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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class                    
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, no par value
 
PM
 
New York Stock Exchange
1.875% Notes due 2021
 
PM21B
 
New York Stock Exchange
1.875% Notes due 2021
 
PM21C
 
New York Stock Exchange
4.125% Notes due 2021
 
PM21
 
New York Stock Exchange
2.900% Notes due 2021
 
PM21A
 
New York Stock Exchange
2.625% Notes due 2022
 
PM22A
 
New York Stock Exchange
2.375% Notes due 2022
 
PM22B
 
New York Stock Exchange
2.500% Notes due 2022
 
PM22
 
New York Stock Exchange
2.500% Notes due 2022
 
PM22C
 
New York Stock Exchange
2.625% Notes due 2023
 
PM23
 
New York Stock Exchange
2.125% Notes due 2023
 
PM23B
 
New York Stock Exchange
3.600% Notes due 2023
 
PM23A
 
New York Stock Exchange
2.875% Notes due 2024
 
PM24
 
New York Stock Exchange
2.875% Notes due 2024
 
PM24C
 
New York Stock Exchange
0.625% Notes due 2024
 
PM24B
 
New York Stock Exchange
3.250% Notes due 2024
 
PM24A
 
New York Stock Exchange
Title of each class                    
 
Trading Symbol(s)
 
Name of each exchange on which registered
2.750% Notes due 2025
 
PM25
 
New York Stock Exchange
3.375% Notes due 2025
 
PM25A
 
New York Stock Exchange
2.750% Notes due 2026
 
PM26A
 
New York Stock Exchange
2.875% Notes due 2026
 
PM26
 
New York Stock Exchange
0.125% Notes due 2026
 
PM26B
 
New York Stock Exchange
3.125% Notes due 2027
 
PM27
 
New York Stock Exchange
3.125% Notes due 2028
 
PM28
 
New York Stock Exchange
2.875% Notes due 2029
 
PM29
 
New York Stock Exchange
3.375% Notes due 2029
 
PM29A
 
New York Stock Exchange
0.800% Notes due 2031
 
PM31
 
New York Stock Exchange
3.125% Notes due 2033
 
PM33
 
New York Stock Exchange
2.000% Notes due 2036
 
PM36
 
New York Stock Exchange
1.875% Notes due 2037
 
PM37A
 
New York Stock Exchange
6.375% Notes due 2038
 
PM38
 
New York Stock Exchange
1.450% Notes due 2039
 
PM39
 
New York Stock Exchange
4.375% Notes due 2041
 
PM41
 
New York Stock Exchange
4.500% Notes due 2042
 
PM42
 
New York Stock Exchange
3.875% Notes due 2042
 
PM42A
 
New York Stock Exchange
4.125% Notes due 2043
 
PM43
 
New York Stock Exchange
4.875% Notes due 2043
 
PM43A
 
New York Stock Exchange
4.250% Notes due 2044
 
PM44
 
New York Stock Exchange
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 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  þ        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-2 of the Exchange Act.
Large accelerated filer    þ                        Accelerated filer              
Non-accelerated filer                             Smaller reporting company    
Emerging growth company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  þ
At April 23, 2020, there were 1,557,129,538 shares outstanding of the registrant’s common stock, no par value per share.

-1-

Table of Contents


PHILIP MORRIS INTERNATIONAL INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
PART I -
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Earnings for the
 
 
Three Months Ended March 31, 2020 and 2019
 
 
 
 
Condensed Consolidated Statements of Comprehensive Earnings for the
 
 
Three Months Ended March 31, 2020 and 2019
 
 
 
 
Condensed Consolidated Balance Sheets at
 
 
March 31, 2020 and December 31, 2019
5 – 6
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the
 
 
Three Months Ended March 31, 2020 and 2019
7 – 8
 
 
 
 
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the
 
 
Three Months Ended March 31, 2020 and 2019
 
 
 
 
10 – 39
 
 
 
Item 2.
40 – 80
 
 
 
Item 4.
 
 
 
PART II -
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

In this report, “PMI,” “we,” “us” and “our” refer 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.

