 
 
 
 
2

 
(11
)
Net impact on equity
 
$
(20
)
 
 
 
 
 
$
3

 
$
(17
)
Currency translation adjustments
 
 
 
$
11

 
 
 
$
4

 
$
15

 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
For the Three Months Ended June 30, 2013
Gain (Loss)
 
Cash Flow
Hedges    
 
Net
Investment
Hedges    
 
Other
Derivatives    
 
Income
Taxes    
 
Total    
Statement of Earnings:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
84

 
 
 
$

 
 
 
$
84

Cost of sales
 
3

 
 
 

 
 
 
3

Marketing, administration and research costs
 

 
 
 

 
 
 

Operating income
 
87

 
 
 

 
 
 
87

Interest expense, net
 
(13
)
 
 
 
2

 
 
 
(11
)
Earnings before income taxes
 
74

 
 
 
2

 
 
 
76

Provision for income taxes
 
(10
)
 
 
 
1

 
 
 
(9
)
Net earnings attributable to PMI
 
$
64

 
 
 
$
3

 
 
 
$
67

Other Comprehensive Earnings/(Losses):
 
 
 
 
 
 
 
 
 
 
Gains transferred to earnings
 
$
(74
)
 
 
 
 
 
$
10

 
$
(64
)
Recognized gains
 
70

 
 
 
 
 
(10
)
 
60

Net impact on equity
 
$
(4
)
 
 
 
 
 
$

 
$
(4
)
Currency translation adjustments
 
 
 
$
13

 
 
 
$
(1
)
 
$
12

 
 
 
 
 
 
 
 
 
 
 

Each type of hedging activity is described in greater detail below.
Cash Flow Hedges
PMI has entered into foreign exchange contracts to hedge foreign currency exchange risk related to certain forecasted transactions. The effective portion of gains and losses associated with qualifying cash flow hedge contracts is deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s condensed consolidated statements of earnings. During the six months and three months ended June 30, 2014 and 2013, ineffectiveness related to cash flow hedges was not material. As of June 30, 2014, subtantially all of PMI's hedged forecasted transactions are for periods not

- 19-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

exceeding the next eighteen months with the exception of one foreign exchange contract that expires in May 2024. The impact of these hedges is included in operating cash flows on PMI’s condensed consolidated statements of cash flows.
 
For the six months and three months ended June 30, 2014 and 2013, foreign exchange contracts that were designated as cash flow hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
 
 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
 
For the Six Months Ended June 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive  Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
 
 
 
 
 
 
$
(40
)
 
$
179

 
 
Net revenues
 
$
32

 
$
125

 
 
 
 
 
 
Cost of sales
 

 
6

 
 
 
 
 
 
Marketing, administration
and research costs
 
(1
)
 

 
 
 
 
 
 
Interest expense, net
 
(16
)
 
(22
)
 
 
 
 
Total
 
 
 
$
15

 
$
109

 
$
(40
)
 
$
179

(pre-tax, in millions)
 
For the Three Months Ended June 30,
Derivatives in
Cash Flow
Hedging
Relationship  
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive  Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
 
 
 
 
 
 
$
(13
)
 
$
70

 
 
Net revenues
 
$
17

 
$
84

 
 
 
 
 
 
Cost of sales
 

 
3

 
 
 
 
 
 
Marketing, administration
and research costs
 
(1
)
 

 
 
 
 
 
 
Interest expense, net
 
(9
)
 
(13
)
 
 
 
 
Total
 
 
 
$
7

 
$
74

 
$
(13
)
 
$
70



Hedges of Net Investments in Foreign Operations
PMI designates certain foreign currency denominated debt and foreign exchange contracts as net investment hedges of its foreign operations. For the six months ended June 30, 2014 and 2013, these hedges of net investments resulted in gains, net of income taxes of $93 million and $36 million, respectively. For the three months ended June 30, 2014 and 2013, these hedges of net investments resulted in gains (losses), net of income taxes, of $76 million and $(55) million, respectively. These gains (losses) were reported as a component of accumulated other comprehensive losses within currency translation adjustments. For the six months and three months ended June 30, 2014 and 2013, ineffectiveness related to net investment hedges was not material. Other investing cash flows on PMI’s condensed consolidated statements of cash flows include the premiums paid for, and settlements of, net investment hedges.