-2-

Table of Contents


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
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 March 31,
 
2020
 
2019
Revenues including excise taxes
$
18,253

 
$
17,705

Excise taxes on products
11,100

 
10,954

Net revenues
7,153

 
6,751

Cost of sales
2,402

 
2,465

Gross profit
4,751

 
4,286

Marketing, administration and research costs (Notes 8, 18 & 19)
1,944

 
2,217

Amortization of intangibles
18

 
19

Operating income
2,789

 
2,050

Interest expense, net
129

 
152

Pension and other employee benefit costs (Note 3)
23

 
21

Earnings before income taxes
2,637

 
1,877

Provision for income taxes
596

 
424

Equity investments and securities (income)/loss, net
54

 
(11
)
Net earnings
1,987

 
1,464

Net earnings attributable to noncontrolling interests
161

 
110

Net earnings attributable to PMI
$
1,826

 
$
1,354


Per share data (Note 6):
 
 
 
Basic earnings per share
$
1.17

 
$
0.87

Diluted earnings per share
$
1.17

 
$
0.87








See notes to condensed consolidated financial statements.

-3-

Table of Contents


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

 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
Net earnings
 
$
1,987

 
$
1,464

Other comprehensive earnings (losses), net of income taxes:
 
 
 
 
Change in currency translation adjustments:
 
 
 
 
Unrealized gains (losses), net of income taxes of ($96) in 2020 and ($128) in 2019
 
(1,582
)
 
286

(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $0 in 2020 and 2019 (Note 19)
 

 
502


Change in net loss and prior service cost:
 
 
 
 
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($17) in 2020 and ($4) in 2019
 
74

 
63

(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $0 in 2020 and ($15) in 2019 (Note 19)
 

 
27


Change in fair value of derivatives accounted for as hedges:
 
 
 
 
Gains (losses) recognized, net of income taxes of ($5) in 2020 and $1 in 2019
 
26

 
(1
)
(Gains) losses transferred to earnings, net of income taxes of $1 in 2020 and $1 in 2019
 
(9
)
 
(4
)
Total other comprehensive earnings (losses)
 
(1,491
)
 
873

Total comprehensive earnings
 
496

 
2,337

Less comprehensive earnings attributable to:
 
 
 
 
Noncontrolling interests
 
81

 
109

Comprehensive earnings attributable to PMI
 
$
415

 
$
2,228

















See notes to condensed consolidated financial statements.

-4-

Table of Contents


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Cash and cash equivalents
$
3,746

 
$
6,861

Trade receivables (less allowances of $19 in 2020 and $20 in 2019)
2,785

 
3,080

Other receivables
549

 
637


Inventories:
 
 
 
Leaf tobacco
2,012

 
2,052

Other raw materials
2,155

 
1,596

Finished product
4,878

 
5,587

 
9,045

 
9,235

Other current assets
736

 
701


Total current assets
16,861

 
20,514


Property, plant and equipment, at cost
13,700

 
14,446

Less: accumulated depreciation
7,593

 
7,815

 
6,107

 
6,631

Goodwill (Note 4)
5,284

 
5,858

Other intangible assets, net (Note 4)
1,850

 
2,113

Investments in unconsolidated subsidiaries and equity securities (Notes 11&14)
4,390

 
4,635

Deferred income taxes
1,113

 
1,153

Other assets
1,889

 
1,971

TOTAL ASSETS
$
37,494

 
$
42,875










See notes to condensed consolidated financial statements.
Continued

-5-

Table of Contents


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share data)
(Unaudited)
 
 
March 31,
2020
 
December 31,
2019
LIABILITIES
 
 
 
Short-term borrowings (Note 10)
$
1,438

 
$
338

Current portion of long-term debt (Note 10)
1,933

 
4,051

Accounts payable
2,073

 
2,299

Accrued liabilities:
 
 
 
Marketing and selling
645

 
666

Taxes, except income taxes
5,058

 
5,837

Employment costs
783

 
1,042

Dividends payable
1,832

 
1,831

Other
2,011

 
1,973

Income taxes
811

 
796

Total current liabilities
16,584

 
18,833


Long-term debt (Note 10)
24,999

 
26,656

Deferred income taxes
838

 
908

Employment costs
3,560

 
3,634

Income taxes and other liabilities
2,576

 
2,443

Total liabilities
48,557

 
52,474


Contingencies (Note 8)

 


STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 

Common stock, no par value
(2,109,316,331 shares issued in 2020 and 2019)

 

Additional paid-in capital
1,992

 
2,019

Earnings reinvested in the business
30,984

 
30,987

Accumulated other comprehensive losses
(10,774
)
 
(9,363
)
 
22,202

 
23,643

Less: cost of repurchased stock
   (552,210,107 and 553,421,668 shares in 2020 and 2019, respectively)
35,146

 
35,220

Total PMI stockholders’ deficit
(12,944
)
 
(11,577
)
Noncontrolling interests
1,881

 
1,978

Total stockholders’ deficit
(11,063
)
 
(9,599
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
37,494

 
$
42,875






See notes to condensed consolidated financial statements.

-6-

Table of Contents


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
 
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 
 
 
 
 
 
 
 
Net earnings
$
1,987

 
$
1,464

 
 
 
 
 
 
Adjustments to reconcile net earnings to operating cash flows:
 
 
 
 
Depreciation and amortization
241

 
240

 
Deferred income tax (benefit) provision
(24
)
 
(94
)
 
Asset impairment and exit costs, net of cash paid (Note 18)
(48
)
 
17

 
Cash effects of changes in:
 
 
 
 
Receivables, net
116

 
4

 
Inventories
(575
)
 
237

 
Accounts payable
(65
)
 
(7
)
 
Accrued liabilities and other current assets
(662
)
 
(855
)
 
Income taxes
(54
)
 
(251
)
 
Pension plan contributions
(23
)
 
(17
)
 
Other
218

 
503

(1) 
Net cash provided by operating activities
1,111

 
1,241

 
 
 
 
 
 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(170
)
 
(324
)
 
Investments in unconsolidated subsidiaries and equity securities
(2
)
 
(24
)
 
Deconsolidation of RBH (Note 19)

 
(1,346
)
(2) 
Net investment hedges
684

 
91

 
Other
2

 
7

 
Net cash provided by (used in) investing activities
514

 
(1,596
)
 
 
















See notes to condensed consolidated financial statements.

Continued

-7-

Table of Contents


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
2020
 
2019
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 
 
 
 
 
 
Short-term borrowing activity by original maturity:
 
 
 
    Net issuances (repayments) - maturities of 90 days or less
$
1,097

 
$
(167
)
    Issuances - maturities longer than 90 days
25

 
989

Long-term debt repaid
(3,641
)
 
(2,137
)
Dividends paid
(1,828
)
 
(1,780
)
Sale (purchase) of subsidiary shares to/(from) noncontrolling interests
2

 

Other
(204
)
 
(56
)
Net cash used in financing activities
(4,549
)
 
(3,151
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(191
)
 
(28
)
 
 
 
 
Cash, cash equivalents and restricted cash(3):
 
 
 
Increase (Decrease)
(3,115
)
 
(3,534
)
Balance at beginning of period
6,865

 
6,620

Balance at end of period
$
3,750

 
$
3,086

 
 
 
 

(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 condensed consolidated statements of earnings for the three months ended March 31, 2019. For further details on these charges, see Note 19. 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 and $5 million as of March 31, 2020 and 2019, respectively, and $4 million and $27 million as of December 31, 2019, and 2018, respectively, which were included in other current assets in the condensed consolidated balance sheets.



See notes to condensed consolidated financial statements.