- 20-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

For the six months and three months ended June 30, 2014 and 2013, foreign exchange contracts that were designated as net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:
 
 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
 
For the Six Months Ended June 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
 
 
 
 
 
 
$
36

 
$
16

 
 
Interest expense, net
 
$

 
$

 
 
 
 
(pre-tax, in millions)
 
For the Three Months Ended June 30,
Derivatives in Net
Investment
Hedging
Relationship
 
Statement of Earnings
Classification of
Gain/(Loss) Reclassified
from Other Comprehensive
Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Reclassified from Other
Comprehensive Earnings/(Losses) into Earnings
 
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings/(Losses) on Derivatives
 
 
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
 
 
 
 
 
 
$
11

 
$
13

 
 
Interest expense, net
 
$

 
$

 
 
 
 

Other Derivatives
PMI has entered into foreign exchange contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s condensed consolidated statements of earnings. For the six months ended June 30, 2014 and 2013, the gains (losses) from contracts for which PMI did not apply hedge accounting were $94 million and $(20) million, respectively. For the three months ended June 30, 2014 and 2013, the gains from contracts for which PMI did not apply hedge accounting were $142 million and $70 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 six months and three months ended June 30, 2014 and 2013, these items impacted the condensed consolidated statements of earnings as follows:
 
(pre-tax, in millions)
 
For the Three Months Ended June 30,
Derivatives not Designated
   as Hedging Instruments
 
Statement of Earnings
Classification of
Gain/(Loss)
 
Amount of Gain/(Loss)
Recognized in Earnings
 
 
 
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
$
1

 
$
2

 
$
3

 
$
2


- 21-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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

(in millions)
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Gain at beginning of period
 
$
63

 
$
92

 
$
32

 
$
157

Derivative (gains)/losses transferred to earnings
 
(13
)
 
(95
)
 
(6
)
 
(64
)
Change in fair value
 
(35
)
 
156

 
(11
)
 
60

Gain as of June 30,
 
$
15

 
$
153

 
$
15

 
$
153

At June 30, 2014, PMI expects $19 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the condensed consolidated statement of earnings within the next twelve months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.
Contingent Features
PMI’s derivative instruments do not contain contingent features.
Credit Exposure and Credit Risk
PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.
Fair Value
See Note 13. Fair Value Measurements and Note 15. Balance Sheet Offsetting for additional discussion of derivative financial instruments.

Note 7. Redeemable Noncontrolling Interest:
Philippines Business Combination:
On February 25, 2010, PMI's affiliate, Philip Morris Philippines Manufacturing Inc. (“PMPMI”), and Fortune Tobacco Corporation (“FTC”) combined their respective business activities by transferring selected assets and liabilities of PMPMI and FTC to a new company called PMFTC Inc. (“PMFTC”). PMPMI and FTC hold equal economic interests in PMFTC, while PMI manages the day-to-day operations of PMFTC and has a majority of its Board of Directors. Consequently, PMI accounted for the contributed assets and liabilities of FTC as a business combination.
The fair value of the assets and liabilities contributed by FTC in this non-cash transaction was determined to be $1.17 billion. At the time of the business combination, FTC was given the right to sell its interest in PMFTC to PMI, except in certain circumstances, during the period from February 25, 2015, through February 24, 2018, at an agreed-upon value of $1.17 billion, which was recorded on PMI’s condensed consolidated balance sheet as a redeemable noncontrolling interest at the date of the business combination. On December 10, 2013, FTC terminated the agreement related to this exit right. As a result, the amount included in the consolidated balance sheet as redeemable noncontrolling interest at that date was reclassified to noncontrolling interests within stockholders' deficit on the December 31, 2013 consolidated balance sheet.


- 22-

Philip Morris International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The redeemable noncontrolling interest balance at June 30, 2013 was $1,296 million. The movement in redeemable noncontrolling interest for the six months ended June 30, 2013 was as follows:

(in millions)
  
Redeemable noncontrolling interest at December 31, 2012
$
1,301

Share of net earnings
67

Dividend payments
(48
)
Currency translation losses
(24
)
Redeemable noncontrolling interest at June 30, 2013
$
1,296




Note 8. Earnings Per Share:
Basic and diluted earnings per share (“EPS”) were calculated using the following:
(in millions)
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2014
 
2013
 
2014