-8-

Table of Contents


Philip Morris International Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
For the Three Months Ended March 31, 2020 and 2019
(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, 2019
$

 
$
1,939

 
$
31,014

 
$
(10,111
)
 
$
(35,301
)
 
$
1,720

 
$
(10,739
)
Net earnings
 
 
 
 
1,354

 
 
 
 
 
110

 
1,464

Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
345

 
 
 
(1
)
 
344

Issuance of stock awards
 
 
(32
)
 
 
 
 
 
75

 
 
 
43

Dividends declared ($1.14 per share)
 
 
 
 
(1,780
)
 
 
 
 
 
 
 
(1,780
)
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(46
)
 
(46
)
Deconsolidation of RBH (Note 19)
 
 
 
 
 
 
529

 
 
 
 
 
529

Balances, March 31, 2019
$

 
$
1,907

 
$
30,588

 
$
(9,237
)
 
$
(35,226
)
 
$
1,783

 
$
(10,185
)
Balances, January 1, 2020
$

 
$
2,019

 
$
30,987

 
$
(9,363
)
 
$
(35,220
)
 
$
1,978

 
$
(9,599
)
Net earnings
 
 
 
 
1,826

 
 
 
 
 
161

 
1,987

Other comprehensive earnings (losses), net of income taxes
 
 
 
 
 
 
(1,411
)
 
 
 
(80
)
 
(1,491
)
Issuance of stock awards
 
 
(25
)
 
 
 
 
 
74

 
 
 
49

Dividends declared ($1.17 per share)
 
 
 
 
(1,829
)
 
 
 
 
 
 
 
(1,829
)
Payments to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
(182
)
 
(182
)
Other
 
 
(2
)
 
 
 

 
 
 
4

 
2

Balances, March 31, 2020
$

 
$
1,992

 
$
30,984

 
$
(10,774
)
 
$
(35,146
)
 
$
1,881

 
$
(11,063
)





 
See notes to condensed consolidated financial statements.

-9-

Table of Contents


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 nicotine-containing products, including reduced-risk products, in markets outside of the United States of America. In addition, PMI ships a version of its Platform 1 device and its consumables authorized by the U.S. Food and Drug Administration ("FDA") to Altria Group, Inc., for sale in the United States under license. Throughout these financial statements, the term "PMI" refers to Philip Morris International Inc. and its subsidiaries.

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

"Platform 1" is the term PMI uses to refer to PMI’s reduced-risk product that uses a precisely controlled heating device incorporating our IQOS HeatControl technology, into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.

Basis of Presentation

The interim condensed consolidated financial statements of PMI are unaudited. These interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and such principles are applied on a consistent basis. It is the opinion of PMI’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings attributable to PMI for any interim period are not necessarily indicative of results that may be expected for the entire year.

PMI has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of March 31, 2020. PMI has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets, long-lived assets or its hedge accounting activities. Additionally, PMI believes that the modification of certain customer payment terms has not changed its assessment of collectability and therefore, there has been no material impact on PMI’s revenue recognition.

As of March 22, 2019, PMI deconsolidated the financial results of its Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH") from PMI's financial statements. For further details, see Note 19. Deconsolidation of RBH.

These statements should be read in conjunction with the audited consolidated financial statements and related notes, which appear in PMI’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 2. Stock Plans:

In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). Under the 2017 Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2017 Plan. At March 31, 2020, shares available for grant under the 2017 Plan were 17,384,530.

In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 Non-Employee Directors Plan”). A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors Plan. At March 31, 2020, shares available for grant under the plan were 954,084.


-10-

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

Restricted share unit (RSU) awards

During the three months ended March 31, 2020 and 2019, shares granted to eligible employees, the weighted-average grant date fair value per share related to RSU awards and the recorded compensation expense related to RSU awards were as follows:
 
Number of
Shares
Granted
 
Weighted-Average Grant Date Fair Value Per RSU Award Granted
 
Compensation Expense Related to RSU Awards (in millions)
2020
1,599,380

 
$ 86.62

 
$
39

2019
1,621,070

 

$ 77.13

 
$
36

 
 
 

As of March 31, 2020, PMI had $218 million of total unrecognized compensation cost related to non-vested RSU awards. The cost is recognized over the original restriction period of the awards, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58.

During the three months ended March 31, 2020, 1,011,318 RSU awards vested. The grant date fair value of all the vested awards was approximately $99 million. The total fair value of RSU awards that vested during the three months ended March 31, 2020 was approximately $88 million.

Performance share unit (PSU) awards

During the three months ended March 31, 2020 and 2019, PMI granted PSU awards to certain executives. The PSU awards require the achievement of certain performance factors, which are predetermined at the time of grant, typically over a three-year performance cycle. The performance metrics for such PSU's granted during the three months ended March 31, 2020 consisted of PMI's Total Shareholder Return ("TSR") relative to a predetermined peer group and on an absolute basis (40% weight), PMI’s currency-neutral compound annual adjusted diluted earnings per share growth rate (30% weight), and PMI’s performance against specific measures of PMI’s transformation, defined as net revenues from PMI's RRPs and any other non-combustible products as a percentage of PMI's total net revenues in the last year of the performance cycle (30% weight). The performance metrics for such PSUs granted during the three months ended March 31, 2019 consisted of PMI’s TSR relative to a predetermined peer group and on an absolute basis (50% weight), PMI’s currency-neutral compound annual adjusted operating income growth rate, excluding acquisitions (30% weight), and PMI’s performance against specific measures of PMI’s transformation (20% weight).

The aggregate of the weighted performance factors for the three metrics in each such PSU award determines the percentage of PSUs that will vest at the end of the three-year performance cycle. The minimum percentage of such PSUs that can vest is zero, with a target percentage of 100 and a maximum percentage of 200. Each such vested PSU entitles the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 will result in the targeted number of PSUs being vested. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned.

During the three months ended March 31, 2020 and 2019, shares granted to eligible employees, the grant date fair value per share and the recorded compensation expense related to PSU awards were as follows:
 
Number of Shares Granted
PSU Grant Date Fair Value Subject to Other Performance Factors Per Share
PSU Grant Date Fair Value Subject to TSR Performance Factor Per Share
Compensation Expense Related to PSU Awards (in millions)
2020
643,640

$ 86.69

$ 79.76

$
23

2019
625,200


$ 77.20


$ 83.59

$
18


The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market price of PMI’s stock at the date of the grant. The grant date fair value of the PSU market based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation model. The following assumptions were used to determine the grant date fair value of the PSU awards subject to the TSR performance factor:

-11-

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

 
2020
 
2019
Risk-free interest rate (a)
1.4
%
 
2.4
%
Expected volatility (b)
23.5
%
 
21.4
%
(a) Based on the U.S. Treasury yield curve.
(b) Determined using the observed historical volatility.

 
 
 

As of March 31, 2020, PMI had $60 million of total unrecognized compensation cost related to non-vested PSU awards. The cost is recognized over the performance cycle of the awards, or upon death, disability or reaching the age of 58.

During the three months ended March 31, 2020, 343,806 PSU awards vested. The grant date fair value of all the vested awards was approximately $35 million. The total fair value of PSU awards that vested during the three months ended March 31, 2020 was approximately $30 million.

Note 3. Benefit Plans:

Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.

Pension and other employee benefit costs per the condensed consolidated statements of earnings consisted of the following:
 
For the Three Months Ended March 31,
(in millions)
2020
 
2019
Net pension costs (income)
$
(4
)
 
$
(5
)
Net postemployment costs
25

 
24

Net postretirement costs
2

 
2

Total pension and other employee benefit costs
$
23

 
$
21



Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:
 
Pension (1)
 
For the Three Months Ended March 31,
(in millions)
2020
 
2019
Service cost
$
65

 
$
54

Interest cost
17

 
29

Expected return on plan assets
(86
)
 
(79
)
Amortization:
 
 
 
Net loss
65

 
45

Prior service cost

 

Net periodic pension cost
$
61

 
$
49

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

-12-

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


Employer Contributions
PMI makes, and plans to make, contributions, to the extent that they are tax deductible and to meet specific funding requirements of its funded pension plans. Employer contributions of $23 million were made to the pension plans during the three months ended March 31, 2020. Currently, PMI anticipates making additional contributions during the remainder of 2020 of approximately $62 million to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.

Note 4. Goodwill and Other Intangible Assets, net:

The movements in goodwill were as follows:
(in millions)
European Union
Eastern Europe
Middle East & Africa
South & Southeast Asia
East Asia & Australia
Latin America & Canada
Total
Balances, December 31, 2019
$
1,338

$
300

$
89

$
2,898

$
551

$
682

$
5,858

Changes due to:
 
 
 
 
 
 
 
Currency
(53
)
(13
)
(19
)
(327
)
(47
)
(115
)
(574
)
Balances, March 31, 2020
$
1,285

$
287

$
70

$
2,571

$
504

$
567

$
5,284



At March 31, 2020, goodwill primarily reflects PMI’s acquisitions in Colombia, Greece, Indonesia, Mexico, Pakistan and Serbia, as well as the business combination in the Philippines.

Details of other intangible assets were as follows:
 
 
March 31, 2020
 
December 31, 2019
(in millions)
Weighted-Average Remaining Useful Life
Gross Carrying Amount
Accumulated Amortization
Net
 
Gross Carrying Amount
Accumulated Amortization
Net
Non-amortizable intangible assets
 
$
1,112

 
$
1,112

 
$
1,319

 
$
1,319

Amortizable intangible assets:
 
 
 
 
 
 
 
 
Trademarks
14 years
1,160

$
518

642

 
1,217

$
526

691

Distribution networks
8 years
103

67

36

 
113

72

41

Other*
9 years
104

44

60

 
106

44

62

Total other intangible assets
 
$
2,479

$
629

$
1,850

 
$
2,755

$
642

$
2,113

* Primarily intellectual property rights

Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia and Mexico. The decrease since December 31, 2019 was due to currency movements of ($207 million).

The decrease in the gross carrying amount of amortizable intangible assets from December 31, 2019, was mainly due to currency movements of ($69 million).

The change in the accumulated amortization from December 31, 2019, was mainly due to currency movements of ($31 million), partially offset by the 2020 amortization of $18 million.

-13-

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


Amortization expense for each of the next five years is estimated to be $75 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

Note 5. Financial Instruments:

Overview

PMI operates in markets outside of the United States of America, with manufacturing and sales facilities in various locations around the world. PMI utilizes certain financial instruments to manage foreign currency and interest rate exposure. Derivative financial instruments are used by PMI principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.

PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Both foreign exchange contracts and interest rate contracts are collectively referred to as derivative contracts ("derivative contracts"). The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble and Swiss franc. At March 31, 2020, PMI had contracts with aggregate notional amounts of $24.0 billion of which $6.5 billion related to cash flow hedges, $8.4 billion related to hedges of net investments in foreign operations and $9.1 billion related to other derivatives that primarily offset currency exposures on intercompany financing.

The fair value of PMI’s derivative contracts included in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, were as follows:
 
 
Derivative Assets
 
Derivative Liabilities
 
 

 
Fair Value
 

 
Fair Value
(in millions)
 
Balance Sheet Classification
 
At March 31, 2020
 
At December 31, 2019
 
Balance Sheet Classification
 
At March 31, 2020
 
At December 31, 2019
Derivative contracts designated as hedging instruments
 
Other current assets
 
$
239

 
$
319

 
Other accrued liabilities
 
$
35

 
$
23

 
 
Other assets
 
161

 
21

 
Income taxes and other liabilities
 
89

 
301

Derivative contracts not designated as hedging instruments 
 
Other current assets 
 
92

 
50

 
Other accrued liabilities
 
100

 
70

 
 
Other assets
 

 

 
Income taxes and other liabilities
 
25

 
25

Total derivatives
 
 
 
$
492

 
$
390

 
 
 
$
249

 
$
419



For the three months ended March 31, 2020 and 2019, PMI's cash flow and net investment hedging instruments impacted the condensed consolidated statements of earnings and comprehensive earnings as follows:

-14-

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

 
 
 
 
 
 
 
 
 
 
(pre-tax, in millions)
For the Three Months Ended March 31,
 
Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives
 
Statement of Earnings
Classification of Gain/(Loss)
Reclassified from Other
Comprehensive
Earnings/(Losses) into
Earnings
 
Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings
 
2020
 
2019
 
 
 
2020
 
2019
Derivatives in Cash Flow Hedging Relationship
 
 
 
 
 
 
 
 
 
Derivative contracts
$
31

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
3

 
$
10

 
 
 
 
 
Cost of sales
 
4

 

 
 
 
 
 
Marketing, administration and research costs